Written evidence submitted by Blake Penfold (IBR0027)

 

Our ref:

BP/TSC/Business Rates inquiry

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Treasury Select Committee

House of Commons

 

25 March 2019

33 Gurney Drive

London

N2 0DF

Dear Sirs,


 

“The Impact of Business Rates on business” – Submission to Inquiry

 

Thank you for offering the opportunity to respond to this inquiry. This letter is my response to the questions raised in the paper.

 

Executive Summary

 

 

 

 

 

 

 

 

 

 

Details of the respondent

Blake Penfold is an independent consultancy specialising in business rates advice. I have more than 40 years’ experience as a rating consultant in private practice and has been involved with rating appeals in respect of all types of property throughout the United Kingdom and in the Irish Republic, the Channel Islands, and the Isle of Man. As well as appeals before Valuation Tribunals and the Upper Tribunal (Lands Chamber), I have been involved with appeals to the Court of Appeal and House of Lords on matters of rating law. I have also appeared before Local Valuation Appeal Committees in Scotland and as an expert witness in the High Court, at County Court, and in Magistrates’ Court proceedings in respect of business rates.

I began my career with H Brian Eve and Company (later Wilks Head & Eve) before joining Hillier Parker (now CBRE) and, most recently, headed the Business Rates team at GL Hearn for ten years. I am a former Chairman of the RICS Rating and Local Taxation Panel and represent RICS on the Valuation Tribunal for England Tribunal User Group and elsewhere, including giving evidence to the Parliamentary Scrutiny Committee on the Business Rates Supplements Bill. I am a past President of the Rating Surveyors’ Association and a former member of the Valuation Standards Board of the Royal Institution of Chartered Surveyors.

I have expertise in all aspects of business rates from legislation to liability and all types of property. I also have experience from throughout the United Kingdom, and in respect of property tax systems elsewhere.

 

Introduction

I preface my response to the detailed terms of reference of the enquiry with two general comments regarding the business rates system. The first is that the rate of tax is too high, both in relation to property taxes in competing economies, and in relation to other corporate taxes in the UK.

When the Uniform Business Rate (“UBR”) was first introduced in 1990, it was set at 34.8p – a tax rate of nearly 35%. At that time, Corporation Tax (standard rate) was 34%, Income Tax (standard rate) was 25%, and Income Tax (higher rate) was 40%. The UBR of nearly 35% made sense in relation to other corporate and personal tax rates.

For the 2019/20 rate year, the UBR for smaller businesses will be 49.1p and for larger businesses (rateable value over £51,000) it will be 50.4p – a tax rate of approximately 50%. But Corporation Tax (standard rate) will be 19%, Income Tax (standard rate) will be 20% and Income Tax (higher rate) will be 40%. The level of business rates is now out of proportion with other corporate and personal taxes.

A comparison with competing economies makes clear the very high level of property taxes in the UK. OECD and other figures show that the UK has the highest level of recurrent property taxes (measured as a proportion of GDP) of any OECD country. OECD data shows that the UK has the highest level of recurrent property taxes of any OECD country measured both as a proportion of GDP (4.1% in the UK in comparison with the average for OECD countries of 1.9%) and as a proportion of total taxes (12.6% in the UK in comparison with the average for OECD countries of 5.6%). This puts UK businesses at a significant competitive disadvantage in comparison with countries both in Europe and the rest of the world.

My second general comment is that the business rates system is too complicated. There are a large number of exemptions, reliefs and supplements that have grown over time and particularly in recent years. The effect of these is to make the system of business rates so complex that even experienced professionals can struggle to understand how liabilities are calculated. There are at least 17 different business rate reliefs, at least 19 different exemptions from business rates, and at least four different business rate supplements. These reliefs, exemptions and supplements interact with each other to make it extremely difficult to calculate rates liability and in some cases drive business behaviour that is undesirable.

 

I give detailed examples of both of these aspects, in my responses to the terms of reference.

 

 

Response to terms of reference

I set out below my detailed comments on the terms of reference set out by the select committee.

 

 

I will look at each of these in turn.

 

  1. Changes in reliefs and allowances

The extension of small business rate relief to provide 100% relief for businesses occupying the property with rateable value £12,000 or below, has resulted in a position whereby 600,000 businesses no longer contribute at all to the costs of funding local government through business rates. This phenomenon was identified by the Barclay review in Scotland as creating “business rates deserts” – areas where few or no businesses were contributing to the costs of funding local government.

 

The scheme of transitional adjustments introduced following the 2017 rating revaluation has penalised businesses in areas where rateable values have fallen following the revaluation. I accept, and support, the need to provide businesses with protection against large business rates increases following the revaluation, but it seems unjust that the costs of doing this are funded by businesses whose business rates liability has fallen as a result of the revaluation, rather than by a wider base of business ratepayers.

The effect of the scheme of transitional adjustments introduced following the 2017 rating revaluation is to apply very stringent limits to reductions in rate liability for larger businesses. Maximum reductions in the first three years following the revaluation, for larger businesses (rateable value £100,000 or more) are, respectively, 4.1% in year one, 4.6% in year two and 5.9% in year three. These maximum reductions are before any uplift for inflation and the net effect of this has been that, in the first year following the revaluation, the maximum reduction of 4.1% was offset by a 2% inflation increase, thereby representing a net maximum reduction of 2.1%. In the second year following the 2017 rating revaluation, the maximum reduction of 4.6% was offset by a 3% inflation increase, thereby representing a net maximum reduction of 1.6%. The effect of this transitional scheme is such that larger properties, which should be seeing significant reductions in rates liability, will not benefit from those reductions during the life of the 2017 rating list. By way of example of this point, I am aware of properties where the annual rates liability, after transition, is more than the rateable value for the property concerned, and more than the rent for the property concerned.

These recent changes to reliefs and allowances are part of a longer-term trend that has increased the complexity of the business rates system very substantially since the current system was introduced in 1990.

 

 

  1. Changes in reliefs and allowances

Turning, now, to look at the ability of businesses to pay business rates, I am concerned that the continued application of an annual inflation increase in the level of UBR (initially an RPI increase and more recently a CPI increase) has resulted in a level of UBR which is beyond the ability to pay of property-intensive businesses. I commented in my introduction regarding a very high level of UBR in relation to other corporate taxes and in relation to property taxes in competing economies. The net incomes of property-intensive businesses, such as those of retailers, have not increased in line with increases in UBR. The result of this is that the tax has now moved to a level that is beyond the ability to pay of some retailers. Evidence of this can be seen in recent retailer administrations and Creditor Voluntary Arrangements (“CVA’s”), many of which cite business rates as one of the reasons for insolvency.

 

 

  1. Relationship between Business Rates and the behaviours it drives in business

The excessively high tax rate also alters behaviour. It favours non-property-based businesses as against property-based ones (for example online retailing as against high street retailing).

Exemptions and reliefs also drive behaviour in ways that are sometimes undesirable. An example of this is that MHCLG is currently consulting on the treatment of holiday-let accommodation. The reason for this consultation is that property owners are representing their properties as available for holiday letting, (when they in fact may not be) in order to qualify as a business and claim small business rates exemptions, rather than paying Council Tax. Another example is the wide range of business rates mitigation schemes that have sprung up since the empty property rate was increased from 50% to 100% in 2008.

Another recent example of the complexity of the system is that, from 1 April 2017, the government doubled rural property rate relief from 50% to 100%. This was necessary because, before that date, small businesses in rural settlements were benefiting from 50% relief, but equivalent sized businesses that were not in rural settlements were benefiting from 100% relief. The increase in rural rate relief was necessary so as to ensure that rural businesses were not worse off than their urban counterparts. The business rates system requires a full and proper review of exemptions and reliefs, which was a recommendation of the Lyons Inquiry into 2007, but one which has never been implemented.

 

 

 

The current business rate system is not a fair one, because the tax rate is too high in relation to other corporate taxes, and in relation to property taxes in competing economies. It is also unfair because of a highly complex system of exemptions and reliefs which, when combined with a very high tax rate, drives behaviour in undesirable ways.

The current system does not support growth or encourage competition amongst property-intensive businesses because of the very high costs of the level of tax. The most obvious example of this is competition between high street retailing (with high business rates costs) and online sales (with relatively low business rates costs), but there are other examples, such as automotive manufacturing where the business rates costs for UK-based car manufacturers are far higher than property tax costs for car manufacturers in other countries. In this last respect, one matter that should be reviewed is the rating of plant and machinery. The last time that this was done was by the Wood Committee in the 1990’s and that Committee recommended such a review at each revaluation, so as to ensure that the rating of plant and machinery kept up with technological change, but there has been no such review at recent revaluations. 

The current business rates system does provide certainty for both local government and for ratepayers, but the certainty for ratepayers is that the level of tax is too high!

The system of reliefs and exemptions is not coherent, and I have given examples of transitional adjustments resulting in rates liabilities that are greater than the rateable value of the property concerned, and examples of business rates reliefs that drives undesirable behaviour.

I have commented above on the adverse impact of transitional adjustments following the 2017 rating revaluation for those properties expecting reductions in rate liability as a result of the revaluation. In locations such as these, the impact of business rates on rental values has been severely adverse. I am aware of shopping centres where units are let at nil rent by the landlord because the rates liability is so high.

The new business rate appeals system introduced following the 2017 rating revaluation, known as “check, challenge, appeal”, is proving very difficult for ratepayers and their advisers to navigate. It is acting as an impediment against ratepayers being able to understand the evidence on which their rateable values were based at the revaluation, and an impediment to any challenge to those rateable values. Nearly two years into the operation of the new system, only about 10% of properties in local rating lists have been “claimed” by an owner or an occupier, for the purposes of CCA. Nearly 90% remain “unclaimed”. Ratepayers are simply finding the system too difficult to operate. 

Perhaps even more importantly than this, the ineffectiveness of the new CCA system is also resulting in the rating list becoming out of date. Whilst there were too many appeals under the former system, and many of them did not result in an immediate alteration to the rating list, an important proportion of them did alert the Valuation Office Agency to changes in the occupation of property (such as two parts of a building that had previously been occupied together becoming occupied separately) that required an alteration to the rating list. To illustrate this, in the 2016/17 rating year (the last year of the former appeals system) there were 218,393 alterations to the 2010 rating lists in England and Wales and, of these, 44,061 resulted directly from proposals. In the 2017/18 rating year (the first year of the new CCA system) there were 117,513 alterations to the 2017 rating lists (ignoring alterations made to compiled list (1 April 2017) figures resulting from dual list maintenance) and of these only 6,942 resulted from checks or challenges. (Source: Rates Data Limited www.ratesdata.com). The number of events giving rise to a rating list alteration has not declined by 50%, so things have been and are being missed because the new CCA system does not work properly.

Despite all these current problems, there continues to be an economic justification for a property-based business tax, which is that the tax is certain, predictable and hard to avoid. The difficulties faced by the business rates system at present result from an excessively high rate of tax, and an overly complex system, rather than from any inherent failure of property-based business tax. Realigning the UBR tax rate with other corporate and personal taxes, at a level that is affordable for businesses would address many of the current problems. A full review of exemptions and reliefs, combined with a lower rate of tax, could result in a property-based business tax that can still contribute to a modern digital economy.

 

I confirm that I have no objection to this consultation response being made public. I am happy to amplify or explain anything contained in this response.

 

Yours faithfully

 

b

Blake Penfold

blake@blakepenfold.com

 

Submitted March 2019