Written evidence submitted by Make UK (IBR0128)

Make UK Response to Treasury Committee The impact of Business Rates on business inquiry

House of Commons Treasury Select Committee: The impact of Business Rates on business inquiry.

02/05/2019

Thank you for giving Make UK the opportunity to participate in this inquiry, published by the House of Commons Treasury Committee on the 01 February 2019. The need for an efficient, effective and fair business rates systems is vital to manufacturers. This paper presents Make UK’s comments on some of the key issues raised by this call for evidence and presents the views of Make UK’s members on achieving an updated business rates system.

About Make UK

              Make UK, the manufacturers’ organisation (formerly known as EEF), is the representative voice of UK manufacturing, with offices in London, Brussels, every English region and Wales. Collectively we represent 20,000 companies of all sizes, from start-ups to multinationals, across engineering, manufacturing, technology and the wider industrial sector. We directly represent over 5,000 businesses who are members of Make UK. Everything we do – from providing essential business support and training to championing manufacturing in the UK and the EU – is designed to help British manufacturers compete, innovate and grow.

Why is this topic important to manufacturers?

The topic of business rates - the tax on non-domestic/business properties- is one that is of key importance for manufacturers, who tend to be both owners and occupiers of their properties. Manufacturers pay business rates of varying degrees throughout the country. Rate amounts are dependent on rateable value (typically the annual rent that the property could have been let for on the open market) and the national multiplier (a rate set each year by central government for the whole of England)[1]. Approximately every 5 years the rateable value of business properties and multipliers are adjusted by the Valuation Office Agency (VOA) to reflect changes in the property market. This revaluation often results in increases or decreases for businesses across different regions.

Whilst the nature of such revaluations means that there will always be winners and losers in business, the 2017 Business Rates Revaluation implemented changes in business rate ratings that had a net negative impact for UK manufacturers.

Whilst the revaluation brought some positive changes, such as the announcement that from April 2020 value increases on the national multiplier will be based on the Consumer Price Index (CPI) instead of the Retail Price Index (RPI) that is currently being used, as a whole, many in industry are worse off.[2]

The current business rates system is not sufficiently fair to SMEs, and manufacturing as a whole, particularly as plant and machinery are also subject to business rates. Make UK has for some time now been calling for the removal of plant and machinery from business rates, as it acts as a disincentive for manufacturers to invest.[3] Whilst on the surface the removal of plant and machinery from this calculation could reduce revenue to local councils, it would provide an incentive for manufacturers to expand, and have more funds available to improve productivity. It would also present the opportunity for manufacturers to contribute to employment and overall economic growth opportunities for their regions. This, in turn, would likely provide more revenue to Local Authorities.

At its core, a fair and sustainable system of business rates in England is necessary to support long-term capital investment and productivity as well as to improve the attractiveness of the UK as a competitive location for manufacturing. This is particularly important now, at a time when several large and high profile manufacturers such as Jaguar Land Rover and Nissan have announced that they will be moving production from, or reducing production activity, in the UK in favour of moving it to other countries. It is therefore important that substantial improvements to the current system of business rates are reformed to be less punitive and more encouraging to both domestic and international manufacturers.

The impact of business rates on UK manufacturers

Current policy relating to business rates often results in companies of varying sizes paying rates that are disproportionate to their earnings, or the value of their premises. As a result, premise that are located out-of-town often pay less than in-town premises, and small high street businesses in rural villages can also pay more than the big out of town storage premises. It can also mean that large online retailers’ corporation tax can be equal to or even significantly less than that of smaller brick and mortar properties. Similarly, the Booksellers Association noted that following the 2017 revaluation, the retail bookstore Waterstones in Bedford pays 16 times more in business rates per square foot than the nearby Amazon distribution centre.[4]

As retail continues to shift online and use out of town warehouse hereditaments, the proportion of retail properties in the tax base will fall. This will place an increased burden on property dependent sectors such as manufacturing, due to the fact that at revaluations the tax ‘yield’ is redistributed across properties. Industry has the largest floorspace amongst businesses, occupying 55% of total space in England and Wales in 2016.[5] As such, the sector is already disproportionately affected by business rates, and the trend towards online retail is likely to exacerbate this issue. Indeed, the report Taxing Land, Not Investment notes that the current system of business rates particularly disadvantages the manufacturing sector relative to less capital intensive sectors.[6]

Disproportionate rates for businesses mean that manufacturers are being priced out of some areas unfairly. It also means that companies have decreased levels of funding to be able to expand and to invest in inventory and staff as a direct result of business rate levels.

As mentioned above, the current system of business rates reduces manufacturers’ incentive to invest. A survey of Make UK members revealed 42% would invest more if plant and machinery were removed from the business rates calculation.[7] For an R&D intensive sector such as manufacturing, investments in plant and machinery are essential not only to able to manufacture day-to-day products, but also to be able to continue to produce new and innovative developments that are crucial to long-term business, as well as economic, growth.

Further issues for manufacturers include the move towards business owners taking on more of the administrative burden. Manufacturers are expected to carry out their own ratings assessments (or pay an external provider to do the assessment) and suffer the additional risk of penalties if they get the assessment wrong. This increased burden, as well as the possibility of increased expenditure, adds to the often heavy administrative workloads that manufacturers carry as business owners.

Reforming business rates in England

Business rates are broken. Ever since the controversial revaluation in 2017, the rates system has proved a headache for many manufacturers. Business rates were originally devised as a property tax based on a periodic treasury assessment of rateable value. They are designed to be fair, consistent with economic conditions and supportive of growth and competition. But policy makers have increasingly attempted to make them serve multiple objectives at once. Consequently, the system can disincentivise investment in productive means and therefore have profound consequences for businesses as well as on regional development. The system is excessively complex, certainly unfair to SMEs and needs a genuine consultation with stakeholders to ensure we get any reforms right. Press attention directed at business rate reform has focused on the retail sector and the spectre of empty high streets. But although business rates are important to retailers, they are also important for manufacturers.

One way to fix the current issues would be to remove some plant and machinery (P&M) from the business rates so that manufacturers can feel free to invest in machinery that can boost productivity and help their firms to grow. The current system including plant and machinery is particularly punitive because when making an assessment the value of the P&M is taken into consideration. With new, modern P&M having a higher value, and therefore carrying a higher tax liability, this actively discourages investments in new P&M. This is particularly relevant when compared with business rates in our European counterparts. In France, the 2010 contribution économique territorial (CET) removed the inclusion of plant and machinery from the French business rate equivalent, taking into consideration the negative impact that it had on French manufacturers.[8]  If the UK is to compete with our international counterparts in this changing political environment, it would be sensible to ensure similar, if not better provisions with regards to non-domestic rates.

Make UK calls for a widening of the debate into a move from a system of business rates to a land value tax- a tax on the undeveloped value of land. Using this system of property taxation could have the potential to ease the burden on manufacturers as not only would it remove plant and machinery from tax calculation, it would disregard personal property and improvements to the site.  The rapid development and adoption of technologies in the 4th Industrial Revolution means that manufacturers will need to invest in improvements to their sites and equipment, which could be further encouraged by a land value tax that does not punish manufacturers who invest in these improvements. Furthermore, the current inclusion of P&M is not based on hard evidence or international best practice, but rather tradition.

The Land Value Tax system could also help to rebalance regional disparities that the current system of business rates has done nothing to abate. The Institute for Public Policy Research (IPPR) notes that a Land Value Tax would make those areas that are currently disadvantaged and have lower land values a more attractive place to do business.[9]  The IPPR also notes that the replacement of business rates with a Land Value Tax has the potential to capture some of the “unearned windfalls from the ownership of land.” Overall, a system of land value tax could help to improve economic efficiency within the UK and is one that should be considered when looking at reform of the existing system.

Conclusion

Manufacturers see the business rates system as a complex and a highly administrative process. Make UK would welcome government incentives to mitigate volatility in income and simplify the business rates system. The intention to create a system that will incentivise behaviours that boost local economic growth is of great importance to manufacturers as well. This is of particular importance to areas in which rates are high and as such businesses are reluctant to perform these behaviours. Setting out a more level playing field both amongst different types of UK businesses, and at an international level, will help to encourage the perception that the UK economy not only welcomes but values manufacturers, and encourages investment and expansion within the country. Most important in achieving this would be the removal of plant and machinery from non-domestic rate calculations to ensure that manufacturers are not disproportionately affected by the tax, and are encouraged to invest.

The topic of moving towards a Land Value Tax is one that has cropped up in the discussion on business rates many times over the years, particularly in comparison with other nations such as Denmark, Singapore and some areas of the United States. Make UK would encourage further discussion on the subject by government, as well as further in depth comparisons with proponents of the system globally, to establish if it could lead to a fairer and more proportional system of property taxation.

Thank you once again for giving Make UK the opportunity to participate in this call for evidence. We hope you find our comments useful and we look forward to further engagement on this topic. If we can provide further information on any of the issues discussed, please do not hesitate to contact me.

Yours faithfully,

Lorraine During

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For further information contact:

Lorraine During
Business Environment Policy Adviser
Follow us online:

Blog: www.MakeUK.org

Twitter: @MakeUK_

LinkedIn: www.linkedin.com/company/makeuk

Submitted May 2019