TAC0017

Written evidence submitted by the Local Government Association

 

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  1. About the Local Government Association (LGA)

 

1.1.  The Local Government Association (LGA) is the national voice of local government. We are a politically-led, cross-party membership organisation, representing councils from England and Wales.

 

1.2.  Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems.

 

  1. Summary

 

2.1.  We welcome the opportunity to submit evidence to the Committee’s inquiry on tax after coronavirus. The LGA is responding to the elements of the inquiry that are relevant to local government. The two main local government taxes are property taxes: business rates and council tax.

 

2.2.  Councils have responded positively and innovatively to the challenges posed by COVID-19. Working in collaboration with national government, councils have protected lives, livelihoods and the most vulnerable residents and have ensured that our most important public services have kept running successfully. This work has had a significant impact on council budgets. Councils have faced increased costs and demand pressures, at the same time they have experienced a significant reduction in income that they rely on to fund services. Even before the pandemic, councils were facing a significant funding shortfall of £6.4 billion. Whilst the Government stepped in and provided some support, significant challenges remain, and existing inequalities have been exposed. These will have a lasting impact for communities, and it is vital that any review of the UK tax system bears in mind the need to provide long term funding certainty and sustainability to local government.

 

2.3.  We are in the process of reviewing our policy on business rates, council tax and wider local government finance reform. This is in response to the Government’s Business Rates Review, but also wider changes in our economy and the need to ensure a financially sustainable local government. We are undertaking a range of work with our members to help inform this policy development, but this will not be complete in time for the deadline for submissions to this inquiry. Therefore, this submission is based on existing LGA policy at the time of writing. We would be happy to share our responses to the two tranches of the call for evidence on the Business Rates Review when these are complete. Our work on council tax and wider local government finance reforms are working to a longer timescale but we would be happy to keep the Committee informed on this as our policy develops.

 

2.4.  In our view, taxes should adhere to certain principles. These are:

 

2.4.1.      Sufficiency - Financing for local government services must be sufficient. Business rates and council tax are important sources of income for local government.

 

2.4.2.      Fairness – The taxpayer makes a fair contribution and the taxbase is not too narrow.

 

2.4.3.      Buoyancy – rises along with economic activity.

 

2.4.4.      Efficient to collect - Any tax should be efficient to collect; if the costs of administration and collection of a tax are high then the net yield will be lower than it would be for a more efficient tax.

 

2.4.5.      Predictability and transparency - Income from a tax should be predictable and it should also be relatively straightforward to work out how the tax has been derived.

 

2.5.  Local government needs a system that raises sufficient resources for local priorities in a way that is fair for residents and gives local politicians all the tools they need to be the leaders of their communities. For councils, it is important that the tax system, including business rates, provides as much certainty as possible and government should take early and decisive steps to achieve this.

 

  1. What are the major long-term pressures on the tax system in the UK, including those arising from changes in working practices, demographics, the environment and other factors? How are these affecting the efficiency of the tax base and the overall level of demand for public services?

 

3.1.  Whilst councils have responded positively and innovatively to the challenges posed by COVID-19, there are a variety of long-term financial pressures on their services which is applying, and will continue to apply pressure on the tax system.

 

3.2.  Even before the pandemic, councils were facing a significant funding shortfall of £6.4 billion. Whilst the Government stepped in and provided some support, significant challenges remain, and existing inequalities have been exposed. These will have a lasting impact for communities, and it is vital that any review of the UK tax system bears in mind the need to provide long term funding certainty and sustainability to local government.

 

3.3.  Adult social care is a good example of a service area that is under significant pressure and has been for many years. Long term significant underfunding coupled with rising demand and costs for care and support, have combined to push adult social care services to breaking point. LGA analysis completed before the COVID-19 pandemic estimated that adult social care faces a funding gap of £810 million in 2020/21, rising to £3.9 billion in 2024/25.[i]

 

3.4.  Government responses to the challenge of adult social care funding in recent years have been short-term and incremental in nature. One-off grants, the council tax precept for social care and increases in improved Better Care Fund funding have been helpful. However, each mechanism has its limitations and they have not been enough to deal with all short-term pressures, let alone address the issue of longer-term sustainability.

 

3.5.  Long-term reform is urgently needed and we have recently launched seven principles that should underpin social care and support reform in light of COVID-19[ii]. Any additional funding that is made available to social care, whether in the short- or medium-term, should not simply be used for ‘more of the same’ and the pre-COVID-19 status quo. Rather, it should be used to help us move to a more person-centred and preventative model of social care. New funding must be sufficient to meet additional demands arising from COVID-19, plus pre-existing pressures. This should be made available with as few a set of conditions as possible. At the point of such funding being made available, the Government should indicate how it is intended to protect and enhance social care for the benefit of people who use services and to enable them to live the lives they want to lead in the future.

 

3.6.  Councils have sought to support and protect care providers’ financial resilience in the face of significant additional costs posed by COVID-19. Recent new analysis jointly commissioned by LGA and Directors of Adult Social Services (ADASS) suggests that providers will face additional cost pressures of more than £6.6 billion between April and September 2020. The bulk of this stems from PPE and workforce pressures[iii].

 

3.7.  The 2020 Spending Review, Autumn Budget and the Government’s social care proposals due to be published will be key opportunities for longer term sustainable funding solutions and movement towards greater service and fiscal devolution, allowing councils to deliver for local communities.

 

3.8.  While it is too early to be conclusive, the Coronavirus pandemic and the consequent economic lockdown is already having a significant impact on economic activity, tax revenue and the demand for services such as employment support[iv]. One of the early visible impacts of the pandemic has been to accelerate a shift away from traditional high street retail models towards on-line shopping. This raises questions about the future sufficiency of income from business rates and the relative tax exposure of online retailers.[v]

 

  1. What more can the UK do to protect its tax base from erosion as a result of globalisation and technological change, and what further impacts will the coronavirus pandemic have on our tax base?

 

4.1.  Online businesses create competition for traditional businesses and to business rates as a tax. According to work commissioned by the LGA[vi], over the decade from 2008, online sales grew by 326 per cent whilst store sales grew by only 13 per cent. As a proportion of all retailing, money spent online has increased from an average of 4.9 per cent in 2008 to an average of 16.3 per cent in 2017. With the COVID-19 crisis, this proportion is likely to have increased further.

 

4.2.  If an activity can be carried out online without the requirement for premises, this will reduce the yield of business rates which goes to local government, which in turn will have an impact on the services that local authorities can provide; unless other income is provided to make up this shortfall. However, it may lead to other activities that will pay business rates, such as distribution warehouses or businesses which start off online and then decide to open physical premises. Taxation should be fair for both physical and online businesses. The LGA has commissioned work on an e-commerce levy[vii] and we are pleased to see that this idea is being examined as part of the Government’s Fundamental Review of Business Rates.

 

4.3.  As part of its COVID-19 measures, the Government has given an expanded discount to all retail, hospitality and leisure premises meaning that they will get 100 per cent business rates relief in 2020/21. This means that, exceptionally, £11 billion of the total business rates income for England will be received through government grants in lieu of business rates. The tax base is eroded by national discounts, with council income propped up by Section 31 grants, which under the Local Government Act 2003, confers powers to Ministers to pay grant to a local authority in England towards particular expenditure incurred or to be incurred by it. The LGA calls for business rates reliefs paid during the current Spending Review period to be continued.

 

4.4.  Despite business rates reliefs and grants available to some business this year, the collection of both business rates and council tax have been affected by the COVID-19 pandemic. According to information supplied to the Ministry of Housing, Communities and Local Government, from all billing authorities in England, the collection of council tax is estimated to be £1.8 billion lower and business rates by £1.9 billion this year[viii].

 

4.5.  Council tax ‘losses’ relate to both payment failure (for example due to cancelled direct debits) and greater demand for council tax support. It is not clear, at this stage, whether some of this council tax might be recoverable at a later date either this year or in a future year. Assuming that the collection of arrears follows past patterns, the arrears of £1.8 billion could reduce to £844 million.

 

4.6.  As far as business rates are concerned, when the workings of the 50 per cent retention system are taken into account, including the payment to the Government of the central share and the levy and safety net, for there to be a net financial effect of nil to councils, authorities would need support to a total of an additional £1 billion.

 

4.7.  Due to the way the collection fund operates, local authorities will feel the impact on their budgets in the next financial year. The Government announced in July 2020 that it will allow losses in business rates and council tax in the collection fund to be spread over three years. This is welcome. In addition, at the Spending Review we expect the Government will announce what it is calling a ‘fair apportionment’ of irrecoverable council tax and business rates losses, between central and local government, for 2020/21. In order to have the certainty they need to set budgets for next year, councils still need urgent clarity on the irrecoverable losses the Government will pick up and this should cover all irrecoverable losses from local taxes.

 

4.8.  The LGA has commissioned work on the impact of COVID-19 on the Collection Fund[ix] and is calling on the Government to compensate local authorities in full for all irrecoverable losses in council tax and business rates due to the pandemic.

 

 

  1. Do these pressures need to be met with tax reform, and if so, is this the right time for reform?

 

5.1.  In our report Rethinking Local,[x]  the LGA highlights how with the upcoming English Devolution White Paper and Spending Review, the Government has a unique opportunity to reset our communities’ relationship with their Government and, in doing so, level up the inequalities faced by our communities. Devolution, including devolution of tax raising, remains key to delivering better local public services, bringing the decisions that matter closer to people and helping councils to build sustainable and inclusive local economies.

 

5.2.  The UK is an international outlier and is one of the most fiscally centralised countries in the world. The Organisation for Economic Co-operation and Development (OECD) estimates that in the UK, local government only has control over 4.9 per cent of total tax revenues, equivalent to just over £30 billion out of the £620 billion collected by HMRC in 2018/19. By contrast the average level of local control over tax across the OECD is 15.1 per cent.

 

5.3.  In practical terms this means that local authorities in places such as Germany, Switzerland and Holland can access a diverse range of revenue sources. They are also able to adjust and introduce local levies in consultation with their residents and businesses, innovating and diversifying their tax base in response to new public priorities, such as responding to climate change, and new forms of economic activity.

 

5.4.  Municipalities in Germany, for instance, have the power to set rates for their local business tax. This approach has forged a closer connection between businesses and communities, with firms knowing they are funding local growth and regeneration for their employees and the community. Berlin also introduced its own city tax in 2014, while income tax is also distributed across the three levels of the German government.

 

5.5.  By contrast, councils in England are only able to levy two taxes: council tax and business rates. Both are subject to significant intervention and control by Whitehall and both stand increasingly exposed in the light of long-term changes in home ownership and business composition, such as the rise of e-commerce and the growth in microbusinesses.

 

5.6.  There is an opportunity for the Government to adopt this type of approach and devolve powers to local communities enabling them to raise more money locally, such as through local tourist or e-commerce levies. It has also been suggested that residents, as they do in Germany, should have a greater say in how national taxation is spent, such as income tax or putting a portion of monies raised through fuel duty towards road investment.

 

5.7.  The evidence[xi] shows that this will lead to better outcomes for all of England’s localities across a wide range of areas – adult social care, public health, children’s services, housing and infrastructure and economic development. It will also improve accountability and participation, with residents finally given a genuine say in how their local areas are run and the money raised there is spent.

 

  1. What overall level of taxation can the economy bear without undesirable or counterproductive harm to economic growth?

 

6.1.  Whilst this question is largely outside of the remit of the LGA, we believe that funding for local government services, through national and local taxation and service and user charges must be sufficient to keep up with the costs placed on those services by demographic and other pressures.

 

6.2.  In 2019/20, according to Ministry of Housing, Communities and Local Government (MHCLG) estimates, local authorities were estimated to collect £25 billion in business rates. Of total business rates income collected by local government, local government as a whole currently retains 50 per cent, with the remainder paid to the Government and used to pay Revenue Support Grant and other grants to councils. Councils were predicted to collect £33.1 billion in council tax in 2020/21.  Together council tax and business rates raise around £58 billion per annum, which is around 57 per cent of total council revenue expenditure of £102 billion.

 

6.3.  Council tax and business rates are therefore significant and important sources of income for local government. In addition, any other changes to the tax system could have consequences for the funding available to local government and in the delivery of essential public services, such as social care. LGA analysis, completed before the COVID-19 pandemic, showed that adult social care faces an additional future funding requirement of just over £2.6 billion for 2020/21 and just over £7.9 billion by 2024/25.[xii] Any review of the tax system needs to be aligned with a consideration of the overall funding requirement of public services, so as to ensure certainty and sustainability of funding for local public services.

 

 

  1. Which areas of the tax system are most in need of reform, and which are best left alone?

 

7.1.  Property continues to provide a good basis for business rates and ninety-eight per cent of business rates are collected in year. Whilst collection rates are high, the Government should rethink howproperty is defined. In our submission to the 2015 Business Rates Review[xiii] we called for a review of the basis of valuation of non-domestic property with a view to arriving at a new statutory definition of what constitutes ‘rateable occupation’ which, as it stands is a matter for the courts. Case law has established that such occupation must be ‘beneficial’, that is it must be of some benefit to the occupier and that it must be non-transient. This gives rise to anomalies such as large properties in town centres awaiting redevelopment not paying business rates because they are not capable of ‘beneficial occupation’ and funfairs in parks (which are themselves exempt) not being subject to business rates as the use is seen as transient.

 

7.2.  Concerns about the sufficiency of business rates as a source of income for local government and a burden on business in the current climate means that there is a need to consider reform, alongside new sources of finance.

 

7.3.  In England, council tax is based on 1991 property values and has not been revalued since. The only circumstance in which a property is revalued is if it is improved and subsequently sold, in which case it may be re-banded if the new valuation (still based on 1991 property values) would place the property in a different band. Any change in relative values otherwise, between properties or between areas, will not be reflected.

 

7.4.  The banding structure is regressive. The eight-band structure has a spread of 1 to 3 (where Band H pays three times as much as a Band A). It is flat at the top of the range, in other words a property worth £320,001 in 1991 will pay the same as one worth much more at that date. The band structure is fixed nationally so there is no ability to vary locally, for example by adding more bands or by changing the relativities within bands.

 

7.5.  Council tax increases from year to year are constrained centrally, originally through capping and now through centrally imposed limits over which a referendum would have to be held. In recent years the referendum limit has been 2 or 3 per cent with a further 2 or 3 per cent allowed for the Adult Social Care precept for adult social care authorities. Centrally imposed referendum limits should be abolished.

 

7.6.  Council Tax is only payable on properties classed by the Valuation Office Agency as dwellings. So, for example, there is no council tax payable on properties not on the list because they are undergoing reconstruction or rebuild. This can result in delays in councils being able to receive income from new or reconstructed dwellings after planning permission is granted, either because they are not built, or they are not valued immediately. Council tax should be charged on every unbuilt development from the point that the original planning permission expires.

 

  1. What reforms should be considered in response to the pressures on the tax system?

 

8.1.  The call for evidence for the Government’s fundamental business rates review was published in July 2020. Some of the proposals such as freezing the multiplier or counting growth in the multiplier recalculation at the time of revaluation, would cut local government income and make the income from business rates less buoyant. Whilst councils’ confidence in business rates as a reliable income source has reduced, any review of the tax system needs to go side by side with a consideration of the overall funding needs of local government as well as the wider principles set out above including greater localisation of taxes, flexibility, predictability and certainty for local government.

 

  1. What is the role of tax reliefs in rebuilding the economy and promoting economic growth and efficiency? Does the current regime of tax reliefs perform this role well?

 

9.1.  For business rates, the ability to give reliefs, both mandatory and discretionary, is determined by statute, central regulations and case law. We would like to see local authorities having more discretion in this area, so that they can help local and independent businesses in order to stimulate the local economy. It would also allow them to give more incentive to provide a relief for new or green investments.

 

9.2.  We would call for a review of business rates exemptions – including the agricultural exemptions where we have heard anecdotally that there are businesses which should be rated which are on farms. Some of these have become apparent in 2020 when occupiers have become aware had they been on the rating list they might have been eligible for grant support.

 

9.3.  Based on a survey of local authorities[xiv], we estimate that around one per cent of total business rates income, or £250 million, is lost to business rates avoidance each year. These relate to the abuse of business rates reliefs and exemptions. For example:

 

9.3.1.      repeated short-term periods of occupation was the method of avoidance most commonly identified among respondents, and this also had the highest average loss. This was also the most commonly used method in a 2014 survey we carried out on avoidance.

 

9.3.2.      Vacant properties being leased to a charity with proposals for the next use to be wholly or mainly used for charitable purposes was the second most commonly identified method.

 

9.3.3.      Second homes being registered as business properties in order to qualify for small business rates reliefs.

 

9.4.  The Government needs to tighten up on the abuse of reliefs and exemptions on the same lines as is proposed for Wales and Scotland which are due to be implemented in to be implemented in 2021.

 

9.5.  Most council tax discounts and exemptions are fixed nationally. The mandatory single person discount covers almost 32 per cent of dwellings. This discount is not means tested. Other mandatory exemptions apply to students. Empty property discounts are discretionary. The LGA would like to see more discretion on discounts which are currently mandatory including the Single Person Discount.

 

9.6.  Council tax support (CTS) replaced the nationally determined Council Tax Benefit in 2013. This support has been increasingly withdrawn for working age residents. The Institute for Fiscal Studies found in 2019 that the most common level of minimum payment for working age recipients is 20 per cent – adopted by almost a quarter of councils. Another fifth has minimum payments of over 20 per cent. In addition, the central resources to support this have fallen by an estimated £2 billion since 2013/14 at the same time as councils were not able to vary the amount received by pensioners. By way of comparison the £500 million COVID-19 hardship fund is just a quarter of this amount and is intended to pay for support to both existing and new claimants. The LGA considers that council tax support should be funded in full.

 

  1. What are the areas for simplification?

 

10.1.                    We have made a number of suggestions on the areas for simplification which include the basis of valuation (section 7) and on reliefs for both council tax and business rates (section 9).

 

  1. What is the best way to tackle tax reform, including what changes might be needed at HMRC to support implementation, and how should the Government consult with stakeholders and parliament?

 

11.1.                    The LGA considers that it is essential that the Valuation Office Agency (part of HMRC) is properly funded so that it is able to perform its role effectively in terms of more frequent non-domestic valuations, the Check, Challenge and Appeal system so that delays in dealing with council tax and business rates valuation matters do not build up as this can impact on local government finances. Over the period from 2010 the Agency’s budget has fallen around 15 per cent in real terms and councils find it less easy to contact staff due to the closure of district offices.

 

August 2020

 

 

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[i]https://www.local.gov.uk/sites/default/files/documents/29.17%20The%20future%20of%20care%20and%20support_03.2%20-%20Final.pdf

[ii] https://local.gov.uk/adult-social-care-seven-principles-reform

[iii] https://local.gov.uk/lga-social-care-providers-face-more-ps6bn-extra-covid-19-costs

[iv] https://obr.uk/coronavirus-analysis/

[v] https://www.thetimes.co.uk/article/amazon-pays-just-220m-tax-on-british-earnings-of-10-9bn-vv9fwxx52#:~:text=Amazon%20paid%20a%20total%20of,paid%20in%20the%20past%20year.

[vi] https://www.local.gov.uk/sites/default/files/documents/5.71%20Councils%20and%20e-commerce.pdf

[vii] https://www.local.gov.uk/sites/default/files/documents/5.71%20Councils%20and%20e-commerce.pdf

[viii] https://www.local.gov.uk/sites/default/files/documents/MHCLG%20June%20financial%20information%20survey%20%E2%80%93%20breakdown%20of%20results.pdf

[ix] https://www.local.gov.uk/lg-futures-work-impact-covid-19-collection-fund

[x] https://www.local.gov.uk/re-thinking-local-full-publication

[xi] The LGA has a range of reports and analysis on fiscal devolution, available on our website. These include reports on fiscal devolution and building inclusive economies.

[xii] https://www.local.gov.uk/sites/default/files/documents/29.17%20The%20future%20of%20care%20and%20support_03.2%20-%20Final.pdf

[xiii] https://www.local.gov.uk/sites/default/files/documents/BR%20review%20response%20final.pdf

[xiv] https://www.local.gov.uk/business-rates-avoidance-survey-report-2019