The Government committed to conduct a fundamental review of business rates and published the terms of reference for the review at the Spring Budget. This call for evidence seeks views on how the business rates system currently works, issues to be addressed, ideas for change and a number of alternative taxes.
The Government is is seeking responses in two phases:
- Views on the multiplier and reliefs sections, by 18 September, to inform an interim report in the Autumn (see the joint sector response below)
- Responses on all other sections are invited by 31 October, ahead of the review’s conclusion in Spring 2021.
The Charity Tax Group (CTG) has provided technical and strategic input to a joint response to the consultation with CFG and NCVO. Key points from the response include:
- Property costs are the second largest cost behind wages for many charities. Mandatory business rates relief is therefore crucial for many charities and is of particular importance to small charities.
- Covid-19 has placed a significant financial strain on charities. Throughout the crisis, charities have seen an increase in demand for services coupled with a significant decrease in income.
- Given the precarious economic situation facing many charities, it is vital that charities are not left any worse off as a result of this review. At the very least, mandatory rate relief of 80 per cent should be retained to ensure charities can play a meaningful role in the country’s recovery efforts.
- Business rates relief is particularly important for charity shops. Having a high street presence for charities is hugely important for brand awareness, for recruiting volunteers and generating income and to delivering public benefit.
- Business Rates Relief should be available to all charities as defined by the Charity Commission under charity law.
- There is sometimes a misconception that mandatory rates reliefs results in higher rents over time. Many charities strike rent deals that are comparable with market competitors and they have a fiduciary duty to ensure that they do not overpay when using charity funds.
- Measures to prevent fraud and abuse of charity business rates relief are important but need to be targeted and proportionate.
CTG and sector partners were invited by HM Treasury and MHCLG to make a supplementary submission to Part 1 of the Review, which focused mainly on charity reliefs, building on the primary consultation response. This submission reiterated the importance of maintaining existing 80% mandatory reliefs and challenged assertions made by other stakeholders on capitalisation of reliefs into higher rents and perceived distortions of competition caused by charity reliefs. We also highlighted the importance of the next in charitable use exemption, but made suggestions for ways in which its implementation and administration could be improved to avoid any misuse.
Scope of the call for evidence
As set out in the terms of reference, the Government’s objectives for this review are:
- reducing the overall burden on businesses
- improving the current business rates system
- considering more fundamental changes in the medium-to-long-term.
At this stage in the review, the Government is not consulting on the specific design of policies. It is gathering views on how the system currently works and any
issues that need to be addressed, and ideas for changes to the taxation of non-domestic property that should be considered. Throughout the review, the Government will consider how any changes align with the government’s objectives to deliver sustainable public finances; minimise economic distortions and support growth; increase productivity; deliver a tax system fit for the 21st century; and to deliver on the UK’s legally binding target to reach net zero emissions by 2050. The structure of the local government funding system, including Business Rates Retention, is outside of the scope of this review.
Central government provides for several business rates reliefs that are intended to support certain businesses, promote growth and investment, or simplify
the rates system. Billing authorities also have powers to offer additional reliefs. Where reliefs are introduced by central government the entire cost of the relief falls
to the Exchequer. Where local authorities introduce reliefs, the costs are shared between central and local government. Some buildings and land are exempt and so
are not assessed for business rates at all. In 2018-19, businesses benefited from £4.25 billion in mandatory relief. The largest of these reliefs are Charitable Rate Relief (cost £1.93 billion in 2018-19) and Small Business Rate Relief (SBRR) (cost £1.26 billion in 2018-19).
Business rates relief principles and concerns
Tax reliefs can serve many different purposes, such as supporting social or economic objectives, improving the progressivity of a tax, or simplifying the tax system. When considering the introduction of new reliefs, and as part of the process of reviewing existing reliefs, the government takes into account how effectively reliefs meet their objectives, whether they represent value for public money, whether they generate unintended consequences such as distorting decisions on use of property, and risks from avoidance or abuse. In delivering changes to tax reliefs the government is also committed to ensuring that changes are predictable, and that they maintain stability and support the simplification of the tax system.
Stakeholders have noted several concerns about the current system of business rates reliefs:
- Capitalisation and targeting
- Eligibility and administration
- Abuse (the call for evidence notes that misuse of Empty Property Relief can include: owners granting leases on vacant properties to charities claiming the property will be used for charitable purposes when next in use)
In light of these concerns the government is seeking evidence on whether and how reliefs can be simplified, targeted more effectively to ensure value for public money, made robust against abuse, or how the design and administration of business rates reliefs can be otherwise improved to ensure the sustainability of public finances.
- How well do current reliefs and exemptions deliver their intended outcomes and satisfy the principles of good tax design? What
changes would you suggest to the system?
- How can reliefs be targeted more effectively? How can reliefs and their administration be simplified?
- What evidence is there on the capitalisation of business rates and business rates reliefs into rents over time? What does any evidence mean for the design of rates reliefs and business rates more broadly?
- What role should local authorities have in determining business rates reliefs and exemptions? Should reliefs and exemptions be set by central government or set locally?
- Are you aware of ratepayers misusing tax reliefs or other means to avoid paying their full business rates liability? What could be done to tackle this?
The business rates multiplier
The business rates ‘multipliers’ are the tax rates used to determine business rates bills. There are two different multipliers. The small business multiplier is currently 49.9p and applies to properties with a RV below £51,000. The standard multiplier applies to properties with a RV of £51,000 or more and is set by adding a ‘supplement’ to the small business multiplier. The supplement is currently 1.3p, making the standard multiplier 51.2p. The supplement was introduced to fund the
cost of providing SBRR.
The small business multiplier is increased on 1 April every year by the Consumer Price Index (CPI) measure of inflation. Until 2018, the multiplier was uprated by Retail Price Index each year. Uprating by inflations ensures that business rates revenues are maintained in real terms each year.
When a business rates revaluation takes place, there is an additional adjustment made to the small business multiplier. The multiplier is adjusted to account for the estimated overall change in total RV due to the revaluation, after anticipated future changes due to appeals. The objective of this adjustment is to ensure as far as possible that, once all future appeals have been resolved, business rates revenues do not rise or fall in real terms as a direct result of the revaluation.
Proposed options for the multipliers
The Government is seeking views on how the multiplier(s) are set. Many ratepayers have raised concerns about the level of the business rates multiplier, the rate at which the multiplier has increased since 1990, and the rate at which it may change in future.
Some stakeholders have noted the advantages of the current uprating approach, that it provides a great deal of certainty to local authorities and to the Exchequer and enables ratepayers to broadly estimate their future bills. Others have been critical of the approach, arguing that it makes business rates unresponsive to changes in the property market.
Some of the suggested alternatives include:
- freezing the multipliers indefinitely, including at revaluations
- including changes in RVs from constructions, demolitions, and alterations in the adjustment made to the multiplier at revaluations
- ending the revaluation adjustments for changes in RV and offsetting the annual CPI changes at revaluations so that at each revaluation the multipliers return to the same level.
- Various stakeholders have also called for the government to either remove the standard multiplier supplement so that all properties are taxed at the same rate,
change the threshold at which the standard multiplier applies, or introduce new multipliers that vary with:
- property type – introducing different multipliers for different types of properties, such as shops, offices or warehouses.
The Government is seeking views on alternative methods of setting the multiplier each year, and at revaluations, when the value of the tax base is updated. Respondents are encouraged to consider how changes to the multiplier could benefit the widest range of ratepayers while managing the overall cost, and to recognise the wider impacts of the level of the multiplier on government policy and the funding of essential public services.
The business rates multiplier: Questions
- What are your views on how the business rates multiplier is set annually and at revaluations?
- How could the multiplier be set in future to ensure the sustainability of public finances and support growth and productivity? What would the impact of any proposed changes be on the level of the multiplier and revenue from business rates over time?
- How should the multiplier and any supplements relate to business rates reliefs? Should these be discrete, or should supplements fund specific reliefs?
- What are your views on introducing additional multipliers that vary by geography, property value, or property type?
Improving the business rates system
A ratepayer’s bill is determined by multiplying their property’s RV by the relevant multiplier and then applying reliefs. In assessing RV, the VOA seeks to ensure that properties which have the same characteristics are valued using the same method of valuation and in a uniform manner to arrive at valuations which are consistent for all ratepayers. RV is set as the estimated rent for an annual tenancy of a property, at a common point in time – the AVD.
Some ratepayers are critical of the business rates system because their property’s RV does not reflect the current rent they pay, and because they believe the system is slow to reflect changes to the value of a property. However, the current business rates system is not intended to reflect the specific amount of rent paid by individual ratepayers. It instead prioritises consistency of treatment of similar properties and the estimated open-market rental value of properties.
Previous revaluations have included transitional arrangements to help those ratepayers facing large increases in their bill. In designing a transitional relief scheme, there is a trade-off between supporting businesses and updating the tax base to ensure ratepayers are paying the right amount of tax. When introducing transitional arrangements, the government must have regard to the object of ensuring (as far as possible) that the scheme is revenue neutral over its lifespan. For previous revaluations, the government has designed transitional relief to limit the effect of large changes in RVs between revaluations through caps on how much a property’s bill can increase or decrease by each year. These caps differed depending on the value of a property.
Stakeholders have raised two main concerns with this approach – that capping annual bill increases means some ratepayers may not reach their full bill before the next revaluation, and that caps on decreases lead to higher bills for ratepayers whose RVs have fallen between revaluations
Valuations and transitional relief: Questions
- What are your views on the frequency of revaluations and what changes should be made to support your preferred frequency?
- What are your views on a banded or zone-based valuations system and the trade off with valuation specificity?
- What are your views on changing the valuation process or the information provided to the VOA, to enable more frequent revaluations?
- What are your views on the relative importance of the period between the AVD and compilation of the list vs. more frequent
- What are your views on changing the definition of rents used in the valuation process? How could this be done in a way that most fairly
reflects the value of the property?
- If you have had concerns over the specific method of valuation applied to your property, what were these concerns and how could the process be improved?
- What are your views on the design of the transitional relief scheme, and how transitional arrangements should be funded, given the requirement for revenue neutrality?
Plant and machinery and investment
Plant and machinery (P&M) is the physical equipment in or on a non-domestic property, other than the structures or buildings themselves. Common examples include lighting systems, lifts and machines used on production lines. For business rates valuation purposes, all items of P&M are exempt unless the P&M regulations specifically list them as needing to be considered in valuations. Therefore, in a business rates context, P&M is confined to this defined list of items.
The Valuation for Rating (Plant and Machinery) (England) Regulations 2000 set out a list of potentially rateable P&M under four classes:
- Class 1: ‘power generation, storage and transmission etc.’
- Class 2: ‘services – heating, lighting, water supply, hazard protection etc.’
- Class 3: ‘infrastructure – telecommunications cables, wires, lifts, pipelines, railway tracks etc.’
- Class 4: ‘named structures such as masts, bridges, dams, fixed cranes and tanks’
As business rates are a tax on the open market rental value of property, more tax is due on more valuable properties. Similarly, if a property is changed so as to become more valuable, its RV and tax liability are likely to increase. Such an increase could occur following improvements made to service P&M contained within a property, such as the installation of a lift or a new security system. Such an increase could also occur following other property improvements such as an extension, which are not related to P&M. This is integral to the nature of a property tax based on accurate values.
Proposed options relating to P&M and investment
Although most P&M that is used in conjunction with the specific occupier’s business needs is excluded from business rates, several stakeholders have raised concerns that the rules regarding P&M are out of date, or that the treatment of P&M and/or physical improvements to properties are barriers to investment and growth. Often these concerns are focused on a perceived need to support investment in specific types of P&M such as digital infrastructure or security systems.
The Government has also heard various proposals on how the business rates system might support decarbonisation through, for example, reliefs or exemptions for certain P&M used in energy generation or to improve energy efficiency, or the imposition of a higher rates burden on less energy efficient buildings, or those used for fossil fuel based generation.
Possible options for reform to address these concerns include:
- Reviewing and updating the P&M principles
- Exempting some currently rateable P&M from business rates
- Providing a temporary relief or exemption for new investments
The Government is seeking views on potential changes to the treatment of P&M, and is particularly interested in responses that provide evidence of the economic benefits of any reforms, and consider the practical challenges of implementation.
Plant and machinery and investment: Questions
- What evidence is there that the business rates treatment of P&M and changes to property affects investment decisions?
- Are the current P&M principles and regulations still relevant? How could these be updated if necessary, and what would the effect of any proposed changes be?
- What evidence is available on the potential benefits of exempting certain types of P&M on a permanent or time-limited basis?
- What practical challenges would the implementation of widerexemptions for P&M pose, and how might those be addressed?
- How can business investment and growth best be supported through the business rates system, and how effective would business rates changes be compared to other available measures?
- How could the business rates system support the decarbonisation of buildings? What would the likely impact of any changes be compared to other measures, including other taxes, spending or regulatory changes?
The administration of business rates
Valuation transparency and appeals
The ‘Check, Challenge, Appeal’ (CCA) system allows ratepayers to see and amend the details the VOA holds about their property, propose alternative values, including in instances where there has been a material change of circumstances, and appeal the outcome to the Valuation Tribunal Service.
The Government is seeking views on further improvements that could be made to reduce the complexity of the CCA system, and particularly on who can use the CCA system, when and on what grounds, and whether this should be changed
Valuation transparency and appeals: Questions
- What further changes would you like to see made to the (a) Check, (b) Challenge and (c) Appeal stages?
- What are your views on sharing information, such as rental/lease details, with the VOA? What are your views on the risks and benefits
of this information being shared with other ratepayers, public sector organisations or more broadly?
- What are your views on who can currently use the CCA system and become party to a challenge or appeal? What are your views on who can use the system, when and on what grounds?
Maintaining the accuracy of rating lists
Rating lists are a compilation of the RVs of all non-domestic properties in England. They are compiled and maintained by the VOA and updated at each revaluation. Well maintained lists, where changes to the list which impact the RV of a property are accounted for, support the efficient administration of business rates by enabling billing authorities to issue up to date bills that accurately reflect the value of the occupied property. If lists are not maintained, this increases the risk that bills become inaccurate and that some ratepayers pay more or less than the right amount in business rates. Inaccuracies can arise when the VOA is not made aware of significant changes to a property which could affect its RV which, when addressed, can lead to substantial back-dated liabilities for ratepayers.
Maintaining the accuracy of ratings lists: Questions
- What are your views on introducing a requirement to provide the VOA with rental information, either routinely or where changes to a lease occur?
- What are your views on making a register of commercial lease information publicly available?
- What are your views on introducing a requirement to notify the VOA or billing authority of changes to a property that could impact the business rates liability?
The billing process
The billing and collection of business rates is the responsibility of the 314 billing authorities in England. Some properties such as nationwide utility networks
are less suitable for listing in local rating lists and are instead listed on the ‘central list’. MHCLG is responsible for the billing and collection of rates for these properties.
A bill is generally issued for each individual property. Where a business occupies multiple properties in different locations, they will receive separate bills from each relevant billing authority and so make separate payments. The core content of a rates bill is specified in regulations but it is for billing authorities to determine the layout of and any additional information in their bills.
The business rates billing system reflects the fact that rates are a local tax and the billing process is devolved to billing authorities. This supports the operation of business rates retention and local decision making over the application of reliefs, but contrasts with other business taxes which are managed on a national basis by HMRC.
The billing process: Questions
- How can the current billing process be improved? What changes would provide the most significant benefits to ratepayers through for example, cost or time savings?
- What are your views on a centralised online system linked to other business taxes, enabling more joined-up data and management of billing across different locations? How could this best support ratepayers and billing authorities?
- What sort of support would businesses and agents expect to receive when moving to a centralised online process, and from where would you expect to receive it?
- What, if any, criteria should be applied in exempting certain ratepayers from online billing?
Exploring alternatives to business rates
The 2015 business rates review considered a move from a property-based business tax towards alternative tax bases. Although some respondents made the case for certain alternatives, including taxes on profits, turnover or local sales, there was no consensus, and respondents acknowledged that each of the alternatives involved practical, administrative, and economic challenges.
In the concluding summary of responses, the government reaffirmed its commitment to a recurrent tax on non-domestic property given its significant advantages, namely that they are:
- less distortive than some other taxes and less harmful to economic growth
- efficient to collect, with low risks from avoidance and evasion
- based on physical property, and so are more easily localised than other taxes
- a relatively stable and predictable tax, providing certainty for ratepayers and the Exchequer.
Some stakeholders continue to advocate for alternative or complementary systems of taxation to business rates, as highlighted by the Treasury Select Committee’s 2019 report.
More recently, COVID-19 and associated public health measures have significantly affected how non-domestic property can be used. COVID-19 has also, in the near-term, increased the use of online shopping. It is too soon to tell what the lasting impact of COVID-19 might be on the non-domestic property market.
The government will need to strike the right balance between continuing to raise the revenue necessary to fund essential public services and supporting the economic recovery. Therefore, the government is again seeking views on the case for the introduction of alternative taxes to either replace or complement the business rates system. Any move towards the introduction of a new tax would be a long-term proposition.
Stakeholders have previously proposed several alternative taxes or changes to existing taxes including an online sales tax, or increased rates of VAT or corporation tax. Each proposal has potentially significant challenges, some practical or administrative, and others more fundamental.
In light of the advantages of property taxes set out above, this call for evidence focuses on an alternative means of taxing non-residential property as a potential replacement for business rates(through a Capital Value Tax [CVT]) and, due to the prevalence of concerns about online retail trends and divided public opinion, an Online Sales Tax. Given that an online sales tax would be unlikely to raise revenue sufficient to replace business rates, we expect that any such tax would exist alongside business rates.
Exploring alternatives to business rates: Questions
- What are the likely benefits and costs of implementing a CVT? What are the practical implications of implementing a CVT?
- What evidence is there of the benefits that replacing business rates with a CVT would have in practice, for example, on business investment and growth?
- How can land and property be valued fairly and efficiently under a CVT in England? What evidence is available to do this?
- How would replacing business rates with a CVT affect the distribution of taxation?
- What are the likely implications of moving the liability for tax from tenant to landowner or property owner? How could the government ensure effective collection from and compliance by these taxpayers?
- What lessons can be learned from other countries experiences with CVTs?
- What other international alternative approaches to the taxation of non-residential land and property merit consideration for England?
- What would be the benefits and risks of introducing an online sales tax?
- Which services and products do stakeholders think should be subject to an online sales tax and what evidence is there to support this?
- What evidence is there for the effects of an online sales tax, for example, on changes in consumer behaviour, or prices?
- How could an online sales tax affect the distribution of taxation?