Business Rates Review: call for evidence: Tranche One response, September 2020

On the high streets, footfall is down over 43 per cent compared to the same period last year. Before the pandemic, footfall had dropped over 10 per cent in the last 7 years. Internet sales had risen 21 per cent of all retail sales from 7 per cent a decade earlier and during the pandemic had jumped to nearly 33 per cent of all retail sales.

1. About the LGA

    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. 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.

2. Key points

2.1 We welcome the opportunity to make this submission to the call for evidence for the Business Rates Review.

2.2 On the high streets, footfall is down over 43 per cent compared to the same period last year. Before the pandemic, footfall had dropped over 10 per cent in the last 7 years. Internet sales had risen 21 per cent of all retail sales from 7 per cent a decade earlier and during the pandemic had jumped to nearly 33 per cent of all retail sales. (See  High Streets Task Force and ONS reports on the Retail Industry and the social impact of coronavirus.)

2.3 All of business has been affected. The shifts to home working and the enforced business closures have had an effect in the short term. The long-term implications are not yet apparent. Local government has played its part in responding to the pandemic and contributing to measures to help businesses. Local government has processed around £10 billion of business rates reliefs and distributed around £11 billion business grants.

2.4 Business Rates was due to raise £25.6 billion to contribute towards local services in 2020/21, both through retained business rates and amounts redistributed through the central share. That accounts for around a quarter of local revenue spending on councils, schools and police, or up to 40 per cent if grants to schools and the police (which are ring fenced or service specific) are removed. Following the measures announced in March 2020, 40 per cent of business rates in 2020/21 is being covered by retail reliefs (around £10 billion).

2.5 We therefore welcome the fact that the Call for Evidence acknowledges that business rates are an important source of revenue for local government and the impact on the local government funding system will be an important consideration in reviewing the tax.

2.6 In response to the additional demands caused by the pandemic, government has provided extra grant income of £3.7 billion to deal with expenditure pressures. However, business rates collection is likely to be down even despite the increased reliefs. Current predictions suggest that it will be down around £1.6 billion over the year 20/21. The LGA has commissioned work from Local Government Futures which proposes a compensation scheme for councils which would involve the Government adjusting business rates baselines for 2020/21 by a figure based on the projected total of irrecoverable losses.

2.7 When the workings of the 50 per cent business rates 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, it is projected that authorities would need support to a total of £1.044 billion.

2.8 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 also important that the tax system, including business rates, provides as much certainty as possible.

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

2.9.1 Sufficiency - Financing for local government services must be sufficient.

2.9.2 Buoyancy – rises along with economic activity with protection for local government from losses in income given the need to support local government services.

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

2.9.4  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.

2.9.5  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.

2.9.6  Incentive – Incentives should be provided to both business and local government.

2.10 Local government has strong interest in a reformed business rates system which commands confidence. An income which keeps up with demand is also important given the pressures on local government especially at this point.

2.11 Property continues to provide a good basis for a local tax on business. Business rates is efficient to collect and has been relatively predictable and buoyant in recent years. However, the changing nature of business alongside the nature of demand pressures on councils means that we cannot look to business rates to form such a substantial part of local government funding in the future and alternative means of funding councils will be needed instead or as well as a reformed business rates system.

2.12 Online businesses pose a challenge to traditional businesses and to business rates as a tax. If an activity can be carried out online without the requirement for premises this will reduce the yield of business rates which goes to both central and local government. It is true that online commerce may lead to other activities that will generate business rates, such as distribution warehouses but, without reform this is unlikely to raise comparable amounts to the high street premises it replaces. Taxation should be fair for both physical and online businesses.

2.13 From 2013 local government as a whole has retained 50 per cent of business rates collected. We supported the increase to 75 per cent business rates retention planned from April 2021, and previously supported the Government’s aim, originally announced in October 2015, to introduce 100 per cent business rates retention by the end of the Parliament. However, in the light of recent events, the steady increase in reliefs and the belief of many that business rates pose too great a burden on business, the LGA now believes that the move to 75% business rates retention only be revisited, if appropriate, once HM Treasury’s business rates review concludes. In addition, attention should be focused on developing new sources of finance for councils and different ways of incentivising growth. Although we recognise that the structure of the local government funding system, including Business Rates Retention, is outside of the scope of this review, we call on the Government to take early and decisive steps to provide councils with as much certainty as possible.

2.14 In the context of the current system of business rates and not withstanding our views about the need for new sources of finance, our responses to the specific questions posed in the consultation are set out below.

3. Questions on reliefs

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?

3.1 The current reliefs system is very heavily weighted towards centrally determined reliefs and thus it is not targeted. The ability to give reliefs, both mandatory and discretionary, is determined by statute, central regulations and case law.

3.2  If local authorities had more discretion over these centrally determined reliefs, they would be able to help local and independent businesses in order to stimulate the local economy.

3.3 It would also allow councils to use reliefs to incentivise new or green investments, as opposed to amending the Plant and Machinery regulations, as is suggested in Tranche Two of the review.

3.4 We call for a review of exemptions – including the agricultural exemptions where we have heard anecdotally that there are businesses which should be rated which are on farms. However, we are also aware that the agriculture sector has been hard hit by COVID-19.

3.5 We are conscious that in 2020/21 up to 50 per cent of potential business rates will be covered by centrally determined reliefs and it might not be possible to achieve the degree of local discretion outlined here immediately. The Government should take this opportunity to announce its intention of making most reliefs discretionary with the timetable for implementation to be discussed at a later stage, including how best this can be made fair for business and local government.

2. How can reliefs be targeted more effectively? How can reliefs and their administration be simplified?

3.6 As stated above, this could be done by allowing local authorities more discretion to target reliefs in the light of local circumstances. Administration could be simplified by online administration, in the way that local government has dealt with reliefs and business grants in the current period.

3. 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?

3.7 The LGA does not have any evidence of capitalisation that it would wish to submit to the call for evidence.

4. 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?

3.8 As stated above, the LGA considers that reliefs should be set locally rather than centrally.

3.9 Currently local authorities are statutorily barred from giving discretionary relief to premises occupied by themselves or preceptors. This has become an issue particularly for public conveniences and for market traders. The LGA considers that this statutory bar should be removed.

5. 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?

3.10 We carried out a survey in July 2019, which was published in January 2020. There is evidence of the specific examples of business rates avoidance which the document mentions and others.

3.11 Specific examples of this are:

3.11.1 Repeated short term periods of occupation (minimum reoccupation period is six weeks) of six weeks or slightly more, resulting in a further period of exemption from empty property rates. This can go together with contrived reoccupation of property, for example by storing box files, in otherwise empty warehouses as evidence of reoccupation.

3.11.2 Misuse of charitable occupation rules for business rates avoidance purposes. This is both through the vacant property being leased to a charity and it is proposed that when next in use the property will be wholly or mainly used for charitable purposes but this is unclear and through the ‘occupation’ of vacant properties, for example retail warehouses and shops by charities, which sometimes entails posters in a window or goods spread out.

3.11.3 Misuse of insolvency exemptions, through the use of ‘phoenix’ or ‘shell’ companies which trade for a short while and then liquidate. One authority reported that the same directors remained in occupation at a property but they set up new businesses with Companies House, describing the business as conducting a different kind of trade.

3.11.4 Splitting properties in order to qualify for small business rates relief. This can be done by serviced office providers who then benefit from the reduction rather than the small businesses.

3.11.5 Second home owners transferring from council tax to business rates on the basis that the property is available for letting for over 140 days in a year and thus qualifies as a small business. Although the Government consulted on tightening the rules in 2018 no action has been taken. One suggestion is that they should be treated as council tax payers unless it can be shown that the property is genuinely operating as a business.

3.12 We call for the Government to tighten up on the abuse of reliefs on the same lines as were proposed to come into force in Wales and Scotland in April 2021.

4. Questions on the multiplier

6. What are your views on how the business rates multiplier is set annually and at revaluations?

4.1 Annual uprating of the business rates multiplier is an important source of business rates buoyancy. Local government has received compensation for the move from RPI to CPI uprating during the current Spending Review period and it would lose out if this were not to be continued. This is an issue that needs to be considered in the forthcoming Comprehensive Spending Review. 7 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?

4.2 Including changes in rateable values from constructions, demolitions and alterations in the multiplier calculations at revaluations would be likely to result in a lower multiplier and thus lower income and would have implications for the buoyancy of local government income and business rates retention. This is again an issue for the Spending Review. 8 How should the multiplier and any supplements relate to business rates reliefs? Should these be discrete, or should supplements fund specific reliefs?

4.3 As stated below, local authorities ought to have to power to vary the multiplier. This would include the ability to fund specific business rates reliefs. 9 What are your views on introducing additional multipliers that vary by geography, property value, or property type?

4.4 Local government should be able to set its own business rates multiplier and would like to see flexibility to set a multiplier (p in the £) above and below the nationally set multiplier. The 2016/17 Local Government Finance Bill gave the power to vary the multiplier downwards to all and gave to directly elected mayors of combined authorities the power to levy an infrastructure premium of up to 2p in the £. We would like to see this power extended to all.

4.5 Local authorities ought to have the power to vary multipliers by property value or property type. This would enable them, for example, to charge a higher multiplier to businesses such as online warehouses in order to support reliefs for other businesses.

5. Additional comments - Occupation as the basis of business rates liability

5.1 Many fundamental concepts such as beneficial occupation have been set by case law and not by statute, leading to results which may seem puzzling to the public, such as the fact that large vacant sites may not pay business rates.

5.2 We proposed in our response to the 2015 review that the Government should bring forward changes in the basis of liability so that more is defined in statute. We continue to support such an approach, and how this is framed should be the subject of a further consultation involving the LGA and councils.