Joint response to the Government s Review of Business Rates. June 2015

Transcription

1 Joint response to the Government s Review of Business Rates June

2 Introduction This joint response to the Review has been developed through discussion and collaboration between several interested organisations, across business and local government, and has been endorsed by all signatories. It follows a period of dialogue between the different organisations represented and with Government. A roundtable discussion in November was followed by a joint letter to the Chancellor of the Exchequer before 2014 s Autumn Statement and subsequent meetings with the Financial Secretary to the Treasury and HM Treasury officials to explore where this group of organisations could add value. This dialogue has taken place in parallel with, and drawn on, work being carried out by individual organisations on business rates and related issues. The developments around devolution, both to nations and to city-regions, that have taken place over this period have also informed individual organisations thinking and will continue to do so, as will the experience of Business Improvement Districts in recent years. There is a depth of mutual understanding between business and local government of the administrative and financial burden that the current system of business rates imposes on all those involved. Beyond this, there is a strong consensus between the different interests represented on the need for fundamental, root-and-branch reform, rather than minor variations to the current system. In that light we were pleased to note the breadth of the questions put forward in the Government s review document published in March. This review provides an important opportunity to revisit the fundamental policy objectives of business rates within the broader contexts of national and local government finance and business taxation, and to ensure that the design of the tax meets these objectives, in terms of revenue raising but also in terms of incentives, behaviours and business viability. We also recognise that there are some shortterm measures that should be put in place. Beyond this, we share the view that reform must provide greater certainty and transparency to both businesses and local government; support, incentivise and facilitate local investment in drivers of growth, such as infrastructure and skills (including in those key urban areas disadvantaged by the current system); improve the engagement of businesses in helping to identify priorities for additional local investment; and keep in mind the need to achieve an internationally competitive regime of local business taxation. We also recognise that any reform must be underpinned by sufficient assurances for the Exchequer around levels of revenue to ensure an acceptable balance of risk and reward. In summary, our key asks are as follows: Consider how a move towards linking business rate rises to CPI could be introduced in the context of maintaining fiscal neutrality Allow local authorities to better respond to local business need through greater flexibility within the system with increased local discretion around scheduling of payments and reliefs Incentivize local authorities to prioritize business growth by retaining additional business rate growth above forecast levels and enhanced income raising powers This submission does not reflect the full views of each individual organisation and some of these organisations intend to submit separate responses. However, several areas of consensus emerged and this joint submission seeks to elaborate on some potential areas where we feel that reform could be fruitful, and highlight some of the longer term work being developed or considered to enhance the evidence base. 2

3 We hope that this submission is helpful and would reiterate our willingness to work closely with HM Treasury over the coming months to develop, test and evidence emerging propositions for reform. John Dickie, Director of Policy and Strategy, London First Mayor Jules Pipe, Chair, London Councils Councillor Philippa Roe, Leader, Westminster City Council Christian Spence, Greater Manchester Chamber of Commerce Colin Stanbridge, Chief Executive, London Chamber of Commerce and Industry Sue Terpilowski, FSB Policy Chairman for Greater London, FSB London Region Rob Whiteman, Chief Executive, CIPFA 3

4 Questions 1 and 2 What evidence and data can you provide to inform the government s assessment of the trends in use and occupation of non-domestic property? Is there evidence to suggest that changing patterns in property usage are affecting some sectors more than others? In order to produce a clearer assessment of trends in use and occupation of non-domestic property there is a clear need to ensure that access to Valuation Office Agency data, and relevant HMRC data, is opened up through addressing the real and perceived legal constraints identified in the Government s interim findings from its review of business rates administration. This data should be made available free of charge, and on an open data basis, in order to ensure compatibility with open data initiatives which can seek to match this data with other data sets to create more useful information. One emerging sector which is being significantly affected by changing patterns in property usage are co-working spaces and incubators. The UK has seen a recent rise in the number of these organisations. The London LEP/GLA Places of Work report (2014) found that there were 112 co-working spaces, 34 incubators and 16 accelerators operating in London, of which more than half had opened in the last 2 years. These organisations are at the forefront of the economic recovery and innovation in the field of business support. The survival rates of new business in these spaces are usually above 80%, with many spaces seeing above 90% long term survival rates amongst their start-up business communities. Typically based in open market B1 spaces in city centre or city fringe locations, business rates represent a significant cost to co-working spaces. Many are also based within rising office rent environments, fuelled by the trend towards office to residential conversions. Despite their obvious need for space of a reasonably significant scale, co-working spaces are almost all small businesses in their own right. However, most are relatively marginal operations and the sustainability and growth of this movement is held back by current business rates legislation. Unlike small business occupiers of offices, service offices, retail shops, etc. co-working spaces providers (and therefore their users) do not benefit from small business relief. Certainly within London, many co-working and business incubation space providers are operating within short term, interim, or meanwhile commercial space due to rising office rental levels and business rate levels. 4

5 Case study: Westminster Council s Civic Enterprise Fund: Local business rate retention to support economic development The Local Authority Business Growth Incentive (LABGI) enabled local Council s to retain a proportion of growth in the rateable value tax base to stimulate local economic development. Using LABGI resources, Westminster City Council established the Civic Enterprise Fund. Through the Civic Enterprise Fund Westminster City Council has made investments in the creation of several innovative economic development ventures which demonstrate how effective local government can be at working with the private sector to support growth when given greater autonomy over the re-investment of business rates. For example, the Council invested in the startup and growth of Hub Westminster with funding as conditional grant, loan and equity finance. This facility has proved hugely popular with entrepreneurs and early stage businesses, and currently houses almost 500 members. Using established Government spending evaluation methodologies, Adroit Economics reported that: 224 jobs were created by members, net attributable to business support received from Impact Hub Westminster since the enterprise space opened in October ,600 public sector investment in Impact Hub Westminster per job created (this compares with typical Regional Growth Fund performance of circa 20,000-40,000 public sector investment per job created). 5M net additional GVA generated by Impact Hub Westminster since it launched in October ,339 new jobs are estimated to be created by members as a result of receiving support from Impact Hub Westminster s over the next 10 years. Source: Westminster City Council Questions 3 and 4 What, in your view, does this evidence suggest about the fairness and sustainability of business rates as a tax based on property values? What evidence is there in favour of the government considering a move away from a property based business tax towards alternative tax bases? What are the potential drawbacks of such a move? Setting this question in its broader context, this review provides an opportunity to revisit and clarify the policy objectives of business rates, which we would suggest fall into two broad areas: Raising tax revenue in a way which is as equitable; stable and certain; economical and convenient to collect; simple and transparent; and non-distortive as possible Minimising disincentives and maximising incentives to private and public investment in drivers of growth and jobs There is consensus around the table that on balance and considering the practicalities of achieving these policy objectives business rates should remain a property-based tax, and the immediate proposals below are based on this premise. However, recent years have seen some significant contributions to thinking on reform of taxation, including the reports of the Mirrlees Review, Small Business Tax Review and the London Finance Commission, as well as the escalation of known trends in business property usage (such as the rise of online retail) referred to in the Government s discussion paper. There is a clear need to look holistically at a) business taxation, b) land and property taxation and c) local government finance when considering reforms to business rates. 5

6 Particular areas of interest raised during discussions include simplifying and consolidating overall business taxation with an emphasis on striking a rational balance between output and input taxes; looking at more equitable and efficient approaches to the taxation of both commercial and residential land values; and reassessing whether the overall local government finance system remains fit for purpose when conditions in the sector have shifted markedly as a response to statutory, demographic and budgetary pressures. In the medium term and as the national fiscal position improves organisations represented will continue to pursue reform in these areas and would be eager to work closely with Government in doing so. Question 5 What examples from other jurisdictions and tax systems should the government consider as part of this review? What do you think are the main lessons for the business rates system in England? The group does not advocate the adoption of any particular measures from other jurisdictions. However, the Northern Ireland system of business rates, which is fully devolved to the Northern Ireland Assembly, allows for valuations based on self-assessment, as well as an element of local flexibility in rate setting within clear parameters. The system could be of interest to explore as a comparator. Questions 6-8 How can government use business rates to improve the incentive for local authorities to drive local growth? What impact will increased local retention of business rate revenue have on business growth? What will the impacts be on local authorities? What other local incentives should the government consider to further incentivise business growth? There is a clear consensus amongst business groups and local government that the system should be reformed to improve local incentives to invest in growth, while retaining transparency and stability for business and local government and providing business with clear routes for engagement. We believe a key way to achieve this is to give local authorities greater flexibility within the system to respond to local business need with increased local discretion around scheduling of payments and reliefs. This is closely linked to larger and more ambitious aspirations for fiscal devolution as part of the wider devolution agenda, referred to above. Under the current system property valuations are slow to respond to economic cycles (which may be sector or geographic specific rather than national). This can lead to large changes in rate liability every 5 to 7 years. A move to more flexible revaluation periods, or local indexation between valuations may help address this issue. This would allow more to be raised in periods of economic growth and less during down-turns. However, it is felt an annual review would create considerable instability and reduce certainty. A fundamental aspect of reform is demystifying the retention system. There are some common misperceptions amongst businesses, which have persisted since the introduction of the Local Government Finance Act, such as the idea that local authorities set the rate and retain all of the revenues which they collect. Such misperceptions exacerbate the feeling of some business owners that they experience a degree of taxation without representation. In a recent survey of Westminster businesses, more than half thought that Westminster City Council set the level of business rates, with two thirds of businesses stating that affordable 6

7 business rates is the most important factor in making an area a good place to operate a business. These misperceptions, which organisations agree are rife across business, has a significant negative impact on relationships and trust between local authorities and business communities, erecting barriers to joint working in crucial areas of mutual interest such as skills development. There is a clear role for central as well as local government to take the opportunity afforded by this review to ensure that there is a clearer understanding of how the system operates making it a more transparent process. The Westminster survey reflects other opinion research which suggests business support for improving transport links, clean and safe streets, efficient planning services and the availability of skilled employees as contributing to local growth. This suggests that there may be a case for allowing local government to retain a greater percentage of new business rates in order to leverage investment in such drivers and stimulate local growth. Our further specific recommendations concern three key areas: consolidating incentives to drive additional growth through extending the opportunities for greater business rate retention beyond Manchester and Cambridge and reconsidering proposed arrangements for resets within the retention system; enhancing and expanding local ability to leverage future income streams through tools such as Tax Increment Financing; and addressing the need for better engagement of businesses around the expenditure of any additional local revenues: As part of the Business Rate Review s conclusions, Government should commit to releasing an initial stock take of the pilot retention schemes in Cambridgeshire and Peterborough and Greater Manchester and Cheshire at Budget 2016, and to set out clear milestones for expanding the approach in line with other commitments on greater devolution to cities and regions. o This should be aligned with a clear plan for any 'reset' of the system (currently planned for 2020) to minimise cliff edge effects on incentives, for example by introducing a rolling period for which authorities were able to retain business rate growth arising from development. o This also provides a welcome opportunity to review the way in which growth is defined: the current definition encompassing only floorspace growth, rather than including revaluation growth, disadvantages built-up urban areas with minimal space for new business premises and undermines the incentive to invest, beyond increasing floorspace, in areas which improve the commercial environment for businesses such as transport, energy and communications infrastructure and improvements to the public realm. This is an area in which various organisations around the table are interested in undertaking additional thinking and economic modelling in the coming months. The Government should set out a timetable, as part of its first Spending Review, to carry out joint work with business and local government to enhance and expand local ability to leverage future income streams. This could include, for example, making Tax Increment Finance a more widely available and locally-driven tool for leveraging additional investment in the drivers of economic growth, building on the Local Government Resource Review, City Deals and Growth Deals and the London Finance Commission. Government should support local areas in exploring approaches, drawing on historical and international precedent, to enhance the engagement of business in helping to identify priorities for investment of additional local revenues generated through routes such as those outlined above and that could potentially enhance the local commercial environment. 7

8 Question 9 Should business rates be reformed to make them more closely reflective of wider economic conditions and if so, how? The unresponsiveness of business property taxation to economic conditions in the UK is atypical of OECD countries and largely due to the artificially imposed constraint that the tax must raise a fixed amount of revenue, linking to broader and longer-term questions on the future of business taxation and local government finance. As a minimum, however, there is broad consensus that the uprating of business rate multipliers should be indexed to CPI rather than RPI, to reflect more fairly and accurately the conditions faced by businesses. As acknowledged by the Government s discussion paper, this would produce a cash flow gap for both the Exchequer and local authorities and a sensible and fair approach to mitigating this would need to be defined, particularly with a view to safeguarding local authority revenues at a time of severe and increasing budgetary pressure. We would anticipate that this would be funded in a similar way to the 2% cap on the business rates multiplier that has been put in place by Government over the last two years. Question 10 If business rates remain a property tax, how do you suggest business rates could take into account the individual circumstances of businesses such as their size or ability to pay rates? Three key aspects of addressing this question are: the differential impacts on businesses of the business cycle and inflationary uprating of the rate multiplier; the relative inability of the current system of reliefs and exemptions to respond to individual circumstances; and differences in cash flow between businesses in different sectors and at different stages of development. The first two points are explored elsewhere in this response. On the third point, it is the group s view that business rates administration could be improved to take better account of varying cash flow between companies by allowing greater flexibility on payment instalments, within clear parameters. One example, which could be explored further, would be allowing a 'grace period' on first occupation when no rates would be payable in order to allow businesses to develop income streams, with the annual payment condensed into the remainder of the year to ensure that overall yields did not fall. This principle could be further extended to allow for flexibility for businesses, such as some types of retail, which experience significant seasonal variation. The grace period option is potentially likely to be subject to a form of business rate avoidance. The Government would need to tackle this as per the separate recent antiavoidance consultation exercise. There is a precedent for flexibility with payments; during the last recession HM Treasury introduced flexibility for VAT payments, offering small businesses payment options, including deferred payments. These small changes were especially helpful for many businesses when introduced and are still valued in the current business climate. Such a move would have impacts on the administration of rates by local authorities which would need to be set against the positive impacts on businesses and overall growth. It could 8

9 also result in reduced collection rates, as businesses factor regular rates payments into their business plans and cash flow plans. One area that would need to be clearly resolved is the knock-on impact on local authority payment profiles and the resulting effect on the current tariff and top-up system. Another area for further discussion would be how the very shortterm cash flow impacts could properly be shared between central and local government, noting that receipts would remain the same over the course of a year. As an illustration, based on total business rate receipts and using a notional 1% interest rate, allowing the entirety of business rate receipts to be deferred for three months would cost c. 28m in lost interest over a full year. Given the significant benefits that this would provide particularly to smaller businesses and those with less regularity of cash flow, we would suggest that this is a highly effective and affordable measure for HM Treasury to implement and fund in full within a broad envelope of fiscal neutrality. It is possible that to minimise the cash flow impacts, this flexibility could be extended only to businesses of a particular size, though this would produce additional complexity and anomalies. There is a clear link to the question of reliefs and exemptions and how different sizes of business are defined; most specifically, such a measure would also require coordination with provisions on temporary occupation and empty properties in order to avoid generating perverse incentives. Question 11 How does the proportion of total operating costs accounted for by business rates vary by the sector and size of a business? The work being scoped by the British Chambers of Commerce to better utilize and analyse VOA and HMRC datasets (see above) will seek to provide a detailed analysis of these differentials and detailed policy recommendations arising. This is conditional on HM Treasury supporting the open access of the VOA database without charge. Question 12 What is the impact of the business rates system on the competitiveness of UK businesses? Are there any particular impacts on SMEs? The group is unaware of any evidence suggesting a direct correlation between the business rates system and investment flows into the UK. However when determining the relative competitiveness of the UK, business rates cannot taken in isolation, but rather should be viewed across the broader suite of taxes including corporate, personal and property taxes. In this regard reductions to the statutory corporation tax rate, introduction of the new controlled foreign companies rules, and the introduction of the patent box, have all improved the relative competitiveness of the tax regimes. However taxes on non-residential immovable property are comparatively higher in the UK (1.6% of GDP) compared with the OECD average (0.5% of GDP), therefore reforms to the current system should be balanced against the need to remain an attractive location for business and investment. It is important to note that stability is at least as important in delivering an internationally competitive regime as the rate of tax. Business values certainty, instability in the tax regime, or wider the political environment can act as a deterrent to investment. A road map from Government which gives clear direction of travel will help alleviate some of this uncertainty. 9

10 Questions How could the government better target support for SMEs given that the size of a company may not be reflected in the rateable value of a property it uses? Should investment in plant and machinery, energy efficiency improvements or other similar property improvements be treated differently by the business rates system? If so what changes could be made? What evidence and analysis should the government take into account when evaluating the impact of and any changes to the range of reliefs and exemptions present in the business rates system? There is consensus amongst the organisations represented that this Review should lead directly to a wholesale review of all reliefs and exemptions. Returning to the objectives of the tax, the starting point should be that reform of business rates should aim to address issues of equity and incentivisation within the workings of the substantive system, while minimizing the need for additional exceptions, thresholds and decisions which add bureaucracy and confusion for both businesses and local authorities. As part of a review of reliefs and exemptions there is the potential to consider removing the smallest SME s from the business rates system altogether, for example through exempting properties with a rateable value below a specific threshold. This measure would need to be funded within a broad envelope of fiscal neutrality - potentially through efficiency savings delivered through other reforms of the system. It should also be recognised that there is currently no local authority or business input into the criteria for reliefs and exemptions and there are consequently clear gaps and anomalies within the system. The powers introduced in the Localism Act for local authorities to grant additional discretionary reliefs have been welcome, and have led to some innovative initiatives in local areas, but have not been widely taken up largely on grounds of affordability. Building on this, there is potential to consider local determination of the current statutory reliefs, for example the level and period of empty property relief. In addition, the notional revenue currently used for reliefs and exemptions (the Government s discussion paper cites partial figures of between 3.5bn and 4bn) could be devolved and used more flexibly under local oversight at the level of a recognised grouping of local authorities. Fundamental to this would be clear mechanisms for business engagement at the regional or sub-regional level. As with the proposals outlined in the response to Questions 7, 8 and 9 above, such a system could provide a greater opportunity for businesses to have a say on where they felt support was most needed locally. Such a system would also provide for clear, consistent communication of all opportunities for businesses in an area to minimize their rate bills, such as via annual NNDR communications from local authorities (which currently include information on precepts set for larger geographical areas, such as for Police and Crime Commissioners and the GLA). Clearly there would be an element of risk involved in such a move and local areas would need to be confident in their resilience to external shocks. Such an offer could potentially be developed and rolled out as part of the broader agenda around devolution to cities and regions, in parallel with the Chancellor s direction of travel on stronger local governance and the pilot schemes in Cambridgeshire and Peterborough, Greater Manchester and East Cheshire to allow councils to retain 100% of any additional business rate growth above expected forecasts. Again this is an area where organisations around the table are interested in undertaking more detailed work. 10

11 References Corlett, A Bold, liberal tax reforms (CentreForum). Available at: Greater London Authority Supporting Places of Work: Incubators, Accelerators and Co-Working Spaces. Available at: HM Treasury and Department for Communities and Local Government Administration of business rates in England: interim findings. Available at: ess_rates_interim_findings_ pdf London Finance Commission Raising the capital: The report of the London Finance Commission. Available at: Mirrlees, J. et al Tax by Design: the final report of the Mirrlees Review on the UK tax system. Available at: Office of Tax Simplification Small business tax review: Final report. Available at: s_small_business_tax_review_hmrc_administration_ pdf 11