The property industry has raised concerns about the pledges on business rates made by each of the main political parties this week in their General Election manifestos, with experts warning the lack of clarity is damaging for investors and businesses.
The Labour Party has today pledged to replace the business rates system, while the Conservatives on Tuesday said they would reduce the burden for high street, leisure and hospitality businesses by increasing the multiplier on distribution warehouses. The Liberal Democrat manifesto pledged this week that business rates would be replaced with a Commercial Landowner Levy.
All three positions are ringing alarm bells for real estate investors and ratings experts.
The Labour Party's manifesto says: "The current business rates system disincentivises investment, creates uncertainty and places an undue burden on our high streets. In England, Labour will replace the business rates system, so we can raise the same revenue but in a fairer way. This new system will level the playing field between the high street and online giants, better incentivise investment, tackle empty properties and support entrepreneurship."
While that intent has been welcomed by the industry, the lack of detail on what the replacement system would look like is drawing criticism.
Simon Green, head of business rates at Gerald Eve, said Labour's manifesto is predictably hazy on the details and there has been no explanation of how they plan to achieve the reform – whether by raising revenue via an online sales tax, cutting the Uniform Business Rate multiplier for the retail sector and small businesses, or perhaps a combination of the two.
John Webber, head of business rates at Colliers, was equally dismissive of the lack of detail: “Successive Conservative governments have promised to reform the tax, but none have delivered, just making the system more onerous and expensive for the ratepayer as time has gone on. Whilst it is encouraging to read of Labour’s aspiration to breathe life back into our high streets, unless they tell us what they plan to do, how can anyone scrutinise their plans or take their calls for change seriously?”
Webber said Colliers would support Labour if it introduced significant reform to the current business rates system, but it would not support the system's total abolition or any form of land value tax. "We would certainly need to see the detail on other reforms suggested or its attitudes to say the Empty Rates Relief regime before we could give our support.
"Indeed, whilst reform of business rates is essential, total abolition would be naïve. Business rates as a tax has been around for 400 years – it’s only the last 20 that it has been tinkered with so disastrously. It is the one 'certain' tax. Given the economic situation in which the UK finds itself, no politician worth their salt would suddenly get rid of this the most certain of taxes, without replacing them."
Webber says one hope is Labour’s new property tax would therefore retain all the best elements of business rates while reforming the existing system, reducing the burden of tax and making things simpler.
"We also feel Labour’s lack of clarity on its policy is damaging for businesses. Pledging to abolish business rates and replace them with a business property tax is the easy bit. But we need to be able to advise businesses on what kind of taxes they will be paying under a Labour government. Many businesses, especially prospective retailers from abroad, will not invest unless they understand the market they are entering. If we cannot tell them, they will invest elsewhere in the world. This issue will only become more pronounced as time goes on.”
Nik Moore, head of business rates at Rapleys, says Labour's idea of a new, fairer replacement for the business rates system sounds promising adding it will be interesting to see how it can yield the same revenue. "The implication is that this will be via some sort of online sales tax which has been consulted on before but deemed difficult to implement without loopholes. However this won't work for office, industrial and less traditional sectors so it begs the question, how will those be supported given the changing economic landscape and occupier market?"
Moore says the manifesto also seems to suggest that the burden of rates on empty properties may be tackled and an incentivisation of sorts introduced to encourage releasing and entrepreneurship.
"However, as with most of the headlines, they sound great but the detail is lacking which raises concerns that there is still a lot to work out to ensure a robust new system will be implemented quickly. We sagely observe that the system has already been reviewed numerous times and given the size of the tax take, the reliability of the income stream, the exceptionally high compliance rate, and the ease and low cost of collection, it will be hard for any really meaningful change to happen."
Gerald Eve's Green said the two other main political parties in England have done little better.
"Tuesday’s Conservative manifesto had very little to say about business rates reform, other than to announce worrying plans to reduce business rates bills for high street, leisure and hospitality businesses by increasing 'the multiplier on distribution warehouses' – an already heavily taxed sector.
"The Liberal Democrats’ suggested plan to replace business rates with a Commercial Landowner Levy brings with it a whole host of different problems. For instance, currently the UK has no definitive register of land ownership and tracing overseas owners for example would likely be a complex and time-consuming process. It would also be difficult to arrive at fair values where there is no reliable pool of evidence."
Green points out that at 54.6%, the UK's multiplier or property tax rate is one of the highest of comparable property taxes in the Western world.
"Britain's business rates system must be overhauled, not patched up with sticking plasters, yet none of the main parties have really addressed the fundamental issues with the system or suggested a realistic alternative. Business rates must be made simpler and cheaper rather than being replaced completely or further complicated by differential tax rates and complex reliefs: this is the only way to help our businesses.”
Melanie Leech, chief executive of British Property Federation, said that from a commercial perspective, the Conservative Party's proposal to shift some of the burden of business rates on to warehouses misses the point, which is that the overall burden of business rates is simply too high for everyone.
"Alongside a reduction in the rate, what we need is more frequent revaluations to ensure that rates bills better track property values, and to de-couple business rates from inflation to make the tax more sustainable.”
Alex Probyn, president of property tax at Altus Group, said the Tory Party's pledge did not take account of the fact that there are 1,520 large distribution warehouses in England this financial year paying £1.31 billion in the business rates tax.
Probyn said: "Whilst the proposal was eye-catching and populistic in reality the measure was relatively insignificant.
"The level of support for the high street ultimately will depend upon the level of the supplement levied on online retailers. But a 2p supplement on the current standard multiplier of 54.6p, would only raise about £50 million to redistribute.”
Colliers' Webber describes the Lib Dem proposals to for a Commercial Landowner Levy as "a drift into Alice’s Wonderland" and "naive at best".
The policy of replacing rates with a Commercial Landowner Levy based on the value of the land only has been a long-term policy of the Lib Dems.
A report in 2018 from the Party claims that commercial land should be taxed regardless of whether the buildings above it are occupied, and the tax should apply to unused and derelict commercial land also. Non-residential stamp duty should also be scrapped to improve the efficiency of the commercial property market. The report claims the Commercial Landlord Levy would mean lower taxes for businesses in 92% of English local authorities.
Webber says: “Whilst it is good to see the Lib Dems are taking the issue of business rates seriously, it is a shame they did not think through the disastrous decision to delay the business rate revaluation from 2015 to 2017 which has caused so much trouble when they were in Coalition and Vince Cable was business secretary.”
“That said, we agree the need to reform business rates. We at Colliers have been calling for reform for years and we are glad someone recognises how poor the current system is and the damage it is impacting on both businesses and the community, and particularly the retail sector.
"However, the idea to replace business rates with a full commercial landowner tax is not the answer.
"Business rates were set up to pay for the amenities and services businesses use in the community. There is surely no dispute that they should pay something for these services. To replace the levy with a total land tax on landowners would impact on land values and discourage investment into property generally – and among other things, this would not be good news for pension fund holders.
"The additional tax would also result in landlords getting the money back by hiking up the rents they charge to occupiers. We would therefore have a system whereby businesses would end up paying more to the landlord but unlike the present system would be unable to appeal against their combined rent and rate bills that the landlord would introduce. So how would they benefit?"