Innovation Lab: A Review of Business Rates

NICVA was invited by the Public Sector Reform Division in DFP to participate in an innovation lab on a fundamental review of business rates.

The format was launched by former Minister for Finance and Personnel Simon Hamilton in April 2014 as a new way to develop solutions to complex problems in a short timescale utilising subject experts in a ‘hothouse’ environment.

On 12th November 2013, Simon Hamilton announced his intention to undertake a fundamental review of business rates. The current Minister Arlene Foster announced her intention to go forward with the review of business rates. The review hopes to answer the question, ‘What is the best way to tax business?’ and the innovation lab was to inform the Terms of Reference of the review (which will go out for consultation in the autumn), to help define the objectives of the review and provide advice on how to undertake the review.

How are rates set?

The DFP Rating Policy Division, headed by Brian McClure, has responsibility for rating policy and legislation. Land and Property Services (LPS) has responsibility for administrating the rating system including valuation, billing and collection. Rates are currently calculated on the basis of a property’s rental value (also known as the Net Annual Value or NAV). The value of a property is multiplied against the annual district rate and regional rate poundages to arrive at the overall rates assessment. The district rate is set by local councils and funds around 70-75 of their resources. The regional rate is set by central government through the Executive’s Budget and comprises around 5-6% of central government funding.

Context

  • There are 72,000 non-domestic rateable properties in Northern Ireland. 20,000 are retail.
  • The average business rates bill is £11,000
  • Net Cash Rates Collection 2013/14 was £1.139bn – 50% of this is non-domestic

Rates Reliefs and Exemptions

There are a number of sectors that currently are exempt from paying rates or are eligible for rates reliefs.

They are:

  • Charitable organisations
  • Industrial derating (Introduced in 1929- Industry pays 30% of rates)
  • Small business rates relief (until April 2016)
  • Empty shops concession (Until April 2016)
  • Rural ATMs (until April 2016)
  • Shop window displays
  • Small post offices
  • Amateur sports clubs
  • Agricultural Property
  • Freight transport
  • Land earmarked for development

Relief

Value

Exempt (e.g. charities)

£85million

Industrial De-rating

£57million

Vacant

£56million

Small Business Rates Relief

£17million

Residential Homes Rate Relief

£10million

Sport and Recreation Relief

£4million

Freight and Transport Relief

£4million

Total Value

£233million

Information is not available on the cost of agriculture or development land exemption as the information is not valued by Land and Property Services.

The Lab

The lab lasted four days. On the first two days, participants heard presentations from taxation experts Penelope Tuck (University of Birmingham) and Dominic de Cogan (University of Cambridge); Neil Gibson (Northern Ireland Centre for Economic Policy, University of Ulster); Isobel Clarke (HM Treasury); David Magor and Richard Harbord (both from the Institute of Revenue, Rating and Valuation); Andy Wightman (Author of NICVA Centre for Economic Empowerment research paper on Land Value Tax); Victor Dukelow and Joanne McBurney (Department of Finance and Personnel); Alan Bronte and Patricia McAuley (Land and Property Services); Joel Neill (Hospitality Ulster) and David Roberts (Invest NI). These presentations helped inform the discussion in the third and fourth days of the lab which focused on whether there was a better way to collect rates or tax businesses, and what were possible solutions to the challenges identified. The participants were varied and included business representatives, retail representatives, local council officials and developers.

Discussion

The discussion concluded that there was no clear alternative to a property based rating system that would satisfy the necessary principles behind a taxation system:

  • simple to administer and understand
  • predictable to ensure the provision of public services could be planned
  • certainty
  • hard to evade

The issue of equity and fairness was an overarching theme of the discussion with the majority of participants believing that everyone should pay something. The NICVA position that was represented is that there should be transparency in who is not paying rates, the reasons behind the reliefs or exemption, and the impact this has on the rates base as a whole. Once there is absolute transparency, a public debate can ensue which can explore the merits of existing reliefs and exemptions and whether they are still of relevance today.

When discussing reliefs and exemptions, the distinction was continually made between charity shops, community and voluntary organisations, the size (turnover) of charitable organisations and organisations that are defined as charities for tax purposes but are not community and voluntary organisations.  The biggest issue which the majority of participants had was with charity shops and the impact this could have on economic development and the future of the high street. Most participants supported reliefs and exemptions for organisations that were providing a community service.

Collection and administration

Aside from reliefs and exemptions, other ways of widening the tax base were explored including ways to optimise collection and administration. Issues about the openness of data collection within Land and Property Services was discussed at length. The main focal points were whether the independence of the service from either the department or the local council was appropriate, and how the lack of a service level agreement between the local council and the LPS service acted as an inhibitor to data sharing and local government subsequently using the data in economic development proposals. Many business representatives at the lab suggested that the link between what the business is paying for and receiving through their rates should be improved. Alternatively, rates should be referred to as an additional tax so as to manage expectations of the business community.

Economic development

Given that the real ‘losers’ of the current tax system are small businesses with rates being a high fixed cost regardless of income, and as 95% of businesses in Northern Ireland are micro businesses with <10 members of staff (FSB), there was a lot of discussion around how to make the rating system more aligned with economic development measures and the NI Economic Strategy to ensure that NI businesses were supported to grow.

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