Fixing the fiscal flaws

By Heather Jameson | 09 February 2021

Business rates are broken. It is not a new story, but the pandemic has hammered home the final nail in the coffin of a funding system that has grown increasingly outmoded, by-passed by the virtual world and buckling under the pressure of rising demand.

The past year has seen struggling firms in need of government cash and unable to pay taxes, while the collapsing retail sector has shifted further online with little likelihood of a return to the business rate-rich town centre properties they once inhabited.

While the tax has always been unpopular with business, and local authorities have increasingly warned of the need to modernise, there has been a growing chorus of voices detailing the problems and calling for change. The Government itself postponed revaluation last summer and issued a consultation on the system – including looking at ways to bring in taxes from online retailers.

Then last week the Treasury announced a pause in business rate billing, calling on councils to halt the process until after the March Budget.

Solace managing director Graeme McDonald interpreted the Treasury move: ‘It implies – not surprisingly – there is going to be some sort of rebate in the Budget. But it doesn’t change the fundamentals; council tax is based on property values of the early nineties and business rates are a 19th century tax trying to keep up with the 21st century.’

While he suggests no one will object to supporting the high street in its time of need, there is a longer term issue. ‘Since the poll tax the Government has never grasped how you finance local government – you can’t keep your head in the sand for 30 years and not expect consequences.’

Gary Fielding, director of resources at North Yorkshire CC said the Treasury don’t appear to be ready to let go of rates just yet, but confidence in the finance system has plummeted, both from the rate payers and local government.

He said: ‘There is going to be a massive hole in the finances. Treasury are probably buying time for themselves.’

But buying time is not enough. An extension of business rate relief may get firms through the lockdown, but it doesn’t get away from the fundamental issue – that the outdated system of finance can’t generate enough tax for the growing needs of the care system.

Chartered Institute of Public Finance and Accountancy associate director Andy Burns agreed that business rates are ‘under even more pressure now than they were before. ‘When they are more flawed and more broken, does that become the point where they have to be reformed, and does the Government have the bandwidth?’

While he appreciated the Government’s desire to postpone business rates to save councils from having to rebill, the former finance director says a month’s delay in billing equaled a month’s delay in cashflow for councils that are already struggling.

Ultimately, business rates bring in £30bn a year. The question is, what will that be replaced with?

Backbench Conservative MP Kevin Hollinrake last month introduced a 10-minute rule Bill to Parliament calling for business rates to be scrapped in favour of a 3p VAT hike, and he has campaigned for council tax reform.

Mr Hollinrake told The MJ that any changes to the tax system would be ‘hugely politically challenging, but we have to be prepared to think differently’. While taxes would have to rise after the pandemic is over, he said: ‘I don’t think you can put [existing] taxes up enough to deal with social care and pensions.’

According to the Institute for Fiscal Studies, his proposed tax hike will not cover the loss in revenue from business rates, however Mr Hollinrake suggested a change in thresholds would also be needed.

He dismissed the existing plans for an online sales tax as too complex and did not cover all businesses and he claimed it would ‘make matters worse’.

Overall, local government has been sympathetic to the Government’s need to deal with the fallout of the pandemic, but is rapidly losing patience with the failure to address the big picture.

Retiring president of the Association of Local Authority Treasurers’ Societies Duncan Whitfield told The MJ: ‘Surely now is the time to review the concept of business rate retention as a funding source for local government.’

‘We are now faced with a fundamental review, a business rate reset, delayed business rate valuation and now we are being asked not to send our bills out…now must be the time to rethink.’

Solace finance spokesperson, and chief executive of Coventry City Council, Martin Reeves, agreed: ‘The proper reform of business rates… is absolutely critical and can’t keep being put in the long grass. While difficult and challenging technically, it has got to be taken seriously.

‘The key bit is what is the aim? It is to provide the right kind of financial settlement for local government and stop short termism.

‘This does need to be a radical overhaul. Some commentators will say it is not the time [as we deal with the pandemic]. I would say it is exactly the time.’

COUNCIL TAX

Floundering business rates may be the biggest issue for local government funding, but it is just part of a broken system. Based on 1990s valuations, and raised most years above inflation, the council tax system is equally strained and hit by the pandemic.

Campaign group Fairer Share, supported by backbench Conservative MP Kevin Hollinrake, have called for a shift to a property tax based on a proportional value of a home. The system would benefit taxpayers in the North, but without regional banding it would leave London and the South East with hefty tax hikes.

Mr Hollinrake said the levelling up agenda would ‘take ages to have a meaningful impact’ on people’s lives. ‘Taxation is the easiest way to deliver prosperity,’ he said.

The Institute for Fiscal Studies (IFS) also revealed last week that councils were set to lose £1.3bn in council tax collection for the 2020-21 year. While the Ministry of Housing, Communities and Local Government has pledged to pay up for 75% of loses, that still leaves a sizable shortfall.

Associate director at the IFS and report author David Phillips told The MJ the final size of the shortfall would depend on how good councils are at recouping unpaid tax – but they faced a ‘tricky conundrum’.

‘Councils will want to support their local residents, but on the other hand the losses they face will be larger if they don’t enforce the council tax bills.’

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