From Property Week:
Neill drops £400m empty rates bombshell on small businesses. Empty rates relief for small properties has been scrapped in a move likely to cost businesses £400m a year.
Vacant properties with a rateable value of less than £18,000 a year had previously been exempt from paying business rates. But communities minister Bob Neill yesterday announced that the threshold would drop to £2,600 from 1 April, estimating that to continue with the exemption would cost government £400m a year...
Liz Peace, chief executive at the British Property Federation, said: "If the government is pinning its hopes on a private sector led economic recovery then this is a damaging and retrograde step. Empty rates is a tax on hardship at the worst possible time. The majority of the properties affected by this announcement will be in areas that are already economically disadvantaged, and so this will be a further blow."
Yesterday’s announcement came despite heavy criticism of the tax from The Morbidly Obese One and business secretary Vince Cable while in opposition.
WTF?
It strikes me that 'vacant premises' and 'somewhere where economic activity is taking place' are two mutually exclusive states. A tax on one is, by definition, not a tax or a burden on the other.
Even if they doubled Business Rates on vacant premises (so they were taxed at a punitive rate rather than being exempt), it would not affect active businesses (you know, those entrepreneurs who are trying to build up something; those people who want to go out and work, all the stuff that'll help get us out of the recession) one iota, and if anything, it would stimulate economic activity, because those vacant premises would be renovated in a twinkling and the landlord would make damn' sure that he got tenants in pronto.
And yes, I've heard all these tales about 'landlords tearing the roof off' which is why a tax on the site value alone would be even better than Business Rates without exemptions, that's just details. And Vince Cable, who has often held himself out as a moderate Land Value Taxer really ought to know better.
Tuesday, 14 December 2010
Epic Logic Fail
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16 comments:
During preparing accounts for various clients who rent their premises, i've already seen a lot of dropped rents as clients have re-negotiated (i.e threatened to move premises) their rent and are now paying less. This move will hopefully see a lot more of this re-negotiation occur and aid economic recovery.
"Liz Peace, chief executive at the British Property Federation, said..."
Well, as spokeswoman for the landlords, she would say that, wouldn't she. She probably knows that 90% of readers aren't going to be interested enough to work out the logical fallacy, they'll just go away with the impression that the government is screwing the poor again, so this move is a Bad Thing.
Sorry, but who do you think owns these empty properties? In many cases it'll be companies and thus this "A tax on one is, by definition, not a tax or a burden on the other." is indeed an epic logic fail.
Where I work just now is a privately owned estate with multiple lots, my company rents two, but some of which are empty. These empty lots will now be charges rates and where do you think that money will come from? The landlord. Who'll do what? Pass part or all of the cost on to his tenants.
All tax is punitive and in a recession the government should be seeking to REDUCE tax on businesses, not increase it.
Rab, my I refer you to the comments made by SW and B?
I think it is safe to assume that landlords are charging market rents for the premises that are occupied (i.e. "as much as they can get, but no more than the tenant can afford"). How on earth can a landlord 'pass on' higher costs he is incurring elsewhere?
If he tries it, then he'll end up with even more empty units, so if he keeps loading his fixed costs onto his dwindling number of tenants, sooner or later he will have none.
Whether or not "all taxes are punitive" is a moot point, but seeing as rents (to the extent they relate to the location and not the building) are just privately collected taxes, that is immaterial to the debate.
To clarify, we observe, in practice (and as predicted by Ricardo) that if Business Rates are reduced, the rents charged go up to soak up the difference. So whether a tenant pays £10,000 rent and £4,000 Business Rates, or £14,000 rent and no Business Rates (in a BR-exempt zone) or any other two figures that add up to £14,000 is entirely irrelevant to the business (i.e. to 'the economy').
It amazes me how many people think that all commerce operates on a cost-plus basis, therefore higher costs are automatically passed on as higher prices. I suppose some businesses do -the oil industry springs to mind - but many more have a vested interest in maintaining the illusion, supermarkets being the prime culprits.
I'd go even further, Mark. The weakened negotiating position of a landlord faced with the fear of paying Business Rates on empty premises means that there's a good chance that the tenant can end up paying £9,000 rent + £4,000 BR. In fact the higher the BR, the lower the total payment for the tenant is likely to be, if the tenant is anything like a half decent negotiator.
Good. Its been nice to have the boot on the other foot.
D, at the margin that is possibly true as well, but the £13,000 total is set 'by the market', negotiating is on top of that. Demand for premises (or indeed houses) to rent is price elastic, so the more is on the market, the lower prices are (but total income of all landlords still rises, so win-winl.
BQ, good to hear it!
Vince Cable? Know better? Now, really, come on!
Changing the subject slightly (but not too much I hope), I read an article about "Silicon Roundabout" in the Economist which is sort-of relevant to this post. The article asks why here, why now and what can HMG do to encourage more such businesses and then explains what HMG has actually done.
Regular readers of this blog should have no difficulty in spotting the magic phrase, "cheap rents", in the article which unintentionally answers all three of those questions. Although no doubt the fact that the location is close to the financial district also played a big role.
However HMG, not being quite so well educated as MW's blog readers, asked the businesses concerned, and got the answer "more investment". Sadly that is exactly what HMG should not do. If they subsidise companies at startup with more investment cash, the companies can afford to pay more rent. And thus will bid up the rents above what they would otherwise be. This will not only impact such a company when the startup loan is gone, it will also impact companies which didn't qualify for a startup loan but now also find themselves having to pay higher rents because of competition. Oh dear.
So here we see the other side of the paradoxical coin: just as higher Business Rates are not necessarily bad for the local economy, so too higher investment is not necessarily good.
D, agreed to all that. All business investment is good - as long as it isn't HMG doing the investing. They should stick to roads and bridges and stuff.
MW. Personally I don't reckon the gummint need do much for roads and bridges and stuff either. The railway network was built with private capital and many roads were also. On the other extreme there are things like the Humber Bridge. Wonderful engineering. Crap allocation of (scarce) financial capital.
L, it's not a question of where the money comes from, it's a question of a higher authority ramming through the planning permission.
Even the old Victorian railway companies needed Acts of Parliament to be able to open a new line.
As we know, railway companies always go bust, because they pay all the costs but it is surrounding land owners who soak up the gains.
So we establish that roads, railways, airports etc need the force of the state to get built (or else NIMBYs and land owners hold them to ransom), and the value they (can) add is far in excess of the cost of building them.
Ergo, it is only fair for 'the nation' to claw back the gains in terms of fuel duty on petrol and LVT on increases in rental values, so by reverse logic, it is acceptable for 'the nation' to pay for these things.
Assuming a sensible cost-benefit analysis (which the Humber Bridge might have failed), this is then good for the economy AND good for the nation's finances.
Here endeth.
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Rab - a final thought. You have to remember that VAT punishes businesses that 'add value' (i.e. make profits), ditto income tax, corporation tax - the more you do, the more you pay.
A tax on land values is the reverse - it punishes land owners who do nothing (i.e. can't even be bothered to get tenants in, thus dragging down the whole area etc.)
Finally, some sense on this issue!
Empty properties damage areas and communities – creating a sense of neglect that has serious consequences for the wider area.
We've recently started 3Space, a charity that encourages vibrant community use of empty property – giving charities the ability to expand their activities, reduce costs and reach new audiences, while bringing life back to areas that are suffering.
We actually try to work with landlords to help them mitigate empty rates - we take short term leases on the properties (with no rent or service charges), and the landlord covers the charity's rates liability (with the 80% relief).
However, even with this financial incentive, many landlords are unwilling to look at innovative or creative community uses of their vacant units, preferring that they sit empty.
Anything that helps encourage continued use of available resources is critical at this difficult time.
Henry
Just curious, but what is "vibrant" community use as against, say, non-vibrant community use?
Maybe recalcitrant landlords don't relish members of "vibrant" communities inhabiting their property. I'm willing to believe that I'm reading too much into your description of what appears to be an excellent idea. However, and colour me reactionary, when an activity or area or community is described as "vibrant" it implies (to me) a noisy, intrusive, council taxpayer-funded, endless extravaganza "celebrating" diversity (or similar crapola) and ending up, sooner or later, with a heavy police presence. If you lived in the London Borough of Haringey you'd know exactly what I mean.
U, thanks to the miracle that is The Charity Commission website we establish that 3Space's head office is in London, Tower Hamlets, which is down market of even Haringey.
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