Saturday, 19 March 2016

Killer Arguments Against LVT, Not (387)

One of my LLC friends emailed in:

Hi Mark,

I have encountered a "Killer argument…", can you turn it into a "… not", please?

"The factory owner of a paper mill will be penalised and might not build another factory while the hedge fund manager with his small office who turnover 5 million will not have to pay for it."

I can argue against it but I know you'd do a better job.

I always find it helpful to look at actual facts and figures to see whether the assumptions are even correct.

Paper mills are a special case, because they need to be near a plentiful water supply, and it helps if they are near a tree supply, i.e. out in the countryside where the land is very, very cheap. So let's just take a generic factory somewhere in England.

According to DCLG, the mean selling price for land with planning for industrial or commercial use across England is £482,000/hectare (£200,000 per acre). (For comparison, The median price for residential land with planning is about £2 million/hectare, i.e. about £80,000 for each plot for a semi-detached house with a reasonable sized garden).

Let's assume the annual rental value is capitalised at 5% = £10,000/acre, so the LVT bill would be £10,000/acre. We don't know how big our hypothetical factory plus parking spaces is, let's say 5 acres @ £10,000 = £50,000 LVT per annum. Unlike Business Rates, the bill would not be triggered when the factory is built or increased when the factory is improved or extended. In all likelihood, the LVT will be pretty similar to the current Business Rates bill (plus or minus 50%, but not huge £ amounts either way).

If our factory owner then decides to buy the five-acre site next door and build another factory on it, instead of paying £482,000 up front and then having to pay Business Rates in future, the land will be more or less free and he will just have the £50,000 LVT bill in future. The current owner of that vacant site, suddenly faced with an annual LVT bill of £50,000 will waste no time selling it or putting up his own buildings to get some money coming in.

According to Findalondonoffice, office rents in St James's and Mayfair, where all the self-respecting hedge funds are based is £98/sq foot per annum, plus £42 Business Rates = £140/sq ft.

How big are our hypothetical hedge fund's offices? They need a grand reception area, a meeting room or two, partners' offices, a trading room. . They might just about squeeze that into two hundred square yards if it's all cubby holes.

So the hedge fund is currently paying £250,000 a year in rent and rates and will continue to pay that much when LVT is phased in. It is his landlord who will pay the LVT which is at least four-fifths of the total value i.e. £200,000.

Like the factory owner, the hedge fund's total tax/rent bill will not change much. Only the hedge fund's landlord's tax bill will increase. There is no reason to assume that the hedge fund will relocate to a small shed in Croydon to save LVT - if they want to minimise occupation costs, they wouldn't be in St James's or Mayfair in the first place, they'd be in a shed in Croydon. And if the hedge fund does relocate, so what? The landlord will still have his £200,000 annual LVT bill, the tax will continue rolling in.

But broadly speaking, the hedge fund will be paying (indirectly) four times as much LVT as the factory owner with his five acre site, not considerably less as the KLN implies

So the Killer Argument fails for lack of evidence. I can't really say much more than that.

If the KLN had been: "Ah, but the landlord who owns office space in central London will end up paying many times more than the owner of a large industrial site in the Midlands." then yes, it would be base on correct assumptions, even thought it still wouldn't be an argument against LVT as such.


Lola said...

The key thing is that LVT is paid by the landlord, not the tenant. So LVT doesn't affect the business case for either HF or Paper Mill. In fcat there might be a reduction in rents.

I had the 'internet business in shed' v 'high street shop' argument presented to me. Same answer. Since HSS is not as profitable as IBIS then HS rents would fall. Or am I missing something?

Bayard said...

My answer, in addition to the above, would be "so bloody what?". LVT is not an income tax. We're so obsessed with the idea that people who earn more should pay more. I wonder if other countries are like this or whether Britain is the most envious nation upon Earth.

Mark Wadsworth said...

L, HSSs are far, far more profitable than IBIS.

That's why rents on the high street are a hundred times as high as for sheds on the outskirts. If HSS were not so profitable, then as you say, rents on the high street would fall.

Be that as it may, UK high street retailers pay on average 1.5p in Business Rates for every £1 of turnover.

LVT might be a bit higher than BR is on high streets, but as the plan is to reduce their VAT from 17p for every £1 of turnover to £zero, I don't think there's anything to worry about.

Steven_L said...

Turns over £5 million a year? That's a coffee shop, not a hedge fund, try adding a couple of zeros.

Mark Wadsworth said...

B, but the Homeys see income tax as normal and LVT as theft. They say that we are the envious ones.

SL, excellent point.

Bayard said...

Mark, it's not just the Homeys, the whole of the British political system, especially the more left-wing elements of it, see to run on envy, but I take your point. BTW, have you done this KLN: If LVT is introduced, it will be yet another tax and we are taxed heavily enough already?

Ben Jamin' said...

@ Bayard.

If it were just envy, then they would set price of all goods and services by a person's income/capital. Not just taxes.

I suspect they are all control freaks.

Mark Wadsworth said...

B: "LVT will be yet another tax and we are taxed heavily enough already"

Done that one here. It's about the only one which has any substance.

Bayard said...

"If it were just envy, then they would set price of all goods and services by a person's income/capital. Not just taxes."

I am sure that there are people who think that that would be a good idea. Anyway, the meme certainly exists, viz: "Why is X complaining about having to pay all that money for Y? He can afford it."