"Experts slam business rates appeals system"

From City AM:

Property experts today said the business rate appeals system is a "time bomb" as the backlog of claims and challenges spiked. Businesses could be waiting years for their challenges to be addressed due to the backlog of appeals, experts said.

Data from HM Revenue and Customs' Valuation Office Agency (VOA) showed that in the 33 months since the new system was introduced, 352,090 properties have started the appeal process. 

It's not the appeals system that's at fault here. if they make the appeals procedures cheaper, quicker and simpler to clear the backlog, then more people will appeal, creating a new back log.

The real cause of this is the fact that Rates are based on the market rental value of each individual building, where there will always be legitimate differences of opinion on which comparatives should be used, the condition of each particular building, how spaces within that building/plot should be classified etc.

Equally stupid is the fact this 'market value' is not the total rental value, but the total rental value minus the Rates themselves, so the effective rate (about 33%) is much lower than the headline rate (about 50%).
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It would be far better to proceed as follows:

1. Assess whole streets (or whole shopping centres or whole retail parks etc) at a time, using all available data from recently agreed rents and selling prices on that street (or in that shopping centre etc). Owners of vacant premises, or those let out to charities will give their own figure of what they expect in rent from a normal business tenant. If it seems reasonable, it goes into the total. If they are low-balling, the council just takes on a lease, sublets for the higher actual value and that goes into the calculation instead.

2. Work out the total rental value of all the premises on that street (with no reduction for the Rates payable, which is a circular calculation).

3. Divide that total by the total frontage of all the premises on the street to find a value per running foot of frontage. This is based on the average value of all available rental and price data, which greatly reduces the incentive for a landlord/tenant to collude to depress the headline rent (and share the Rates saving via cash in envelopes). If you value individual premises, then depressing the rent by £1 saves 50p rates. With averaging, if a landlord/tenant collude to depress the rental value by £1, that only depresses the average by a few pence.

4. The Rates assessment for each premises is then simply the frontage (the most valuable element) multiplied by the answer from 3, minus a provisional 20% for those who accept the assessment, multiplied by an arbitrary percentage (see 8). It would be payable by the owner, not the occupant (for administrative simplicity and to improve collection rates).
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There would be very few appeals against that sort of system because...

5. It is largely a data gathering and maths exercise, not questions of judgment.

6.  The actual condition or size of a particular building would be pretty irrelevant, so the owner of a dilapidated building with no lift would pay the same amount per foot of frontage as the owner of a new building next door to it which has a lift. So it would act pretty much like Land Value Tax. 

7. Of course, sometimes assessments will be based on poor data or mathematically wrong. but this applies to the whole street, so instead of some occupants appealing against individual assessments, the owners of all the premises on the whole street (which might only be one or two landlords) can pool resources and do a joint appeal.

8. The 20% discount does not mean lower Rates overall, as the percentage payable would be increased accordingly. So instead of paying 40% on £10,000 (the probable actual value), you pay 50% on £8,000 (the discounted value).

9. If you win your appeal and get the assessed value reduced from £10,000 to £9,000, you pay 50% of £9,000 (appellants waive entitlement to the discount). So before putting in an appeal, you would have to be confident you can get enough real world data to push the assessed value down from £10,000 to no more than £7,500 or so, which is going to be nigh impossible in most of the few cases where the assessments appear too high...

10. ... of course, the evidence to support the lower rental value will be taken into account at the next revaluation (appellants and non-appellants alike get a lower assessment), which will tend to depress assessed values nationally, to a low but defensible figure. Again, this is not a problem as the percentage payable in Rates can be nudged up a bit to keep revenues constant.

Good idea; good idea; bad idea

Good idea

Paul Ormerod in City AM:

Here is a great opportunity for the government to both increase the level of human capital in the economy and be seen to be delivering for the "left behind". There are already rumours that the chancellor is planning a big increase in spending on FE in the March Budget.  

Investment in university students has gone well past the point of diminishing returns. In contrast, the neglect of the FE sector offers the chance of getting a real return on increased spending.

The obvious beneficiaries will be the young people who do not go to university. With extra skills, they can earn an "FE premium". It may be modest, but being able to earn even £10 an hour instead of the minimum wage makes a big difference to the individual concerned.

Good idea

From The Daily Mail

Prince Andrew was urged by lawyers today to 'get on a plane' and answer questions from the FBI as part of a reciprocal deal that would see US spy's wife Anne Sacoolas sent to the UK where she is accused of killing teen Harry Dunn.

The demand was made in an extraordinary press conference in New York where Lisa Bloom, lawyer for alleged victims of billionaire paedophile Jeffrey Epstein, teamed up with Dunn family lawyer Radd Seiger in an attempt to break the stalemate that has ensnared both of their cases in political red tape.

A publicity stunt, but an excellent one, even better if it works. The UK is way too keen to extradite people to the US, or let the threat hang over UK citizens' head for years and years (Gary McKinnon, Hound of Hounslow etc), funny how that doesn't apply to Prince Andrew. The US never sends anybody back, but that woman quite clearly killed somebody.

Bad idea

Also from City AM:

The [Retail Sector Council] report is expected to include several recommendations, including the proposal to raise corporation tax by two per cent to raise around £6bn a year by 2022/23.

According to Sky News, the extra revenue would be used to reduce the business rate multiplier to around 40p in the pound. Other proposals cover VAT reform and tax and property cost transparency.

Robert Hayton, head of UK business rates at real estate adviser Altus Group, said the move to increase corporate tax and reduce business rates would be an "eminently reasonable fiscally neutral solution".

The actual rental value is a fairly fixed figure and is shared between landlord and government. The tenant doesn't care how it's split.  A corporation tax change does not affect total rents as they are paid out of pre-tax profits.

Let's do a worked example and see who gains or loses from this, using premises with an actual rental value of £21,000, which is currently split into £14,000 to landlord and £7,000 to government (50% of £14,000). Under their suggestion, it would be split £15,000 to landlord and £6,000 to government (40% of £15,000).

Winner #1 - the landlord, who currently gets £14,000 less 19% corporation tax = £11.340. That would go up to £15,000 less 21% corporation tax = £11,850.

Winner # 2 - owner-occupier business with low profits (pre tax or rent) of £40,000 who owns such premises. Current net profit after Business Rates and corporation tax = £26,730. That would go up to £26,860.

Loser #1 - tenants - the higher their profits, the bigger the hit..

Loser # 2 - owner-occupier business with high profits of £100,000 (pre tax or rent) who owns such premises. Current net profit after Business Rates and corporation tax = £75,330. That would go down to £74,260.

Not huge numbers, but a marginal gain for landlords and unprofitable owner-occupier businesses, and a tax hit for tenants and profitable owner-occupier businesses.

"More High Street/Business rates fun"

Emailed in by Lola from The Telegraph:

Harrods’ Knightsbridge store alone will pay £17.1m this year in business rates, according to property consultant Altus Group. Retailers large and small claim the property tax is deeply unfair because it hits high street stores far harder than online players such as Amazon, which rely on cheap out-of-town warehouses.

“There isn’t a level playing field and nobody’s tried to put in place a level playing field,” Ward says, “Until there is a fundamental review of the business rates system, then I think that the high street is really doomed.”

According to this, Harrods has an annual turnover of £2 billion, most of that will be from its flagship store in Knightsbridge, so they are paying less than 2% of their turnover in Business Rates.

Does he not realise that there is a perfectly level playing field? If he thinks he can make more profit by shutting down the flagship store and just selling stuff online from an out-of-town warehouse, then why doesn't he do it?

He doesn't do it because he knows perfectly well that the £17.1 million a year they pay is only a fraction of the extra profit they can make by trading from a huge building in the swankiest area of London, surrounded by obscenely wealthy people and tourists who have nothing better to do that go to Harrods and spend money.

Can Someone Tell Me the Truth About This?

Madeleine Grant, on High Streets, wrote this

Our business rates, levied on the rental value of the premises, penalise physical shops in favour of e-commerce and price many out of trading on the high street altogether. Charity shops are exempted from paying the majority of these fees, which explains their proliferation in recent years. Any relief here would be of great assistance to Britain’s ailing high street, as would a rethink of other ill-advised tax policies.

First of all, I don't see anything wrong with e-commerce not paying the same rates. They use cheap land that no-one is fighting over, so they pay cheap rates. They do their thing without scarce resources.

And yes, I know charity shops get some exemptions

But other than that, is any high street half empty because of business rates? What's the mechanism for setting them, because if I was a council, I'd rather get £100/yr of rates than £0/yr of rates. Having empty shops because you set rates too high would seem to be shooting yourself in the foot.

I was surprised to see this in The Telegraph

I just stumbled across this, from three years ago:

Business rates are the closest thing we have in the UK to a land value tax (LVT). They're favoured by economists for their property of being "non-distortionary". They don't mess around with incentives, unlike many other forms of taxation.

A higher income tax may be a deterrent to earning more money in the UK, as are corporation tax hikes, but the supply of land is fairly fixed - people aren't going to change their production of it in response to higher taxes...

Business rates have existed for a lot longer than we’ve had evidence in support of them. They were first introduced in their current form in 1990. Their heritage can be traced back further, to the Poor Law of 1572, and later the Poor Law of 1601. They’ve had more than a few facelifts since.

Are they popular? Other than with economists? Not really. Business rates have become the business lobby’s bogeyman. The British Retail Consortium (BRC) is particularly opposed.

“Business rates bills have continued to rise when property values have fallen,” Sir Charlie Mayfield, the BRC’s president has said. “Reforming the rates system would be a welcome boost for retailers and help drive investment in training and technology.”

The opposition from businesses on the grounds of their cost is rather strange, because it's not occupiers that end up taking the financial hit. Rather, it's land owners. This is the so called "incidence" of a tax, who ends up shouldering it. 

If business rates rise or fall by a small amount businesses aren't likely to face different costs, just correspondingly higher or lower rents over time. So there would be no more money for investment [as a result of reductions in Business Rates] after all.

It's the landlords who lose out as a result of business rates. Over a period of two to three years, three quarters of the change in business rates is capitalised into rents, according to a report from Regeneris, the consultancy. This has been backed up by work from the London School of Economics which examined properties in London, and a more recent paper using data from enterprise zones, which also came to the conclusion that it is landlords who end up taking the hit.

City AM lets another one slip into its pages...

From City AM Debate:

Is the Tesco boss right to call for slashed business rates and an online tax to save the high street?

Robert Palmer, executive director of Tax Justice UK, says YES [actually he says 'no', but hey]

Since it’s likely that an online sales tax would be passed onto shoppers, what we really need is a proper shake-up of how we tax multinationals to make them pay their fair share, including by making it much harder to stash corporate profits offshore.

Business rates are also a mess. Because the current system is based on rental values, if a landlord improves a property, the value goes up and so does the tax.

The government should replace the current system with a tax based on the underlying value of the land the property sits on.

Sam Dumitriu, research director at The Entrepreneurs Network, says NO:

Online sellers shouldn’t be punished for responding to changing consumer demand by offering goods at a lower price in a more convenient manner. E-commerce platforms such as Amazon have lowered barriers to entry and enabled small and micro-businesses to cater to every obscure taste out there.

Worst of all, the reforms will do little to help struggling bricks and mortar retailers.

The evidence suggests that commercial landlords respond to cuts [in Business Rates] by raising rents, leaving shopkeepers no better off. The only retailers that will benefit are those which own large property portfolios like, er, Tesco.

Killer Arguments Against LVT, Not (453)

From a recent Evening Standard, for "business rates" read "land value tax":

Labour needs to do more to help get rid of business rates

Rohan Silvas' comment article ("Government's refusal to help small businesses is destroying them", March 15) admirably reinforces the case against persisting with business rates.

In days of physical manufacturing, assessing rates in accordance with the rentable [sic] value of the premises may have had an approximate correspondence with the value of the businesses concerned.

Nowadays, when a hedge fund can operate from the same space as a corner shop, it makes no sense whatever. It is the enemy of the start-up and subsequent rate rises, as Silva illustrates, can suddenly destroy viable enterprises.

It is difficult to understand why Labour has not committed itself to abolishing this tax should it get into office and its replacement with one that is based on turnover and/or profit. Surely these are ostensibly Conservative clothes that are ready to be stolen?

There is a larger point that parliamentary initiatives on such matters should be easier to frame and pass in a way which binds the executive. The Brexit process has revealed how parliamentary scrutiny is trapped in critical mode.

Sue Broadhurst and Neil Harvey.

Reply by Jim Armitage, City Editor:

Dear Sue and Neil

You are right. Business Rates are holding back potentially great businesses.

The latest round of rises in London have [sic] left a clear mark on our high street as the numbers of vacant shops climb. The average business in the capital now has to find £33,000 a year just to cover its rates bill. That really hurts small operations that don't have the deep pockets of national chains.

Meanwhile, online retailers don't pay high-street business rates at all. They pay them on their warehouses but these are in out-of-town areas where charges are lower.

Politicians won't scrap rates because they bring in 4.5 per cent of the UK tax take. We need that cash for schools and hospitals...

See how many factual inaccuracies, misleading statements, crass generalisations and faulty leaps of logic you can spot, or the subtle contradictions between the two diatribes!!

"Glaring tax divide between high street and online rivals"

The Daily Mirror does cognitive dissonance.

Compare and contrast their two tables:

£100 spent on the High Street
74p goes to Treasury in Corporation Tax
£13.20 on wages
92p on National Insurance
£2.06 on business rates

£100 spent online
20p goes to Treasury in Corporation Tax
£5.74 on wages
56p on National Insurance
26p on business rates

What are they missing/overlooking?

1. In both cases, up to £16.67 goes in VAT (the worst tax of all). That's as much as all the other taxes and wages paid by High Street retailers put together, and greatly reduces the relative difference between High Street and online.

2. I am well aware that large non-UK online sellers take the piss on corporation tax, but if High Street retailers are paying 74p corporation tax at an average rate of 19%, that means that their net profits after all costs are in the region of £4 per £100 sales, which looks OK to me.

3. It ignores the amount paid in rent, which is two or three times as much as the business rates. If included, this would increase the relative difference between High Street and online.

4. They ignore tax incidence.

a) The National Insurance (second worst tax of all) is borne by workers in terms of lower wages.

b) Business Rates are borne by the landlord, so do not increase overall costs either. For owner-occupier businesses, the business rates are largely just rent on that part of the land and buildings they never paid for in the first place - the price they originally paid was depressed by one-quarter or one-third because of the likely future business rates payable.

c) Our man of the moment, Mike Ashley, is perfectly aware of this, that's why he's going into battle with Debenhams' greedy landlords and demanding they drop the rents. Having achieved that, the business rates bills will fall of their own accord, being set at a percentage of rental values.

5. It is quite probably true that large 'online' retailers pay relatively little in business rates per £1 of sales, that's because they largely trade from out of town warehouses, where the location value is low. If High Street retailers think that they can sell as much stuff for the same price by relocating to the middle of nowhere, then good luck to them. Common sense says they can sell 2% more, or charge 2% higher prices, by simply being on the High Street, so big deal.

Ruth Davidson: Maths Genius

H/t Lola, from The Herald:

Business leaders have warned the tax burden on high street shops is disproportionately high. Ms Davidson said: “The retail sector currently makes up 5 per cent of the UK economy but pays 25% of all business rates, over £7 billion per year.”

That's about as helpful as saying "The haulage industry pays 90% of all diesel fuel duty" or "Smokers pay 100% of all tobacco duty". Business Rates is a tax on valuable locations, and retail premises are usually in the most valuable locations (town centres). It's as broad as long, if there were no Business Rates, rents and purchase prices would be correspondingly higher.

Having flunked the logic bit, she's wrong on the facts as well. From the House of Commons retail briefing paper:

In 2017, consumers in the UK spent around £406 billion in retail purchases [about 20% of GDP]. In 2017, the retail sector as a whole contributed £194 billion to UK economic output (11% of the total), measured by Gross Value Added or GVA3; this was an increase from £190 billion in 2016.

In 2016, the sector employed 4.9 million people (20.5% of the UK total), and contained 374,000 businesses (15.5% of the UK total).

We can argue whether the retail sector is 11% or 20% of the UK economy or anything in between, but either way it's more than 5%. I could have guessed that without looking it up.

Please note: £7 billion Business Rates divided by £406 billion sales = 1.7p for each £1 of sales on average or about one-tenth as much as the VAT thereon.

Amazon's tax bill (here we go again)

From The Independent:

Philip Hammond has said he will consider tax changes hitting online businesses to ensure there is a more level playing field for high street retailers.

The hint at a so-called Amazon tax for online companies that sell products over the internet comes as high street stores – under pressure from soaring costs like business rates – demand a fairer system.

The only logical way that a special 'Amazon tax' would help high street retailers is if the tax is so high as to discourage people from buying online; or so high as to push Amazon into a permanent loss-making situation.

Mr Hammond added: “The European Union has been talking about a tax on online platform businesses based on the value generated. “That’s certainly something we’d be prepared to consider.”

Amazon already pay two kinds of taxes on 'value generated', being normal VAT at 1/6 of their turnover and corporation tax on their residual profits. Do they play fast and loose and book profits sideways elsewhere? Quite possibly, says The Murphmeister, but that's a different topic. Try enforcing existing laws first before you start inventing new ones on an ad hoc basis.

The Guardian is of course going to town on this:

The company... revealed that pre-tax profits at its UK business tripled from £24m in 2016 to £72m last year. The figures were reported by Amazon UK Services, the company’s warehouse and logistics operation that employs more than two-thirds of its 27,000-plus UK workforce, in its annual financial filing to Companies House. The company almost halved its declared UK corporation tax bill from £7.4m in 2016 to £4.5m last year.

Amazon UK’s warehouse and logistics staff and management enjoyed a bumper $164m (£125m) payout from the company share scheme – a rise of almost a third on 2016’s £95m bonanza – thanks to the company’s surging share price... The payouts will have reduced Amazon’s tax bill because under UK tax law companies are required to deduct the vest value of the shares provided to employees.

Companies aren't *required* to claim this deduction, but they would be stupid not to (I've submitted such claims for my own clients, it's great fun). The value of those shares is liable to PAYE in full as if it were a cash payment.

PAYE rates are much higher than corporation tax rates, so these share-related gains don't *reduce* Amazon's tax bill, they significantly *increase* it, i.e. that £125 million was probably taxed at about 40%, meaning Amazon paid £50 million extra PAYE in addition to the £4.5 million corporation tax. Which is a pretty high overall tax rate when compared to £72 million profits.

For accounting purposes Amazon Services UK reports turnover as a charge to its parent company for the cost of delivering products, which hit £1.98 bn last year. Amazon will not reveal how much it paid in total to HMRC last year, beyond what it paid through Amazon Services UK.

That's turnover net of VAT, so Amazon will have paid about £400 million in VAT as well. Makes a total of £454.5 million tax paid. And we have no reason to assume that they don't pay full Business Rates on their offices and warehouses etc.

All the mugs who believe that 'the consumer bears the VAT' can go back to the remedial class. VAT is a tariff, just like the tariffs that Trump imposed on lots of stuff recently. Did all the businesses affected by them just shrug their shoulders and say 'Not to worry, consumers in the USA will pay the tax'? Of course not.

"Government urged to slash business rates to save UK high streets"

This week's prize for people who completely undermine their own logic goes to...

From The Independent:

Sainsbury’s boss Mike Coupe joined the calls for reduced rates on Wednesday.

After the supermarket chain announced slowing sales growth on Wednesday, Mr Coupe said: “There isn’t a level playing field between online players and traditional bricks and mortar players, and it’s playing out in a very stark way on the high street at the moment.”

He added the government needs to review “total business taxation”. Sainsbury’s paid £560m in business rates last year, 6 per cent of its overall tax bill.

Yup, a modest 6 per cent. VAT is by far and away their biggest bill (unless you believe the crap about consumers paying it); PAYE is probably not too bad because most staff are on fairly low wages; and corporation tax is chump change.

Their total turnover is £28 billion (page 94 of latest financial statements), divide one by t'other and Business Rates cost them 2p for every £1 of sales. If they think online is so easy, why don't they do it themselves and save the 2p. Ah, they do. So what's the problem?

Tesco boss - wrong facts, wrong logic.

Emailed in by Shiney, from the BBC:

The boss of Britain's biggest supermarket has blamed the collapse of some retailers partly on the expense of business rates.

Dave Lewis, Tesco chief executive, said the charges that firms must pay on their buildings played a "large part" in sending some retailers to the wall... He questioned whether raising business rates was resulting in an "uneven playing field" for some firms...

"Are we allowing it to stay competitive, or are we by stealth lowering corporation tax and increasing business rates to a place which is creating an uneven playing field and forcing people to think about how it is they avoid that cost and find other routes to the market?" he asked.

The Tesco boss said business rates was the biggest tax his company paid, adding up to more than £700m a year.

The last claim is a straight lie. To put that figure in context, it is a smidge more than 1% of Tesco's annual turnover of around £60 billion.

If he could be bothered to look at his own company's accounts for the years when VAT was reduced from 17.5% to 15%, then increased to 17.5% and then to 20%, he would know that Tesco bears about two-thirds of the VAT it pays every year.

He knows better than I do how much of Tesco's turnover is VAT-able items (basically anything except basic food), but sure as heck the VAT born by Tesco is several times as much as the £700 million Business Rates it pays.

He's wrong in logic as well.

- For premises which Tesco rents, the Business Rates is just part of the rent bill. As we know, Business Rates are supposed to be a certain percentage of the total rental value, although some individual valuations are miles out, so by definition, the official rent bill is at least twice as much as the Business Rates Tesco pays on its rented premises.

- The Business Rates on the premises Tesco which *thinks* it owns is just rent on that part of the premises which it doesn't own and never owned.

The point is that Business Rates (which have existed for over four centuries - so it's not like businesses are unaware of them) reduce the selling price of commercial premises by an equal and opposite amount, thus saving the purchaser a chunk of change up front. The government claws back the under-value via Business Rates, so the total cost to an owner-occupier is much the same with or without Business Rates.

(Clearly, the downside with Business Rates is that it is calculated on the total rental value including the occupant's own improvements. Which is absolutely no different to normal land law - if a tenant pays for improvements, legally they belong to the landlord and he can increase the rent accordingly, unless the rental agreement says otherwise.)

Maplin's landlords - cutting off their noses to spite their faces.

From The Evening Standard:

Landlords to collapsed retailers Toys R Us and Maplin could be left with empty stores totalling more than two Shard skyscrapers and lose tens of millions of pounds in rent, property experts predicted on Thursday.

Agent Colliers International has calculated that the failed chains use more than 4 million sq ft of space in the UK. That comprises around 300 shops... Industry sources estimate that collectively landlords were getting an income of around £73.8 million a year from the failed tenants...

If no rescue deals are agreed, a long list of landlords could be left with vacant space, including LandSec, British Land, Hammerson and Intu. 

Ho hum, let's take one of my favourite shops, Maplin.

Their 2017 accounts show a net loss of £3.9 million after paying £21.7 million in rent. Maplin also own some long leaseholds, but most of their shops were rented.

Sane landlords would just reduce the rent by a quarter, leaving Maplin at least marginally profitable. But instead of accepting £16 million a year easy money*, they decided to push Maplin into insolvency. As a result, they can whistle for the last quarters' rent and will be stuck with long void periods until they finally decide to accept lower rents.

* The average paid by both businesses was £18.45/square foot. The actual costs to the landlord is south of £10/square foot, so a one-quarter reduction would still have left them with some unearned location rents.

I hope that the landlords can't wangle themselves any Business Rates discounts beyond the normal three months for empty premises (which is three months too long, if you ask me). If local councils waive the rates, this just enables the landlords to hold all these units out of use for longer, with a corresponding depressing effect on other shops on the same High Street or in the same shopping centre or 'retail park'.

Anti-Business Rates propaganda doesn't even make sense.

From page 8 of Monday's City AM:

SIX OUT of 10 firms facing increased business rate bills are already planning cutbacks, new figures reveal.

The revaluation of business rates is due to come into force next week, and amid building pressure chancellor Philip Hammond introduced some transitional protection for firms in his spring Budget. However, a survey of London’s firms has now laid bare the number of businesses forced to find savings.

A poll of 500 firms commissioned by the London Chamber of Commerce and Industry (LCCI) has found 60 per cent of businesses facing bigger bills will make cutbacks, including downsizing or relocations. Just over one in four of the London firms planning savings expect to look at reductions to capital investment, while a fifth say they plan to look at reducing staff numbers.

And 17 per cent say the increases, which are expected to hit firms in London and the south east hardest, could see them move some activities outside of the capital...

Yes, Business Rates are inferior to proper LVT in many ways (the legal liability is on the tenant not the landlord; they include the value of the building; revaluations are too infrequent etc), but they're the closest we've got.

Anybody whose done more than five minutes of micro-economics knows that proper businesses try to maximise profits (including a notional cost for proprietor's own time, effort and capital). Decisions on staffing levels, pricing, opening hours, whether to do up the premises etc are all geared up to this.

A change in fixed costs (rent and rates) does not change the profit-maximising mix of staffing levels, pricing, capital investment etc one iota. Why would it? So an increase in fixed costs does not change it either. Day-to-day business decisions remain unaffected, unless the increase is so large as to make the whole business unviable (which will only happen in 0.1% of cases).

In some cases it would make sense to relocate to cheaper premises or start selling online. Great, that means more jobs in lower rent/wage areas (hello Amazon!) and more profitable businesses move into the newly vacant premises in high rent/high wage areas. Win-win, what's not to like?

I could understand if a small business owner on The High Street says "Shit, I'll have to extend my opening hours to generate enough money to keep my business afloat" that's not so nice for him, but good for his customers and the economy overall, so still a win-win.

Small Local Businesses v Eton

Via MBK from The Sunday Times:

Eton College is eligible for an 80% discount on its business rates because, like most other independent schools, it is a charity. This saved it almost £500,000 last year — and will be worth more than £630,000 this year.

But the discount is a source of anger and resentment among the owners of small businesses on the nearby high street, which are seeing their business rates rise by up to 15%...

Eton Antique Bookshop on Eton High Street just misses out on the exemption from business rates as its rateable value is rising from £11,000 to £12,750. It will pay £1,425 this year — a sum it can ill afford thanks to falling tourist numbers.

That's £30 per week.

... Aimee Fleet, owner of the Wags Pet Boutique a little further up the High Street, said the small business relief she had been granted this year was the only thing saving her from going under.

“I paid £6,000 in business rates last year and am only getting a slight reduction next year because I am getting some small business relief. If my rates had gone up like others around here, I wouldn’t last more than another year.

“It’s not much of a support for small businesses, is it? I don’t know what I am paying for, either, because the council doesn’t collect waste any more from us and we have to pay for cardboard to be collected.

If she is renting, she will be paying a damn sight more than £6,000 in rent. Does her landlord provide the public transport, collect the rubbish, light the streets, provide the overall ambience and other local amenities which draw tourists there? Does he heck. So what is she paying him for, above and beyond a few thousand quid for the building? And why is she not complaining about the rent?

Some of the comments are spot on:

dcch: This is a silly article that seems to have been manufactured in the news room. The new business rate wouldn't be any more affordable if Eton paid it too. The school is not competing with the local shops so the same complaint about Eton enjoying discounted business rates could be made by any business in the country. The idea that an organisation should be stripped of charitable status because it turns over a lot of money is particularly fatuous.

David at Wateroakley: On the basis of 1300 pupils, the rebate is worth about £484 per pupil. Senior school education in the state sector is about £4,500 per pupil. On that basis, Eton College is potentially saving the state incurring additional costs of about £5 million.

Stefan: If you don't like it, then go set up shop in a town that doesn't owe its existence to a historic institution like this (so better avoid Cambridge and Oxford then).

Neil Alldritt: Would the shops survive if it were not for Eton being there?

The Read Lines: Roolz is Roolz - It is a charity, education establishment and fancy dress party. Ok so it is for the toffs but if you live in Windsor it all sounds pretty toffish to me. I am sure it has its parts where you don't want your kids mixing with, but my guess is that the business' set up there to sip some of the cream. At least you did not mention Amazon.

Clearly, the Business Rates for "charities" is a nonsense because charitable status is at the bureaucrats' whim, it encourages inefficient use of land and buildings and is a tax break for landowners, but the points stand.

City AM jumps the shark, again.

The Chief Executive of the British Retail Consortium in City AM:

Retailers pay a quarter of all business rates and it is the single largest tax paid by the industry.

My comment, let's see if they publish it...

You really are ramping up the propaganda. Quite clearly it isn't. Retailers pay £7 billion business rates (quasi rent) and over £40 billion in VAT, with tens of billions in PAYE/NIC (not sure how much).

So in truth, business rates is the fourth largest tax paid by retailers, and the economic incidence is of course not on the business itself but on the owner of the building - tenants are shielded from business rates in the long run because every £1 rates pushes down rents by £1.

Funny how you don't complain about rent being a "disincentive to investment" and all that nonsense.

None so blind as those who think we can't see the wood for the trees etc.

The director of a London landlord writes in City AM:

Ultimately, business rates are a property tax rather than a corporate one, and for some companies this means that there is a relatively straightforward solution: move location. Businesses currently located in areas from Victoria to King’s Cross will be considering their options. Most worryingly for the locations worst hit by rates rises, the most desirable and influential businesses are also often the most mobile.

East London has undergone fundamental change over the last 10 years. In 2008 the Crossrail Bill received Royal Assent and construction started on Europe’s largest infrastructure project that would shift London’s economy East. That same year, the first iPhone was launched, a watershed moment in the fourth industrial revolution which would firmly take hold in East London with the “launch” of Tech City in 2010. All this before the Olympic Games put East London at the centre of the world for a month in 2012.

Shoreditch, Old Street and Clerkenwell are unrecognisable from 2008. Tech and creative businesses arrived in the area due to its affordability and stayed because of the community of businesses, cafés, shops and the nightlife that sprung up around them. Rents increased incrementally, but a tech and creative cluster endured as businesses recognised the value of collaboration with their peers.

However, from 1 April 2017, rates will increase overnight to reflect seven years of economic development in East London. When added to the associated rental increases, this will be too much for many businesses to bear. Smaller, entrepreneurial firms in particular may decide their growth prospects are better in a cheaper location...

Successful regeneration projects such as King’s Cross and Victoria take years to deliver, and the painstaking process of creating new spaces, attracting businesses and growing rental values will be undermined by the sudden sharp increase in business rates.

Bums on seats.

The City AM at its innumerate best:

London’s theatreland will be forced to pay an estimated £31m in property taxes over the next five years once the government’s planned hike in business rates comes into effect in April.

The total rates bill for theatres in the West End will rise by nearly 40 per cent to £6.3m for the 2017 to 2018 year alone, according to figures compiled by City A.M.

They couldn't find anybody from theatre-land stupid enough to complain about this - as a general rule, one group owns the physical theatre building and a quite separate promoter puts on the actual play - so they recycle this rent-a-quote:

The New West End Company, a lobby group for the West End*, has warned that the dramatic tax changes could lead to job losses and reduced investment for the capital’s retailers.

* If you look at the company accounts, you will note that at least half their directors represent landlords, not retailers.

Let's try and put those numbers in perspective, shall we?

From The Stage (figures possibly a little out of date but not wildly wrong):

West End theatres have reported a 12th year of growth at the box office, but attendances to London shows have remained flat.

Overall, there were gross sales of £633 million in 2015, up 1.6% on the previous year, when box office revenue was £623 million. However, the 2015 figures are based on a 52-week year, compared with the 53 weeks in 2014.

In total, there were 14.7 million attendees to West End theatres, roughly the same as in the slightly longer period counted in 2014.

In other words, their Business Rates will be nudged up to about 1% of gross ticket etc sales. The VAT they have to pay is 17% of gross sales, so the Business Rates are nigh irrelevant.

Alternatively, it works out at less than 50p per ticket sold, that's their share of the location rent. The real theatre people know full well that they are getting off lightly here; if they put on an identical play somewhere out of town, they'd struggle to fill the house for an average ticket price of £43. That 50p is what theatre goers are paying extra for the experience/convenience of going to the West End.

"Jeremy Warner nearly gets it"

Emailed in independently by Lola and Mombers (who suggested the post title), more wailing about Business Rates in The Telegraph:

This is obviously very welcome news, but it is small thanks to a Government which seems to be doing its level best to make the costs and complexity of doing business in Britain ever more burdensome.

The latest example of such wrong-headedness is in changes to the business rates system, due to come into effect next April. For some businesses, they mean an immediate increase in the tax on their properties of 42 per cent, with still worse to come in future years. Particularly badly hit will be smaller traders in London and the South East. Many face an eventual doubling or worse in their rates bill.

A significant number will be broken by the increases, and in despair close up shop (1). Others will find ways of passing the extra costs on to their customers (2), or alternatively demand rent reductions from landlords (3). Still more will simply take the hit to profits and invest less (4).

The first outcome is pure speculation, the shop is there and somebody will always want to use it.

The second is nonsense, we know for a fact that the total rent and rates bill does not affect output prices, because retail prices are the same whether you shop in a high rent/rates area or a low rent/rates area.

As it happens, UK retail sales are in the order of £400 billion a year and the total increase in UK retailers business rates bills is going to be about £500 million a year, i.e. one-eigth of a percent of  turnover, with many retailers outside London and the South East enjoying rates reductions.

The third is the most likely outcome for commercial tenants, although there will be a nasty transition period between the rates increase and the next rent review, which is one of the flaws of making the tenant not the owner legally liable for the business rates.

The last suggested outcome is nonsense, whatever the rent plus rates bill, a good investment is a good investment, and if there are good investment opportunities available, people will avail themselves. You could even argue that a higher rates bill for owner-occupier businesses will give them the kick up the arse they need to increase profits.

All this is in stark contrast to what he wrote a few years ago:

As it happens, there are some quite strong economic arguments for taxing land and housing more than they are already. Again, many thanks to The Mirrlees Review for drawing my attention to what Winston Churchill, who was from a big land owning family himself, had to say on the matter as early as 1909…

Taxing land value, in other words, is the equivalent of taxing an economic rent – it does not discourage any socially desirable form of wealth creation. Moreover, in a world where both income and capital are increasingly mobile, there are obvious advantages in taxing the physical; it is less easily avoided.
So in an ideal world, you might indeed want to tax land more, while reducing income and other forms of capital taxes to compensate.

Economic Myths: Business rate hike may force UK's shops to raise prices

The Guardian repeats the usual bleating from the owners of retail premises:

An analysis by Paul Turner-Mitchell, a business rates expert, and the property agent CVS has found that the business rates for 485,435 retail premises in England, which account for more than a quarter of all properties liable for rates, will rise from £7.7bn a year to £8.2bn over the next five years.

Mark Rigby, the chief executive of CVS, said: “The retail sector is facing a significant shift in structural dynamics, with most reporting challenging conditions ahead.

“Add to the mix the already ‘lethal cocktail’ of increased operating costs from the national living wage and apprenticeship levy, and a near half a billion pounds increase in business rates per year for the next five years is simply unsustainable. Something will have to give – whether that’s store closures or even higher prices at the till.”

They fail to make a distinction between marginal costs (i.e. the cost of each extra unit) and fixed costs. The profit-maximising price/output level is dictated by marginal costs, not fixed costs. Here's the relevant article from Economics Help and here's the diagram:


The article does not mention fixed costs at all. Clearly, the National Living Wage and the apprenticeship levy increase unit costs, so these might result in lower output/higher prices. In economic terms, those things are very bad indeed (whatever their political/social appeal).

But changes in fixed costs like Business Rates won't make a difference to prices, unless they are so high as to wipe out profits altogether; in which case
a) shops will threaten to shut; either landlords concede on the rent to balance out the BR increase or they don't care and shops go out of business
b) in which case landlords are stuck paying the Business Rates themselves with no rental income to cover it
c) local average rents will fall, Business Rates will fall and the shop will become viable again.
d) owner-occupier businesses (our much loved 'small local shops') are usually much less profitable (before rent) than tenant businesses, who have to make the rent each month, and can't be insulated with rent reductions. Well so what? Get with it or get it rented out.

And anybody who has travelled outside his home town knows that freely transportable goods sell for the same price all across the UK - despite the huge disparity in Business Rates. Why would anybody think that this will suddenly change?

It is only goods and services consumed at point of purchase (restaurants, pubs, cinemas etc) whose price includes a location rent element where there is any noticeable different in price between expensive areas and cheap areas; assuming that those businesses are already charging the profit maximising price, why would anybody think this will suddenly change?