Rates and council tax
Business rates and Council Tax are taxes on the occupation of commercial and residential property respectively. Owning property is a great privilege. Net property wealth in the UK amounts to just over £5 trillion or 35% of total private household wealth [1]. Ownership of any spare residential property, besides one’s main home, or of commercial property allows for the generation of income via rent which for many landlords has generated incredible returns, well in excess of the actual costs of running and maintaining property, which they acquire through the mere fact of being the property’s owner. Annual private residential rental incomes are in excess of £50 billion [2] while the costs of business renting office and retail space amount to approximately another £40 billion, as of 2016 [3]. Since 2000, the return on investment on commercial property has exceeded the FTSE 100 [4].
Despite property ownership being such a substantial source of wealth and income, the UK’s property taxes do not charge ownership but rather occupation. This results in the same outcome for owner-occupiers of course, both people who own their own home and businesses who own the premises they operate from, but it means that private tenants and commercial renters pay property taxes rather than their landlords. In effect, tenants have to pay both rent to their landlord and tax to the government for the right to occupy a property.
While it has proven to be a lucrative source of wealth for many, property ownership is not, in and of itself, an economically productive activity. The construction and efficient use of property may of course be genuinely productive, but a great proportion of the rents and capital gains accrued by property owners are rewards for the mere fact of their ownership. The benefits of property ownership are, therefore, a legitimate target for taxation. A property owner who simply holds onto a property in a high-value location for enough time, renting it out, perhaps even delegating administrative and maintenance tasks to contractors and employees, may be rewarded with a great profit if they just wait for having done little to no productive work themselves. Given that it can generate large windfalls which are excessive rewards for the work involved, property ownership is a legitimate target for taxation and doing so is unlikely to hinder economic efficiency – it may in fact do the opposite by encouraging investments into more productive sectors of the economy rather than tying so much money up in speculative activity [5].
It is, therefore, especially egregious that those property taxes which exist in the UK (excluding Stamp Duty which is specifically a tax on property transactions rather than ownership itself) are applied on the basis of occupation rather than ownership, making tenants in rented accommodation or commercial space pay themselves. This means that the incidence of these taxes tends to be diverted from less to more productive actors – from wealthy landlords to young workers and entrepreneurial businesses. Property taxes could be a key tool for rebalancing the burden taxation from work to wealth, but as they exist they instead function for many as a further tax on work.
Business rates.
Business rates are charged on most non-domestic properties, including shops, offices, warehouses, factories, etc. [6] Rates are calculated by multiplying the property’s open market rental value as of the most recent official valuation by a set amount: for 2019-20, 0.504 for values of £51,000+ or 0.491 for values below £51,000. These rates have been gradually rising in recent years, by 0.7p/£1 since 2016-17 [7]. E.g., if a property is valued at £50,000, its liability will be £24,550 (50,000 x 0.491). This multiplier is set nationally – it cannot be manipulated by local authorities.
Rates are collected by local authorities, who do have some discretion in applying reliefs and exemptions, and the liability for paying falls on the property’s occupier rather than its owner – the owner is usually liable if the property is unoccupied [8]. Local government as a whole retains half of business rates revenue, though each individual authority does not necessarily retain all of the revenue collected within its boundaries as some amount is redistributed between authorities to rebalance regional disparities. The other half of revenue is passed to central government. The government intends to increase the share retained by local government to 75% by 2022 and several local authorities have piloted 100% retention schemes since 2017 [9].
According to the Federation of Small Businesses (FSB), business rates are the third highest cost for small businesses after staff and rent [10]. (Note that two of the three largest costs are paying both the owner and the council for the right to occupy the property – it could be described as a sort of double rent.) The Confederation of British Industry (CBI) have described business rates as “a barrier to entrepreneurship, investment and productivity growth” and called for removing properties valued less than £12,000 from the system, more frequent valuations , and reducing the rate at which the multipliers have risen [11].
Council Tax.
Council Tax is levied upon domestic properties, with the liability generally falling upon anyone aged 18+ who owns or rents a home [12]. Unlike business rates which are set nationally, local authorities can vary what they charge; properties are valued in bands, and councils have a limited leeway to decide what they charge each band [13].
Like business rates, the liability for Council Tax falls upon the property’s occupant(s) rather than its owner(s). Therefore, tenants renting a property are the ones who are charged Council Tax, rather than their landlord (unless the landlord also lives in the same property). Exemptions and discounts are available for some groups of people, including students and single adults living alone, while discounts or extra charges can be levied upon second homes and empty properties at the discretion of the local authority [14].
The Resolution Foundation criticises Council Tax as a regressive tax, placing a heavier financial burden on the residents of less valuable properties. This is because Council Tax rates are only weakly correlated to property values, with rates only rising slightly between bands despite much larger rises in property value. This means that the occupants of less valuable properties pay a higher proportion of the value of their homes than the occupants of more valuable properties do; in 2015-16 median council tax bills were 3.3x higher in band H (the highest band) than band A (the lowest band), even though average property values were 6.8x higher. Furthermore, revaluation is not just rare, it does not happen at all: Council Tax in England is still based upon 1991 market values, i.e. before it was even introduced in 1993! As a result, market changes in the past 28 years are not reflected. On top of all that, local authorities’ leeway to adjust Council Tax rates means regional inequalities, as councils in wealthier areas can charge lower rates and still receive sufficient revenue: in 2015-16 typical net Council Tax bills in London were about 10% higher than those in the North East, even though typical property values were 220% higher. This regressivity falls disproportionately upon the young who are more likely to live in properties valued in the lower bands [15].
Property owners should pay.
The issue here is fundamentally about the incidence of the taxes in question: who pays the tax. A key issue with tax incidence is that the formal incidence (who is legally liable and settles the bill) does not necessarily coincide with the effective incidence (who actually bears the added cost imposed by the tax).
In the case of business rates where the formal incidence falls upon the property’s occupier rather than the owner, the cost of the rates can put pressure on the owners to lower the rents they can charge – since tenants have to pay rent plus rates, the more they have to pay in rates the less they will be willing or able to pay in rent – meaning some of the effective incidence is passed onto the owner who cannot charge as much in rent as they could under lower/no rates [16]. (And, since business rates are charged on the owners of empty properties, they do have an incentive to find a tenant even for less rent.) The effective incidence of Council Tax can be presumed to be very similar.
Does this mean that there would be no real gain from shifting the incidence of property taxes? Not necessarily. Firstly, it is not clear that all of the effective incidence of property taxes are shifted from occupiers to owners so it is likewise not certain that all of it would be shifted back to occupiers if the formal incidence was moved to owners. In other words, property owners might be able to rake back some of the cost of paying rates themselves by raising rents, but are unlikely to be able to recoup the whole cost. Secondly, shifting the formal incidence to owners would improve the transparency of rental markets. Currently the real cost of renting is somewhat obscured by the fact that rent is not the whole price, tenants also have to pay rates as well as any other bills their landlord expects them to bear the cost of. Even if making property owners liable to pay rates caused them to raise rents somewhat, this would at least make rental prices a fuller reflection of the real cost of occupation and therefore make it easier for renters to make more informed decisions.
Council Tax in particular is administered on the basis of outdated and arbitrary bands. These should be regularly revalued and administered on a more rational and progressive basis with tax liabilities being a certain proportion of property values, as is already the case with business rates. The owners of hugely valuable properties in prime locations should be expected to pay a commensurate amount, rather than getting away with only paying a little more than the owner of a much more modest property.
​
1 https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/totalwealthingreatbritain/april2016tomarch2018#aggregate-total-wealth-in-great-britain
2 https://www.lettingagenttoday.co.uk/breaking-news/2019/8/uk-private-rental-sector-now-bigger-than-many-national-gdp-figures
3 https://propertyindustryalliance.org/property-data-report/
4 https://www.shawbrook.co.uk/media/2897/20190408_b2b_collateral_cb_commercial-research-report_sb.pdf
5https://www.wsj.com/articles/how-property-booms-eat-our-economic-future-11606466679
6 https://www.gov.uk/introduction-to-business-rates/how-your-rates-are-calculated
7 https://www.gov.uk/calculate-your-business-rates
8 researchbriefings.files.parliament.uk/documents/SN06247/SN06247.pdf
9 researchbriefings.files.parliament.uk/documents/SN07104/SN07104.pdf
10 https://www.fsb.org.uk/standing-up-for-you/policy-issues/local-government-and-communities/business-rates
11 http://www.cbi.org.uk/cbi-prod/assets/File/pdf/Business%20Rates%20briefing%202016.pdf
12 https://www.gov.uk/council-tax/who-has-to-pay
13 researchbriefings.files.parliament.uk/documents/SN05682/SN05682.pdf
14 https://www.gov.uk/council-tax/second-homes-and-empty-properties
15 https://www.resolutionfoundation.org/app/uploads/2018/03/Council-tax-IC.pdf