Annex C: Other Ideas Considered - Other Changes to the Operation of Non-Domestic Rates.
C.1: Digital / future proofing.
C.1 While we have not recommended changing the basis on which non-domestic rates are levied, we do acknowledge that any tax which is based on rental values will not capture the whole economy.
C.2 We are all aware that consumer habits are changing and many businesses now offer a mix of online and physical services. Many are based only online and for those a property tax is neither efficient nor appropriate and we were bound within our remit to look only at the rating system.
C.3 Some stakeholders suggested that as the online trend increases the need for physical property may decline and so the overall tax base upon which rates are levied reduces, meaning the burden of taxation is paid by an ever decreasing pool (this assumes that revenues are protected in real terms). While we found no evidence that there are a decreasing number of properties on the valuation roll, they did not perceive this as sustainable over the longer term.
C.4 Non-domestic rates policy must continue to respond to those sectors of the economy that pay large amounts of rates bills. For retail in particular, this means that future policy should consider elements of the digital economy that are not as highly dependent on property in order to sell goods and services, such as online only retailers.
C.5 We are of the opinion that adapting non-domestic rates as a tool to ensure that the digital economy makes a fair contribution to local services would be inefficient. Attempting to crowbar a property tax upon some businesses that do not rely on property is not only counter-intuitive, but will also likely lead to significant unintended consequences. For example taxing highly mobile businesses in Scotland may create a disadvantage compared to elsewhere in the UK or other parts of the world and the businesses may simply relocate elsewhere, resulting in zero gain. In considering different bases for tax (see annex A), we did consider elements that might bring more of the digital economy into paying rates, however the drawbacks of these approaches were considerable, and it is unclear if they would fully address this issue.
C.6 We note that a separate Scottish Government group on the collaborative economy is taking forward work in this area and may look at taxation as part of its remit, however ensuring the digital economy pays its fair share of taxes, including for local services is a very complex issue.
C.7 We therefore urge the Scottish Government to think widely about future proofing all forms of taxation in its taxation policy development, especially with regard to the digital economy. While this is a worldwide issue, the Scottish Government has an opportunity to lead in this field and may wish to commission external work around this broad issue to look at how the digital economy should be appropriately taxed - and how these businesses can contribute towards local services.
C.8 Over time, and as part of the tax mixture, the Scottish Government should develop a transparent way to ensure that the burden of rates is reduced, as the tax contributions made by the digital economy increase. This will avoid a scenario whereby the current rates burden paid by bricks and mortar businesses and service providers (in particular retail) will be divided amongst an increasingly small tax base as more activity moves online.
C.2: Revaluations before 2022.
C.9 We have recommended more frequent revaluations and a shorter time period between the 'tone date' of a revaluation and the revaluation itself (recommendation 2). In an ideal world we would have liked this to be implemented as soon as practicable - with the first revaluation occurring ideally in 2020. However, in discussion with practitioners, we realise this would not be feasible. This is because we feel a number of our other reforms need to take place ahead of more frequent revaluations. These include the movement of appeals system into Tribunal Scotland and the opportunity for the vast majority of all appeals against 2017 revaluation to be settled, new information gathering powers to be created to enable valuations to be better informed and less likely to be appealed and time to allow the various administrative and cultural changes to be introduced.
C.10 This will mean that valuations in Scotland and England will likely be aligned until at least 2025. As such, if the Scottish Government chooses to continue to pursue a policy of matching key English commitments on rates, this will be easy to achieve over the medium term. If revaluation cycles in the two countries move out of line with one another, at this point it will be harder transparently to pursue this policy, and a distinct Scottish approach may be required.
C.3: Alternative valuation methodology for hospitality properties.
C.11 As highlighted in the Scottish Government's revaluation report  , outside of the "designated utilities", hotels saw the largest increase in rateable values of any sector in Scotland at the 2017 revaluation. The current method that Scottish Assessors employ to value hotels, pubs and restaurants  relies on obtaining turnover information in the first instance. The turnover is then used to inform the valuation - with ratios used to convert turnover information into imputed rental values.
C.12 The hospitality sector (accommodation, pubs and restaurants) made a particular case to us that their method of valuation was flawed. It is clear that any valuation reform would have to apply equally to all hospitality properties for fairness.
C.13 However, a separate submission made to us following a meeting with hospitality interests and rating professionals outwith the formal review meetings failed to identify any alternative method of valuation that would be acceptable to all in the sector.
C.14 This was disappointing, but we hope that several of the measures in this report when combined (including more frequent revaluations, better source data to ensure valuations are correct, a requirement for the Assessors formally to consult on practice notes etc.) will go some way to alleviating the concerns of the sector. Additionally we listened to those in the sector who argued for a level playing field with those who don't pay rates and we will go some way to achieving this by recommending that rates are paid by universities and others who let out student accommodation outside of term times pay rates and by ALEOs who offer competing services such as leisure facilities, function and meeting rooms.
C.4: Limiting small business bonus scheme ( SBBS) eligibility for the most profitable organisations.
C.15 We have recommended both a review of the Small Business Bonus Scheme (recommendation 7), and some restriction of the Small Business Bonus Scheme for specific types of property and to reduce abuse of the scheme (recommendations 25 and 22 respectively).
C.16 We also considered restricting SBBS eligibility for high value organisations. An example might be a business that is focussed only or mainly on online sales, or a high value activity that does not require a large floors pace (for example a successful High Street legal firm or jeweller). We are inclined to believe that the savings available to such organisations under the SBBS are considerably less significant than they would be to many emerging or struggling small businesses. We understand that the SBBS is aimed largely to help sustain small and emerging businesses rather than provide an additional bonus to organisations that are already highly profitable and, in that case, it is reasonable to ask whether any savings might be spent helping better target support to small businesses.
C.17 If for example, the 1% of recipients with the highest levels of profit or turnover had their eligibility removed, the maximum savings associated with such a policy would be £7 million. In reality, savings would likely be far less. We decided against putting this recommendation forward on the basis that it would require imposing a significant administrative burden on the tax base in terms of reporting procedures. To assess which recipients of the scheme had the largest turnover or profit would require assessing these factors for the group as a whole, and then looking at whether or not there were a significant number of large value businesses in receipt of relief under the scheme. This seems disproportionate to the savings that could be made. Instead we would like to see a review of the Scheme containing a breakdown of who receives relief in the first instance, and how it can be best targeted to support investment, employment and growth in the second instance.
C.5: Devolution of non-domestic rate policy to councils.
C.18 As discussed in our other options for government to consider, one of the defining features of Scottish Government policy on non-domestic rates has been to ensure a high degree of consistency with policy in England. It is clear that many ratepayers value this consistency and our recommendations reflect this. One way in which such consistency would be lost would be by allowing each council in Scotland to set a local poundage rate for its area.
C.19 However, in our recommendation number 6 we suggest some potential additional powers for councils through a small number of pilot schemes. If these prove to be successful, we would anticipate these powers being eventually rolled out across Scotland.
C.20 The argument in favour of consistency for ratepayers across Scotland is based around efficiency - ease of administration, payment, and ensuring that rates don't affect investment decisions between different areas. These concepts are very important for larger ratepayers with multiple properties and the potential to move operations around, whether in Scotland or in the UK. For smaller ratepayers, who are less likely to face a large number of different systems, the argument against localisation is less strong. At the moment the Small Business Bonus Scheme excludes any ratepayer with properties with a combined rateable value of £35,000, and so it is far less likely that recipients of relief under the Small Business Bonus Scheme would own properties in a large number of areas. One potential difficulty that was brought to our attention with the Small Business Bonus Scheme is that, because it is based on rateable value thresholds and not the size of the organisation or the floor space of the building involved, the relief covers a much larger proportion of rate payers in rural areas than it does in city centres. Even within council areas, there will be a wide variation in the sorts of properties that qualify for the Small Business Bonus Scheme. As such, a degree of discretion at council level might allow the scheme to better target small businesses.
C.21 For these reasons, it would be worth considering as part of an independent review of the Small Business Bonus Scheme whether or not councils should have some autonomy over the design of the scheme in their communities. We therefore note that as part of recommendation number 7 (an evaluation of SBBS), consideration should be given to devolution of the design of SBBS.
C.6: Rates retention for councils.
C.22 At the moment, notwithstanding views held in some quarters, councils in Scotland retain all of the income that they raise from non-domestic rates. However, a long term increase in non-domestic rates income would not necessarily lead to an increase in the budget of a particular council because rates income only forms part (see discussion around chart 4 in para 3.42) of the overall funding of councils. The sum of funds made available to councils is assessed on a needs basis. Scottish Government grants to councils make up the bulk of the income that councils receive.
C.23 Furthermore, these grants take account of non-domestic rates income ( NDRi) - all things being equal, an area with higher non-domestic rates income will receive a smaller grant, and vice versa. As such, it can be argued that councils have relatively little incentive to grow the tax base in their area.
C.24 In England, councils currently retain 50% of non-domestic rates revenues generated within those areas, and 50% are redistributed via central government. This is different from the needs basis funding discussed above - an area that sees strong growth in its tax base would see its budget increase faster (or decrease slower) than an area that sees week growth in its tax base. For this reason, there are a series of top ups and tariffs that are designed to ensure that there is a "safety net" for councils that see a large decrease in revenues  . The implementation of 100% rates retention is underway in England, which will extend this framework further.
C.25 In Scotland, the Business Rates Incentivisation Scheme does provide some incentives for councils to grow the tax base, and this scheme has paid out around £2.5 million to councils over the past two years - around 0.1% of total NDR revenues in Scotland.
C.26 We recognise that any debate around retention of non-domestic rates needs to be balanced with consideration of the wider Local Government Finance landscape. For example, we are aware that the Commission on Local Tax Reform discussed whether "assigning" a share of revenues from the Scottish Rate of Income Tax would be help to broaden the tax base of Local Government  , prompting some discussion of how this would interact with the Local Government Finance settlement. We therefore believe that while there is merit in a discussion of incentivising councils to grow their non-domestic rates tax base, this should take place as part of a wider discussion on Local Government Finance.
C.7: Ensuring that every ratepayer pays something.
C.27 Non-domestic rates represent a contribution by businesses (and other groups) to the costs of providing public services. This was a point widely understood - and supported - by the ratepayers we met.
C.28 Indeed, we met with numerous ratepayers who expressed some guilt at not paying any rates, and a sentiment that they should be making some - even it was a small - contribution to paying for local services.
C.29 As we have discussed in reference to the Large Business Supplement, a large majority of non-domestic rates are paid by ratepayers with larger properties - properties with a rateable value of over £51,000. This is reflective of the fact that in rateable value terms, the tax base is made up primarily of a relatively small number of large properties. However, the opposite is true when looking at the number of properties on the valuation roll. In terms of the number of properties, there are a large number of properties with a smaller rateable value. Approximately 182,000 properties - 77% of the properties contained on the valuation roll have a rateable value of less than £18,000.
C.30 The Scottish Government - in common with the UK Government - has prioritised relief for small businesses. Indeed, the Scottish Government's report on the 2017 revaluation notes that over half of the properties on the valuation roll will pay no rates in 2017-18 - with 100,000 properties paying no rates as a result of the Small Business Bonus Scheme. As such, the Scottish Government's relief policies dramatically narrow the tax base in terms of the number of properties that pay a rates bill.
C.31 For reasons discussed earlier, we think there is merit in an independent review of the Small Business Bonus Scheme. We also considered whether or not to recommend that every rate payer pays something into the rates system. This could take the form of a minimum bill, or registration fee etc. We did not foresee this generating large amounts of revenue - the intentions of this idea would be to create a symbolic link between every rate payer and the provision of public services in their local area. For example, a minimum charge of £250 (£5 per week) would affect around 110,000-120,000 properties that currently do not pay rates. As such revenues raised would be relatively low - up to £30 million - or around 1% of current income levels. In practice it is likely that revenues would be lower. For example, it wouldn't be reasonable to expect very small properties (with a rateable value of less than £500 - approximately 17,500 properties) to pay this fee. It would also place an administrative burden on owners of these small properties that could be perceived as disproportionate and so it is foreseeable that collection rates would not be as high as seen across the rest of the tax base.
C.32 The costs of billing an additional 100,000 plus properties for a relatively small amount, such as £250, may also be problematic. We heard from billing authorities who noted that the Small Business Bonus Scheme had allowed them to reduce their staffing levels as a result of processing far less bills. Reversing this trend would therefore carry some costs.
C.33 We remain attracted to this idea in principle, but recognise the limitations set out above. We therefore urge the Scottish Government revisit this topic in light of the results of the independent review of the impact of the Small Business Bonus Scheme - as this is the policy with which a minimum charge would have the largest interaction.
C.8: Taking the public sector out of rates altogether.
C.34 A small number of individuals and organisations suggested to us that the public sector should be taken out of rates altogether - to avoid "cycling" money around the public sector and increase efficiency.
C.35 It is first worth considering how much of the total tax is paid by the public sector - Table C1 looks at pre-relief bills by public/private sector, and key areas where the public sector pays rates. As can be seen, less than a sixth of pre-relief bills are attributable to the public sector. The majority of these bills are attributable to councils, who are responsible for a wide range of public services, including education, social care, waste management and cultural services. NHS Scotland accounts for around £100 million of pre-relief bills. The other category includes Scottish Government ( e.g. Civil Service offices), UK Government ( e.g. Ministry of Defence properties), and other bodies:
Table C1 - Breakdown of the tax base showing public sector properties.
|Occupier Type||Total Properties||Total Rateable Value||Total Gross Bills|
|No.||% of Tax Base||£m||% of Tax Base||£m||% of Tax Base|
|Public Sector Total||22,400||10%||1,080||15%||520||15%|
|… of which Council owned||15,300||7%||600||8%||290||8%|
|… of which NHS owned||2,100||1%||190||3%||100||3%|
|… of which other||5,000||2%||280||4%||140||4%|
|Whole of Tax Base||233,000||100%||3,570||100%||3,570||100%|
Source: Valuation Roll (April 2017).
C.36 We acknowledge that there are some attractions to this idea, however we were not minded to consider it at length. This was because we did not find significant support for the idea, even amongst public sector rate payers, and we realised that it wouldn't raise any extra money to pay for public services, as the move would simply give with one hand (reducing rates liabilities for the public sector) and take with another (reducing the rates revenue that pay for public services).
C.37 We found that many of the public sector rate payers we spoke to thought that it was right that they pay rates. In the first instance they recognised that rates help to pay for public services anyway, and so any gains would therefore be made in terms of the administrative costs of complying with the non-domestic rates system, not by reduced bills.
C.38 In the second instance many public sector ratepayers made the point that often they were in competition with the private sector, and paying rates forced them to manage their commercial assets efficiently - selling off empty buildings etc. This was essential for the credibility of business facing elements of the public sector, given they were encouraging these sorts of behaviours more widely. In sectors where the private sector can also provide a particular service - such as prisons and hospitals - allowing the public sector providers to qualify for rates relief might give them an unfair advantage over private sector providers.
C.39 The third argument that we heard in favour of maintaining the status quo was from rates practitioners - given the increasingly blurred lines between the public and private sector, it wasn't clear that this sort of policy could be enacted without creating unintended consequences. Increasingly, even public sector buildings that aren't in competition with the private sector will contain some elements that could be considered private. For example, many public sector buildings contain ventures which compete with private businesses such as cafes, nurseries, gift shops or meeting facilities. In other instances such as where a private sector firm occupies a building in order to produce a good or service for the public sector, it may not be entirely clear whether the building is in the private or public sector.
C.40 In considering these issues we therefore did not feel that a blanket relief or exemption for the public sector could help meet the remit we were given.
C.9: Introducing marginal rates of tax.
C.41 In Section B.1, we mentioned that several consultation responses suggested that non-domestic rates should become more like Income Tax. The context was employing a more or less fixed tax rate, and instead of poundage changing each year. Another way that non-domestic rates could be brought more in line with Income tax would be to employ marginal tax rates.
C.42 Poundage and the Large Business Supplement ( LBS)- currently operate as a "slab tax". This means that small changes in rateable value can lead to a large change in a property's bill. For example, a property with a rateable value of £51,000 typically pays a tax bill of more than £1,000 higher than a property with a rateable value of £50,999. The Small Business Bonus Scheme operates in a similar manner.
C.43 A marginal tax rate would ensure that instead of small changes in rateable value causing large changes in bill entitlement, taxes gradually increased with rateable value.
C.44 While such a structure would be attractive, the complexity that would be involved with adopting such a structure likely prohibit it being effective and well understood. Clearly, a marginal rate can be relatively well understood - much like income tax. However, it is unclear if the concept could be easily translated to the non-domestic rates tax base where the tax base is measured in rateable value - a concept that isn't as easy to define as PAYE income. In the absence of annual revaluations, it is also problematic that both the bands and the rates under this sort of structure may need to be adjusted every year in order to achieve revenue neutrality.
C.45 The analysis below looks at what sort of tax rates might be possible under such a scheme, under the following assumptions:
- The analysis uses individual property values, rather than the total RV attributable to each ratepayer. Any move to marginal rates would need to be done on a ratepayer basis rather than a property by property basis - otherwise it would incentivise large ratepayers to split up their properties in order to qualify for lower taxes.
- The analysis was carried out on 2014-15 values and using outturn data on 2014-15 income and relief expenditure, as this was the latest publically available data at the time of the analysis.
C.46 As part of this exercise, it is assumed that this structure must achieve revenue neutrality, subject to the caveats above. In 2014-15, it is assumed that this means the system would raise around £3.0 billion.
C.47 This figure is based on published non-domestic rate revenues statistics for 2014-15.
C.48 In 2014-15 total non-domestic rate revenue was £2.5 billion with £0.7 billion of reliefs other deductions granted. Of this, £0.7 billion of reliefs, £0.2 billion was attributable to the Small Business Bonus Scheme ( SBBS). The remaining £0.5 billion were attributable to other relief schemes and deductions such as charitable rates relief and bad debts.
C.49 This analysis removes reliefs provided under SBBS and incorporates the value of these reliefs into the tax bands. Therefore the revenue neutral target is £3.0 billion coming from £2.5 billion of non-domestic rate revenue plus £0.5 billion of other reliefs and deductions.
C.50 Three different scenarios are presented that would achieve broad revenue neutrality. The relevant comparison for this group is the tax levied in that year (the poundage rate was 47.1p or 47.1% with an LBS rate of 1.1p or 1.1%).
C.51 The scenarios are:
1) "Central Scenario" - A tax band structure with all properties paying rates, with rates for larger properties being somewhat higher than those for small properties.
2) Scenario 2: The same tax rate is applied across all rateable value tax bands
3) Scenario 3: A tax band structure with some properties exempt from paying rates, with rates for larger properties being significantly than those for small and medium sized properties.
Table C2 - Illustrative marginal tax rate structure - based on 2014-15 tax base.
|RV Band (April 1 2015)||No. of properties||2014-15 Tax rate*||Scenario 1||Scenario 2||Scenario 3|
|Tax Rates||Revenue (£m)||Tax Rates||Revenue (£m)||Tax Rates||Revenue (£m)|
* Note that this is largely illustrative - the tax rate faced by many rate payers is dependent on SBBS and other relief eligibility. In practice, many rate payers faced a significantly lower tax rate than is implied by this column.
Source: Review Group analysis based on Valuation Roll (April 2015).
C.52 Under the central scenario, all properties under £250,000 rateable value see a decrease in rates paid. Smaller properties will see the greatest benefit from this change, seeing a larger percentage decrease in their bill. However, with no SBBS provided a large number of properties under £12,000 will see an increase in their bill.
C.53 Under the second scenario, the same rate is applied on all rateable value - similar to poundage. The smallest properties see an increase in non-domestic rates paid (as a result of SBBS being withdrawn), whilst medium and large properties will see a decrease in their tax bill.
C.54 The third scenario applies a very "progressive" tax structure - to the extent that increasing tax rates in line with rateable value can be considered progressive. Small and medium sized properties pay little or no non-domestic rates. This is financed by large increases in non-domestic rate bills for high rateable value properties. Properties with a rateable value over £250,000 see larger bills - with the largest rateable values seeing very large increases in rates liabilities.
C.55 Charts C1/ C2 present a comparison of the central scenario to actual tax bills levied in 2014-15:
Charts C1 and C2 - Projected bills under "Central Scenario" versus actual 2014-15 bills.
(Chart on left gives a detailed picture of the changes for low rateable value properties, whereas the chart on the right focusses on a wider range of rateable values).
Source: Review Group analysis of Valuation Roll (April 2015).
Table C3 outlines the non-domestic rate due under each scenario for a series of properties with different rateable values ( RVs) in more detail:
Table C3 - pre-relief bills under illustrative marginal tax rate structure.
|RV||Pre - Relief Bills Under Various Modelling Scenarios|
|2014-15 - no Relief Entitlement||2014-15 with Full SBBS Entitlement||Central Scenario||Scenario 2||Scenario 3|
Source: Review Group analysis of Valuation Roll (April 2015).
C.56 To afford a system that is better for all smaller properties ( e.g. scenario 3), would require very high marginal rates of tax to be applied to more valuable properties, however given the prominence of single large ratepayers, the rates outlined in scenarios 1 and 3 could be adjusted downward somewhat.
C.57 We do see this is an interesting idea - and are attracted to the idea of abandoning the "slab tax" structure of SBBS, and Large Business Supplement in favour of marginal rates, however it is clear that much would need to be developed to make this sort of structure feasible.
C.58 We believe that this sort of structure could only feasibly be implemented if tax rates were not subject to change from one year to the next. Stakeholder groups have highlighted the difficulty that many ratepayers have in fully understanding their rates bill. In a scenario where multiple tax rates and bands changed each year, it is unlikely that any efficiency gains associated with this sort of change could outweigh the costs in terms of reduced transparency and accessibility.
C.59 We also believe that the above analysis only describes part of the picture. The Valuation Roll or the system used for billing ratepayers would have to be improved substantially. Marginal rates of tax would only work if levied on cumulative holdings. For example, it would make little sense for a large company that owns hundreds of small properties to pay lower rates of tax than a much smaller company that owns a single larger property. This would also be essential for avoiding a situation where ratepayers can split up their properties in order to create a lower rates bill.
C.60 Even if these conditions outlined above were met, there would be merit in a discussion of whether or not higher rental values should incur a higher marginal tax rate. For these reasons, we decided to focus our work and recommendations on areas where achievements could be realised much sooner. However, we did want to include some analysis of this idea in our report, as if these conditions are met, then this sort of scheme would be far more achievable, and worthy of further consideration.
Email: Marianne Barker, firstname.lastname@example.org
Phone: 0300 244 4000 – Central Enquiry Unit
The Scottish Government
St Andrew's House