Why the Government Must Include Council Tax in Any Rates Reform

“The current pandemic has more than ever exposed the flaws in our broken business rates system as a means of funding local government services and any reform in Autumn must consider alternative means of financing- including looking at Council Tax.” so says John Webber, Head of Business Rates at property advisors Colliers.

Webber points out that many cash starved councils have been in discussions with the Government for a bail out or “capitalisation directions” due to loss of income during the pandemic.

The twelve-month 100% business rates holiday (April 2020 to March 2021) given to the retail, hospitality and leisure sectors would have cost local government coffers between £11 and £12 billion in income if Central Government had not stepped in.

And as this rates holiday was extended for another three months to the end of June, with further concessions for the following nine months, further income loss from business rates is on the cards.

It is therefore no wonder says Webber that the Local Government Association has warned ministers that any planned shake up of the business rates system must “recognise the importance of this income stream for funding key local services”.

In a normal year business rates contribute £26 billion net, which is collected and used by local authorities to pay for local services including adult and child social care, public health, fire and rescue services, highways and transport and rubbish collection- all key services that we don’t want to be without.

Yet says Webber, £26 billion from this one source is unsustainable.

Nearly one third of the total rates bill is funded by the physical (bricks and mortar) retail sector (£7.6billion), despite this sector having seen its high streets decimated in recent years.

Many retailers are struggling to pay their bills now the rates holiday relief was capped at the end of June, due to the devastating impact of the pandemic and lockdowns on retail and hospitality businesses in this last year. And at a basic level, current business rates are just too high.

As Webber explains:

“Because it’s been four years since the last revaluation in 2017, business rates bills are still linked to rental levels of 2015.”

“Yet values have plummeted since. In some parts of the country, we are seeing retailers paying higher rates bills than they are paying in rents- since at least they can (and have been) negotiating with their landlords on rent payments.”

“The government’s recent legislation -that it will not recognise any Covid related rates appeal on the grounds of material change of circumstance- puts another nail in the coffin for any respite from the high bills coming in.”

Webber adds, “We have long been advocates of business rates reform. The system in current form is unsustainable.”

“The multiplier at 51p in the £ is too high and has created an effective 50% plus tax on business occupiers, the relief system is out of date, the system is unfairly skewered against the retail sector, revaluations are too spaced out to reflect proper rental levels and the appeals system is a disaster.”

“It’s essential the government reforms the system properly and looks at other forms of income to alleviate the burden on business rates, before it totally roasts the goose that lays the golden eggs.”

So What can be done?

One area that Webber thinks the government should consider is a re-look at Council Tax.

Council taxes are domestic rates in the same way as business rates are non-domestic rates- yet whereas as business rates are based on rental values, council taxes are calculated on the value of the property- as of April 1, 1991.

The highest band H is for properties worth £320,000 and above.

“Whilst its pretty shocking that we haven’t had a business rates revaluation since 2017, it’s probably more shocking that we haven’t had a council tax one for over 30 years! It’s way overdue.” says Webber.

This lack of revaluation has meant that house values and council tax bills “are now way out of step”.

According to a recent survey by Xendpay, some of the richest areas in the country have the lowest council tax bills and some of the poorest areas have some of the highest *

Colliers has investigated this by carrying out its own research comparing the boroughs of Westminster, Solihull, and Stockton on Tees in terms of business rates and council tax.

Source: Colliers

Colliers research found that whilst Solihull and Stockton on Tees raise a similar amount of revenue annually from business rates and council tax, in Westminster the picture is totally different.

Westminster raises a massive £2.35 billion from business rates, due to its higher property values. This is almost twenty-two times what it raises from council tax.

£1.01 billion of the business rates collection is returned to the central government pool to help other parts of the country as part of the levelling up agenda.

Given the wealth of many homeowners in Westminster and the value of houses there, it seems incongruous there is such an imbalance from the two collections.

In Westminster property owners in the highest band of council tax, Band H, pays £1655.12 in council tax a year**- despite many houses in areas such as St John’s Wood and Mayfair being worth several millions of pounds.

In Stockton on Tees Band H is £4202.66 – yet there are actually few homes (if any) in either Band H or Band G; the highest band appearing to be Band F where property owners pay £2999 a year in Council Tax, nearly twice what is paid in Westminster.

In fact, only houses in Band A and B in Stockton, the lowest value houses in the borough do residents pay less than the highest council taxpayer in Westminster.

And it’s not just Westminster that house values and council taxes are out of step. Multi-million-pound homes in Chelsea and Kensington change hands- but the highest bands of council tax in the borough is £2,627.20 a year.

“The current system is just out of step.” says Webber.

“If as a country we want our public services to be paid for – and I think the pandemic has shown how important this is – then we need to think wider than just relying on business rates and milking the system dry.”

“The government is considering other options – such as a tax on online shopping or a tax on deliveries for on-line purchases – and all options should be explored.”

“But a more equitable council tax regime would certainly be a good start in trying to reduce the burden on the business rates system and restore the balance in our local authority finances.”

*According to a recent survey by Xendpay, some of the richest areas in the country have the lowest council tax bills and some of the poorest areas have some of the highest.

For example, the London borough of Kensington and Chelsea now has the UK’s highest average house price, measured at £1,220,511.49 in February 2021. However, residents there also enjoy England’s fifth lowest Council Tax bill – an average of just £1,515 a year.

In Hartlepool meanwhile, the average house price is £115,437.76, which ranks it as 308th out of 313 boroughs in the country. Meanwhile, its average council tax bill is £2,528, the sixth highest in the country.

** There is an additional supplement for residents in Queens Park and Montpelier Square