Land Value Taxation Campaign

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Home Discussion Theory Business rates and their effects

Business rates and their effects

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In view of the announcement of Business Rate reform in the Queen’s Speech, a potted summary of the imact of the tax on business property is presented here.

Business rates concessions are only of temporary help, and only to existing tenants. The value of the concession will be captured by the landlord at the next rent review, and new tenancies will be agreed at rents which reflect the value of the concession.In granting this concession, the government is giving up a stable and reliable source of revenue, with little benefit to the group of people it is intended to help.

The effects of the business rate and any other property taxes are best understood in the light of Ricardo’s Law of Rent.

  • Regardless of who is nominally responsible for payment, the incidence of the tax is ultimately on the owner of the land. However, this effect may be subject to a time lag. In the case of new lettings, the entire incidence of the property tax is on the landlord, as the rent that can be charged is directly affected by the amount of the tax payable by a tenant, whose concern is with total occupation costs.
  • In the case of existing tenants, there is a time lag. An increase in the property tax is borne by the tenant until the end of the lease or until rents are reviewed. Conversely, the benefit enjoyed by a tenant from a reduction in property tax is temporary and is clawed back by the landlord when the rent is reviewed or the lease renewed.
  • If the property tax exceeds the gross annual rental site value, the site cannot be put to sustainable economic use; ie it is sub-marginal.

The following implications arise from the above points.

  • Unless valuations are up to date, it is possible that if rental values are falling – for example, due to changed trading conditions. The tax can then tip land into sub-marginality.
  • Because valuations are based on land plus improvements, the tax payable may exceed the land value of the site. This situation can arise where sites of low land value are developed with valuable plant; examples are Nissan in Sunderland, chemical plant in locations such as Teeside and Runcorn, and steel manufacturers in Scunthorpe and South Wales. This damages the long term prospects of these locations as viable manufacturing sites.

REFERENCE The effect of the ten year ‘rates holiday’ in the Enterprise Zones established in 1981 is analysed in the report of this study commissioned by HM government after the conclusion of the scheme. This confirms the prediction of Ricardo’s Law, that the incidence of property taxes is on the landlord and that any concessions are captured through rent increases.

http://webarchive.nationalarchives.gov.uk/20090211195642/http://www.hmrc.gov.uk/research/report42.pdf

 


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