Sam Dumitriu is Policy Adviser at The Entrepreneur’s Network.
Backing entrepreneurs should be a no-brainer for the Conservatives. If we are to succeed outside the European Union, then it is vital that Britain remains one of the best places in the world to start and grow a business. To do that we need to take a hard look at the regulations and taxes that pose barriers to Britain’s ambitious business-owners.
To that end, the All-Party Parliamentary Group (APPG) for Entrepreneurship has launched a new report on tax reform. We surveyed 500 entrepreneurs, listened to business groups and policy experts, and put together a series of recommendations that show how, in the words of Colin Clark MP, “the tax system can – and should – be designed to encourage enterprise”.
Business rates were top of the list when we asked entrepreneurs which taxes discouraged entrepreneurship. Over half surveyed thought they were harmful to entrepreneurship in the UK, more than any other tax.
Even if the money were available, simply cutting rates wouldn’t solve the problem. The problem is, as the Nobel Prize winning economist William Vickrey told it, that business rates are “economically speaking, a combination of one of the worst taxes—the part that is assessed on real estate improvements …and one of the best taxes—the tax on land”.
Conservatives know that while taxes may be paid by one group, the true burden can fall on another. Theory predicts that the group least responsive to changes in price will end up bearing the bulk of the economic burden.
Take Corporation Tax, companies may sign the cheque, but if high taxes discourage investment or incentivise firms to relocate in low-tax jurisdictions then workers end up paying.
There’s a similar logic to business rates. Businesses can respond to rate hikes by using less space, moving to cheaper premises, or shutting down altogether. But as a result of our bureaucratic planning system, the supply of commercial property barely changes in response to rate hikes. This means that, according to economic theory, rate hikes will eventually be counterbalanced by cheaper rents.
The question is, as The Smiths didn’t quite put it, “How Soon is Eventually?” Research from the British Property Federation found that even after three years rents will have only adjusted by 75 per cent. For many firms that’s simply too long.
Business rates also impose a large administrative burden. Challenging incorrect valuations is time-consuming and resource intensive. Recent reforms to the process have made it worse, making it harder and leaving many firms to decide appealing simply isn’t worth it.
In their current form, business rates also discourage investment in commercial property. A shop adding a lift, a restaurant installing a walk-in fridge, and an office introducing CCTV will all face higher tax bills. The problem is worst for manufacturers. Building berths, blast furnaces, and standby generators all increase rateable values and lead to higher tax bills, discouraging productivity-boosting investments.
So what’s the answer? It’s not moving to a tax on turnover or sales; business rates get bad press because they don’t discriminate between small high street shops and out-of-town Amazon warehouses. The tax system shouldn’t punish firms for economising on real estate.
Instead, if Philip Hammond wants to fix business rates and spur on growth, he should make two key reforms.
First, he should change who signs the cheque. While in the long run, it doesn’t matter who pays, as Keynes famously said “In the long run, we’re all dead”. Reforming rates so that property owners and not occupiers handle payment will have two benefits.
It will speed up the adjustment. Regular revaluations may help, but there will always be a lag between rate hikes (or falls) and rent changes. By levying the tax on commercial landowners instead of occupying businesses, the transition will take place almost immediately. For firms currently grappling with a temporary double-whammy of high rents and high rates this will be a massive relief.
The move will cut tax compliance costs, too. Under the status quo, every company in a business park is forced to file a separate business rates payment and make a separate appeal. Under our proposed reform, only the business park owner will be responsible for paying and appealing incorrect valuations eliminating duplicate paperwork.
Second, rates should be assessed upon the land or site value of a commercial premise rather than on the value of the property itself. This would ensure firms aren’t penalised for renovating their property and would ensure local governments aren’t reliant on internationally mobile capital for revenue. There will be logistical challenges, but land taxes aren’t uncommon internationally.
If we can remove the barriers in the tax system that hold entrepreneurs back, then Britons will benefit from higher wages, more jobs, and better products. Scrapping business rates and replacing them with a business land tax would cut red-tape for growing firms and encourage them to invest. Let’s back Britain’s entrepreneurs.