Question 33: What are the likely benefits and costs of implementing a CVT? What are the practical implications of implementing a CVT?
The LGA believes that local authorities need the powers and flexibilities to be able to raise income from a variety of sources given the fundamental changes that have affected the economy for over more than a decade. The impact of COVID-19 on the economy, which is likely to have a lasting effect, reinforces the need to widen the taxbase available to local authorities. This includes, but is not limited to, an online sales tax as referred to in questions 40 to 43. The LGA’s response to the questions on CVT should be viewed in this context.
We consider that any tax, including a CVT, should conform to the principles we outlined in paragraph 6. A new system could use modern valuation and collection methods, particularly online, which would make it more efficient and a clear methodology would make it more predictable and transparent. It could also be designed in a way to provide incentives to councils and businesses, and flexibilities could be built in for example where both land and buildings are valued which could be valued and weighted separately. Sufficiency would depend upon the overall yield of the tax, and buoyancy on building in an annual inflation adjustment as is the case for the business rates multiplier and regular revaluations.
Some councils report that it is currently hard to get property owners to engage. Moving liability from occupier to owner as would be the case for a capital values tax would give owners more of a stake in localities. It could also mean that any tax liability would be attached to the property and so would have to be paid by the new owner if the property were to be sold. On the other hand, property owners may be more difficult to locate and could be based overseas which could make collection difficult.
Based on examples internationally it would be possible to design a capital values tax which conformed to those principles and overcomes some of the issues with business rates. However, the above advantages may not be unique to a CVT and any advantages would need to be assessed against any disadvantages which could include locating the owner, the possibility of more appeals, transitional costs, and the incentives that could be created for high density usage of land or building on green spaces.
Overall, the LGA believes that there is merit in the Government doing some research on CVT and LVT (Land Value Tax) including a review of current international practice and forward plans for local taxes on business in order to avoid a scenario where England, and potentially other nations in the UK, opts to implement a CVT just as other countries are considering alternatives. This review should also consider whether the tax could be used to incentivise socially useful behaviours, whether any benefits or disadvantages are unique to CVT, or whether there could be unintended consequences as a result of the tax.
Question 34: What evidence is there of the benefits that replacing business rates with a CVT would have in practice, for example, on business investment and growth?
There do not appear to be any empirical studies on the effect of replacing business rates with a capital values tax and we would encourage the Treasury to commission these.
We note that a 2003 World Bank study stated that rental value, which is used to determine business rates, is usually based on actual use of the property rather than the ‘highest or best use’. It states that “from a land use perspective, a tax based on value in highest and best use is more efficient than a tax based on current use because it stimulates use to its highest potential by increasing the cost of holding unused or under-used land (as compared to developed land).” There are also issues about taxing vacant land which is not generally taxed under a rental approach.
However as noted above we consider that there should be safeguards built in so that, for example, councils have power to take effective action against any unintended consequences such as building on green spaces which have a social utility.
Question 35: How can land and property be valued fairly and efficiently under a CVT in England? What evidence is available to do this?
There are a variety of approaches used internationally. For any variant of capital value tax, it is likely that valuation would be done by professional valuers although ratepayers would have an input in providing evidence in order to generate a market value. Other tools such as statistical modelling and quality assessment could be used drawing on examples from the Netherlands and Australia. The Land Registry keeps a register of sale prices which could be used for valuation and to impute values of similar properties.
In England at present valuation expertise is held by the Valuation Office Agency, although in most countries, including Scotland valuers or assessors are employed by local governments. In a new system, there would be a judgement to be made as to where the function should sit. It would be necessary for local government to be funded appropriately for any transfer of functions and new burdens.
Question 36: How would replacing business rates with a CVT affect the distribution of taxation?
Whatever the options available to local authorities for raising taxes there will need to be equalisation between local authorities to reflect the different tax raising abilities and differences in need for, and costs of, services. This is fundamental to funding public services.
Location already has a significant influence on rental value. Therefore, replacing business rates with a capital values tax would lead to changes in the distribution of taxation only where capital values differ from estimated open market rental values. There would be more of a change if property that is currently assessed using a different method of valuation were to change to a pure property value, but it would be possible to consider alternative methods of valuation for such cases, such as schools and hospitals.
Question 37: What are the likely implications of moving the liability for tax from tenant to landowner or property owner? How could the government ensure effective collection from and compliance by these taxpayers?
As the Call for Evidence states, there is an argument that at least a proportion of business rates is capitalised in the form of lower rents for owners. However, the extent to which this actually occurs would depend on the individual property market and the bargaining power of landlords compared with tenants as well as the lag in changes in rates being passed on in changes in rents. Billing authorities should have responsibility for collecting the tax and for ensuring compliance. They should be able to levy appropriate sanctions for non-compliance, including on owners resident abroad.
As mentioned in the reply to question 33 above, some councils report that it is currently hard to get property owners to engage. Moving liability from occupier to owner as would be the case for a capital values tax would give owners more of a stake in localities. It could also mean that any tax liability could be attached to the property and so would have to be paid by the new owner if the property were to be sold. On the other hand, property owners may be more difficult to locate and could be based overseas which could make collection difficult.
We have given examples in our response to Tranche One of avoidance of business rates through the misuse of mandatory reliefs. It would be necessary to design and set up any new system to limit avoidance and to give councils effective powers to curb any avoidance which did occur.
Question 38: What lessons can be learned from other countries experiences with CVTs?
We would comment that many countries and jurisdictions have experience in capital values taxation. We would point to the following examples in particular:
- Requiring all businesses to submit an annual return on the lines of the New York Real Property Income and Expense form. We note that the City of New York uses this, along with statistical modelling, to compute market value. There are stiff penalties for non-completion, up to $100,000 for property with an assessed value of $25 million or above;
- The Brazilian concept of ‘valor venal’ (‘Assessed purchase value’) in calculating IPTU (Urban Buildings and Land Tax) which starts from the sale and purchase price but also takes account building characteristics and use and the average value of property in the street. It may therefore be lower than market price. It is calculated by the municipality which also sets the rate and has discretion on how the different elements are weighted;
- The Brazilian approach where municipalities have discretion to charge higher rates of IPTU for unimproved or under-used land, linked to local plans;
- Assessing land and buildings separately on the Australian model; this is used by almost all Australian states to calculate land values on which Land Tax is based. Generally, a mass valuation approach is used where properties are valued in groups called components, whose market values move uniformly. In New South Wales valuers analyse property sales, including vacant land and improved properties. They then adjust the sales price to remove the value of improvements. A representative property in each component is individually valued as at 1 July each year to determine how much the land value has changed from the previous year. This change is then applied to all properties in the component to determine their new land values.
- The approach in the Netherlands where the local authority carries out annual revaluations of property value (WOZ) and is responsible for setting the multiplier.
We consider that the Treasury should study other countries including those mentioned above to see how the system they have in place is seen locally by different stakeholders including business and local government.
Question 39: What other international alternative approaches to the taxation of non-residential land and property merit consideration for England?
Other than the examples in reply to question 38 above, we do not have any other examples to suggest.
Question 40: What would be the benefits and risks of introducing an online sales tax?
We welcome the recognition in the Call for Evidence that while an online sales tax would not replace business rates, it could still provide a sustainable and meaningful revenue source for the government and that while the scope of an online sales tax would need further consideration, it could be levied on the revenues that businesses generate from online sales to UK customers, and focused on sales in direct competition with those carried out through physical premises.
The LGA commissioned work on this from WPI Economics and we would support consideration of the options set out in the report, which could be a local e-commerce levy along the lines recommended in this report or VAT (Section 3). Although there would be risks that it would put up the cost of doing business online, we consider that if it was introduced at a relatively low level that this would be a low risk.
Question 41: Which services and products do stakeholders think should be subject to an online sales tax and what evidence is there to support this?
We would agree with the proposal in the Call for Evidence, it should be levied on the revenues that businesses generate from sales to UK customers. (WPI found that these represented 90 per cent of all sales). WPI used for their modelling the value of website sales to private customers, produced by the ONS. These website sales totalled £160.2 billion at the end of 2017. Based on assumptions about the proportion of businesses that undertake e-commerce sales, they estimated that these website sales are generated by roughly 218,000 businesses.
Question 42: What evidence is there for the effects of an online sales tax, for example, on changes in consumer behaviour, or prices?
It would be up to businesses and the market to determine the extent to which it was passed on in prices; they might set it off against the savings from physical premises, both property and staff costs. The WPI report for the LGA suggests that the move to e-commerce is part of wider structural changes in the economy. It is unlikely that a small levy, which might not be passed on, would have much effect on this.
Question 43: How could an online sales tax affect the distribution of taxation?
It could broaden the range of taxes to local government and should be considered alongside the reform of business rates and other alternatives.