The end of the Business Rates era: Is Land Value Tax a viable alternative?

June 23, 2020

3 min read

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What's going on here?

Ever-increasing business rates have raised questions for the government as to whether reform is required to prevent the decline of high street retailers. Land Value Tax (LVT) has been presented as an alternative taxation method, to alleviate pressures on tenants and put the tax back in the landlord’s court.

What does this mean?

Business rates generated £31bn of income for the UK Government in 2018-19, of which the hard-hit retail sector paid a quarter, despite accounting for only 5% of UK economic activity. In February, the British Retail Consortium, backed by more than fifty retail leaders including M&S and Boots claimed that the business rates had forced retailers outside of London to subsidise those in the capital by £596m over the last three years.  This has raised concerns among lobbying groups, arguing that the tax is triggering the decline in high street presence and the loss of an estimated 180,000 jobs as a result of stores folding.   

Replacing business rates with LVT would mean basing taxes solely on the value of the land in accordance with economic fluctuations, as opposed to business rates which assess the value of what is built on the land and then tax accordingly.  Despite the obligations of LVT resting with the landlord, both landlord and tenant could benefit through the incentive to develop on the land and promote future real estate value, since LVT does not penalise expansion.

What's the big picture effect?

With the looming presence of coronavirus in the air, the current business rates further highlight the struggle that high streets and particularly the retail sector are facing to keep stores afloat.  It is clear that businesses are continually losing capital, despite employing means to keep the cash flowing, including expanding their online presence and going all out with sales.  This means that it is unlikely that retailers will be able to afford business rates in light of the current crisis and as a result, may have to renegotiate rental payments with landlords to be able to pay taxes.  

Since LVT is determined based on the location of the land in question, local authorities may see some variable outcomes in the level of tax collected which could reduce government funds accordingly.  This raises questions of justifying LVT when it comes to land in rural locations often used for agricultural purposes, which generates lower revenue than urban plots.  In turn, income generated from taxing land will suffer if businesses are no longer taxed regardless of their profitability.

On the whole, a move to LVT is likely to make a difference in the long term if companies are spared tax burdens irrespective of profitability.  This would enable tenants in desirable high-street units to save cash which could be put to better use, for example by increasing their marketing in order to bring in greater revenue which could ultimately save stores.  Consequently, the tax sacrifice if business rates are dropped may be worth it to see healthier high streets in action, despite landlords potentially suffering from income losses.  Yet, this may lead to renegotiations of leases and rent charges if it is found that businesses have gained a lucrative advantage if a move to LVT is initiated.  However, since it is local authorities who hold the strongest benefits from business rates to conduct regeneration projects, could the introduction of LVT be bad news for communities who rely on these vital funds to keep afloat?

Report written by Evangeline Taylor

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