Update on Property Tax Issues: July 2018

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep its members up to date with the latest developments in property taxes both in the USA and Europe.

IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org).

As far as Europe is concerned, this month’s report includes articles on France, Ireland, and the United Kingdom. There is a separate IPTI report on the United States, with a focus on New York.

 

France: Wealth Tax

You can download HERE ( France – Introduction to Wealth Tax )an outline of the “new” wealth tax that was introduced by the French government in 2018. Although France had a wealth tax previously, there have been significant changes in the nature of the tax as explained in the attached note.

 

Ireland: European Commission warns of major risks to Irish economy

The shortage of housing supply and the significant increases in property prices are posing a major risk to the Irish economy, the European Commission has warned.

In its latest post-programme surveillance report, seen by The Irish Times, the Commission says the introduction of rent pressure zones has been ineffective and contributed “little to containing price rises”.

It says rental inflation is “well above” the 4 per cent prescribed by the rent pressure zones, despite them being introduced more than a year ago and across the major population zones.

Increases in property prices and rents are continuing and the supply response has been insufficient and below the level needed to address long-term housing demand, the commission says.

Recent Government measures are going in the right direction, it says, but it advises there is a need for “timely and efficient implementation”.

Elsewhere the commission warns against reducing taxes and increasing expenditure in the upcoming budget as it may lead to a repeat of the “pro-cyclical stance of the past”.

It accepts a failure to reduce some income taxes could “face political hurdles” but stresses the economy is already operating close to its capacity. It again points to the reliance on corporation tax among a small number of large multinationals.

“In view of the heightened external risks, reducing tax expenditures and broadening the tax base would be prudent … It is less painful to revamp the tax system when the economy is experiencing an upswing.”

 

Property tax

The commission points to the current review of the local property tax and says it should examine “more regular re-evaluation of the tax base while addressing the horizontal inequality issues embedded in the current system”.

Consideration should also be given to the introduction of a vacant property tax to increase the supply of homes for rent or purchase to meet demand.

Other risks include the uncertainty surrounding the ongoing negotiations on the terms of the United Kingdom’s withdrawal from the European Union and changes to international taxation.

In relation to the banking sector, it says important challenges remain despite the improvement in their capital position. Lenders’ exposure to the property market remains high and the growing uncertainty elsewhere represents an additional challenge, the commission adds.

 

Arrears problem

Long-term mortgage arrears continue to pose difficulties and are still the most critical part of the nonperforming loans.

“This is partly due to the heavy use of loan-restructuring solutions, which has left behind a substantial number of borrowers with long-term arrears who are unwilling – or unable – to engage with their banks.

“At the same time, repossession activity remains relatively limited, as banks face reputational concerns for exercising collateral enforcement options, especially on vulnerable borrowers, while the length of proceedings continues to be protracted.”

Staff from the European Commission and the European Central Bank conducted a visit to Dublin in May as part of its post-bailout surveillance. This is the ninth such visit, and the commission prepares a staff report for the Department of Finance.

The report, which will not be published until mid-February, was sent to the Oireachtas committee on finance.

 

UK: Hammond promises tax on digital firms as business rates weigh on struggling retailers

Business rates are hitting the high street too hard, the Chancellor Philip Hammond has admitted.

These taxes are calculated based on the cost of a property that a business occupies and, with prime locations, high street retailers have been hit hard compared to their online competitors. Many are already struggling, with mounting numbers of store closures.

Retailers have complained that the revaluation exercise undertaken last year has left them with higher bills in an already challenging climate.

The Chancellor said he would continue efforts to “find a better way of taxing the digital economy” in order to reduce the tax advantages for online retailers compared to high street stores.

Mr Hammond said: “The Government recognises that business rates can represent a high fixed cost of some businesses.”

However, Mr Hammond has refused to bow to pressure from MPs calling for a tax overhaul, saying it supports the stability of local government funding.

The release of the Chancellor’s letter to MPs comes days after retail veteran Bill Grimsey called for “decisive action” in support of retailers and an abolition of business rates in order to help struggling high street firms.

Many efforts have been made to mitigate the impact of business rates, including a relief fund worth £300m. This administration of this fund has, however, been very slow, according to several critics, including the Federation of Small Businesses.

The new business rates system also made it harder to challenge valuations via an appeals process set up for firms, according to data released in February.

The number of appeals had dropped by more than 99pc from when the system was introduced in April 2017 to the end of last year – a collapse which may also have been partly due to the £500 fine businesses face if they are deemed to have wrongly appealed.

Mr Grimsey has proposed scrapping the tax altogether.

However, such a move could prove challenging as it generates £25bn a year for the Treasury.

Chairman of the Treasury select committee and Tory MP Nicky Morgan said:“The Committee is increasingly concerned with the financial burden that business rates are placing on high street businesses.”

Ms Morgan added: “We are likely to scrutinise business rates further as part of our Autumn Budget inquiry later this year.”

 

UK: Chancellor admits to business rates’ effect on high street but no reform yet

Chancellor Philip Hammond has finally admitted that business rates are hitting the high street too hard, but has stopped short of making any immediate changes to the system.

In a letter to MPs seen by the Daily Mail, Hammond refused to bow to parliamentary pressure to overhaul how business rates are charged, saying it supports the stability of local government funding.

Business rates tax generates an estimate of £25 billion worth of revenue a year for the Treasury.

However, Hammond suggested that online retailers may soon be subject to a tax system of their own as he confirmed he would continue finding “a better way of taxing the digital economy” in order to reduce the tax advantages they have compared to bricks-and-mortar retailers.

“The government recognises that business rates can represent a high fixed cost of some businesses,” Hammond said.

Treasury select committee chair Nicky Morgan MP echoed the Chancellor’s comments.

“The committee is increasingly concerned with the financial burden that business rates are placing on high street businesses,” she said.

She added: “We are likely to scrutinise business rates further as part of our Autumn Budget inquiry later this year.”

The comments from Hammond and Morgan come amid a tumultuous week for the ongoing debate on business rates and high street retail.

On Wednesday, the British Retail Consortium ramped up its battle against business rates by urging the government to implement a three-year freeze on increases until 2021 to allow for the “reinvention” and modernisation of retailers at a crucial time.

On the same day, a review conducted by a team led by retail expert Bill Grimsey called for “decisive action” to support retailers by scrapping business rates all together.

Meanwhile, earlier today the New West End Company – which represents over 600 retailers in London’s West End district – published a report that recommended replacing business rates with a revenue-based tax for businesses that are wholly or largely online.

It said the extra money raised through this could be used to reduce the rates burden for other businesses.

The government has attempted to mitigate the impact of business rates since its revaluation in April last year in various ways, including £300 million worth of relief that has met criticism for the lack of speed in the administration of these funds.

The new business rates system also made it harder to challenge valuations via an appeals process, according to data released in February, which includes a £500 fine businesses face if they are deemed to have wrongly appealed.

Business rates are calculated based on the cost of a property that a business occupies.

Leaders across the retail industry and the government have vocally opposed the tax, with many retailers left with higher bills amid challenging market conditions

Tesco chief executive Dave Lewis, Sainsbury’s chief executive Mike Coupe, Bank of England governor Mark Carney, The Entertainer chief executive Gary Grant, Argos chief executive John Rogers, retail expert and

TV personality Mary Portas and numerous other high-profile names have also flagged the tax for damaging the retail industry.

 

UK: Britain’s retailers are too quick to blame business rates

It is a remarkable fact, but few businesses ever seem to fail because of excessive leverage, misconceived strategies, or inability to meet the needs of their customers. They struggle because banks unreasonably refuse further credit, or because of unseasonable weather, or some unexpected adverse effect, such as a terrorist attack. Most often, however, their difficulties are the result of some insufficiently supportive government policy. The corporate executive who says “we got it wrong” is as rare as the politician who makes a similar admission.

So the nation’s shopkeepers have spent recent weeks explaining how their problems are the result of the excessive and unfair burden of business rates. Excessive because rates on commercial premises make up about 5 per cent of total tax revenue, with retail accounting for about a quarter of that total; unfair because they fall more heavily on bricks-and-mortar retailers than on their online competitors.

Pressure on the retail sector has been intensifying for a decade. In the years of the credit boom finance was cheaply and readily available to fund new property development. It was also readily and cheaply available for leveraged private equity purchase of retail chains. But since 2008 consumer expenditure has stalled. Shopping has become a diminishing fraction of household spending, and online sales have grown.

So the weakest retailers have been struggling — the dowdy department stores (we all know which they are, even if we haven’t recently visited one); the groups with financing structures too precarious to survive any setback. And surely it should not be a surprise that the market for imported tat and wholesalers’ overstocks at £1 per item has its limits. Even the stronger chains have had to review their less profitable stores. All that is an appropriate market response to evident overcapacity. There will be fewer retailers, fewer shops and less popular high streets and shopping malls will struggle until some sort of equilibrium is restored. So where do business rates come into it all?

Business rates are levied on a notional rental value of commercial property, and the rate of tax (the multiplier) is increased annually in line with the retail prices index. These assessed rental values are subject to revision every five years. The effect of revaluations is to leave the total rates bill unchanged but to redistribute it in line with changes in relative rental values. The latest revision, which had been postponed for two years to avoid an unwanted clash with a general election, came into effect in April 2017. Some pay less, but those who pay more make more noise.

Based on estimated rental value, business rates are a tax on structures and on site values, since property consists of both a building and the land it sits on. For a logistics warehouse outside a northern town, the value of the property rests almost entirely in the building; for a convenience store in central London, the value of the property is almost entirely in the site. And simple economics suggests that a tax on a building will fall mainly on the people who use the building, while a tax on land value will fall mainly on the people who own the land. The same simple economics suggests that a tax on valuable land is quite an efficient tax — land in central London is not going away, or falling out of use, however much you tax it. But they are less favourable to the tax on structures — that logistics warehouse might move, or shrink.

The critics of business rates have the wrong end of the stick. First, and fundamentally, they have failed to recognise that the core problem is one of overcapacity in retailing. Shopkeepers are victims of their own historic hubris, not government greed. Second, those critics have not thought through who would be the main beneficiaries of the relief they seek. The gains would not go to struggling discounters and outmoded department stores. The winners would be the holders of the most valuable land in England. Think of the big landowners of central London and your thoughts should turn to the Queen, the Duke of Westminster and Land Securities.

Finally, there is little truth in the claim that the present system unduly favours online retailers. True, the cost of retailing from Amazon’s fulfilment centre near Rugeley is a lot less than the cost of selling from a shop in Bond Street. But only a small part of that difference is accounted for by business rates. And, paradoxically, once the consequential rise in land values is taken into account — almost none at Rugeley and substantial in Bond Street — a reduction in business rates might actually reduce Amazon’s costs more than those of Tiffany’s. Anyone who thinks that business rates are an important element in the rise of online retail really has little grasp of what is going on in the industry.

Compliments of the International Property Tax Institute (IPTI), a member of the EACCNY