Fixing the cost
Making the UK attractive to manufacturers
Adrian Bailey David Gauke Tim Tozer Helen Foord
Chris Richards Jagjit Singh Srai Mike Heiser
In partnership with
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ROUND TABLE PARTICIPANTS
Graham Armitage
Adrian Bailey
Helen Foord
David Gauke
Partner (automotive),
KPMG
Chair of the business,
innovation and skills
select committee
Government relations
manager UK, General
Motors
Financial secretary to
the Treasury
Mike Heiser
Mark Higgin
Julian Lyon
Peter O’Connell
Senior adviser
(finance), Local
Government
Association
Partner and head
of ratings, Montagu
Evans
European real estate
manager, General
Motors
Local government
policy adviser,
Federation of Small
Business
Blake Penfold
Chris Richards
Chris Sanger
Director of business
rates, GL Hearn
Senior business
environment policy
adviser, EEF
Global tax policy
leader, Ernst & Young
Jerry Schurder
Partner, Gerald Eve
Dilip Shah
Jagjit Singh Srai
Tim Tozer
Jon Bernstein
Principal economist,
CBI
Head of Centre for
International
Manufacturing
Chairman and MD of
Vauxhall Motors and
CEO Opel Ireland
Chair
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CONTENTS
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COVER: CHRIS ONG
First published as
a supplement to
the New Statesman
of 13-19 February 2015.
© New Statesman Ltd.
All rights reserved.
Registered as a
newspaper in the UK
and USA.
The paper in this
magazine originates
from timber that is
sourced from sustainable
forests, responsibly
managed to strict
environmental, social
and economic standards.
The manufacturing mills
have both FSC and PEFC
certification and also
ISO9001 and ISO14001
accreditation.
7
44
Business and government at the round table p.4
The UK tops the table for property taxes p.6
Waiting for Westminster
Critics might be tempted to
accuse the government of
kicking yet another contentious
issue into the long grass. Any
recommended reform into
business rates will have to wait
until well beyond the forthcoming
general election, in the same way
as the decision on additional
aviation capacity in the south-east
of England and on the publication
of the Chilcot inquiry into the Iraq
war must wait.
Last December, the Chancellor
George Osborne used his final
Autumn Statement of this
Parliament to announce a review
into business rates, the tax levied
on non-domestic properties. It
will report in time for the 2016
Budget, nearly a full 12 months
after this May’s election.
For those who think reform is
well overdue the timetable is a
frustration. A group that includes
large manufacturing companies,
high street retailers and a range of
smaller businesses has a laundry
lists of complaints against the tax.
Business rates, this group says, are
too complex and too expensive;
they act as a tax on enterprise
and a disincentive to invest; and,
revaluations are too infrequent
and linked to the higher of two
measures of inflation.
There is a counter argument
to all of this. The government
points to the UK’s excellent
infrastructure, transparent tax
system and a corporation tax
rate that is now joint-lowest
among the G20. Moreover, the
manufacturer’s association EEF
says its members have little
appetite for reform, noting
the “stable, fixed cost” that
characterises business rates.
Given there is a lively debate,
what can interested parties
expect after the election? An
apparent consensus between
Westminster’s two largest parties
might give hope to both sides.
Adrian Bailey, the Labour chair
of the business select committee,
believes a review is needed. In the
event of a change of government
this represents good news for
those who want reform.
However, Bailey also shares
the government’s view in one
other respect. He told panelists at
the New Statesman round-table
event that forms the heart of this
supplement: “To recommend
a reform of business rates that
would decimate the contribution
to the Exchequer is not realistic in
the current financial situation.”
Meanwhile, Financial Secretary
to the Treasury David Gauke’s
assessment was even more
blunt. “There is no money left,”
he told panellists.
That’s not to rule out reform
but expectations might need to
be managed. l
This supplement, and other policy reports, can be downloaded from the
NS website at newstatesman.com/page/supplements
2 Round table
The participants
Full list of panelists from the two New Statesmanconvened round table events, Fixing the costs:
Making the UK attractive to manufacturers.
discuss the merits and demerits of business rates
and suggest ways the tax levied on non-domestic
property might be reformed.
7 Glossary
Jargon buster
4 Round table
A taxing question of property
Complex and unfair or a guarantee of stability?
Leading voices from politics, academia and business
From business rates multipliers to empty property
rates, from rateable value to revaluation, a plain
English guide to key terms of reference in the
business rates debate.
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ROUND TABLE
A taxing question
of property
To critics business rates are complex, unfair and produce perverse incentives.
To others they offer the guarantee of stable and fixed costs. If reform is
coming, what should it look like? The New Statesman brought some leading
voices together to find out
In the run up to last December’s Autumn
Statement, 14 major industrial companies
wrote to the Chancellor George Osborne
urging him to overhaul business rates. In
the letter seen by The Sunday Times, organisations including Tata Steel, Siemens
and General Motors (the sponsor of this
supplement) declared the tax levied on
non-domestic properties was “simply
not fit for purpose”. In doing so these
multinationals joined high street retailers and small businesses in a rejection of
business rates by business.
In the event, Osborne didn’t deliver,
certainly not in the immediate term. Instead he capped the rates increases at 2
per cent for a second year running and
announced a review into the “structure of
business rates” that is due to report ahead
of the 2016 Budget. And, as all the players
are aware, there’s a general election between now and the 2016 Budget.
Speaking at the second of two New
Statesman-convened roundtable discussions – entitled Fixing the costs: Making the UK attractive to manufacturers
– Osborne’s colleague David Gauke, the
financial secretary to the Treasury, said
a review was the right approach. “These
things are better done when you’ve got a
little bit of time to look at it,” Gauke told
fellow panelists.
He also cautioned that any reform
would have to be fiscally neutral, meaning that the £27-28bn business rates generated (before exemptions and reliefs)
would remain the target. In turn that
“Unless you forgo revenue
reaching a consensus is
going to be hard work”
means there would continue to be losers
as well as winners. “Unless you are willing to forgo revenue, reaching a consensus of what is the right way forward is
going to require a lot of hard work, a lot
of thinking, building up a degree of momentum and consensus building.”
So what should the review try to fix?
To judge by feedback at both round table events, the answer is quite a lot. The
charge sheet against the business rate
is lengthy: it’s too complex; it’s too expensive; it acts as a tax on enterprise; it
doesn’t reflect the ability to pay; revaluations are too infrequent; subsequent
implementation takes too long; and it
unaccountably uses the higher of the
two measures of inflation. All these were
common complaints.
In addition, there are two characteristics of the tax that large manufacturers
want to address: the way rentable value of
industrial property is measured and the
additional costs associated with implementing changes to an existing site.
If that’s the argument for reform,
doesn’t it smack, at least in part, as special
pleading? The government would argue
that the UK remains an attractive place to
do business. It is the sixth largest trading
nation in the world, boasts a transparent
and robust tax system, excellent infrastructure (over 70 airports and 40 major
ports) and from this year it will have the
joint lowest corporation tax rate, at 20 per
cent, among G20 countries.
To that end a KPMG’s 2012 Competitive
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pay taxes as long as they are fair and balanced.” She added: “One size does not fit
all when it comes to business rates and
that’s what the government needs to take
away. Where there is rentable evidence,
use it; where there isn’t use capital value.”
Currently, 60 per cent of all of General Motors’ property-based taxes across
Europe are paid in the UK even though
the company’s Luton and Ellesmere Port
plants represent just 8 per cent of its European manufacturing footprint. General
Motors is Vauxhall’s parent company.
“To have a hypothetical rental value
as the main driver seems frankly ridiculous,” Tozer argued. He offered an
example of another anomaly. Capital
investment in equipment – plant and machinery to use the language of the valuation office – pushes up rates. General Motors planned to install solar photovoltaic
panels at its Ellesmere Port plant a decade
ago, in order to reduce its environmental
impact and save money. In the event, the
company abandoned the plan because
any cost savings would have been outweighed by the increased rateable value
of the plant as well as what GM’s real estate manager Julian Lyon calls the “impact
of failure”. In other words, the company
would have been tied into a 15 year contract with an energy company and higher
rates even if the company stopped producing cars there. “So we have solar panels in all our plants across Europe but not
in the UK,” explained Lyon.
General Motors believes that this disincentive to invest is perverse. It was a view
supported by a number of other panelists.
Jagjit Singh Srai, head of the Centre for International Manufacturing at the University of Cambridge, said that rather than
driving the right patterns of behaviour,
the current business rates regime “encourages the hollowing out of our companies”. He argued that in the UK, “we
discourage start-ups, we discourage automation, we discourage new technology
investment. We encourage hollowing out
and we encourage moving overseas; all of
which sounds wrong.”
Chris Sanger, global tax policy leader
at Ernst & Young, suggested there was
evidence of a foreign direct invest-
t
DUNCAN SOAR
Alternatives Study declared that the UK
was the lowest-cost destination among
established markets in which to do business. Or to quote a comment that appeared below that Sunday Times piece on
the pre-Autumn Statement letter: “Big
companies want to pay less tax, nothing
new here. Let’s move on folks.”
So how does Tim Tozer, chairman and
managing director of Vauxhall Motors,
respond to the charge of special pleading?
Shouldn’t firms like his look at the whole
picture and accept the rough (business
rates) that comes with the smooth (the
rest)? “We absolutely do,” said Tozer,
“and that’s why we are being quite measured in saying we don’t expect anything
immediately. What we are saying is that
there are some rigidities and some anachronisms in a system that has, frankly,
seen its day.”
Tozer’s colleague Helen Foord, the
company’s government relations manager, added: “This is about us being more
competitive against other businesses out
of the UK. For us, it’s about ensuring we
can be here in the future. We are happy to
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CHRIS ONG
t
ROUND TABLE
ment (FDI) black hole as a result. According to EY figures, the UK gets 20 per
cent of all FDI projects across Europe but
that figure falls to 12 per cent when looking just at manufacturing. “We are clearly
missing out,” Sanger said. FDI was worth
€223bn in 2013. By fixing these business
rate anomalies, the UK could attract an
additional €4.6bn into the economy. On
the impact of plant and machinery investments, Sanger said: “This is not related to
making a profit. It’s related to how much
you are going to invest in the infrastructure to make that profit. So the tax itself is
penalising investment.”
Yet, some suggest that these plant and
machinery problems could easily be fixed
by updating the list of items included
rather than abandoning the idea altogether. Meanwhile, the official government
line – to quote Gov.uk – is that “plant and
machinery adds value to your property.”
“But does it always add value?” asked
Blake Penfold, director of business rates
at GL Hearn. “If you’re doing something
merely to comply with emissions controls are you adding value? You’re merely
enabling the value of your property to
stand still, to continue to operate.
“Some strange behaviours are being encouraged and some good behaviours are
being discouraged.”
Gauke wouldn’t be drawn on whether
he supported this view. “When it’s a
point that is raised again and again and
again, clearly it is something we will want
to consider,” he said. “There is clearly a
perceived ... disincentive on putting up
solar panels. But trying to deal with that
issue in isolation could result in some
perverse consequences.”
Given the hostility towards business
rates, perhaps any sort of property-based
tax should be avoided altogether. None
of the panelists was willing to go that far.
Tozer said he didn’t have a fundamental
objection to a property tax, while others
pointed out the benefits. Mark Higgin,
head of ratings at Montagu Evans, argued
that business rates were very easy to collect, the target of the tax was easy to identify (“a big car factory is quite difficult to
hide”) and it can be used to shape behaviours and the efficient use of property.
“So let’s not throw out the baby with the
bath water,” he urged.
Penfold agreed. “It’s not a bad tax,”
he said. “You can’t escape it very easily
and it’s relatively cheap to collect with a
Recurrent property taxes as % of GDP
%
Source: OECD Revenue Statistics 2013
The UK tops the OECD table for property taxes
strong degree of certainty.” The problem,
Penfold said, was not in the principle but
in the delivery. “The tax is just too high
and disproportionate.” He urged any incoming government to switch the measure of inflation against which business
rates are set, from RPI (retail price index)
to CPI (consumer price index). The latter
is typically lower. “When this tax was
first introduced the tax rate was 34.8 per
“What would the impact
be of ripping the system
up and starting again?”
cent – and that made sense in relation to
levels of personal and corporation taxation at the time. Next year it will be 48 per
cent for smaller businesses and 49.3 per
cent for larger businesses. It is now just
out of proportion.”
For his part, Gauke said there would be
no move from RPI to CPI until the government had dealt with the deficit. “The
point I would make is a very familiar one
– there is no money left.”
A switch from one measure of inflation to another, however unlikely in the
short term, would also please the membership of the employers’ organisation,
the Confederation of British Industry.
It has to be “a first point of reform”, said
the CBI’s principal economist Dilip Shah.
Among a shopping list of other reforms,
Shah called for an overhaul of the “20th
century billing system” that proved a major bureaucratic burden, and urged policy
makers to rethink exemptions and reliefs
“to properly target them so there isn’t a
disincentive towards environmental policy or business investment.”
Unlike other interested parties, however, Shah suggested that many of the CBI’s
manufacturing membership preferred
the certainty of five-year valuations rather than anything more frequent. He also
insisted that despite the need for business
rates reform, the lowering of corporation
tax was always a priority as it was “more
distortive” than other taxes.
Chris Richards, senior business environment policy adviser at the manufacturers’ association EEF, went further
pointing out that there was little appetite for reform among his membership.
While acknowledging issues that directly
impact larger manufacturers and urging
the valuations office to update the plant
and machinery list, he suggested most
members favoured the “stable, fixed
cost” that characterises business rates and
warned against the unintended consequences of reform.
“What would be the impact of any kind
of ripping up the system and starting
again?” Richards asked. “It could mean
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actually more costs to the manufacturers
in the UK. It could mean that we created a
more volatile tax system.”
Meanwhile Peter O’Connell, local government policy adviser at the Federation
of Small Business, said: “A very common
complaint from our members is they
don’t understand how the rateable value
has been arrived at and the process of trying to form some clarity and understanding about the process.” In common with
other business groups he said his members were concerned how the overall
cost of business rates had risen over time
and suggested that a rebalancing of the
tax burden away from property tax was
worth exploring.
Jerry Schurder, partner at Gerald Eve
insisted that it is “wholly appropriate
for a government to have within the basket of taxes a property-based tax”. The
problem, he said, was in the execution.
Business rates had consistently failed to
respond to changes to the economy, he
said. As a result, when compared to most
other nations, the UK’s property tax was
highest at nearly 3.5 per cent of GDP (see
graph, opposite). Graham Armitage, a
partner at KPMG, added: “The UK is pretty cost competitive in total. One of the areas where it really isn’t is property costs.
What business rates do . . . is take the area
where the UK is arguably least competitive and make it a hell of a lot worse.”
For Mike Heiser, senior finance adviser at the Local Government Association, the perspective is a little different.
Business rates account for 19 per cent of
local government income, revenue no
authority can afford to lose. This doesn’t
mean, however, that the LGA is against
reform. Heiser said he wants a review of
appeals “that take time and destabalise
the system”.
He would also like government to look
at ecommerce companies that pay little
or no business rates and whose computer
servers do not fall under the current plant
and machinery regime. “What we would
like to see in the first 100 days of a new
government,” Heiser said, “is local government being given more power and
more incentive to set discounts so that
they can work with business.”
So what are the main political parties
likely to offer ahead of the general election? Both coalition parties are committed to the review announced by Osborne
last December, while the Liberal Demo-
crats repeated their broad support for a
land value tax in a pre-manifesto document released in September. Beyond that,
Gauke said he was unwilling to be drawn
on his or his party’s preferences so as not
to influence the review (“I’m not going to
rule in or rule out what’s going to be in
it”) although his party may be tempted
to hint at changes as we approach the
election in May.
For Labour, Adrian Bailey said his party
is committed to reverse the percentage
point reduction in corporation tax and use
that money to freeze business rates for
a year.
Bailey, chair of parliament’s business,
innovation and skills committee accepted,
however, that this “is only a short term
measure” and a review to work out how
to “reconfigure” rates was needed. And,
like the Conservatives, Bailey insisted the
solution would need to be fiscally neutral.
“To recommend a reform of business rates
that would decimate the contribution to
the Exchequer is not realistic in the current financial situation,” he said.
“If you replace a blast
furnace I can’t think why
that would increase rates”
Jargon buster
Business rates
Charged on most non-domestic
properties, business rates are
calculated in England and Wales
by multiplying the “rateable value”
of a property by the business
rates multiplier.
Business rates multiplier
Set by central government, the
business rates multiplier is the
number of pence in every pound of
rateable value to be paid. Referred to
as “poundage rate” in Scotland.
Business rates relief
Discounts on basis of eligibility,
these include small business relief,
rural rate relief and charitable rate
relief. Application for relief is made
via the local authority.
Empty property rates
A levy applicable to properties left
empty. Typically, there is a three
month rates holiday after a
building has been vacated.
Plant and machinery
Bailey also said he was keen to look at
those plant and machinery anomalies. “If
you replace one blast furnace by another,”
he said. “I can’t think of any particular
reason why there should be an increase in
business rates, but obviously there is.”
Assuming it survives beyond the election, the Conservative-Lib Dem Coalition’s review will report back next spring.
The implementation of any changes will
take longer.
Tozer said he is relaxed about the timing, for now. By the middle of the next
Parliament, General Motors will have
begun reassigning its presence in Europe.
“That timing is fine,” he said. “If it was
later than that, it could start to become
very dysfunctional to our decision.” l
Two round table discussions were
convened by the New Statesman in
association with General Motors UK.
The first took place on 5 November 2014,
the second on 15 December 2014; both at
Church House in Westminster. For a full
list of participants, see page two.
Certain types of plant and
machinery will be included in the
rateable value when they are deemed
to “add value ” to a property. Often
calculated based on a replacement
cost. Items include generators,
lighting, lifts and hoists.
Rateable value
Set by the Valuation Office Agency
(VOA), the rateable value is the
hypothetical annual rental value of
the property as if it had been let on
the open market.
Revaluation
Usually carried out every five
years, revaluation is designed to
marry business rates to changes
in the property market. The next
revaluation is due this year for
Northern Ireland and 2017 for
England, Scotland and Wales.
Source: gov.uk/introduction-tobusiness-rates
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