A costly business

Changes in business rates – the equivalent of council tax for businesses – are causing a storm of protest.

The property values used to calculate business rates are being updated from the levels set seven years ago (having been deferred for two years to avoid this happening in an election year). As from the 1 April, half a million businesses face increases of up to 300 per cent. Businesses in London will pay an additional £830 million a year. And the most adversely affected towns in the south will see average increases of over 100 per cent.

But overall the changes are revenue neutral, raising little extra money. 40 per cent of businesses will see no change in their rates and 32 per cent, particularly in more deprived areas, will see their bills fall. There is also ‘transitional relief’ capping increases for more valuable properties at 42 per cent per year while decreases will be limited to 4 per cent a year; with respectively slightly lower and higher caps for less valuable properties.

At first sight fair enough. Businesses in the successful south and Midlands will pay more and those in hard-pressed areas less. Many also believe business should pay more tax anyway.

But this is to be distracted into a divisive debate about winners and losers while ignoring more fundamental issues. Rather it is symptomatic of a tax system which biases heavily against those doing productive things and employing people here in Britain, while giving all the advantages to those who don’t.

For starters taxing property is entirely arbitrary and simply because it can’t go anywhere (albeit dampens Britain’s unhealthy love affair with property). Raising £29 billion in 2016-17, business rates add significantly to business costs. Roughly 50 per cent over and above the rent, these are the highest business property taxes in the world and over twice the OECD average. This, for instance, favours online businesses that don’t use property or rely on cheaper warehouses; and favours big multiple chains over stand alone local businesses.

Paid by those using the property, not its owners, business rates are unconnected to the ability to pay. Yet most of the increases in property values have been driven by housing/property shortages and overseas investment, rather than increases in business performance; indeed, many businesses have been under pressure precisely because of ever rising property costs. Similarly, differences in business profitability between, say, north and south only account for the lesser part of increases in rents.

High property taxes are in turn merely one facet of a tax regime which puts all the loading on ‘front end’ costs, particularly employment; while giving all the tax advantages to ‘back end’ profits and unearned income, particularly if accruing offshore, and barely tax’s wealth/capital at all. All of which is before adding big or offshore businesses greater opportunities to minimise or avoid taxes to start with.

Accounting for 44 per cent of all taxes, work/employment is taxed at least twice as heavily as any other type of earnings, whether corporate or personal. Various other impositions like workplace pensions and the apprenticeship levy then add yet further to the costs of employment.

Here we are again distracted by divisive distinctions between tax and national insurance, employers and employees contributions and those on low versus high pay. But in reality any difference between the gross cost to employers and the net pay of employees is an incremental imposition on the costs of labour. This on average adds half as much again to the cost of employees; with the burden increasing proportionately the more people are paid. As a result, Britain has among the very highest taxes on work per pound of output in the world.

Conversely, corporation tax has been repeatedly reduced to today’s 20 per cent rate as well as benefitting from far more generous allowances; contributing just 7 per cent of overall tax receipts. This is then compounded by offshore companies and the offshore earnings of British companies benefitting from various exemptions and allowances which reduce the effective tax rate yet further – if not avoiding tax altogether. Meanwhile, unearned income and capital gains are taxed at between half and fifth of the rate applying to work. And wealth/capital itself escapes tax entirely during its owner’s lifetime.

The same biases are also seen in the extensive duties and other levies. Whether technically paid by consumers or businesses, these are invariably front-end costs which most reduce sales and competitiveness. Similarly, VAT applies to nearly all productive activities but not most financial transactions and earnings, unearned income or non-productive returns from capital. Meanwhile we tolerate companies maintaining the fiction that goods are ‘supplied’ or assets owned offshore, hence escaping VAT or duties entirely.

The justification for all this is to encourage much needed investment and enterprise. But this is risible. You don’t maximise production and business activity, let alone employment and demand, by first suppressing output and competiveness by heavy upfront cost impositions on productive activities while letting less productive ones off the hook or reducing taxes on the profits of those who’ve managed to climb over these hurdles.

Clearly substantial tax revenues are still needed to underpin an advanced economy and inclusive society. But this shouldn’t mean going about it in a way which compounds the economy’s structural weaknesses or overtly encourages businesses to avoid productive activities, send as much as they can offshore and relentlessly bear down on workers.

To underscore the point compare a productive business employing people and working from premises here in Britain with the alternatives. Investors are, for instance, far more likely earn a better net return from putting their money into less productive activities like property or consumer finance. Similarly, businesses are actively driven to offshore as much of their activities as possible simply to compete; and, to the extent they can’t, are driven to relentlessly drive down costs, particularly labour costs, just to survive.

In the cold light of day, Britain’s tax system is simply unfit for purpose. And for Labour tree-and-branch tax reform is the only way to square the circle between improving economic performance, raising enough tax and greater fairness and equality.

For more information, read Chris Nicholas’s report on tax reform: Chris Nicholas, Fairer Tax for a Better Economy (IPPR, May 2013)

Image: Colin Knowles