Monday, January 23, 2017


BLOG 178


I am reading a lot in the Press about business rates.  One effect of growing old is that one remembers why things happened in the days when most of today’s practitioners were at school or still to be born.  The current version of business rates – Uniform Business Rates or Non-domestic Rates as it is actually called – dates from 1 April 1990.  Its introduction was hailed by business at the time as preventing far left local authorities from being able to impose inordinately high imposts on local businesses.

The idea was very simple.  Value every non-domestic property in the country, add up the values, decide how much business as a whole should contribute to local government and divide one figure by the other to arrive at a rate per £ of value (or a multiplier as bureaucrats described it).

So rates are all about fairness between different businesses.  Of course the world has moved on since 1990 and in the internet age it is questionable whether a property tax is still a sensible way to raise local funds from business.  Nevertheless the government, after consultation, has decided that it is.  So today business rates are the way to divide business’ contribution to local expenditure fairly between users of business properties.

The multiplier was 34.8p in 1990/91 and it is 48.4p for small businesses in 2016/17.  £1 in 1990 was worth £2.25 in 2016.  Accordingly if the value of the property owned by a business has not moved, the increase over the period has been well below inflation.  The problem is that the value of almost all properties has moved.  In addition the national stock of commercial property has changed.  Nevertheless business overall has not done badly if the aggregate value of all commercial property in 2017 is 2.25 times or more of the aggregate value of commercial property in 1990 (or 1989 when the 1990 valuations were arrived at).

But of course nobody looks at things globally.  Most people’s perception is at individual property level.  Properties do not increase uniformally across the country.  If a shop in Camden High Street was worth 100 in 1990 it could well be worth 500 today, whereas the equivalent shop in Liverpool or Stockport may only have doubled in value over the period.  So is it fair for the shop in London to pay 2½ times the rates of the shop in Liverpool?  The value of a shop largely reflects its ability to generate income, in which case that seems fair to me.

And what about the shop in Watford High Street that was worth 100 in 1990 and is probably not worth much more now because the shops in Queen’s Road, a relatively quiet street behind the High Street, were demolished and replaced by the Harlequin Centre which has taken away a lot of the trade from the High Street and whose value today is far greater than in 1990.  Doesn’t fairness mean that today the Harlequin Centre ought to contribute more per square foot to Watford BC than the High Street?  That will be reflected in the values of the properties.

The real problem is that we do not have enough revaluations.  They ideally ought to take place every year but the work involved makes that impractical.  Parliament in 1988 (when the legislation was put in place) compromised at every five years.  Sadly when the time came for the 2013 revaluation the government put it off for a couple of years so the current rates are based on 2008 values and those for 2017/18 will be based on 2015 values.

This posting was prompted by some sad stories in The Times the Saturday before last.  For example, the crafts shop in Southwold High Street mainly run by volunteers whose only aim is to break even.  Their rates will go up from £152 p.a. to £7,500 p.a. (by the time the transitional relief runs out).  “How can that be fair” asked the shop manager, “It’s totally perplexing”.  I think it’s fair.  Why should any shop (other than one operated by a charity, which the crafts shop could probably become if it wished) pay less than £3 a week in rates?  Why should the crafts shop keep out of business the person who could run a shop selling something else that could justify £7,500 p.a. in rates?  As rateable values reflect rental values, what has happened to the crafts shop’s rent?  If it has increased since 2008, why shouldn’t the rates increase too?  If it has not, it is hard to see how the rates could have gone up so much unless the landlord is subsidising the crafts shop.  And if he is, why should other businesses in Southwold or elsewhere subsidise it too.

Similarly with the Two Magpies Bakery.  The owner does not understand why she should pay the same rates as Costa Coffee a few doors away whose rates are increasing by less.  Well why shouldn’t she if her shop is worth the same as Costa’s?  If her customers are not prepared to pay more to buy her freshly baked bread, so she cannot afford to pay the real cost of her shop being where it is in Southwold, why should Sainsbury’s and Tesco subsidise her?

Of course I feel sorry for all of these people and for Alex Pose-Gill whose family have run his Coffee Lounge near Buckingham Palace for three generations.  He has had to put an extra 60p on the price of his full English breakfast.  But surely that is what should happen.  The cost of his premises is the aggregate of his rent, rates and utilities.  His prices need to absorb those costs.  But it is not reasonable to blame the government if the rates element of that package goes up but to accept as a fact of life if the rent element increases.

It is certainly reasonable to moan at the government for continuing with rates rather than find a better way for businesses to contribute to local authorities so that internet businesses do not have an unfair advantage over those that trade from buildings.  But it is not reasonable to criticise the fairness of a system that seeks to allocate a tax on buildings between buildings according to their values.  It is hard to conceive a fairer way.

It is also unreasonable to have allowed new businesses to be created in a fool’s paradise where their economic model was based on paying an artificially low price to occupy their premises, so that the substitution of a more realistic price will destroy the business.  However that is not the fault of business rates.  It is due to either the lack of adequate advice to micro-businesses or the failure of such businesses to seek proper advice before starting up.


Wednesday, January 18, 2017


BLOG 177


I keep reading in the press that Mr Osborne’s increases in SDLT have killed the housing market.

The latest is Simon Heffer in last week’s Sunday Telegraph who tells me that “Among George Osborne’s disasters as Chancellor was his ramping up of stamp duty to a level – 12% on properties over £1.5million – that has killed the London housing market and caused revenues to plunge”.  He exhorts Philip Hammond “to cut the tax in order to increase revenues”.

I hope that Mr Hammond ignores this suggestion.  It seems to be based on a number of fallacies.  Leaving aside that stamp duty is not imposed on property transactions and that Mr Heffer cannot apparently tell the difference between stamp duty and SDLT (although of course he is a journalist and has to write half a page every week for the Sunday Telegraph so perhaps does not have time to check such details), prices are determined by markets, not by taxes.

Of course if a person is prepared to pay £1.6million to acquire a house, the imposition of a 12% SDLT may well mean that he is prepared to pay only £1,428,571 so that the £171,429 SDLT brings his total cost to his target figure of £1.6million.

Accordingly an increase in SDLT might well cause house prices to fall, although personally I think it more likely that they will still increase but at a lower rate than before.  That may however depend on the greed of vendors who may be reluctant to sell at a lowered market price in the hope that the slowdown is temporary.

The 12% rate is not something introduced recently.  It has applied since 4 December 2014, which is now over two years ago.  So how far have London house prices in fact fallen in that period?  The House Prices Index indicates that London house prices have risen, not fallen, by 7.6% over the 12 months to November 2016.  This roughly reflects the average rise in all UK cities and exceeds the UK residential growth figures overall of 6.7% fairly comfortably.  Hometrack predict a 4% increase in city level prices in 2017, again not a fall at all.

HMRC’s own statistics do show that the number of UK residential property transactions has fallen over the six months to the end of November 2016 from 683,340 to 625,280, a reduction of around 8.5%, but the 2015 figure was itself significantly higher than the 2014 one and a better comparison may be that the six months 2016 sales falls midway between the comparable figures for 2013 and 2014.  They also show that the SDLT yield from residential property did fall from £7.5million in 2014/15 to £7.310million in 2015/16 but the latter figure is still well above the £6.450million yield in 2013/14 and indeed above that for every year from 2006/07 onwards.  The total value of residential property sales actually rose from £304.155million in 2014/15 to £321.530million in 2015/16.

None of these figures support Mr Heffer’s claim that revenues from SDLT have “plunged” since the 12% rate was introduced in December 2014.  On the contrary, the indications are that receipts have in fact increased.

Another interesting point is that Mr Heffer’s 12% applies to owner-occupation acquisitions.  Since 1 April 2016, the rate on second homes and most buy-to-let investment has been 15%.  This 3% addition was announced in November 2015.  The number of residential property transactions has been running at around 100,000 a month.  Unsurprisingly, this leapt to 171,370 in March 2016 due to bringing forward purchases planned for April and May, but the figure returned to the 100,000 level in June and remained at around that level up to November 2016, which is the latest figure available.  Accordingly even that surcharge does not seem to have actually had a long-term effect on sales.  Of course there may have been a shift from buy-to-let purchases to owner-occupier purchases, which is what the surcharge was partly intended to achieve, but as most property purchases are largely financed by mortgage and the owner-occupier has to pay his mortgage interest out of net income, whereas in most cases the buy-to-let investor has the advantage of paying it out of gross rental income, so receiving a substantial subsidy from the exchequer, that seems unlikely.  Suppose the annual interest on a £1.5million purchase is £80,000 p.a.  The owner-occupier needs to earn £133,333 to pay this (after tax of 40% and ignoring national insurance).  The cost to a landlord is £80,000, a saving of £53,333.  Accordingly one year’s tax saving on the interest far outweighs the one off extra £45,000 of SDLT.

It’s a long time since I studied A level economics, but my recollection is that market prices are a reflection of supply and demand. If supply increases and demand remains constant, prices will fall.  If supply decreases and demand remains constant, prices will rise.  In a property context, demand is largely fuelled by the availability of mortgages and the purchaser’s ability to borrow enough to meet the shortfall between the purchase price (including SDLT and other buying costs) and the purchaser’s own available cash.  The sub-prime mortgage debacle illustrated that where there is a ready available supply of mortgages, demand will increase substantially.  The controls that have been imposed on mortgage lending are accordingly far more likely to account for the slowdown (not plunge) in residential property prices than any increase in the one-off SDLT cost of the acquisition.