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Publication - Report

Non-domestic tax rates review: Barclay report

Published: 22 Aug 2017
Part of:
Business, industry and innovation, Economy
ISBN:
9781788511636

Report of the external Barclay review into tax rates for non-domestic properties, with recommendations for rates system reform.

140 page PDF

1.6MB

140 page PDF

1.6MB

Contents
Non-domestic tax rates review: Barclay report
Section 3: The Current Non-Domestic Rates (NDR) system in Scotland.

140 page PDF

1.6MB

Section 3: The Current Non-Domestic Rates (NDR) system in Scotland.

3.1 This section briefly outlines how the non-domestic rates ( NDR) system (also known as business rates) currently operates in Scotland and provides a useful context for the recommendations and discussions that follow.

Background.

3.2 Non-domestic rates are a tax based on property which is levied in order to help pay for the very wide range of services that councils deliver (such as education, social care, waste management, local roads management and cultural services). The principles of non-domestic rates were established in the Lands Valuation (Scotland) Act 1854. Non-domestic rates in their current form have been in place, not just in Scotland but across the UK, for many generations. In Scotland, they are fully devolved to Scottish Ministers and the Scottish Parliament.

3.3 The amount that each ratepayer will pay depends - in the first instance - on the determined value of their property. The value of each property on the valuation roll is assessed by the local independent Scottish Assessor - and referred to as its "rateable value". Assessors are currently independent of the Scottish Government and are accountable to local valuation boards and professionally, through the Royal Institution of Chartered Surveyors. The rateable value of a property is generally based on its estimated open market rental value on a specific date [3] . Not all properties appear on the valuation roll. Some, such as agricultural properties, are exempt from the requirement to be included on the valuation roll.

The infographic below summarises the current system of non-domestic rates in Scotland.

infographic summarises the current system of non-domestic rates in Scotland

3.4 There is a right of appeal against the Assessor's determination of rateable value and this right of appeal can typically be exercised within 6 months of a revaluation, within 6 months of a new occupation or, in certain cases if there has been a material change in circumstances. Appeals are dealt with initially by Local Valuation Appeal Panels, but may ultimately be heard by higher courts up to the Land Valuation Appeal Court at the Court of Session.

3.5 The pre-relief rates bill is determined by multiplying the rateable value of the property by the poundage. The poundage is pence in the pound rates set annually by the Scottish Government. The same national tax rate (poundage) applies across Scotland.

3.6 Rates are collected by councils who will calculate the bill, apply any applicable reliefs and will typically issue bills in March of each year for the following financial year ( i.e. for the 12 months beginning on 1 April). Generally bills are paid by regular instalments and debt recovery procedures exist if a ratepayer falls into arrears.

3.7 Councils retain the money collected from rates in the council area to fund local services, including those to businesses. Councils also collect council tax and various fees and charges for services they themselves provide.

Reliefs.

3.8 Each of the 32 councils in Scotland have local policies on award of relief, but they work together through forums such as the Institute of Revenue, Rating and Valuation to share best practice. As noted above, bills can be reduced by rates "relief" to give the net bill. There are a significant number of relief schemes. For example, ratepayers who occupy a single, low value property may see their bills reduced (or removed completely) under the Small Business Bonus Scheme ( SBBS). Similarly, charities may see their rates bill reduced (or removed) through charitable rates relief.

3.9 Table 2 describes the amount of each relief awarded to each type of property across Scotland. Where a property type receives greater than £10 million of relief, this is highlighted in orange:

Table 2: Amount of relief (£ million) awarded by property type.

Table 2: Amount of relief (£ million) awarded by property type.

Source: 2015 Billing System Snapshot (provided by councils to the Scottish Government).
Notes: Relief totals don't match end-year audited relief amounts as this is a snapshot taken during the year.

3.10 A number of different reliefs are available in Scotland, these currently include:

  • Small Business Bonus Scheme ( SBBS) - Ratepayers who occupy one or more non-domestic properties with a combined rateable value of £35,000 or less may be eligible for a discount of between 25% and 100%. Where a ratepayer has one property with a rateable value under £15,000 the relief is 100%. The majority of the cost of the SBBS is funded by the Scottish Government, but a portion is funded by the Large Business Supplement (a 2.6p supplement on top of the standard poundage rate).
  • Empty/Unoccupied Property - 50% mandatory rates relief for empty properties for the first three months with a 10% discount thereafter. Industrial property benefits from 100% relief for 6 months, then 10%, while listed properties and properties with a rateable value less than £1,700 qualify for 100% relief for an indefinite period.
  • Renewable Energy Generator - Stepped discounts of up to 100% for properties that generate renewable energy and provide community benefit or are new build, capped at State aid de minimis.
  • Rural - relief for properties that provide key services in designated rural settlements, including post offices, public houses small general stores, petrol filling stations and small hotels. Councils have discretion to top this up to 100% relief and can also award up to 100% relief to properties with rateable values less than £17,000 that are beneficial to the local community.
  • Fresh Start - relief to incentivise occupation of empty shops and offices, pubs hotels and restaurants. A 50% rates discount is offered for the first year of occupation where a property is previously long term empty.
  • New start - up to 100%, for empty new build properties for up to 18 months. This relief is capped by State aid de minimis.
  • Charity/Not for Profit - 80% mandatory relief for properties occupied by registered charities. Councils have discretion to top this relief up to 100% and award relief of up to 100% for those who operate properties on a not-for-profit basis.
  • Sports clubs - 80% mandatory relief for sporting premises including community amateur sports clubs. Councils have discretion to top this up to 100%.
  • Disabled Persons - Up to 100% relief for properties used for the care, training or education of disabled persons.
  • Religious - 100% relief for properties used as places of worship.
  • Enterprise Areas - Up to 100% relief is available for eligible growth sectors within set geographic Enterprise Areas. Because of the sector specific nature, this is capped at State aid de minimis. Properties occupied by eligible growth sectors are the manufacturing of renewables, life sciences, food and drink manufacturing, creative industries and aerospace.
  • Hardship - Councils have discretion to offer up to 100% relief for businesses suffering severe hardship provided the business occupying the property meets set criteria and it is in the interests of other local tax payers to do so (since councils part fund this relief).
  • Former Steel sites - relief for properties involved in steel production at two specified addresses in Scotland.
  • Local reliefs - Councils have wide powers to create and fund local reliefs within their areas. To date three such schemes have operated.
  • Transitional Relief Schemes - schemes aimed to reduce the bill increases seen by certain sectors and areas at the 2017 revaluation.

Revaluations.

3.11 In order to ensure that the distribution of rates bills reflects changing property rental values over time, the tax base is "revalued" periodically. The most recent revaluation came into effect on April 1 2017 - 7 years after the previous revaluation. Prior to that, revaluations typically occurred every 5 years. Revaluations are intended to redistribute the tax base to reflect shifts in market values that have taken place since the last revaluation and are not intended to increase the overall tax burden. Generally, if the value of the tax base increases at a revaluation, the poundage will reduce and vice versa.

3.12 Figure 1 provides a more concise summary of how bills are estimated.

Figure 1: How non-domestic rates bills are determined.

Figure 1: How non-domestic rates bills are determined.

Rates policy.

3.13 From a policy perspective, the following principles appear to have dominated decisions on non-domestic rates in Scotland since the inception of the Scottish Parliament.

  • A desire to match key policy commitments with the position in England - such as the headline tax rate (poundage), and the timing of revaluations.
  • A commitment to provide increasing amounts of non-domestic rate ( NDR) relief - especially for small businesses.
  • The need to provide an essential contribution to overall council funding.

3.14 Between 2007-08 and 2015-16, the Scottish Government set the rate(s) of poundage and the Large Business Supplement so as to match prevailing tax rates in England, partly in response to pressure from some businesses for a level playing field across the UK. Reliefs in Scotland were generally slightly more generous than in England.

3.15 In 2016-17, the Scottish Government departed from this approach - adjusting the Large Business Supplement so that higher valued properties paid a higher tax rate in Scotland (of 2.6 pence in the pound) than in England (where the equivalent rate is 1.3 pence) and decreasing the level of empty property relief offered to vacant premises.

3.16 At the time of the 2017 revaluation, the Scottish Government matched the English poundage (known as multiplier), but retained the higher Large Business Supplement, although the threshold at which it became payable increased to £51,000 (the same threshold as in England). Otherwise, the Scottish Government has retained key similarities with the tax structure in England. This is summarised in Table 3):

Table 3: Headline rates of tax across the UK.*

Country* Properties with a rateable value of up to £50,999 Properties with a rateable value of £51,000 and above
Scotland 46.6p 49.2p
England 46.6p 47.9p
Wales 49.9p 49.9p

*Northern Ireland is excluded as properties were revalued in 2015, meaning that the tax rate is not applied to a comparable tax base in Northern Ireland. It should also be noted that some properties in London pay City of London supplement and a Crossrail Supplement in addition to the poundage.

3.17 The Scottish Government also expanded the Small Business Bonus Scheme, in order to bring more properties into the scheme, and announced additional relief schemes for properties in sectors experiencing significant bill increases at the 2017 revaluation.

Who pays rates?

3.18 The occupier of a non-domestic property typically appears on the valuation roll, which is an online register of non-domestic properties as defined by law. As of mid-July 2017 there were over 230,000 properties on the valuation roll, with a combined rateable value of over £7.3 billion. Those numbers will increase as shooting estates are added onto the valuation roll following a Scottish Government decision to repeal the exemption that applied to this type of property up to 1 April 2017.

3.19 Much as the tenant or owner occupier of a house (or domestic property) typically pays council tax, the occupier of a non-domestic property is liable for rates. Where there is no occupier to pay rates, liability for the rates bill would normally fall to the owner of the property.

3.20 In general the collection rate of non-domestic rates is high (we understand the overall collection rate across Scotland is around 98%). The estimated 2% in each year that remains uncollected would account for some £40-50 million. This represents bad debt write offs (for example when a business goes bankrupt) and some avoidance that nevertheless over time represents a significant loss of revenue to the public purse.

3.21 The treatment of non-domestic properties varies greatly. A large number of properties are currently exempt from paying rates. The exact number of exempt properties is not known but may be very roughly estimated to be around 100,000, albeit by their nature the majority of these properties will be of a far lower rateable value than those on the current valuation roll. For example, agricultural properties are exempt both from valuation and from paying bills. Other property groups, such as places of worship, care centres for the disabled and property occupied by charities are subject to valuation and appear on the valuation roll, but see their rates bill eliminated [4] or substantially reduced as a result of rates relief. As a result, the tax base is actually significantly narrower than the phrase "non-domestic rates" suggests.

3.22 Table 4.1, looks at pre-relief (or gross) bills for different sectors. The equivalent data for properties not subject to valuation, such as agricultural land and properties, are not held centrally.

Table 4.1 - Breakdown of the tax base by sector.

Sector Total Properties Total Rateable Value Total Gross Bills
No. % £m % £m %
Shops 53,700 23% 1,610 22% 780 22%
Offices 44,100 19% 1,080 15% 520 15%
Industry and Petrochemical 49,200 21% 1,380 19% 670 19%
Health and Education 6,900 3% 790 11% 390 11%
Public Service Subjects* 10,100 4% 360 5% 170 5%
Hotels and Pubs 9,200 4% 410 6% 200 6%
Leisure and Cultural # 23,700 10% 340 5% 160 5%
Designated Utilities <100 0% 800 11% 390 11%
Other # 36,500 16% 600 8% 290 8%
Scotland total 233,000 100% 3,570 100% 3,570 100%

* This group is made up of varied properties, including military facilities, waste water treatment centres, halls, community centres and airports.
# These categories contain large numbers of typically low rateable value properties.
Source: Review Group analysis of the Valuation Roll (April 2017).

3.23 In practice, rates relief will dramatically reduce the bills paid in certain sectors. For example, the "other" heading contains religious buildings, care homes for the disabled and a large number of properties that may qualify for the Small Business Bonus Scheme as a result of having a relatively low rateable value. Similarly, the education sector sees its bills reduced dramatically because universities, colleges and private schools receive charitable rates relief.

3.24 We estimate that shops, offices and industrial properties pay over 55% of both pre-relief and post-relief rates bills.

3.25 Looking further into the data, it is clear that larger properties (those with rateable values over £51,000) pay the greatest share of tax revenues in Scotland:

Table 4.2 - Breakdown of the tax base by size of property (measured in Rateable Value - RV).

RV Band Total Properties Total Rateable Value Total Gross Bills
No. % £m % £m %
Zero Rated 7,000 3% 0 0% 0 0%
£1 to £18,000 174,000 75% 980 13% 460 13%
£18,001 to £51,000 30,000 13% 910 12% 430 12%
£51,001 plus 22,000 9% 4,670 63% 2,300 64%
Designated Utilities <100 0% 800 11% 390 11%
Scotland total 233,000 100% 7,360 100% 3,570 100%

Source: Review Group analysis of the Valuation Roll (April 2017).

3.26 Table 4.2 shows that less than 10% of the tax base (in terms of property numbers) is responsible for over three quarters of pre-relief bills.

3.27 By council area, rates bills are slightly more evenly distributed, although rates liabilities are higher in large cities and lower in more rural areas.

Figure 2: Average (pre-relief) Bills by Council

Figure 2: Average (pre-relief) Bills by Council

3.28 Figure 2 (above) shows an average pre-relief bills council depicted on a map of Scotland. As the key shows, the average pre-relief bills vary significantly, with average pre-relief bills highest in Aberdeen City at almost £31,000. The lighter coloured areas of the council map have lower average pre-relief bills. For example the council with the lowest average pre-relief bill is Comhairle nan Eilean Siar - just over £5,000.

3.29 Chart 2, shown (overleaf) depicts the total pre-relief bill by council. Total pre-relief bills in Glasgow City and City of Edinburgh councils are higher than in Aberdeen City because there are a greater number of properties. Together these three cities make up a very significant element of the tax base. Setting aside bills for utilities (such as electricity, gas and water) which are collected on a Scotland-wide basis, Glasgow, Edinburgh and Aberdeen City councils make up around 39% of pre-relief bills, whereas their population is only 25% of the total population of Scotland.

Chart 2: Total pre-relief bills (£m) by council.

Chart 2: Total pre-relief bills (£m) by council.

Source: Review Group analysis of the Valuation Roll (April 2017)

How large are non-domestic rates revenues?

3.30 The introduction briefly set out that non-domestic rates account for a fairly large proportion of economic activity when compared with other international commercial property taxes - but that overall the amount of tax paid by businesses in Scotland and the UK remains relatively low by international standards.

3.31 This section briefly sets out how non-domestic rates ( NDR) revenues have changed over time. Over the past 20 years, there has been a relatively little change in the "tax burden" - the proportion of GDP accounted for by non-domestic rates. The tax burden has varied between 1.7% and 2.0% of (onshore) GDP between 1998-99 and 2015-16 as shown in Table 5.

Table 5 Growth in non-domestic rate revenues compared to GDP growth, and measures of inflation.

Financial Year Scottish GDP (onshore only - cash prices) - £m NDRi - £m NDRi as a % of GDP (onshore only) Inflation - Measured by RPI Index Inflation - Measured by GDP Deflator
1998-99 71,690 1,436 2.0% 1.4% 1.4%
1999-00 73,152 1,497 2.0% 3.1% 0.5%
2000-01 76,669 1,578 2.1% 1.9% 2.1%
2001-02 80,422 1,670 2.1% 1.2% 1.3%
2002-03 84,152 1,705 2.0% 3.0% 2.3%
2003-04 89,554 1,706 1.9% 2.8% 2.2%
2004-05 94,272 1,813 1.9% 3.0% 2.7%
2005-06 100,911 1,933 1.9% 3.0% 2.7%
2006-07 105,893 1,933 1.8% 4.4% 3.0%
2007-08 110,533 1,921 1.7% 4.4% 2.4%
2008-09 113,668 1,933 1.7% -1.3% 2.7%
2009-10 112,483 2,010 1.8% 5.1% 1.4%
2010-11 112,123 2,138 1.9% 5.1% 1.8%
2011-12 114,891 2,251 2.0% 3.1% 1.4%
2012-13 117,975 2,347 2.0% 3.1% 2.1%
2013-14 123,636 2,367 1.9% 2.5% 1.6%
2014-15 128,305 2,511 2.0% 1.0% 1.5%
2015-16 129,224 2,578 2.0% 1.4% 0.7%
Cumulative Growth - 1998-99 to 2015-16 80.3% 79.5% minus 0.01 percentage points 60.7% 39.6%

Data Sources: Scottish Quarterly National Accounts, Scottish Local Government Finance Statistics, ONS Price Indices and HMT GDP Deflators.

3.32 This is relatively intuitive - between revaluations, valuations remain fixed, meaning that the only factors driving an increase in bills for a particular property are the change in the tax rate, and the provision of reliefs. Growth in individual non-domestic rates bills have effectively been capped at Retail Prices Index ( RPI) inflation over this period, with below RPI increases in the tax rate being quite common. Similarly, the provision of reliefs has expanded quite substantially. While bills can increase for individual properties following a revaluation, the overall effect of revaluation is typically designed to be revenue neutral - over the course of the revaluation cycle any increases in rates bills should be balanced by reductions in rates bills for other ratepayers [5] .

3.33 As such, the driving factor behind whether or not the "tax burden" increases or decreases largely depends on whether or not economic growth outstrips RPI inflation - although there will also be some growth in tax revenues as a result of any growth in the tax base itself (for example, as a result of new properties, or extensions to existing properties).

3.34 Revenues as a proportion of GDP declined somewhat prior to 2008 - 2009. After 2008‑ 2009, non-domestic rate revenues have grown faster than the economy - this is largely reflective of the fact that following the financial crisis, GDP growth was relatively constrained, while RPI was relatively high - leading to significant growth in non-domestic rates revenues.

How does this compare with council tax?

3.35 The approach of mirroring English policy - with differences in tax structure typically being minimal - has not been matched in the Scottish Government's approach to Council tax. Over the period since 2007-08, the Scottish Government pursued a distinct approach from England - imposing a freeze on rises in council tax rates [6] , and later announcing changes to the "council tax multipliers" that will generate a greater amount of revenue from higher value properties [7] . Chart 3 looks at how revenues from the two taxes have varied over the same time period:

Chart 3 - Non- domestic rate and council tax revenues / reliefs / reductions - time series

Chart 3 - Non- domestic rate and council tax revenues / reliefs / reductions - time series

Source: Scottish Government Local Government Finance Statistics and Auditted Local Authority (Council) NDR Returns.

3.36 The break in the chart (the difference between the purple and the blue line) relates to the localisation of council tax support in 2013, when Council Tax Benefit was replaced with Council Tax Reduction [8] . Partly to maintain consistency, and partly to improve the presentation of the chart, some factors which reduce council tax revenues - such as exemptions and the single person discount - have not been included. Revenues are presented in cash terms rather than on an accruals basis.

3.37 The chart shows that prior to the introduction of the council tax freeze in 2007-08, revenues for both taxes grew at a similar rate. Since the start of the council tax freeze, Non- domestic rates revenues have increased, while council tax revenues have remained broadly constant - with some increase relating to buoyancy in the tax base. As a result, revenues from the two taxes have diverged since the council tax freeze.

3.38 Much as non-domestic rates, council tax also contributes directly to the funding of local services. While council tax revenue has not grown at the same rate as non-domestic rates revenue, this was a result of the council tax freeze in Scotland, whereby the Scottish Government provided councils with £70 million in funding, cumulatively per annum over the period for which the freeze has been in place in lieu of the revenue that might have been raised had the freeze not been in place. Over the lifetime of the freeze, the Scottish Government provided councils with an additional £3,150 million.

3.39 Chart 3 also shows that non-domestic rates relief (the purple line on the graph) has grown substantially over this period. Over the period 2007-08 to 2015-16, NDR income increased by 34% (£651 million), while the value of NDR reliefs granted increased by 94% (£303 million).

Administration of the non-domestic rates ( NDR) system.

3.40 Across the UK, councils are responsible for collecting rates and for the day to day administration of the rates system with central Government generally setting most rates policies, such as tax rates and relief eligibility. All rates collected locally are retained locally and it is vital that ratepayers understand that every pound they pay in rates is used by their local council to fund the services provided in their area.

3.41 In Scotland, the Scottish Government then distributes additional central government grants to councils according to a needs based formula. This ensures that overall council budgets are not just determined by their revenue raising capability alone. The main difference between the Scottish and English non-domestic rates system is the degree to which councils are affected by year to year changes in revenues. In Scotland, if a large ratepayer closes, the council will not suffer any detriment as the Scottish Government will adjust the grant given to the relevant councils to ensure they receive the same overall level of funding.

3.42 In our discussions with Scottish councils there was a general preference for continuation of the status quo with the current system offering a level of protection to council revenues, although some appetite for reform of the current Business Rates Incentivisation Scheme ( BRIS). Chart 4 (below) shows both revenues raised from non-domestic rates and other elements of the Local Government Finance Settlement. Even in council areas that raise relatively large volumes of non-domestic rates, the settlement is significantly greater than the amount of revenues collected. For example, non-domestic rates revenues make up two thirds of the settlement for Aberdeen City and just over half of the settlement for Edinburgh. For other council areas, such as Aberdeenshire and the Lothians, rates revenues make up less than 30% of the overall settlement.

Chart 4: Non-domestic rates income ( NDRi) retained and total local government finance settlement (by council).

Chart 4: Non-domestic rates income (NDRi) retained and total local government finance settlement (by council).

Source: Scottish Government Local Government Finance Circular No. 1/2017.

3.43 In England, the implementation of rates retention means that councils collect rates and are allowed to retain this income - subject to a series of restrictions. The objective of rates retention in England is to provide an incentive to councils to grow their tax base - in order to raise more money for local services. This is in contrast to Scotland - where there is relatively little incentive for Scottish councils to grow their tax base - as any increase in non-domestic rates is offset by a reduction in the Local Government Finance Settlement [9] . The drawback of this approach is that it may mean a council where the local economy is struggling may have less income to pay for local services than they otherwise would have - placing more risk onto councils and possibly meaning that areas in need of additional funding actually receive less. More discussion on this can be found in Annex C (Section C.6).


Contact

Email: Marianne Barker, marianne.barker@gov.scot

Phone: 0300 244 4000 – Central Enquiry Unit

The Scottish Government
St Andrew's House
Regent Road
Edinburgh
EH1 3DG