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Publication - Report

Non-domestic tax rates review: Barclay report

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

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

140 page PDF


140 page PDF


Non-domestic tax rates review: Barclay report
Section 5: A Final Option for Consideration.

140 page PDF


Section 5: A Final Option for Consideration.

5.1: Background.

5.1 We were given a clear and unambiguous remit by Scottish Ministers: to support business growth, respond to wider economic conditions and changing marketplaces, and to support long-term growth and investment - while ensuring that our recommendations are revenue neutral.

5.2 The final part of our remit (in relation to revenue neutrality) prevented us from making a final recommendation for which there was widespread enthusiasm amongst ratepayers. This section briefly discusses this option - linking increases in poundage to CPI inflation.

5.3 In discussing the context around the current non-domestic rate ( NDR) system, we explained earlier in this report that one of the primary characteristics of recent Scottish NDR policy has been a desire to match the broad tax rates of the English NDR scheme. Each of the last five Programmes for Government published by the Scottish Government has clearly stated this policy objective - to ensure Scotland is the best place to do business in the UK and to ensure that Scottish businesses have a competitive advantage as a result of the non-domestic rates system.

5.4 In our discussions with ratepayers, this was repeatedly highlighted as a benefit of the Scottish system. Ratepayers often made the point that the broadly similar tax structure between England and Scotland allows ratepayers to plan for rates in a consistent manner and means that rates will not affect investment decisions. More broadly, ratepayers thought that the commitment to a competitive non-domestic (business) rates environment was good for business confidence.

5.5 In order to achieve this, the Scottish Government maintains a similar NDR structure to that in England. Most notably, Scotland has achieved this by having revaluations at the same time as England and Wales and ensuring that the Scottish poundage rate matches the equivalent rate in England (known as the multiplier). While not always identical, the relief schemes provided for ratepayers in Scotland and England are also similar.

5.6 This is not the case right across the UK. For example, Northern Ireland carried out a revaluation in 2015, and therefore the basis of tax as well as the tax rates in Northern Ireland differ from those in the rest of the UK. The revaluation of non-domestic properties in Wales was aligned with England and Scotland, however the base tax rate (poundage) in Wales is 49.9p in 2017-18, compared to 46.6p in England and Scotland. There is however, no Large Business Supplement in Wales.

5.7 We believe that our recommendations will continue to give Scottish businesses a competitive edge, and will incentivise investment. However, we also recognise that the easiest way for ratepayers to assess the competitiveness of the non-domestic rates system in Scotland and England is to look at the headline rates of tax.

5.8 This explains the main rationale for the option for consideration below - to ensure that the rates of tax in Scotland and England are the same, and therefore that there is no incentive for investment decisions to favour England as a result of the different non-domestic rate schemes in the two countries.

Box 5.1: The Costs Involved with matching poundage to the equivalent rate in England (as opposed to uprating poundage by the Retail Prices Index ( RPI).

In England, legislation links the maximum possible uprating of its Small Business Multiplier to September RPI of the preceding year. No such legislation exists in Scotland. However, given that Scottish Ministers have chosen to set poundage in order to match tax rates in England since 2007-2008, September RPI has also acted as a cap on inflationary increases in poundage in Scotland too.

For three of the last four years, we note that Scottish Government policy does not appear to be to cap poundage rises at RPI. In both 2014-15 and 2015-16, poundage rises were capped at 2.0% - lower than outturn September RPI would have implied - in order to match the prevailing tax rates in England. Similarly, the Cabinet Secretary for Finance and the Constitution has publically stated that he has foregone a revenue neutral revaluation in 2017-18 - again in order to ensure that poundage matches the equivalent rate in England.

In practice, therefore, the Scottish Government has already foregone significant amounts of revenue to ensure that poundage moves in line with the multiplier in England. Poundage rises were capped in 2014-15 and 2015-16 - reducing the poundage rate by approximately 0.8p compared to if September RPI. Similarly, at the 2017 revaluation, Scotland matched poundage to the multiplier, despite seeing lower overall growth in rateable value. If one were to assume that the net effect of appeals is similar in both countries, this represents a further reduction in poundage equivalent to approximately 1.3p. As such, it is reasonable to conclude that the costs to the Scottish Government of matching the poundage rate in Scotland to the Small Business Multiplier in England over the past four years is equivalent to the revenues associated with a 2.1p rise in poundage which equates to around £120 million per annum.

5.9 It should be noted that, if our recommendations are adopted, then Scotland may see its revaluation cycle diverge from England in 2025 - either in terms of the date of the revaluation, the time period between 'tone date' and the revaluation, or both. In this scenario, it is likely that the Scottish Government may have to develop a Scottish approach to non-domestic rate that balances competitiveness against other key policy objectives. For example, Box 5.1 (above) looks at the costs of matching poundage to the equivalent rate in England over the past four years.

5.2: Why consideration should be given to linking inflation increases in Poundage to the Consumer Prices Index ( CPI).

5.10 As discussed above, legislation links the maximum possible uprating of the English Small Business Multiplier to September RPI (Retail Prices Index) of the preceding year, and the Scottish Government has ensured that poundage matches the Small Business Multiplier in England - this has created an impression amongst ratepayers and business groups that poundage in Scotland is linked to September RPI - although it should be noted that the Scottish Government has not set out policy on poundage beyond 2017-18.

5.11 One frequent suggestion - coming up in many consultation responses as well as being cited by numerous ratepayer groups was to link increases in poundage to the CPI (Consumer Prices Index) rather than the RPI.

5.12 The uprating of poundage means that overall NDR revenues are more or less protected in real terms - as the tax rate grows in line with inflation, and the tax base is largely stable, revenues also grow in line with inflation. This can be seen in the non-domestic rate time series presented in the context section, which shows non-domestic rate revenues as a % of GDP have stayed broadly similar (see Table 6).

5.13 Both the CPI and the RPI measure inflation, but the two indexes look at spending by different populations on a different basket of goods - and so they differ. RPI includes housing-costs but these are excluded from CPI - this is the biggest difference in terms of which goods the two indexes measure. There are also computational reasons for the divergence between the two series [11] . Over the last twenty years, September CPI has tended to be lower than September RPI with only one exception in 2009 - this largely related to lower mortgage interest payments in that year.

  • On average, over the past twenty years, inflation measured by September CPI has been 0.8 percentage points lower than when measured by September RPI.
  • Over the past twenty calendar years of available data, the CPI index increased by a total of 46 percentage points, compared to an increase of 72 percentage points in the RPI index.

5.14 We would view moving to a more widely accepted measure as a desirable policy goal.

5.15 In the UK Government Budget of March 2016, the Chancellor announced that, from 2020, changes in the tax rate [12] used to determine non-domestic rates bills in England will be linked to CPI inflation, rather than to RPI inflation. This move will take effect from 2020 onwards. If Scotland chose to continue to ensure that the poundage rate matches the tax rate in England, the impacts on the public finances will be substantial. Conversely if Scotland does not follow suit, then a disadvantage may be created for ratepayers in Scotland. Importantly, the impacts of changing the way that poundage is uprated would be both recurring and cumulative - such that the annual impact of the change is likely to grow with each financial year. More specifically:

  • Currently the Office of Budget Responsibility ( OBR) forecast for 2019 September RPI is 3.1% and for 2019 September CPI is 2.0%.

5.16 Applying the CPI forecast to poundage instead of the RPI forecast to poundage for 2020-21 would equate to a poundage rate that is 0.6p lower than would otherwise be the case. This translates as an non-domestic rate loss of around £30 million to £40 million.

  • If implemented, the impacts would be recurring and cumulative - similar to the capping of poundage below RPI in 2013-14 and 2014-15, which permanently reduced non-domestic rate receipts in future years.
  • The OBR forecasts for September 2020 RPI and September 2020 CPI in 2020-21 match those for 2019-20. As a result, the annual loss in 2021-22 is expected to be roughly £60 million to £80 million, and would continue to grow if this divergence continued.

5.17 Another way to consider the likely costs would be a backward looking scenario. Table 8 compares a scenario showing what would have happened to non-domestic rate income if RPI had been used [13] to up-rate poundage over the current revaluation period compared to a scenario where CPI was used. This analysis therefore assumes a shared starting point in 2010-11.

  • It is anticipated that total annual revenues could have been around £120 million lower in 2016-17 if CPI inflation had been used to uprate poundage as opposed to if RPI inflation had been used to uprate poundage.
  • As discussed above, the impact would have been cumulative and recurring - the annual impact grows in each and every year of the analysis.
  • The 6 year cumulative impact over 2011-12 to 2016-17 could have been around £400 million.

Table 8 - Simple NDRi projections - capturing effects of using RPI vs CPI to uprate poundage.

Year 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Poundage (actual) 40.7 42.6 45 46.2 47.1 48 48.4
Scenario where poundage is uprated by RPI 40.7 42.6 45.0 46.2 47.7 48.8 49.2
Scenario where poundage is uprated by CPI 40.7 42.0 44.2 45.2 46.4 47.0 47.0
Modelled NDR Income ( RPI Scenario, £m) 2075 2231 2373 2439 2512 2591 2697
Modelled NDR Income CPI Scenario, £m) 2075 2200 2331 2387 2444 2498 2581
Annual Difference (£m) N/A -31 -42 -52 -67 -94 -116
Cumulative Difference (£m) N/A -31 -73 -125 -192 -285 -401

Source: Review Group Analysis, employing simple model of NDR income, using historical ( ONS) inflation data and snapshots of the Valuation Roll from prior years.

5.18 Clearly, and compared to using the RPI, the costs of adopting the CPI or the CPIH [14] , as a measure to uprate poundage would be significant. We recognise that the CPI is widely thought of as a better measure of the overall levels of inflation in an economy than RPI is, and as such would support using CPI as the method of uprating poundage, rather than RPI. While we are not experts in inflation indexes, the arguments in favour of using CPI rather than RPI appear well rehearsed [15] .

5.19 However, due to the large costs involved in switching from RPI to CPI as a mechanism to uplift poundage, we could not find a "revenue neutral" package of measures that would offset the costs of such a change and not adversely affect particular sectors of the tax base. As such, we are unable to include this in our formal list of recommendations. Nevertheless, we would still urge the Scottish Government to consider moving to this measure as soon as finances permit - especially in light of its stated desire to provide the most competitive business (non-domestic) rates package in the UK. Recognising that there could be legitimate concerns over the affordability of this proposal, we therefore consider it appropriate for this option to be considered in the medium term - and likely alongside changes in England, so as to ensure Scotland retains the sort of competitive non-domestic rate environment discussed above.


Email: Marianne Barker,

Phone: 0300 244 4000 – Central Enquiry Unit

The Scottish Government
St Andrew's House
Regent Road