Annex A: Other Ideas Considered - Changing the Basis on Which the Tax is Levied.
A.1 As indicated in section 2 of our report, our deliberations ranged widely and included consideration of whether there would be merit in fundamentally changing the basis on which non-domestic rate is currently collected. This section expands a little on some of that wider consideration.
A.2 The initial impetus for our discussions around this area focused on whether the current basis of non-domestic rates is the fairest and most reasonable. Our conclusion was that rental evidence is a reasonable and fair thing to tax. We believe it is important that property taxation continues to form part of the overall tax mix in Scotland. We did consider other bases for tax, including a mix of rental values and performance measures. However, all have drawbacks and we remain to be convinced that any would be clearly superior to rental values.
A.3 Discussions with ratepayers themselves also covered this aspect. But we found relatively few proponents in favour of radically overhauling the system - with most suggesting that the current system needed to be refined rather than replaced. Many were particularly concerned that fundamental changes could lead to large one‑off shocks in tax liabilities of the sort which are potentially greater than would occur at a revaluation. It is clear that any substantial reform to the tax base would provide such a shock and we do not believe that this is the right time to consider this kind of uncertainty - particularly given the current uncertainty about the economic impact of what emerges from the Brexit process with the European Union.
A.4 In any case, such consideration would have required substantial, complex and lengthy research and evaluation and, in all the circumstances, we did not consider this could be undertaken within the timetable set for our review.
A.5 The various options we did consider are set out below but, for the reasons above, these options were not considered in same depth as those which underpin our recommendations.
A.2: Land Value Tax.
A.6 A move to Land Value Tax was proposed by a small number of consultation responses as an alternative to non-domestic rates. The Review Group acknowledges that there are some economic arguments in favour of a Land Value Tax, which include:
- A tax on land value may encourage optimal activity (such as investment in a property) that a tax on property values currently does not;
- The supply of land is fixed and cannot be affected by the imposition of a tax;
- A land value tax would better capture the benefits to landowners of public spending (for example, the value of land would increase with improved infrastructure and access to a more educated workforce.)
A.7 In reviewing all the submissions we received, it appeared to us that there was very limited support for this sort of change to the tax base. Land Value Tax was also not one of the proposals that rate payer organisations were in favour of. Furthermore, we recognise that the Commission on Local Tax Reform (which reported in 2015) concluded that gaining a full understanding of the impact of a land value tax would require significant further analysis. Given the resources that would be required to carry out this analysis, we decided not to make this a focus of this Review.
A.8 The likely implications of introducing a Land Value Tax would be large - likely re-distributing tax bills in a pronounced way. We also recognise that, if applied only to the non-domestic tax base, a land value tax might distort the market for domestic properties - making them more or less attractive investments relative to non-domestic properties And would therefore be likely have to be reviewed jointly with council tax.
A.9 For these reasons we did not consider it would be a good use of our resources fully to investigate the potential for a land value tax in Scotland. However we support the recommendation of the Commission on Local Tax Reform that more work should be done to assess land values, so that the debate over land value tax can be better informed.
A.3: Other bases of tax.
A.10 We considered various bases of tax other than land and property - most notably a tax based on turnover/sales or profit. This was proposed in a number of submissions made to us by ratepayers. The arguments in favour of taxing these elements instead of property include that they would better reflect "ability to pay" and that they would better reflect changing economic circumstances, such as the fast expanding digital economy.
A.11 We believe that some form of land or property based tax is an essential part of a balanced tax framework - and not taxing land or property at all would be a mistake.
A.12 We also considered whether there might be merit in a tax that combined property values and a measure of ability to pay such as profit or turnover. In principle, such a combination would still ensure that property taxes remained an important part of a balanced tax system, while also allowing for a better link between tax liability and the ability to pay. It could also arguably serve to alleviate ratepayer concerns that a revaluation would result in unaffordable bill increases. We could therefore foresee a model along these lines that would help to "future proof" non-domestic rates revenues by ensuring that rates capture elements of the digital economy that are competing with traditional bricks and mortar industries.
A.13 While this sort of approach could have some merit for some sectors, it could not be applied to the tax base as a whole. For example, many public and third sector rate payers do not deliver profit and turnover. And those in support of a method that better assessed "ability to pay" did not provide a consensus view on what might be the best option - whether it should be based on turnover, profits, or even footfall - and on how these terms should be defined. Furthermore, for many of the smallest ratepayers, the cost of establishing the information to undertake an analysis of the potential impact would be disproportionate to the benefits that could be secured.
A.14 As with a land value tax, it is not clear whether revenue neutrality could easily be achieved by switching to this sort of system, and there remains the risk that a change along these lines would lead to significant shocks to individual liabilities.
A.15 There is no guarantee that a tax based on these measures could be revenue neutral to Government over an economic cycle. For example, it may imply higher taxation in times of plenty to allow revenues to be reduced when there is a downturn in the economy.
A.16 Finally, any reform which fundamentally shifts the basis of tax from property and/or land to another tax base would need to be made with reference to an assessment of the overall tax mix in Scotland. That would require, for example, consideration of the interactions with other taxes such as Corporation Tax and VAT and to what extent the overall package of taxes was "fair". Such consideration is beyond the terms of our remit.
A.4: Taxing capital values instead of rental values.
A.17 Although capital values form the basis of council tax liabilities, we found relatively low support for a change along these lines for non-domestic rates.
A.18 Rental values are of course linked closely with capital values - in simplified terms rental values can be determined by assessing the capital value of the property and multiplying by the yield (or rate of return that an investor can expect to make from the property). Yields make up one element of the return that a property investor receives from a property, with an increase in the properties capital values making up the second element of this return. Other factors and costs, upkeep and upgrades will also affect returns.
A.19 We are of the opinion that rental values are more meaningful for the ratepayer for a simple reason: rental values are relevant for ratepayers irrespective of whether they rent or own the property that they are occupying. Owner occupiers typically have the opportunity to rent out their property and benefit from rental income, however tenants typically do not benefit from capital values rising. Furthermore, shifting the basis of tax from rental to capital values would likely bring about the sort of large one off shock to tax liabilities that ratepayers have stressed to us they want to avoid.
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The Scottish Government
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