Non-domestic tax rates review: Barclay report

Section 2: Introduction.

2.1 In assessing our remit, we made the decision at the outset that our work and recommendations should embed, so far as possible, the following broad principles:

• Fairness - to make the rates system as fair as possible and to remove what can be perceived as anomalies in the system that give some organisations an advantage over other organisations delivering the same services. This includes consideration of future proofing;
• Consistency - to endeavour to ensure that shocks to the system (such as steep rises in rateable values following a revaluation) are minimised and help ratepayers plan for the future;
• Transparency - to seek to ensure that the rates system is as transparent as possible to those who pay rates and that there is better understanding across Scotland as to how the rates system operates and how funds are spent;
• Simplicity - to seek to ensure that the administrative systems and processes surrounding the rates system are as simple and straightforward as possible, and;
• Accountability - to promote greater accountability on all involved in the rates system - on councils to identify and collect all rates due; on ratepayers to provide information sought by Assessors; on the Assessors to be more transparent; and on the Scottish Government to provide more certainty to ratepayers and oversee these reforms.

2.2 Our deliberations ranged extensively. At the outset, we considered, for example, whether the current rates system, based on the annual rental value a property would attract in an open market, should be replaced - and the possible options for doing so. These included switching from the current property-based tax, based on rateable values, to a local tax based on land value or a local turnover or sales tax or a combination of these. Each of the alternatives we considered has pros and cons. A land value tax, for example, might better reflect the overall value of assets than rateable value and a sales tax might better capture the impact of the growing digital economy. On the other hand, there are relatively little data available currently to assess how land value tax would work in practice, and a turnover or sales tax would be inappropriate for public sector organisations, many of whom would pay nothing by virtue of having no sales or turnover.

2.3 Equally, we took note of experience of tax systems in places further afield of Scotland, including the rest of the UK and in Europe, America, Australasia, Singapore and Hong Kong. All the countries that we looked at had some form of property taxes and no country appeared to have a perfect model.

2.4 There were some challenges in looking at only one tax in isolation on a revenue neutral basis and not considering the interdependency of non-domestic rates and other taxes. However we took a pragmatic approach and concluded that, on balance, a property tax system based on rateable values, as is currently in place in Scotland, best fits the principles set out above. That conclusion also appears to be supported by the majority of those we consulted. A further general view among ratepayers is that stability and certainty are important and that radical ideas could lead not just to uncertainty but also potentially to significant shocks to the rates system, both to ratepayers and Government revenues.

2.5 Alongside this, we considered the purpose of the rates system and concluded that this is primarily to provide one of the routes (alongside council tax, grant funding provided to councils by the Scottish Government and the income councils raise from fees and charges) by which councils secure funding to enable them to deliver local services.

2.6 Rates are a crucial part of this mix and must be levied to pay for local services - we believe there is a strong rationale for the non-domestic sector to help pay for these services. We do recognise that, by international standards, both Scotland and the UK raise a relatively large amount of tax from property taxation - and that this places a burden on businesses across Scotland. However, this should be seen in the wider context of business taxation and regulation in both Scotland and the UK. For example, while non-domestic rates raise a larger amount of revenues than is typical for commercial property taxes across the OECD ^[1] , the total taxes paid by UK businesses (as a % of commercial profits) are lower than averages for both the OECD and the EU - while businesses pay relatively high amounts of property tax, they pay relatively low amounts of other taxes ( e.g. corporation tax). This is illustrated in Chart 1. Similarly, the UK does well in 'ease of doing business' rankings and other measures of providing a competitive business environment ^[2] .

Chart 1: Total tax rate (% of commercial profits), OECD Countries, 2016.

Source: World Bank. Total tax rate measures the amount of taxes and mandatory contributions payable by businesses after accounting for allowable deductions and exemptions as a share of commercial profits. Taxes withheld (such as personal income tax) or collected and remitted to tax authorities (such as value added taxes, sales taxes or goods and service taxes) are excluded.

2.7 This is not to say that the rates system cannot be improved - we believe there are changes that should be made to it which will stimulate economic development in some key respects.

2.8 Crucially, it was essential that we listened to ratepayers and those with responsibility for the day to day running of the rates system in Scotland. In making our recommendations, we considered all comments made to us, whether in person or in writing.

2.9 We took note of the pleas of many ratepayers for an overall reduction in the rates burden, but that fell outside of our remit. Some pointed out that, with recent reductions in corporation tax, non-domestic rates now comprise the largest tax burden on many businesses. Others noted that the rates burden was, as a result of the extensive reliefs and exemptions in place, increasingly skewed towards the largest businesses and organisations. Against that, however, we had to balance the provision in our remit to ensure that our recommendations were, taken together, fiscally neutral. We came to the conclusion that there is no silver bullet, no simple revenue neutral solution that would simultaneously maintain the same level of income and make all ratepayers content with the system.

2.10 Taking everything into account, we have settled on a package of 30 recommendations which we believe will best deliver against our remit, the principles we have set out and which we believe offers considerable improvements to the current rates system in Scotland.

2.11 Some of these are relatively straightforward to introduce and if accepted by the Scottish Government, could be implemented immediately. Other recommendations are more complex and will require legislative change. We recommend that the Scottish Government should consult further with ratepayers and other stakeholders before implementing these changes.

2.12 In our engagement with ratepayers and others, we received a wealth of feedback on how the system works, as well as a large volume of suggestions on how to improve it. Many of these suggestions had real merit, and are worthy of further serious consideration. While the main body of this report focuses on our recommendations, we do not want to give the impression that we simply set aside these other ideas and suggestions. In fact, we gave them serious consideration, as described in Annexes (A-C).

2.13 Rates, like many subjects, has its own terminology. Where possible, we have tried to minimise our use of rates terminology (and to explain terms where we use them). However, it has not always been possible to retain accuracy of terminology without use of technical language and a glossary is also included at Annex E.