The recent debate over business rates highlighted the problems created by the imposition of business differentials.
It is interesting to look back at the findings of the 2007 Local Government Rates Inquiry, more commonly called the Shand Report. They came up with the following conclusions:
The panel does not support a higher differential on businesses to compensate for the tax deductibility of rates for business income tax. The tax status of residential ratepayers is not considered when setting rates and many owners of residential investment properties also have an ability to claim rates as a tax expense. More importantly, other taxes and goods and services are not set on the basis that businesses should pay more because of their tax status. The panel considers that the tax status of a business or individual is not a relevant factor in deciding the incidence of rates.
"In most cases, businesses receive largely the same benefits as other ratepayers and at a similar cost to the local authority. Services that are regarded as providing a greater benefit to the business sector than to other ratepayers include economic development, improvements to central business districts, and tourism promotion. In addition, local authorities sometimes consider that business causes more roading expenditure than other ratepayers because business enterprises generate more and heavier traffic. However, a contrasting point of view (often advanced by business) is that residents in the wider area benefit from having businesses in their locality and therefore should contribute to the costs that might otherwise be funded by a targeted business rate."
"The panel considers business differentials have been set in an arbitrary fashion historically and are not related well to the benefits received. These are generally fixed by a subjective and essentially "political" decision. The panel recommends that business differentials should be abolished. Instead, local authorities should make greater use of targeted rates to reflect any additional costs reasonably attributable to the effects of business (for example, roading and parking), and also the relatively greater benefit enjoyed by business sector ratepayers from the provision of some local authority services. This will significantly increase the transparency of setting rates on the business sector. While targeted rates can also be used to achieve a particular balance of the rates burden between different classes of ratepayers, using this mechanism has the advantage of requiring a transparent process."
The clear recommendations of the Shand Inquiry, and lack of any sustainable counter-arguments, reinforce the case for the Government including provision to remove business rate differentials in the forthcoming Bill to action the "Better Local Government" tipped for introduction to Parliament later this year.
