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Reforming property taxes for business – what are the options?

Taxing business property forms an important part of the tax base for many countries, but property taxes are often complex and can be detached from an organisation’s ability to pay. The time has come to overhaul business property tax systems and here ICAEW outlines the options.

Property makes a good target for taxation. Its location is fixed, its ownership recorded and the tax liability can be calculated with relative certainty and consistency.

But business property taxes are becoming increasingly unpopular. The advent of online business models that can operate with a smaller physical presence has led to criticism that some businesses are being taxed unfairly. At the same time, the system for assessing the tax liability can be extremely complex, difficult to understand and costly to navigate.

Over the past 10 years, business rates receipts in the UK have risen rapidly, from £21bn to £29bn, outstripping the growth of both the retail price index and gross domestic product. However, with growing pressure on business property taxes, is this sustainable?

ICAEW believes that governments now face hard choices for the reform of business property tax.

The options available are:

Maintain:

Make piecemeal changes to the system to address particular stresses, perhaps by providing more targeted reliefs, or allowing local government greater flexibility to address particular local issues or capture growth opportunities (this is the option taken so far).

Rebuild:

Replace the tax on business property with an entirely new tax (such as a land value tax), with the aim of simplifying assessment and administration while spreading the tax burden equitably.

Demolish:

Remove tax on business property and raise revenues elsewhere instead, perhaps by increasing corporate or sales tax. Although such a move could dramatically simplify business tax, there may be a scale problem: UK business rates raise nearly half as much as corporation tax, and abolition would significantly increase taxes elsewhere.

Refurbish:

Retain business property tax but fundamentally reform elements of the system that are particularly inefficient or problematic.

In their thought leadership report, Business rates: maintain, demolish, rebuild or refurbish?, ICAEW explores the history of business rates in the UK, why they have become so controversial in recent years, and how each of the four options for reform might work in practice.

This article was originally published by ICAEW.