A land levy would be far fairer than our punitive business rates

 
Vince Cable
Debenhams And Carpetright Report Challenging Trading
The current system is undoubtedly contributing to Britain’s recent miserable productivity performance (Source: Getty)

We have by now all heard about the crisis facing our high streets, and the burden of business rates in particular.


But while high-profile retail struggles like that of House of Fraser and Maplin have brought this issue into the headlines, the problems with this badly designed tax run far deeper.

Contrary to what any economist would recommend, business rates – which tax the value of a company’s machinery and premises – are a tax on investment itself.

Read more: Scrap business rates in favour of land tax, Lib Dems say

The result is a higher bill for the ambitious entrepreneur who decides to expand her factory space, add another floor to her shop, or install solar panels on the roof, and a lower one for the speculative landowner who leaves his plot underutilised or unused.


The current system is undoubtedly contributing to Britain’s recent miserable productivity performance, by holding back the crucial investment required for our economy to thrive in the twenty-first century.

A groundbreaking new report called “Taxing Land, Not Investment” by Andrew Dixon, founder of the Liberal Democrats Business and Entrepreneurs Network, sets out a way forward.

It has been welcomed by trade bodies and think tanks across the board, including the manufacturers’ organisation EEF, the Internet Services Providers’ Association, UKHospitality, the Institute for Public Policy Research, the Entrepreneurs Network, and the Institute of Economic Affairs.

The report proposes the replacement of business rates with a new tax – the Commercial Landowner Levy (CLL) – based solely on land value (thereby excluding premises and machinery from calculations) and paid for by landowners rather than businesses.

Unlike business rates, this would include commercial land with empty or derelict property on it.

It is an approach that has already proved successful in countries as diverse as Denmark, Australia and Estonia, with the latter frequently topping the International Tax Competitiveness Index.

This change would not only remove the existing disincentive to invest, but would also spare the half a million SMEs that currently rent their premises the bureaucratic burden of business rates (although much of the new levy would likely be passed down in the form of higher rents).

And with far fewer plots of land in Britain than individual businesses, the CLL would save councils valuable time and money as well.

Those sectors of the economy that are most capital-intensive – including manufacturing, technology, and renewable energy – would be the biggest beneficiaries from the CLL, receiving tax cuts of over 20 per cent compared to business rates.

Businesses in the most deprived parts of the country – where land is relatively cheap – would also be substantially better off.

In fact, 92 per cent of local authorities in England would pay lower business taxes if the proposals were enacted – an important consequence, given Britain’s unenviable status as one of Europe’s most regionally unequal economies. It would also go some way towards alleviating the difficulties facing retailers on our struggling high streets.

This would not, of course, negate the need for separate action to force online retailers – most notably Amazon – to pay their fair share of corporation tax, which my party is also committed to. But it would more accurately take into account the value of land on which their warehouses are located.

While present dissatisfaction with business rates has accentuated the need for a viable alternative, land value taxation is an idea with a long and distinguished Liberal heritage, from David Lloyd George’s bold attempt to introduce it in his “People’s Budget” of 1909, to current longstanding Liberal Democrat support.

And it has been endorsed by organisations from across the political spectrum, most notably the Institute for Fiscal Studies, the Institute for Public Policy Research, the Adam Smith Institute, and recently The Economist.

What has been lacking up until now is not the arguments, but evidence and practical detail. Dixon’s report provides both in abundance.

I myself have long been convinced of the merits of land value taxation, which is why I agreed to chair the All-Party Parliamentary Group on Land Value Capture – bringing together politicians from the Conservative, Labour, Liberal Democrat and Green parties – set up last year to develop innovative proposals in this area.

Introducing and sustaining a change to the tax system as fundamental as replacing business rates with a land tax will require consensus across the political spectrum – something this report will be instrumental in building. In the lead-up to the Autumn Budget this year and beyond, the Liberal Democrats will lead the charge.

Read more: Taxing Amazon won’t save the UK high street

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.