An In-depth Look at the Impact of the Government’s Business Tax System on Council Tax Revenue
Introduction
Local and central governments in England and Wales are facing a significant loss of council tax revenue due to the government’s business tax system, warns Colliers, a leading real estate services and investment management company. The current system allows vacation home and second home owners to avoid paying council tax if they make their properties available for rent for only 10 weeks a year. This loophole has resulted in an estimated loss of £170m per year, which could have been crucial in bridging the gap in local government finance.
The Commercial Fee Relief System
Under the commercial fee relief system, holiday rental properties in England and Wales can qualify for a business rate list if they are available for rental for at least 140 days a year, with short-term rentals totaling at least 70 days. However, Colliers argues that these measures are not strong enough to deter property owners from switching to the business rate list, thereby reducing local authorities’ ability to raise money.
The Impact on Local Authorities
The ability of second home owners to rent their properties for only 10 weeks a year without paying any business or council tax poses a significant challenge to local authorities. According to Colliers, the number of properties entering the commercial rate lists continues to grow, indicating that the current deterrent is ineffective. This not only leads to a loss of revenue for local councils but also puts a burden on residents and other businesses struggling to pay their council tax bills.
The Qualification List in the Southwest of England
The South West of England, including popular holiday destinations such as Cornwall, Devon, Dorset, and Somerset, has witnessed a surge in the number of properties claiming a 100% commercial fee reduction. In the last six years alone, 13,085 new properties have entered the qualifying list, more than double the number at the beginning of the 2017 Qualification List. This trend is particularly acute in Cornwall, where 12,065 holiday rental properties escape both business and council tax, leading to an estimated loss of over £27m in revenue annually.
The Property Price Boom and the Role of Second Homes
The Southwest of England has experienced a significant increase in property prices in recent years, especially in Cornwall, which has been heavily influenced by second-home owners. House prices in Cornwall have risen by over 63% in the last five years. This trend has been fueled, in part, by the fee-saving advantages associated with holiday rental properties. Real estate agents actively market these advantages, further driving up prices.
The National Picture
When we look at England and Wales as a whole, the situation becomes even more striking. Colliers estimates that there are now over 85,044 holiday rental properties on commercial rate lists, resulting in a loss of approximately £170m in local authority revenue each year. The growing trend of switching from council tax to business rates is a cause for concern, with losses increasing from £110m two years ago to £150m last year, and now reaching £170m. Without reforming the entire system, the government will continue to face the challenge of bailing out local authorities due to the loss of council tax revenue.
The Need for Government Reform
Colliers emphasizes the urgent need for comprehensive reform to address the flaws in the current business tax system. Despite rising financial pressure on local authorities, the government has done little over the past five years to adequately address this issue. The burden of local taxes continues to weigh heavily on residents and businesses, as council tax bills have seen substantial increases. The lack of action and reform not only affects local government finances but also fails to address the shortage of affordable housing and other pressing social issues.
A New Perspective on Second Homes
Contrary to the perception of second home buyers as villains, John Webber, head of business rates at Colliers, suggests that politicians should consider charging holiday owners at least as much as council taxpayers. By doing so, over £100m could be generated, which could be invested exclusively in building affordable housing in Cornwall. Webber points out that the crux of the problem lies with politicians who fail to understand and address the underlying issues.
Conclusion
The government’s business tax system is causing local and central governments to lose millions of pounds in council tax revenue. The current commercial fee relief system for holiday rentals allows property owners to avoid paying taxes, resulting in a loss of revenue that could have been used to support local government services. The growing number of properties entering the commercial rate lists is evidence that the current deterrent measures are ineffective. It is crucial for the government to undertake comprehensive reform to ensure that the tax system is fair and does not burden residents, businesses, or local authorities.
Summary
The government’s business tax system is having a detrimental impact on council tax revenue for local and central governments in England and Wales. A loophole allows vacation home and second home owners to avoid paying the tax by making their properties available for rent for a minimum of 10 weeks per year. This has resulted in an estimated annual loss of £170m, which could have been used to bridge the financial gap in local government. Despite efforts to close the loophole by introducing stricter requirements for property qualification, the number of properties entering the commercial rate lists continues to grow. This not only reduces the ability of local authorities to raise money but also puts a burden on residents and other businesses struggling to pay their council tax bills. It is crucial for the government to undertake comprehensive reform to address these issues and ensure a fair and sustainable tax system.
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Local and central governments are losing millions of pounds of council tax revenue to the government’s business tax system, Colliers warned.
This is because vacation home and second home owners can avoid paying the tax as long as they make their properties available for rent and do so for only 10 weeks out of the year.
Colliers estimates that the total loss to the government due to the commercial fee relief system for holiday rentals in England and Wales alone is now around £170m a year (2023/2024), a significant sum that will undoubtedly could help bridge the gap in local government. finance.
The government sought to close the loophole, as from April 2023 a property can only qualify to be on the commercial rate list if it is available for rental for 140 days a year and is rented for short periods totaling at least 70 days.
But John Webber, head of business rates at Colliers, said: “These measures are not strong enough to deter companies from ‘switching’ to the business rate list and therefore reduce the ability of the local authority to raise money.
“A second owner can still rent their property for only 10 weeks a year and could avoid paying any business or council tax. The fact that the number of properties entering commercial rate lists continues to grow is a testament that the deterrent is not working.”
Owners who make their properties available for holiday rentals for 140 days a year can claim that they are a small business and as such can choose to pay commercial rates instead of council taxes.
However, as small businesses, they can claim a 100% exemption from business fees payable if their properties have an assessed value of less than £12,000.
Those properties with an assessed value between £12,000 and £15,000 are also entitled to relief on a sliding scale in accordance with the Government’s business rate relief policy.
Colliers looked at the qualification list for the South West of England (Cornwall, Devon, Dorset and Somerset), where 13,085 new properties, claiming a 100% commercial fee reduction, have entered the list in the last six years, more than double the number you claim at the beginning. of the 2017 Qualification List.
The Southwest now has 23,817 self-catering vacation rental properties on the qualifying list that are eligible for a 100% business fee reduction and therefore do not pay the tax.
Colliers has estimated that if these properties paid at least council tax, local councils would benefit from more than £53m of revenue.
The problem is most acute in Cornwall, where 12,065 holiday rental properties pay neither business nor council tax, because they are holiday rentals and classified as non-domestic. Colliers estimates that if these properties were to pay council tax, more than £27m of additional revenue would be raised every year in Cornwall alone.
Meanwhile, there has been a boom in home prices in recent years, particularly in the Southwest, which has been hit hard by second-home owners. House prices in Cornwall alone have risen by over 63% in the last five years.
Looking at England and Wales as a whole, the picture is even more striking. According to Colliers, there are now over 85,044 holiday rental properties on commercial rate lists in England and Wales that are eligible for a 100% commercial rate rebate and as such pay no commercial rates or council tax. Colliers estimates that this is reducing local authority revenue by around £170m a year.
Webber added: “Despite the stances, the government has done little in the last five years to adequately reform the trade tariff system. This is especially extraordinary given the pressure on the finances of local authorities and the subsequent need for central government to fill in the gaps.
“The local tax burden continues to weigh on residents or other types of businesses struggling to pay their council tax bills, which have again risen substantially in the last year. Meanwhile, agents selling properties in popular vacation areas are positively advertising the fee-saving advantages, which has likely contributed to further increases in home prices.”
He said: “Cornish Council, by raising council tax by the maximum allowed this year and at the same time cutting services, they are simply missing the point if they think ‘quadrupling’ council tax on second homes is the answer. Doing that will only force more people to switch from council tax to business rates. I’m not sure it takes a genius to figure it out.
“While local authorities may be compensated by central government in some respects for these losses, the point is that less money will be raised locally, which will mean less to spend on services, unless of course the tree money magic is being tossed around by the cash fairies in White Hall.
“While politicians argue about the lack of social housing in places like Cornwall and portray second home buyers as the villains, if they charged holiday owners at least as much as a council taxpayer they would have received over £100m of pounds sterling to build affordable housing. only in Cornwall. The problem isn’t the second homeowners, it’s the politicians who don’t understand the issues and have the courage to do something about it.
“The fact that this trend of moving from council tax to business fee schedule is growing every year is also a real cause for concern. Two years ago we estimated the loss of revenue to the government was £110m, last year it was £150m and this year it will be £170m. Such a loss of council tax each year will soon accumulate over the years, and the government will increasingly need to bail out local authorities. The government really needs to reform the whole system and do it thoroughly.”
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