Commons Committee Fails To Understand – Landlords Pay Rates, Not Retailers

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There is indeed something interesting going on in the retail sector at present. We’ve that new, irruptive, technology of online retailing making its mark. This is going to mean, as with other such structural changes, sets of winners and losers. And why not try to analyse who is who and what, if anything should be done about it?

Which is that the Commons committee tries to do here. It being rather handicapped by the fact that it’s not the slightest clue of the subject under discussion. In fact, they start out from an entire and palpable untruth which really isn’t a great beginning.

They think that business rates are paid by retailers:

The government must reform the tax system to “level the playing field” between online and high street retailers, according to an MPs’ blueprint for saving town centres. The report by the Housing, Communities and Local Government Committee (HCLG) contains a series of proposals from tax changes to action by local authorities.

A key example found Amazon’s bill amounted to around 0.7% of its UK turnover while bricks-and-mortar shops were paying between 1.5% and 6.5%.

We can have a number of interesting conversations about whether people should pay more of a tax for using more of the resource being taxed. That’s always useful. Here, the tax is upon using property of value. The more property value you use the more tax upon property value you’ll pay. Seems simple enough. If we tax water then people who use more water will pay more tax.

But the mistake being made here is long before that. Business rates are in fact a tax upon rents. They’re not a tax upon property use at all, but upon rents. And as such it’s landlords who pay them.

The net economic effect is exactly the same as a straight tax upon rents in fact. Someone is willing to pay £100 to occupy that building. Doesn’t matter to them whether that’s £100 in rent and that’s it, or £1 in rent and £99 in taxes upon rent. £100’s what they’re willing to pay.

In anything like a competitive market that’s what the total price of renting will be too. £100. Whether that’s £60 in rent and £40 in rates, a special income tax of 40% on rents or rent is entirely tax free. The tenant will be paying £100. The change in taxation only changes what the landlord gains – it’s the landlord paying the tax.

At which point everything the committee is saying about business rates is rubbish, isn’t it? They’ve entirely misidentified who currently suffers from the system – landlords – and who will benefit from the proposed changes – landlords.

This though is how the country is ruled – by the incompetent, those ignorant of the reality they’d reign.

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Rhoda Klapp
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Rhoda Klapp

The punter always pays. In this case it is just as valid to say the shopper pays. He will accept (or not) the price/convenience differential when he chooses who to buy from.

OK pederants, from whom to buy.

Quentin Vole
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Quentin Vole

In the short term, a rate increase must fall on the shopkeeper*, because commercial rents are normally subject to review every five years, with no option to reduce anyway**. Ultimately, the lease will end (or the tenant go bankrupt) and a new commercial rent will be agreed, reflecting the increase in rates, but we all know Keynes’s view about what happens in the long run. * they may try to put up prices to compensate, but that’s difficult if you’re competing with online retailers ** If you’re a giant renting hundreds of sites you might be able to negotiate a… Read more »

Matt
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Matt

Indeed, the main reason there is so much empty retail space is because the large commercial landlords have their mortgages based on a capitalisation of rents — which sounds fair enough really — the second order effect is that they have upwards-only rent reviews as a requirement of the mortgage, which is daft. In order to maintain the fiction of their building’s value they would rather see a tenant go bust and leave the premises empty than accept a reduction in rent because that would mean acknowledging that the value of their building had gone down, while an empty building… Read more »

Quentin Vole
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Quentin Vole

Yes, Matt. And even property funds, investing other people’s money on their behalf, operate in the same way. This is because their managers’ bonuses depend on fund values, which are calculated on a multiple of rents, even if there’s no rent actually being paid. In these circumstances, it’s much better for them to have an empty property with a high notional rent than to have it occupied at a commercial rent.

Jonathan Harston
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Jonathan Harston

I’m a landlord and I’ve never had or paid a rates bill. My tenants are always the ones that receive and pay the rates (and council tax) bills.

I’m a landlord and I’ve dropped my rents when needed, much prefering to get 1*smallnumber than 0*largenumber.