G150. The review considered how best to maintain the aggregate tax yield in real terms during the life of the lists, as required by its terms of reference. The principal concern was how to ensure that erosion of the lists through appeals and other losses could be reconciled with the desire to achieve a constant tax yield. The Environment, Transport and Regional Affairs Select Committee and the Treasury Sub Committee have both expressed concern about the level of losses and the ability of the current system to recover them and maintain yield.
G151. The main options considered were:
- Continue as now, with an initial adjustment on revaluation to take account of estimated losses on appeal over the life of the lists (5% in 1995 and 4.7% in 2000);
- No "up-front" adjustment, but with annual adjustments (in addition to RPI increases) to reflect losses from successful appeals;
- A mixed system, with an initial adjustment together with the possibility of further adjustments if necessary, either annually or retrospectively at the next revaluation.
G152. The rules governing the setting of the non-domestic rating multiplier are set out in Schedule 7 of the Local Government Finance Act 1988. This effectively means that in a non-revaluation year the multiplier must be adjusted in line with the retail price index (RPI) in the previous September. The Treasury can provide by Order that a figure lower than RPI can be used. This would amount to a real terms cut in the level of the tax and has never been done. As there is no provision for any increases to recover such cuts, it would lead to an irrevocable reduction in the yield.
G153. Schedule 7 specifies that in a revaluation year the calculation of the multiplier also takes into account the total rateable value of all hereditaments in England on the last day of the old lists and the first day of the new lists. This is to ensure that the total yield remains constant, whatever happens to total rateable value as a result of the revaluation.
G154. This requires the Secretary of State to estimate what the values to be shown in the lists would be, after taking into account future changes to the lists as a result of successful appeals and other similar changes. The multiplier set at each of the three revaluations has therefore included an element to allow for future losses from the lists, to ensure that yield remains constant over the life of the lists. However, if the estimate made at the time of revaluation is wrong, there is no provision for any other adjustments. Any difference between the estimate and the outturn of losses on appeal leads to a permanent change in gross yield and any loss of yield cannot be regained.
Discussion
G156. The consultation paper prompted a mixed response. 19 responses out of 114 favoured maintaining the current system, while 16 favoured annual adjustments and 17 a mixed system.
G157. The current system provides ratepayers with certainty to plan resource needs over the five-year cycle, on the basis that the multiplier, and hence their rate bills, will only rise annually in line with inflation. It does this on the basis of an estimate made even before any appeals are received. Whilst it provides ratepayers with certainty, this is at the cost of an adjustment at the outset for losses which may not occur for several years, so ratepayers are paying in advance.
G158. There is also a risk to the Government of a permanent loss of yield, as occurred in 1990 where the original estimate was 1.5% but actual losses reached 9%. The difference amounts to a significant and permanent reduction in gross rate yield, at the expense of central and local Government, to the benefit of ratepayers, particularly those who appealed successfully. But all ratepayers have benefited in every year since 1990, by having a lower starting point for the multiplier than would have been the case if it had allowed for the full 9%.
G159. The options for change would all ensure that gross yield was fully maintained. This is no different from the intended position under the current system, assuming that the current adjustment turns out to be an accurate estimate of future losses. In 1990 that estimate was too low, but that made in 1995 appears to have been more accurate. The multiplier in 1995 allowed for losses of 5% from the rating lists. Appeals can be made against the 1995 lists up to 31 March 2001, but those settled to date suggest that the initial estimate was accurate.
G160. In terms of fairness, any system which adjusts the multiplier to maintain yield shifts the burden of the tax from those properties whose value are reduced on appeal to those which are not. In so far as the appeals system is itself fair in assigning reasonable values to properties, this system of redistribution is also fair. Those who appeal successfully would otherwise be paying more than their fair share of the total yield, while those who do not have their values reduced on appeal would otherwise be paying less than their fare share of that total. This applies to properties where appeals are unsuccessful and to those where there is no appeal. Given the high volume of appeals and the information given to all ratepayers on their appeal rights, it is reasonable to assume that most of those who make no appeal have an acceptable valuation.
G161. If adjustments were made to take account of appeal losses during the life of the lists, ratepayers would be faced with annual adjustments to the multiplier other than for inflation. As with RPI, the exact amount of the annual adjustment to the multiplier would not be known from year to year, reducing certainty for ratepayers. These annual adjustments may be relatively modest in any one year, probably increasing over the life of the lists as more appeals are settled. With a mixed system, combining an up-front estimate of losses with annual adjustments if those proved to be inaccurate, the level of those annual adjustments would be less. Either way, the total amount collected would be the same over the life of the lists as under the current system, when it works.
G162. An alternative suggestion is that, rather than making annual adjustments, the multiplier is only changed, other than for inflation, at the time of revaluation, but that more flexibility is allowed. In particular, the new multiplier should take account of any loss or gain in yield from previous lists, as a result of difference in outturn from previous adjustments, as well as an estimate of future losses for the new lists, and any adjustment for revaluation effects. This would provide greater certainty for ratepayers between revaluations, although the size of this single adjustment would be greater than any annual adjustments.
G163. While this approach would protect Government from long term loss of total yield, there may still be short-term losses in the period before a multiplier adjustment is made. The Government cannot legally impose retrospective taxation, so any losses that occur in the life of the lists could not be recovered for the years until the next revaluation. Any adjustments made at that time could restore total yield to what it would have been without appeals losses, but may not be able to increase total yield to recover earlier losses.
Conclusions
G164. The current system is intended to ensure that there is no loss of total yield as a result of appeals and similar changes to rateable values. However, there is only one opportunity to estimate in advance what the size of that loss might be. If that estimate is too low the Government runs the risk of a permanent loss of yield, as happened on the 1990 lists. Greater experience of the NNDR system, both in terms of the values set and the estimate of losses, should reduce that risk at future revaluations, as seems to have occurred with the 1995 lists. But the uncertainty remains.
G165. Allowing more flexibility in the system would eliminate that uncertainty for Government, by ensuring that the full amount of losses can be recovered as they arise. On the other hand, there is some concern that allowing annual adjustments to the multiplier, however modest, would reduce certainty for ratepayers. The alternative of delaying any adjustment until the next revaluation would increase certainty for ratepayers, with one, larger change. The Government would still risk losing some yield in the intervening years, although could restore the position in the long term.
[ Annex G Section6 ] [ Contents ] [ Annex G Section8 ]
Published on 19 September 2000
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