SEEC/SECL South East Property Tax Devolution · SEEC/SECL South East Property Tax Devolution...

SEEC/SECL

South East Property Tax Devolution

January 2015

Report overview

1. Objectives of the Work

2. Fiscal Balance

3. Property Taxes – Overview

4. Property Taxes – Analysis

5. Conclusions

2


3

Identify headline property tax figures for the South East, consistent with

the report by the London Finance Commission’s (LFC’s) 2013 report,

“Raising the Capital”.

Specifically, quantify the values of (i) council tax, (ii) business rates,

(iii) stamp duty land tax, (iv) annual tax on enveloped dwellings, and (v)

capital gains tax on property disposal.

Estimate total property tax for each local authority in the South East,

based upon assumptions about potential apportionment bases.

Compare against local authority funding from central government.


4

Definitions:

(i) Council Tax – levied on households, based on property value and

occupancy

(ii) Business Rates – levied on non-domestic property, based on rateable

value

(iii) Stamp Duty Land Tax – on ‘land’ transactions, including property

(based on purchase price), leases, rent

(iv) Annual Tax on Enveloped Dwellings – payable by companies,

partnerships, investment vehicles that own high value residential property,

based on property value

(v) Capital Gains Tax on Property Disposal – on the ‘gain’ from the

sale/disposal of property (but note that the LFC only considered property

owned by companies).

2. Fiscal Balance

5

To provide context, we begin with an overview of the balance between

total tax revenue and total public expenditure in the South East.

Oxford Economics estimates that, in 2011/12, the South East had

resident-based revenues of £88.5bn, compared to a share of total public

expenditure of £84.0bn.

This translates to fiscal balance of +£4.5bn, second only to London.

Since 1999, the South East’s net fiscal contribution has averaged

+£10.2bn per year. This ‘return on investment’ contracted sharply in the

wake of the global financial crisis, and has since partially recovered.

Fiscal Balance

6

Figure 1 – South East Fiscal Balance

-25

0

25

50

75

100

19

99

/00

2000/0

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2001/0

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20

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1

2011/1

2

£b

n R

eve

nu

e /

Ex

pe

nd

itu

re

Revenues Expenditure

Fiscal Balance

7

Figure 1 – South East Fiscal Balance

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0

5

10

15

20

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25

50

75

100

19

99

/00

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2001/0

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Fiscal Balance (right axis) Revenues Expenditure

Fiscal Balance

The fiscal balance captures all major sources of tax revenue and public

expenditure in the UK.

Public expenditure includes services that are typically outside the remit of

local government, such as health care, welfare payments and defence.

Oxford Economics’ measure of tax revenues include all major revenue

streams, including:

Income tax

National Insurance Contributions (NICs)

Value Added Tax (VAT)

Corporation tax

Council tax

Business rates

8

Fiscal Balance

An earlier study by Oxford Economics (London’s Finances and Revenues)

included a breakdown of the South East’s tax revenues in 2010/11.

9

Figure 2 – South East Tax Revenues, 2010/11

* Capital Gains Tax also includes financial assets, and so is not a

pure property tax

4.9% 3.6%

1.6% 0.6%

30.6%

17.6%

15.1%

5.9%

20.0%

Council Tax

Business Rates

Stamp Duty

Capital Gains Tax*

Income Tax

NICs

VAT

Corporation Tax

Other

Council Tax

Business Rates

Stamp Duty

Capital Gains Tax*

Income Tax

NICs

VAT

Corporation Tax

Other

Fiscal Balance

Overall, it showed that property taxes accounted for only 11% of the

region’s total tax take.

10

Figure 2 – South East Tax Revenues, 2010/11

11%

* Capital Gains Tax will also include financial assets, and so is not

a pure property tax

3. Property Taxes - Overview

11

The following sections focus on property taxes in the South East, in the

context of the London Finance Commission’s (LFC’s) report, “Raising the

Capital”.

The report calls for the devolution of all property taxes. It is argued that

this would increase the capital’s autonomy to invest in infrastructure,

promote economic growth, and increase accountability to local residents

and businesses.

Specifically, the commission calls for the devolution of:

1. Council tax

2. Business rates

3. Stamp duty land tax (SDLT)

4. Annual tax on enveloped dwellings (ATED)

5. Capital gains property disposal tax (for companies only)

Property Taxes – Overview

LFC concluded that property taxes are well suited to devolution

because:

They have immobile tax bases

They are buoyant, increasing over time in line with general economic

growth; and

They are relatively easy to administer and enforce.

12

Property Taxes – Overview

LFC did not believe that devolution of the other major taxes was

appropriate at this time:

Income tax could disincentivise employment, create inefficiencies

(due to a mobile workforce) and would be difficult to implement.

NICs are already ‘ring-fenced’ for nationally administered services,

such as pensions.

VAT could not be devolved, due to EU requirements that member

states apply common rates within their jurisdictions. It could instead

be assigned (i.e. collected by central government and allocated to

local authorities), but this would be difficult to implement.

Corporation tax posed a number of challenges, such as volatility,

distortions (e.g. authorities driving away businesses, or engaging in a

competitive ‘race to the bottom’), and difficulty identifying the origin of

the tax revenues.

13

4. Property Taxes – Analysis

14

Analysis was carried out to estimate property tax yields in the South East

and use assumptions to apportion these to local authority level.

This section is divided into the following parts:

Methodology

Results

Analysis

Property Taxes – Analysis

When estimating tax revenues at the local authority level, it is necessary

to consider local government structure. Within the South East, there are

four structure types, as illustrated below.

15

Methodology Results Analysis

Shire

District

County

Council

(no fire)

Fire &

Rescue

Unitary

Council

(no fire)

County

Council

(with fire) Unitary

Council

(with fire)

Fire &

Rescue

Shire

District

Figure 3 – Local Authority Structure

Type 1 Type 2 Type 3 Type 4


Tax revenue data is often only available for shire districts and unitaries. In

this case, we need to estimate how much of the revenue would be

passed on to the other tiers.

16


Shire

District

County

Council

(no fire)

Fire &

Rescue

Unitary

Council

(no fire)

County

Council

(with fire) Unitary

Council

(with fire)

Fire &

Rescue

Shire

District



?

?

?

?


To do this, we need to estimate the shares attributable to the lower, upper

and fire tiers. One approach is to base these share on past service

expenditure. In this case, we have used actual Revenue Outturn 2013/14.*

17


Shire

District

County

Council

(no fire)

Fire &

Rescue

Unitary

Council

(no fire)

County

Council

(with fire) Unitary

Council

(with fire)

Fire &

Rescue

Shire

District



Lower

Upper

Fire

* Based on the average for South East England. Only a sub-set of

authorities can be used in these calculations.


The resulting shares, based on past expenditure, are illustrated below. As

can be seen, the majority of expenditure is attributable to the upper tier

(87.5%).

18


Shire

District

County

Council

(no fire)

Fire &

Rescue

Unitary

Council

(no fire)

County

Council

(with fire) Unitary

Council

(with fire)

Fire &

Rescue

Shire

District



Lower

Upper

Fire 2.8%

87.5%

9.7%


Council tax revenue is already known for all tiers of local government.

For business rates and SDLT, revenue was allocated between tiers on

the basis of past expenditure, as described in the previous slides.

For ATED, figures were only available at the regional level, so population

was first used to estimate the shares for each district/unitary council.

19


Property Tax Regional

amount

District or

Unitary amounts

Fire & County

amounts

Council Tax Actual Actual Actual

Business Rates Actual Actual Past

expenditure

Share

Stamp Duty Land Tax Actual Actual

Annual Tax on Enveloped Dwellings Actual Population share

Table 1 – Methods used to allocate notional tax revenue


Capital gains tax was ultimately excluded from our analysis.

The LFC report only includes capital gains tax relating to UK residential

properties, worth over £2m, which are owned by companies.

LFC report that this revenue was worth £25m to the UK in 2013/14, of

which an estimated £20m would be raised in London.

Any remaining revenues raised by the South East would therefore be

insignificant compared to the other property taxes discussed here.

An earlier LFC working paper* stated that the devolution of capital gains

tax more widely would be “prohibitively complex”

20


* London Finance Commission Working Paper ‘Options for Tax

Assignment and Devolution’, September 2012


Overall, property taxes were worth £9bn to the SEEC area alone in

2013/14

21


Figure 4 – South East Property Tax Revenues, 2013/14


Overall, property taxes were worth £9.8bn to the South East in

2013/14.These figures include Swindon, Wiltshire & Central Bedfordshire.

22


Council Tax £4.34bn

Business Rates £3.65bn

SDLT £1.84bn

ATED £0.01bn

Figure 4a – South East Property Tax Revenues, 2013/14

£9.8bn


For unitaries and counties, once apportioned, total property tax revenues

ranged from £1,340m (Surrey) to £108m (Isle of Wight)

23


Figure 5a – Property Tax Revenues (Unitaries & Counties)

0

200

400

600

800

1,000

1,200

1,400

Surr

ey

Ken

t

Ha

mpshir

e

We

st

Su

sse

x

Oxfo

rdsh

ire

Buckin

gha

msh

ire

Wilt

shir

e

East

Susse

x

Milt

on

Ke

yn

es

Brig

hto

n &

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ve

Centr

al B

edfo

rdsh

ire

Win

dsor

an

d…

Read

ing

Sw

indo

n

We

st

Be

rkshire

Me

dw

ay

Sou

tha

mp

ton

Wo

kin

gh

am

Slo

ug

h

Port

sm

ou

th

Bra

ckne

ll F

ore

st

Isle

of

Wig

ht

Cou

ncil

£m


For shire districts, property tax revenues ranged from £27m (Elmbridge)

to £7m (Gosport)

24


Figure 5b – Property Tax Revenues (Shire Districts)

0

5

10

15

20

25

30

Elm

bridg

eO

xfo

rdR

eig

ate

and B

an

ste

ad

Guild

ford

Ma

idsto

ne

Ne

w F

ore

st

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be

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wle

yA

yle

sbury

Vale

Waverle

yW

eald

en

Ton

brid

ge a

nd M

alli

ng

Basin

gsto

ke a

nd D

eane

Ca

nte

rbu

ryM

id S

ussex

Wokin

gS

eveno

aks

Win

ch

este

rH

ors

ha

mC

herw

ell

Ch

icheste

rS

outh

Oxfo

rdshire

Aru

nD

art

ford

Tu

nbrid

ge W

ells

Vale

of

Wh

ite

Hors

eS

urr

ey H

ea

thA

sh

ford

Mo

le V

alle

yE

ast H

am

pshire

Eastle

igh

Test V

alle

yS

peltho

rne

Wort

hin

gT

ha

net

Ch

iltern

Shep

way

Sw

ale

Eastb

ou

rne

Ha

va

nt

Ru

nnym

ede

Tan

drid

ge

Fare

ham

South

Bucks

Ha

rtLe

wes

Ru

sh

moo

rD

ove

rE

psom

and

Ew

ell

Ro

ther

West O

xfo

rdshire

Ha

sting

sG

ravesham

Adur

Gospo

rt

£m


We assessed the balance between (i) property tax revenues and (ii) local

authorities’ current funding from central government.

The objective was to determine whether the devolved property taxes

(excluding council tax) would be sufficient to replace the major grants.

This includes all grants making up ‘Revenue Spending Power’ in 2015/16,

with the exception of two major ring-fenced grants (Public Health Grant

and Better Care Fund). This also excludes funding for education, police,

and other grants that were not included in Revenue Spending Power.

Property tax revenues in 2013/14 were projected forward to 2015/16.

Business rates were increased by 1.9% each year (reflecting the

multiplier cap), and SDLT was increased in line with OBR forecasts

(which increase sharply, due to rising property values and transaction

volumes).

25



By 2015/16, the SEEC area alone was forecast to have revenues of

£5.8bn, vs. grants of £2.7bn. This gives a ‘funding surplus’ of +£3.1bn.

After ring-fenced grants, the SEEC area surplus would be £2.3bn

26


Figure 5 – Balance of Funding


By 2015/16, the South East was forecast to have revenues of £6.3bn, vs.

grants of £2.9bn. This gives a ‘funding surplus’ of +£3.3bn. These figures

include Swindon, Wiltshire & Central Bedfordshire.

27


Figure 5a – Balance of Funding

Non ring-fenced grants

Business rates

SDLT

ATED

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Property Taxes Grants Surplus

£ m

illi

on

Surplus

+£3.3bn


Even including ring-fenced grants, the region would still have a surplus of

+£2.4bn. Business rates alone would almost cover almost all the grants.

These figures include Swindon, Wiltshire & Central Bedfordshire.

28


Figure 6 – Balance of Funding

Non ring-fenced grants

Ring-fenced

Business rates

SDLT

ATED

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Property Taxes Grants Surplus

£ m

illi

on

Surplus

+£2.4bn


Excluding ring-fenced grants, nearly all unitaries and counties would have

a funding surplus in 2015/16 (with the exception of Isle of Wight)

29


Figure 7a – Funding Surplus (Unitaries & Counties)

-100

0

100

200

300

400

500

600

700

800

Surr

ey

Ham

pshir

e

Ken

t

We

st

Su

sse

x

Oxfo

rdsh

ire

Buckin

gha

msh

ire

Win

dsor

an

d M

aid

enh

ea

d

Milt

on

Ke

yn

es

Wilt

shir

e

We

st

Be

rkshire

Read

ing

Wo

kin

gh

am

Brig

hto

n &

Ho

ve

Bra

ckne

ll F

ore

st

East

Susse

x

Sw

indo

n

Slo

ug

h

Centr

al B

edfo

rdsh

ire

Sou

tha

mp

ton

Me

dw

ay

Port

sm

ou

th

Isle

of

Wig

ht

Cou

ncil

£m

su

rplu

s (

+)

or

de

ficit (

-)


For shire districts, 60% would have a funding surplus and 40% would

have a deficit

30


Figure 7b – Funding Surplus (Shire Districts)

-10

-5

0

5

10

15

Elm

bridg

eG

uild

ford

Waverle

yC

raw

ley

South

Bucks

Mo

le V

alle

yT

un

brid

ge W

ells

Ru

nnym

ede

Re

iga

te a

nd B

an

ste

ad

Ch

iltern

Surr

ey H

eath

Wycom

be

Wokin

gW

inch

este

rS

outh

Oxfo

rdshire

Ch

icheste

rD

art

ford

Vale

of

Wh

ite

Hors

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art

Seveno

aks

Ho

rsha

mS

peltho

rne

Ne

w F

ore

st

East H

am

pshire

Ton

brid

ge a

nd M

alli

ng

Mid

Sussex

Fare

ham

Eastle

igh

Ch

erw

ell

Epsom

and

Ew

ell

Tan

drid

ge

Oxfo

rdW

est O

xfo

rdshire

Basin

gsto

ke a

nd D

eane

Ru

sh

moo

rT

est V

alle

yLe

wes

Ash

ford

Wort

hin

gA

dur

Ro

ther

Ma

idsto

ne

Weald

en

Ha

va

nt

Eastb

ou

rne

Do

ve

rG

ospo

rtC

ante

rbu

ryA

run

Gra

vesham

Shep

way

Ayle

sbury

Vale

Sw

ale

Ha

sting

sT

ha

net£

m s

urp

lus (

+)

or

deficit (

-)


The preceding slides raise two additional issues:

Ensuring a fiscally neutral outcome; and

Equalisation of funding between the South East councils.

31



Fiscal neutrality

LFC recommended that newly devolved taxes should be offset through

corresponding reductions in grant, to ensure a fiscally neutral outcome.

As shown on the previous slides, property tax revenue (excluding council

tax) exceeds the South East’s major sources of revenue funding.

To ensure fiscal neutrality, options include:

Assume responsibility for funding a wider set of services, e.g. police

and schools

Return a share of property tax revenue to central government

Devolve a limited set of property taxes, e.g. business rates, which

would be sufficient to replace most existing, non ring-fenced central

government grants

32



Equalisation

Based on the assumed revenue splits between the upper, lower and fire

tiers (of 87%/10%/3%), a large number of shire districts would still not be

revenue self-sufficient if property taxes were devolved to the local level.

This would require equalisation among the South East authorities. This

could take the form of ‘top ups’ and ‘tariffs’, similar to the current business

rates retention scheme.

At the outset, equalisation could be based on prevailing levels of funding.

However, the region would then need to consider if or how equalisation

would be adjusted to reflect future changes in need; for example, due to

population growth, ageing populations or changes in deprivation.

33



Council Tax

Finally, it should be noted that our measurement of “surplus” excluded

council tax. This is because council tax is already fully devolved, and is

both collected and retained by the South East.

Our definition of “surplus” measures the difference between (i) property

tax revenues that are currently collected on behalf of the Exchequer, and

(ii) the amounts that are currently redistributed back to local authorities in

the form of central government grants.

For completeness, however, we also provide projections of council tax

revenues in 2015/16. As a prudent estimate, we used 2014/15 council tax

requirements, which assumes a 100% uptake of the council tax freeze

that is to be offered in 2015/16.*

34


* Historically, the take up of council tax freeze grant has ranged

from 65% to 100% of local authorities (nationally) in any given year.


Summary of Revenue Streams

The table below summarises the projected value of all major property

taxes in the South East from 2013/14 to 2015/16, including council tax.

35


Property Tax 2013/14 2014/15 2015/16

Council Tax £4.338 bn £4.449 bn £4.449 bn

Business Rates £3.650 bn £3.719 bn £3.790 bn

Stamp Duty Land Tax £1.845 bn £2.257 bn £2.473 bn

Annual Tax on Enveloped Dwellings £0.010 bn £0.010 bn £0.010 bn

Total Property Tax Revenue £9.843 bn £10.436 bn £10.722 bn

Table 2 – Summary of Actual and Projected Property Tax Values, South East

5. Conclusions

Oxford Economics estimated that the South East generated a fiscal surplus of

£4.5bn to the UK (as at 2011/12).

Earlier work by Oxford Economics (in 2010/11) identified that property taxes

accounted for 11% of total tax revenues in the South East.

LG Futures estimates that devolving the property taxes under consideration would

generate revenue of £9.8bn in the South East of England in 2013/14.

By 2015/16, property tax revenues (excluding council tax) would be £3.3bn

greater than the major non ring-fenced grants currently received by local

authorities from central government.

Limiting devolution to business rates, rather than all property taxes, could help

ensure fiscal neutrality.

Given our key assumptions, most counties and unitary authorities would become

revenue self-sufficient. However, ‘equalisation’ would still be needed for a large

number of shire districts.

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