Il-informed comments epidemic
The latest revisions to the UBR have brought about a wave of ill-informed comments in the press, even in publications such as the Financial Times, where one would expect journalists to be on top of the subject.
The incidence of all property taxes is on the landlord. An increase in the UBR means that rental levels will drop, or rise less quickly than they would otherwise have done. This has been well researched. In the days when rates were set by local authorities, it was often the case that identical properties on the two sides of a boundary were subject to different charges eg low-rates Wandsworth and high rates Lambeth. The same situation arose with the Enterprise Zones. In all cases, as one would expect, TOTAL OCCUPATION COSTS WERE THE SAME. This is also the reason why small business rates relief is nothing but a gift to landlords. Business tenants gain nothing at all, since the availability of the rates relief is reflected in the rent, as should be obvious. One wonders whether the policy is not a cynical means of putting more money in landowners’ pockets, whilst deceiving the public into thinking that the government wants to help businesses.
The real problem for businesses is that rents do not respond promptly, partly because tenants are locked into agreements which fail to take account of tax changes, and partly because of the prevalence of upwards-only rent revision clauses. Tenants should have the right to renegotiate under certain circumstances, and upwards-only rent revision clauses should be banned. Upwards-only clauses are an unreasonable and onerous condition which fails to take account of the reality that rental values can go down as well as up.
This study was done for the government HM Treasury and HM Revenue and Customs. If policymakers and journalists would study it, comment would be better-informed and misguided policies would not see the light of day. It is essential reading.
Postscript – this comment which came as response sheds some light on the issue…
“My friend’s hairdresser biz has an upward only clause set to the RPI. If this is typical its also a feckless mistake – RPI fluctuates significantly between 1% and 25% and is only 1.7% currently and has averaged 3% over the past 20 years so is not a reflection of the actual rental value at all. It’s been 40% too low for 20 years so if the theory stands UBR should have risen to take up the difference.
The premises had a rent of £8,400 in 2011, and rates of £2,700. Her new contract 5 years later is for £12,700. The RPI over that time has averaged 2.3% which going by the leases own upward only clause equates to £9,400- But… subject to recent changes in the UBR her shop is eligible for zero rating. 12,700 – 9,400 = £3,300 One does not need to be scientifically precise about this. The zero rating to encourage small business has been swallowed up completely by the privatised rent. Funny. Are our government administrators and operators aware of their actions? We do keep pointing it all out to them.
The other problem is psychic – my friend thinks by buying the business she is buying the location too. And further still, that the rent she pays is for the location and the building, where its obviously not because she has a Full Repairing and Insuring lease (FRI)All this shows why its a mistake to blame landowners and economists exclusively. “