• Valuations are impossible, subjective, can’t be decided by government (skip to article)
• The Army Of Surveyors (skip to article)
• Endless appeals, would cost more to collect that it raises (skip to article)
• What about leaseholds and freeholds? (skip to article)
• What about unregistered land? (skip to article)
• What about social housing? (skip to article)
• Not all flats in a block are worth the same (skip to article)
• What about protected tenancies? (skip to article)
Let us get this clear from the off. The tax is not based on absolute selling prices from time to time, it is based on the "annual site premium" of any site,(although relative selling prices prior to the tax being introduced are a good enough proxy for rental values to get the ball rolling) which is quite simply the difference between:
- The total annual rental value of any plot of land and buildings on it (or permission to build on it), and
- The rental value of very similar land and buildings in the cheapest area (provided that those buildings can actually be rented out at all).
We already have perfectly good records for commercial land and buildings, which are used for assessing rateable values for Business Rates, so we need not concern ourselves further with those.
Residential land and buildings are even easier than commercial. I have explained how it would all work on a separate page (it's surprisingly easy to do).
1. "Valuations are impossible, subjective, can’t be decided by government."
a) No they're not, they are very easy to establish for 99% of homes.
b) The site premium is not "decided" by the government, all the Valuation Office Agency does is observe what market rents are and allocates homes to bands accordingly. They are perfectly capable of doing this for Business Rates, and the Council Tax banding exercise went without too much of a hitch, as did the fairly recent full revaluations in Wales and Northern Ireland.
c) It's like saying "If we had income tax, then the government would be able to decide what your taxable income is." Ignoring silly tax breaks, by and large it is you, operating within the constraints of supply and demand, who decides what your taxable income is; the government then levies a tax on that resulting figure.
The problem with the existing system is that:
- first the government decides whether a business is VAT-able or not; if it is, the government takes an arbitrary percentage of your gross profits in VAT;
- when salaries are paid out, and the government takes arbitrary percentages in income tax and National Insurance;
- of what's left the government takes an arbitrary amount in corporation tax;
- when a company pays dividends then some shareholders have to pay an abitrary amount in higher rate income tax.
- and the government might then give individuals an arbitrary amount of money back for transferring money into favoured schemes (pensions) or take away a further arbitrary amount of money in benefits withdrawal.
At each stage, there is a pseudo-scientific statutory method of working out a precise arbitrary percentage of a large number of precise but ultimately arbitrarily chosen large amount. The actual effective tax rate can thus be anything between negative and over one hundred per cent, with an average marginal rate of about fifty per cent.
It is far better to have a single layer of tax levied at a high rate on a reasonably accurately assessed lower amount, i.e. LVT, ultimately, LVT is far less arbitrary.
d) Values are not "subjective" either any more than the price which any supplier charges is "subjective". An airline doesn't know or care exactly why any particular passenger on any particular flight decided to fly where he did and when he did. The airline just charges the highest price it thinks it can get away with and still have a fairly full flight. If enough people are willing to pay it, then that is the market value of that service.
e) Most people will be perfectly willing and able to pay the LVT, and by simply paying it, that sends a signal that the tax was not "too high". And yes, of course there will be some home owners who decide that they'd rather trade down and save some money, but there will be plenty of others who'd like to trade up. The selling price of homes will adjust to whatever the parties think is a fair net payment for swapping places.
f) Once the tax is in place, the selling price of houses will be the new correct market price taking the tax into account. Similarly, the tax will always be the correct amount of tax, taking the selling price of houses into account.
2. "The Army Of Surveyors"
Compare and contrast: if the government wants to find out how much you earn, it has to employ people to do a lot of snooping, they have to see your payslips, employment contract, bank statements etc. Even with the force of the law on their side, people can still cheat. Most don't, because they can't be doing with the hassle of an investigation, but they would if they could. And these calculations have to be done from scratch every month, every quarter and every year. Last year's turnover, wage bill, income or profits are only a very rough guide to this year's.
In contrast, how difficult is it to establish the site premium of any home? Very easy indeed. Once all homes are valued and banded, then it is an easy matter to observe how rents and selling prices develop and index homes in different areas up or down accordingly, every year is an incremental exercise only.
There is also absolutely no need for internal inspections, that goes against the whole point of the tax!
The site premium depends on where a plot is, what sort of planning permission it has and how big it is, plus or minus a few external factors (like being next to a mobile phone mast), that's all. And HM Land Registry, the Valuation Office Agency and local planning departments already hold 99% of this information.
The point is that if the average total rent for generic 3-bed semi-detached houses in Area Such-and-such is £10,000 a year and the total rent for the zero baseline generic 3-bed semi is £4,000 a year, then the site premium is £6,000. All generic 3-bed semi detached houses in Area Such-and-such then are allocated to Band K, the tax is £6,000 a year and no back chat. The tax is the same for a semi which is in tip-top condition with brand new kitchen and conservatory as it is for one with no central heating and an outside toilet.
3. "There will be endless appeals, the tax will cost more to collect that it raises."
In the real world, the UK has Business Rates, which is a lot like LVT but the valuations are more complicated because they take the bricks and mortar into account and Council Tax, which is/was a fairly crude Banding exercise.
The system proposed here is that all homes be put into Bands which are twenty per cent "wide" and all homes in each band are taxed at the same rate. A lot of people might appeal against the initial Banding if they can show that their home/plot has the same or a lower site premium than homes/plots in a lower band, in which case some homes/plots will be moved down a band (and others up a band).
Once homes/plots have been allocated to Bands, there is little need for homes to be shifted between Bands. The LVT due for all Bands in each area will be indexed up or down for changes in local average rents (so after a few years, the tax on a Band K home will be different in different areas).
As to the cost, even die-hard Home-Owner-Ist Eric Pickles admitted that a full Council Tax rebanding would cost a mere £10 per home. His other claims in the linked article are quite simply ouright lies:
He also says a revaluation would cost around £260 million, see ‘snoopers’ going into homes to revalue them, and take three years to implement fully
and we have the experience of the original Council Tax valuations/Banding and the more recent revaluations in Wales and Northern Ireland to prove it.
The work of the VOA encompasses:
* compiling and maintaining lists of rateable values of the 1.7 million non-domestic properties in England, and the 100,000 in Wales, to support the collection of around £25 billion in business rates; [that's an average Business Rates bill of £14,000]
* compiling and maintaining the lists of council tax bandings of some 23 million domestic properties in England and 1.3 million in Wales, to support the collection of around £26 billion in council tax;
According to page 66 of their Annual Report 2011-12, they have just under 3,000 employees keeping all those valuations up to date.
Under proper LVT, valuations for commercial land and buildings would be a lot simpler but valuations of residential would have to be a bit more sophisticated because there would be more bands (at least twenty or thirty), broadly speaking the workload wouldn't change much (it can all be computerised, everything can be indexed up from year to year, and so on).
The VOA's total running costs including salaries, IT and so on are about £200 million a year, i.e. 0.4% of tax collected; and only about two or three per cent of Business Rates and Council Tax go uncollected. That's not absolutely brilliant, but far, far better than for any other taxes (collection costs approx. 1% and evaded and unpaid taxes about 10%).
The Valuations Tribunal deals with appeals against Business Rates and Council Tax valuations. There were 180,000 appeals against Business Rates valuations in 2011-12 (that's one-in-ten valuations, but three-quarters were agreed within the year) and 2,040 appeals against Council Tax bandings (that's one-in-twelve thousand bandings), see page 7 of their Annual Report 2011-12. The Tribunal employs about 80 people.
4. "What about leaseholds and freeholds?"
The connoisseur then advances this argument, which means that they have ignored Rule One, that the tax is on the annual site premium or ground rent.
With blocks of flats, we often find that there is a freehold and several layers of leaseholds before we get to the real leasehold, the one that gives exclusive possession in exchange for the next ... years in exchange for payment of ground rent to the next leaseholder up, who pays ground rent to the leaseholder above him all the way up to the freeholder, who just collects.
The rental value and hence site premium of the leasehold flats (level 1) is easily established, and if they have to pay £100 ground rent each to their immediate superior leaseholder (level 2), then the level 1 LVT assessments are knocked down by £100.
The leaseholder at level 2 thus has [number of flats] x £100 ground rent = income and pays [random amount] to the leaseholder at level 3. If the level 2 leaseholder receives more than he gets, the net income is what is liable to tax (at up to 100%). If a leaseholder decides it's not worth the hassle of collecting it, merely to pay most or all of it over in LVT, then he is free to waive it, and the LVT assessments on the flats go up by £100 a year each.
5. "What about unregistered land?"
The notion that we can't have LVT because there is so much unregistered land is another myth.
a) It's not the land which is unregistered as such, it's the owner who hasn't bothered to register himself. Either way, this does not stop the land being assessed to tax just like any other land; the valuations and banding are quite independent of who owns it and whether he or somebody else occupies it - we manage to assess Council Tax and Business Rates on 'unregistered land' without too much of a hitch.
b) Even if it were true (which it isn't), this is an irrelevant consideration, or else they could have opposed the introduction of the national income tax two centuries ago on the basis that there was no official register of how much people earn. Working out who owns (earns) what is part and parcel of any system of taxation of rental values (or incomes).
c) It is quite true that back in 2005, HM Land Registry's Strategic Plan (which I can no longer track down online) said that half of land by area was as yet unregistered, but that they hoped to have full registration by 2012.
As it happens...
d) By 2012, HM Land Registry had completed registration of over eighty per cent of land, and if they keep going at this rate, they will have full registration in four or five years.
e) On an administrative level, this was pretty irrelevant, as the unregistered land was largely agricultural land, the total rental value of which is about £2 billion a year, as against the rental value of residential and commercial land which is over £230 billion a year (and which would be much higher than that if earned income, output and profits were not taxed).
f) All this residential and commercial land is already registered for Council Tax or Business Rates purposes, even if it is not registered at HM Land Registry. So we can run Council Tax and Business Rates perfectly well, even though the owners of some bits of land are not registered with HM Land Registry, so we can run LVT without every owner being registered. HM Land Registry also runs a separate registry for mortgages secured on unregistered land.
g) Even if valuable urban land is not even registered for Council Tax or Business Rates (how, exactly?), then it is still physically there and shows up as a blank on HM Land Registry's computerised maps. So what "unregistered" means is that HM Land Registry don't officially know who the owner is.
In which case, the LVT bill gets sent to the occupants (just like with Business Rates and Council Tax). If they are the owners, they pay it. If they are tenants, it's their choice whether to pay or not, or to tip off the council as to who their landlord is. If the tax doesn't get paid, despite demands being issued, i.e. if the plot is unoccupied, then under general English law, the land can be obtained under a court order and sold to cover the debts, and under English land law (different in Scotland, I believe), if the owner doesn't come forward for twelve years, the title lapses and he loses ownership anyway.
h) There is a rough and ready parallel register for agricultural land called the Rural Land Register:
All land must be registered on the RLR in order to be eligible for payments under the Single Payment Scheme (SPS), the Environmental Stewardship Scheme (ES) or the English Woodland Grant Scheme (EWGS)."
i) So to the extent that we wanted to go to the hassle of collecting a billion or two from agricultural land (as long as they pay the full tax on the areas used for buildings, that is quite enough, actually), we can base it on what the RLR says. The subsidies used to be based on how good the land was, so the payments for owning arable land was much higher than for marginal land used for forestry. It'll be very interesting to see how many landowners start trying to explain that their prime arable land of ten years ago is now so degraded that it can only be used for forestry or for grouse shooting, for which the rental value is £5 or £10 per acre per year.
6. "What about social housing?"
a) This requires no special rules whatsoever, as rents in social housing (local council or Housing Association), like all rents by definition, include a payment for the bricks and mortar value and a payment for the site premium. Any rents received in excess of the bricks and mortar cost is to all intents and purposes LVT. It seems to be bureaucratic madness for local councils/Housing Associations to collect two quite separate sums of money from tenants, the rent itself and the council tax (each with their own earmarked means-tested benefits) instead of the council/Housing Association just collecting a single, all-inclusive figure.
b) Whether there should be an obligation on local councils to provide affordable housing and how high the rents should be are separate topics.
c) One thing is clear though, it is another layer bureaucratic madness for social housing providers to demand average rents of £83 per week and for another part of the government, the Department for Work and Pensions to then pay up to two-thirds of the rent via Housing Benefit. Figures from the DCLG English Housing Survey 2011-12. It would make more sense just to set the headline rents at however much the tenants are willing and able to pay (which can be netted off with a tenant household's personal allowance/Citizen's Income entitlement). If that's only £30 a week per home in some areas and £250 a week in others, then so be it.
d) Remember that the LVT proposed here is a national tax, just like Business Rates. Councils would be allowed to keep a certain percentage of what they collect locally (approx. twenty per cent) and the rest would be pooled nationally. So there are two separate cash movements: from tenant to social housing provider, and from the social housing provider to the national pool. The simplest approach would be for social housing providers to have to pay 80% of the notional full amount of LVT relating to their housing into the national pool (i.e. the full amount less the 20% which can be retained locally) and to leave them to maximise receipts from tenants as far as possible. By and large, any excess of rents collected over and above the bricks and mortar cost will be the "site premium", which in lower-income areas or on less desirable estate will be very low or zero.
e) While the whole aim of the tax system proposed here is to move away from taxation of incomes; and the aim of the welfare reforms proposed here is to move away from income- or asset-based means testing, it has to be accepted that there are people with low or irregular incomes for whom social housing is the only realistic option. In such cases, it would make sense to set rents at a certain percentage of earned income, so that people automatically pay more when they are earning and less when they are not.
f) In most cases, an additional "income tax" on social tenants of up to about 25% of earned income (collected via PAYE) would mean that the total rents actually collected from social housing (headline rents minus Housing Benefit) are about the same as they are now (but with a lot less adminstrative faff). This might lead to a greater demand for social housing and longer waiting lists in some areas, in which case social housing provider has to make the same decision as any other supplier: either increase the supply or increase the rents (or the percentage of earned income to be paid in rent).
7. "Not all flats in a block are worth the same"
This is quite true.
a) But to the outside world, it makes no difference who of the various people going through the same front door lives on the top floor and who lives in the basement. While some are getting slightly more benefits than others from the building itself, by and large, they are all getting the same benefits from the location, i.e. they all have the same work or leisure opportunities, they all have the same access to transport links and so on.
b) If a block consists of 1, 2 and 3-bedrooom flats, then the LVT could be apportioned according to the relative interior area of each flat.
c) Ultimately, it is up to the owners of the various flats to sort out between themselves. One possibility would be a self-assessment/auction process: each owner writes down how much rent he would be prepared to pay to occupy each flat (sight unseen). If the highest offer for your flat is more than you are willing to pay, then you and he swap places and the LVT to be paid is adjusted up and down accordingly.
8. "What about protected tenancies?"
a) For an explanation of what protected tenancies are, see Shelter. Basically, tenants who moved in before 1989 and had the right sort of rental agreement are still paying whatever rent they were originally paying, which in today's money is to all intents and purposes nothing. So the selling price of a home with a sitting protected tenant is usually only about half of a vacant home (all depending on how old the tenant is and what the chances are of another household member having the right of succession). And such home are usually in a miserable state of repair.
b) Rough justice says that the LVT has to be paid by the tenant, as he is getting the benefit of the location (and the landlord certainly isn't), but then again most such tenants are relatively old, so we are back into the Poor Widow Bogey. It appears that there are only 100,000 of these tenancies left, so it's hardly a big issue is it?