Business rate valuation: the Netherlands’ approach

Going Dutch

14 November 2017

John Webber considers the lessons England could learn from the Netherlands’ approach to business rate valuation

Business rates in England are at a crossroads. For several weeks this year they have been headline news, something that only happens if there are serious questions about the way that the system works. So how did we get here? What can we do to improve the system? And are there lessons that England can learn from other countries?

The government’s response to recent consultation on business rates will decide not only the frequency of revaluations over the coming years but how they are carried out. In its discussion paper Business rates: delivering more frequent revaluations, it sets out 3 options for these:

  • more frequent revaluations under the existing system
  • formula-based revaluation
  • self-assessment.

The second 2 are certainly radical considering what we have at the moment, and there is every indication at the time of writing that the government is looking closely at a self-assessment route. An announcement is expected before the end of the year.

Principles of property tax

Before discussing some of the possible consequences of this decision, it is important to go back to the principal attributes that a successful system of local property taxation should possess:

  • it should be related to the ability to pay
  • it should be easily understood
  • it should be administratively efficient
  • it should be difficult to evade and avoid
  • it should be impartial
  • it should benefit those who pay.

There are a number of additional questions that should be asked as well.

  • What role does property tax play as part of the revenue equation?
  • Does the property tax purely support ring-fenced services, and will a number of services be paid for directly by the users?
  • What initial level of property taxation is reasonable in both economic and political terms?
  • What long-term level of property taxation is reasonable, economically and politically speaking?
  • What property should be exempt from tax for political or economic reasons?

One of the leading academics on real-estate taxation is Dr Peadar Davies, Senior Lecturer at the University of Ulster’s School of the Built Environment. His view is that any property tax system should start with the following:

  • a complete and accurate real-estate cadastre that identifies all land and its owners
  • individual property assessments based on market value
  • a thorough analysis of taxation policy options based on aggregate information that represents the value of all property assets
  • an efficient and unified system for both tax billing collection and enforcement.

In many developing countries, one of the major obstacles to setting up a property-based taxation system is the cost of identifying and valuing property where there may be insufficient evidence from valuers or transactions; this will in turn have a negative effect on how fair the system is perceived to be. However, this is certainly not an obstacle that should prevent England operating a successful and transparent system, given the amount of data held by the government’s various agencies.

What should guide all governments in arriving at a fair business rate system are the 4 maxims of taxation set out by Adam Smith in The Wealth of Nations, which are:

  1. equality
  2. certainty
  3. convenience
  4. economy.

Any decision made on the routes of the business rates system should respect these principles.

Revaluation in the Netherlands

The Netherlands has a more collaborative and transparent system, in which ratepayers and taxpayers are seen as part of the process of gathering and supplying information. They have carried out a study that suggests that the accuracy of the valuations are far greater as a result.

One of the other criticisms of the system in England is that ratepayers do not understand the connection between rateable value, the uniform business rate, their own bill and the level of service they receive, whereas this is set out clearly for all users of the Dutch model.

The annual revaluation of 8.5m domestic and non-domestic properties in the Netherlands has had the following positive effects, for instance:

  • discrepancies and appraisals are identified and corrected at an early stage
  • taxpayers have greater trust in the appraisal process when they see their valuation is in line with those of other properties.

The Netherlands is very keen to ensure the values it provides can be trusted. In the UK, however, some may say the attitude to ratepayers questioning their valuations is becoming more antagonistic, while the Valuation Office Agency (VOA) is defending its figures at all costs. It appears that the opposite view is taken in the Netherlands. The research provided an insight into what influences taxpayers’ trust in the system: the main thing is that the real-estate data on which the valuation is based has to be correct and if not – or if the taxpayer perceives that it is not – the valuation will not be trusted.

Researchers believe that trust in the assessments can be cultivated by emphasising the accuracy of data used by the municipalities. Empowering the taxpayer to register and update the data, and explaining how the municipalities handle and process this information to arrive at an accurate assessed value, keeps ratepayers happier.

There has also been a significant change in the relationship between the Dutch government and taxpayers, something that is needed in England. The Dutch government’s emphasis is shifting towards public services, customer-friendliness, shorter response times and online communication. It is becoming the norm for taxpayers to have access to data the government has collected about them. In terms of the annual appraisal, this means that any interested party has the opportunity to access the data behind the appraisals online, monitor it and, where necessary, contribute changes. An additional advantage is that taxpayers will start to feel responsible for the accuracy of this data and will therefore be more likely to trust the appraisal.

Oppositional system

The Dutch approach seems to be in stark contrast to the UK, where the Department for Communities and Local Government (DCLG) and the VOA seem to fight tooth and nail to hang on to the information they hold, using data protection as an excuse to prevent ratepayers and their agents from accessing more.

My opinion is that the UK government cannot continue with a system that is being brought into disrepute on a daily basis. Unfortunately, the forthcoming response to the consultation will take place alongside the introduction of the Check Challenge Appeal system (CCA), which represents a backwards step in the way that rating appeals are handled (see the previous isurv feature: Business rates 2017 revaluation: Check, challenge, appeal system).

The CCA system is now shaped by the HMRC’s way of operating, of which lack of transparency is a major characteristic. Added to this, the IT system for CCA was not properly tested before it went live on 1 April, which has meant the system is currently unworkable. With the first revaluation in 7 years resulting in some of the largest increases in a generation, this can only lead to a decline in trust in the system.

In summary, England could benefit from:

  • an annual revaluation process
  • publication of all assessments with a summary of how the valuation was calculated, including key rental evidence
  • a website that runs on leading software used by agents, thus enabling a free flow of information in both directions
  • increased investment in the VOA to allow it to explore greater use of mass appraisal systems – which, given the amount of data held by the agency and HMRC alike should not be too difficult
  • ease pressure on the VOA from its paymasters at HMRC and the Billing Authority.

Essentially, if Adam Smith’s maxims of taxation were followed and transparency was a priority in every decision made by the VOA, HMRC and DCLG, then trust in the system could be restored. Unfortunately, we seem to be in a position where that trust has broken down and, unless something is done soon, it will be very difficult ever to rebuild it.

John Webber is Head of Rating at Colliers

Further information