The opponents of business rates on fibre must feel like Sisyphus – the mythological Greek figure compelled to roll a huge boulder up a hill, only to watch it roll back down, and condemned to repeat this exercise throughout eternity.
I understand that business rates became an issue for the telecoms industry after the 2000 Revaluation, when the Valuation Office Agency (VOA) decided to change the basis of assessment, by rating each lit strand of fibre. Suddenly, lighting an additional fibre incurred significant additional cost; the previous basis of assessment had been the “constructors test”, which was independent of the number of fibres in use.
Network operators flagged up the problem as early as 2001, and in its second Annual Report in 2002 the Broadband Stakeholder Group (BSG) recommended that “Government should review the current regime for property taxes in respect of their application to cable/duct infrastructure”. Perhaps surprisingly, the Government actually agreed to do just that.
The Department of Trade and Industry (DTI) commissioned an expert to examine the effect of business rates on the communications industry, and to consider whether it was having a detrimental effect on the roll out of broadband. BSG also set up a Working Group on Property Rates to consider all the information and decide how best to proceed.
The resulting report written by Colin Sharp of GVA Grimley was completed in June 2004. He concluded that “Liability to business rates is having a material affect [sic] on the providers of communications apparatus by distorting investment decisions and distorting the competitive playing field.”
Sharp also noted that business rates were influencing technology choices, pushing new entrants to use BT infrastructure, and said “rating fibre is a peculiarly British phenomenon” that could put the UK at a disadvantage compared to our European neighbours.
Fast forward to 2010 and the industry is firmly back to square one. I’m not sure what happened in the meantime, but Malcolm Taylor, former Chair of BSG and head of the Working Group on Property Rates, has moved on to pastures new, and ministers and civil servants appear to have only a vague recollection of past work.
If anything the situation is worse rather than better. The new Guidelines on assessment of next-generation acccess NGA) networks issued last month add further layers of complexity to a system that is already weighed down by anomalies and unintended consequences. Adrian Wooster writes eloquently about some of them in his blog, including the fact that the new regime effectively triples the tax on Greenfield operators, appears to discriminate against community projects, and does not give clarity on how to assess connections to business customers, which could skew technology choices.
In November last year the boulder almost reached the top of the hill again, when a Commons Select Committee revisited the topic of business rates as part of a wider review of broadband, and drew the following conclusion:
113. [...] We conclude that the current arrangements hinder the delivery of investment in NGA, which is being championed by Government. We recommend that the Government review the application of business rates to fibre optic networks as a matter of urgency, and develop a uniform system for all providers.
114. We acknowledge that the Government has offered a measure of support to the industry, through the increase of capital allowances. However, we believe that using business rates is a better way of using the tax system to encourage investment in the NGA infrastructure. Indeed, we believe that the importance of NGA warrants consideration of either a reduction, or even a temporary removal, of business rates on fibre optic cable to encourage NGA roll-out. This would be a more effective use of limited public sector funds than either the recent changes to capital allowances or direct intervention.
It was around this time that the Conservative Party promised a review of fibre tax if it was able to form the next Government, but once in office that promise was revoked. Back down the hill.
In a nutshell, Government understands that the property ratings regime is working against its policy objectives on broadband, but it appears to be locked into an internal battle with the HMRC, which cannot afford to lose the income. This is a crazy situation to be in, especially as it may be possible to find alternatives that would still earn revenues for the Treasury.
GVA Grimley’s 2004 report suggested two possible ways forward. The first was to seek a negotiated scheme of valuation with VOA, which would be applied diligently and evenly across the whole industry – although the report does not say what this method might be. The second was to de-rate fibre and use ducts as the unit of assessment, although this particular solution sounds complicated and time-consuming to enforce.
Separately, Vtesse Networks has put forward a proposal to de-rate fibre, but bring telephone exchanges and operator buildings back into the local ratings jurisdiction so that the overall effect was more revenue neutral to HMRC. Vtesse’s proposal appears to be elegant and simple, but has one potentially serious flaw – professionals in the arcane art of valuing telecoms networks would have nothing left to do.
