Is It Time For Council Tax Reform?


by Caroline Lee, CIPFA Local Government Revenues Advisor

In local taxation terms, business rates is very much a hot topic for local authorities; the review of the administration of business rates concluded at budget 2016 and preparations are well underway for the introduction of the 100% retention of business rates in 2020. It is clear that central government, through its reform of the local government finance system, is paving the way for a more fiscally independent local government. As business rates and council tax are the core mechanisms through which local authorities can now raise money to finance core services, maybe it is also time for a reform of the Council Tax system.

Higher Bands

Council Tax was introduced by the Local Government Finance Act 1992. Council Tax, which has been in operation since 1993, is based on property values determined in 1991. The highest Council Tax band, Band H, covers all properties exceeding £320,000 as at 1991 - even those worth millions of pounds. It’s a regressive tax with those taxpayers in the lower bands paying a higher proportion of their property’s value in Council Tax than those in the higher bands. There have been many calls for the revaluation of Council Tax over the years but political concerns about how a revaluation would play out with the electorate have deterred politicians from going ahead. Council Tax revaluation was ‘postponed’ in England in 2005 and has not really re- surfaced since. The 2005 Revaluation went ahead as planned in Wales and this led to the introduction of a new Band I for the highest value properties.

Fenced for Schools

In Scotland, The Commission for Local Tax Reform was set up to look at alternatives to Council Tax, specifically looking at reforming the council tax, introducing a land value tax or a local income tax. Their final report in December 2015 concluded that the current Council Tax System must end. Following this report, the Scottish government have stopped short of implementing massive change to the local taxation system but do plan to increase the amounts charged by those in Council Tax Bands E- H from April 2017. Those on low incomes will be exempt from these increases and the estimated £100 million the changes will generate will be ring fenced for schools.

It is interesting that any recent plans to reform the Council Tax system involve a ring fencing of the revenue raised for specific areas and that these areas are not always local government services. The ill- fated 2015 general election manifesto pledge to introduce a Mansion Tax for high value properties specified that any additional revenue would fund specific central government priorities; in Labour’s case  investment in the NHS or the Liberal Democrat plans to reduce the deficit. Local government would be wise to argue that should future Council Tax reform occur, the additional money must go to local government particularly when local government finance through business rates is in the process of moving away from centralised control.

Reforming Council Tax would be risky. Local tax bills can be unpopular with the electorate, every household receives a council tax bill and it is a very visible form of taxation. A change to the system, which inevitably would create winners and losers, can lose votes.Despite concerns about political impacts, politicians know that the taxing of property is a solid way of raising extra revenue, collection rates are high and property is fixed rendering the tax hard to avoid. 

A ComRes /British Property Foundation survey of 150 MPs published in January 2015, found that 75% agreed that Council Tax should be re-valued. At a time when local government finances have never been more stretched, a reform of the Council Tax system could potentially bring in more revenue to support local services and result in a more progressive and fairer system.  It remains to be seen though, given the political risks involved and the spectre of community charge for the Conservatives, whether radical Council Tax reform will happen in England any time soon.