Reform ‘distorted’ council tax, says European Commission

3 Jun 14

The European Commission has urged the government to reform council tax to remove ‘distortions’ caused by basing the system on property values that are more than two decades old.

In its annual assessment of the UK’s economic reform plans, the commission also said ministers should be prepared to cut back the controversial £130bn Help to Buy programme in response to rapid increases in property prices, particularly in London.

The commission said reforms to the system of land and property taxation in the UK, particularly council tax, were needed to address issues in the housing market.

‘At the moment, increasing property values are not translated into higher property taxes as the property value roll has not been updated since 1991 and taxes on higher value property are lower than on lower value property in relative terms due to the regressivity of the current rates and bands within the council tax system,’ its report stated.

Regular revaluations of the council tax system could help stem rapid increases in property prices, and bands and rates for the local tax should be altered to make the system more equitable.

The European Commission’s report comes after the director of the Institute for Fiscal Studies Paul Johnson said last month that the failure to carry out property revaluation for the purposes of levying council tax was ‘increasingly absurd'.

As well as urging the government to prepare to reduce the element of the Help to Buy scheme that provides Treasury guarantees for mortgages if buyers have small deposits, the commission said the Bank of England should ‘increase the transparency of the use and impact of the macro-prudential regulation’.

It must be clear that the Financial Policy Committee is ready to act to address excessive house price rises and increases in mortgage indebtedness. However, the commission also said the government must also take steps to address the shortage in housing supply.

‘A shortage of supply has long been a structural phenomenon and is likely to extend into the medium term,’ the report stated.

‘Although the supply of new properties has risen, it remains low and has fallen short of demand by a considerable margin.’

Responding to the commission, local government minister Brandon Lewis said: ‘A council tax revaluation is unnecessary, expensive, and would push up taxes on people’s homes.

'This government is funding a five-year council tax freeze that has already delivered a 11% real-terms reduction in bills for hard-working families. This is in stark contrast to the last administration, when council tax bills doubled.’

 

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