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Rating (Empty Properties) Act 2007

Volume 478: debated on Tuesday 8 July 2008

I wish to draw the Government’s attention to the no doubt unintended consequences of the Rating (Empty Properties) Act 2007, which came into force in April this year, and put a number of companies in Sunderland out of business. There is no reason to suppose that its impact will be confined to Sunderland, and indeed, if the British Chambers of Commerce is to be believed, the impact on jobs and business is likely to be widespread. The fact that the economy now appears to be in downturn will only make matters worse.

The measure was drawn up by two extremely clever people—Kate Barker and Sir Michael Lyons—at the Treasury’s behest. No disrespect to the Minister, but it is a pity that no Treasury Minister is here to account for the consequences—so often the Treasury is omnipresent, and yet absent. The aim was laudable: to give businesses an incentive to maximise the use of their premises and perhaps to lower rents by forcing on to the market properties otherwise being kept idle. That presumed that there would be takers for properties thus forced on to the market, but Sir Michael, Miss Barker and their masters at the Treasury appear to have overlooked the possibility that in areas such as the one that I represent, where a huge swathe of traditional industry has disappeared, there is little or no market for some of the vast industrial premises currently lying idle.

Those responsible cannot say that they were not warned. In response to the Government’s consultation last autumn, One NorthEast, the regional development agency, described the reforms as a “very blunt instrument” that would

“adversely affect what is a fragile regional property market”.

Also in response to the consultation, the North East chamber of commerce disagreed with the premise that commercial properties deliberately left unoccupied represented a significant barrier to growth in the north-east. It spoke of the “serious impact” that the reforms were likely to have if applied across the board. Nevertheless, the Government chose, with minor adjustments, to go ahead, and the consequences are plain for all to see.

Pallion Engineering is a company based in the old Pallion shipyard in Sunderland, and faced an overnight increase in business rate from £55,000 to £277,000. It employs 10 people and rents space to a number of other companies that, between them, employ up to 200 people on a vast site that once employed several thousand. Obviously, an increase in rate demand of the type that I just described will put the company out of business, at a time when it had hopes of attracting subcontracts for the recently commissioned warships. The only impact will be the loss of up to 200 jobs and revenue of up to £55,000 a year, and the odds are that the site will be derelict for many years. Is that what the Government intended?

WH Forster, a print company, offers another example from Sunderland. It employs about 100 people at sites in Sunderland and Gateshead and is faced with an increase in rates from less than £10,000 to £105,000 on premises that it owns in Washington, which it is unable to sell, and which is only about one-third tenanted. It is also trying to sell its existing premises with a view to consolidating on to one site. It has been on the market for three years, but so far there have been no takers. The only impact of this penal increase in rates will be to threaten the survival of a business that has been built up over 50 years.

My attention has also been drawn to SST Engineering, which is a small fabrication business set up only last year that employs just seven people, but with the strong prospect of expansion. It is exactly the sort of business that we should be seeking to encourage. Currently, it uses only one of the three bays on the premises that it rents on the Sunderland enterprise park. When it was set up, it was given to understand that it faced a business rate bill of about £16,000 a year, but now it has been told that it is likely to be about three times that amount. The impact will be ruinous.

I first drew this situation to Ministers’ attention in mid-April. Not unnaturally, I wrote to the Treasury, but the response came from the Minister here, who advised that local authorities had discretion to delay the imposition of the new rates for up to six months, to spread the cost over 12 months, instead of 10, and to offer 100 per cent. relief in cases of particular hardship. I went back to my local authority, which said that that was not so, and that the most that it was permitted to offer under the constraints of European law was 10 per cent. relief, which in the cases of the companies to which I just referred would make no practical difference.

I wrote again to the Minister, on 16 May, and in the hope of generating an air of urgency I copied the letter to the Prime Minister’s parliamentary private secretary and to the Minister for the North East, my right hon. Friend the Member for Newcastle upon Tyne, East and Wallsend (Mr. Brown). One month later, I received a reply from the Minister for Local Government, my hon. Friend the Member for Wentworth (John Healey). It was apparent from his reply that the Government are in denial. The threefold increase faced by the small engineering company, to which I referred earlier, was described as a

“private contractual matter between landlord and tenant”.

There was a paragraph of nonsense about how unhappy businesses have a right to appeal and a reference to section 49 of Local Government Act 1988, which permits relief in exceptional circumstances and which, I am advised by my local authority, is of no relevance in the cases that I have mentioned. Finally, it was suggested that the bill could be spread over 12 months, instead of 10, to

“relieve any cash flow difficulties”.

At that point, it became apparent that I would have to raise the matter publicly if we were to stand any chance of breaking through the wall of complacency that I have so far encountered.

I have since discussed the matter with the Secretary of State for Communities and Local Government, my right hon. Friend the Member for Salford (Hazel Blears), who showed every sign of grasping the seriousness of this situation. Incidentally, I would be surprised if the consequences that I have outlined are confined to Sunderland and the north-east. Only this morning, my attention was drawn to the case of a warehouse business in north London facing insolvency as a result of this legislation. According to the British Property Federation, it will also have an adverse impact on regeneration schemes, because no one will build speculatively if they face the added risk of being taxed on an empty building.

The way forward is clear: one way or another, local authorities must be given the discretion to apply common sense and relieve rates on unused and underused property. If disaster is to be averted, that will need to be done quickly, because the bills have already been sent out and the court orders for non-payment are already being applied for. I understand that the Government had the foresight to give themselves a reserve power to permit local authorities to relieve 50 per cent. of the new charge in the event of an economic downturn, which undoubtedly would help were it to be called upon. However, in some of the cases that I have mentioned, it will not be sufficient. The Government will want to consider giving local authorities the discretion to remit the whole charge if there is a strong case for doing so. That is what I hope the Minister will say today. What I am hoping to hear from him is that the Government have finally grasped the nettle and will take action before people start turning up in our surgeries, accusing us of putting them out of work.

Mr. Pope, it is a pleasure to serve under your chairmanship—for the first time, I believe.

I congratulate my hon. Friend the Member for Sunderland, South (Mr. Mullin) on securing the debate and on the way in which he has put across his points. He has always been a persuasive friend, and I have probably followed him into the Lobby many times because of the conversations that we have had. He has probably got me into trouble once or twice as well.

I take on board my hon. Friend’s concerns about the two local engineering companies and the printer company that he mentioned. I apologise for not being a Treasury Minister, but, as he says, I am a Minister at the Department of Communities and Local Government. I am delighted that he has already had some informal conversations with our right hon. Friend the Secretary of State. If he wants to have detailed discussions, I am happy to set up a meeting between my hon. Friend and Ministers in my Department to help to foster the dialogue.

I will outline how we arrived at our current position and the reasons why the Government have taken the decisions they have. Ultimately, those decisions are aimed at stimulating the market and ensuring that every property is utilised. Non-utilisation of buildings costs the taxpayer approximately £1 billion a year. I understand why my hon. Friend has raised the issue, and I am very sympathetic to his concerns.

As my hon. Friend said, the reforms followed on from recommendations of the independent Barker review into land use planning and the Lyons inquiry into local government. The changes to the empty property rates relief came into force from 1 April this year following Royal Assent to the Rating (Empty Properties) Act 2007, which was scrutinised in great detail during the legislation’s progress through the House.

The main element of the reforms to empty property rates was to raise the business rates liability of owners of empty properties to 100 per cent. of the full occupied rent. The reforms provided a new zero rate for charities and community amateur sports clubs in respect of any property that they own. They also exempt companies in administration from rates on their empty properties in line with our policy to assist such companies. The reforms were part of a package of measures. However, I understand and sympathise with the fact that they have not helped the engineering firms or the printer company that my hon. Friend talked about. The Government considered that it was right for landlords to receive rate relief for limited periods while they manage their vacancies. The reforms kept the three-month exemption period for non-industrial properties, but replaced the previous total exemption in perpetuity for industrial properties with a six-month exemption period.

Let me explain the rationale for the reforms. Our cities and towns occupy very high-ranking positions in the table of the world’s most expensive markets for rents. The 2007 King Sturge survey of global rents found that English towns and cities—namely London, Birmingham, Bristol, Manchester and Leeds—occupy five out of the top 10 positions for the world’s most expensive total occupancy costs for prime industrial space. Those same towns occupy five out of the top 20 positions for the world’s most expensive total occupancy costs for prime office space.

Those points were considered during the course of the reviews that my hon. Friend mentioned. High rents might be a sign of companies recognising the attractiveness of locating in the UK and, to some extent, be a marker of how successful we have been. However, while our cities and towns occupy high-ranking positions in the table of the world’s most expensive markets for occupation costs, owners of empty properties received a subsidy of £1.3 billion, paid for by other taxpayers. The reforms to empty property rates should reduce the costs of relief to the public purse by £950 million in 2008-09 and £900 million in 2009-10.

Obviously, the reforms will benefit the public purse only if the companies concerned are capable of paying the large increases. In the case of Pallion Engineering, there has been a fivefold increase in rates. If the effect is to put the company out of business, that will reduce the revenue available to the public purse.

I am grateful to my hon. Friend for raising his concerns about his constituents and his local companies. As I explained earlier, we have had to strike a difficult balance. We have a big problem with empty properties, but we must do something to stimulate the market, partly to bring down rents and to ensure that the spaces are utilised by would-be entrants to the local marketplace and other companies. I hear what my hon. Friend is saying about his own local businesses. I am keen for him to have the opportunity to sit down with Ministers in the Department to discuss how his local companies have been affected.

The overall purpose of the reforms is to increase the costs of holding empty property, thereby providing a stronger supply-side incentive for owners to re-let, redevelop or sell empty properties. That incentive should increase access to existing premises for business, reducing the need for new development on greenfield sites, increasing the supply of commercial properties available to new and existing businesses, and helping to reduce business rents across the board.

The Minister has outlined a theory. Further south, that theory may be justified. Perhaps there is a market for the surplus property that will be forced on to the market. In large parts of the country, however, especially in the area that I represent, there is no market for that property. Some of it has been on the market for years. Earlier, I mentioned the site owned by the printing works. The company has been trying to sell it for three years, but has had no takers. At that point, the theory breaks down, does it not?

I am always keen to ensure that theory and practice come together and are resolved effectively. The reforms are relatively new, so we will need to look at the patterns and see whether the changes have made a difference. I am confident that they have. My hon. Friend asks whether there will be regional variations—an interesting point that must be considered. It is important to sit down and assess whether the changes are making the difference that Barker suggested they would make.

The Government have estimated that the reforms could result in an overall reduction in business rent across the commercial property sector of between £80 million and £165 million. Such a reduction should directly benefit many local companies up and down the land, which is important when the world economy is facing an increasingly challenging environment. The UK is well placed to meet these challenges, thanks to the resilience and stability engendered by the Government’s macro-economic framework and a decade of reform that has promoted open and flexible markets for labour, products and capital.

To help business further, from 1 April we have seen the implementation of the major package of business tax reforms announced in the 2007 Budget, including the reduction in the main rate of corporation tax to 28 per cent., which will deliver the lowest ever rate in the UK and the lowest in the G7, improving competitiveness and encouraging investment. All these measures need to be seen as a package.

To assist deprived areas, the business premises renovation allowance, which was introduced on 11 April 2007, almost a year before the reforms to empty property relief took effect, gives 100 per cent. capital allowance for the renovation of empty commercial property in deprived areas, as defined by the UK assisted areas map. Hopefully, that measure will also make a difference to many local companies.

The package of measures should help to tackle low demand for property, as it is designed to increase competition in the economy more generally and to maintain the UK’s attractiveness as an investment location, thereby helping to attract foreign direct investment and to stimulate innovation and growth.

It is fully understood that the circumstances of property owners and the reasons why properties lie empty vary from case to case, and that many owners are genuinely trying to let their property, as my hon. Friend has made clear during this debate. However, too many commercial properties lie empty indefinitely, in many cases blighting communities and wasting the potential of brownfield assets. As a consequence, other areas are then developed.

The Government no longer believe that we should continue to offer tax reliefs for buildings to lie empty, so the reforms were applied to all non-exempted properties in England, on the basis that it is in the interest of all communities that land and property are utilised efficiently. Indeed, we find empty properties in all communities in England. For example, in 2004-05 empty properties were found not only in areas of low demand, such as Wolverhampton or Sandwell, but within fast-growing and strong regional economies, such as Ealing, Manchester and Birmingham.

Furthermore, in removing the total exemption for industrial properties, the reforms improve the fairness of the system between different sectors of the property market, by ensuring that the incentive to re-let or redevelop a property is applied to all empty properties, whether they are in the industrial, office or retail sectors.

I can see that my hon. Friend is approaching the end of his remarks, but there is one point that I would like him to address. The problem with all this reform is not that there is not some theoretical reason why it is worthy, but that it does not allow for any flexibility or for the application of common sense. The one thing that might help, as I have mentioned before, is that there is apparently a reserve power to allow 50 per cent. relief in the event of an economic downturn. Is there such a power and, if there is, will the Government contemplate using it? I must say that the situation is very urgent. We are really running out of time; some of the businesses that I have mentioned will be bankrupt by the end of the autumn if this situation continues.

There is no such reserve power that I am aware of, although my hon. Friend did mention local authorities and relief, so I will try to explain a little more about what local authorities can and cannot do. Having said that, the detail of what they can and cannot do is a complex area to get into during an Adjournment debate. I am sure that he will take up the opportunity to meet Ministers to discuss the matter further.

Local authorities have no discretion to exempt or vary the rates liability of empty property ratepayers. Although there are reliefs for small businesses and other occupants, such as charities, they apply only where there is a business in actual occupation of a property. Local authorities have discretion to award hardship relief, but there are provisos within that, too. Those provisos are where it gets a little more technical and complicated, so my hon. Friend would probably benefit from having a more detailed conversation with Ministers about them after this debate.

We believe that overall the reforms represent a good balance between providing incentives to owners to re-let or to redevelop property—I think that my hon. Friend is in favour of that himself, although how we do it is perhaps where the disagreement arises—and for providing rate relief for limited periods while they manage vacancies.

In summing up this debate, I say to my hon. Friend that Kate Barker and Sir Michael Lyons saw that empty property rates should be reformed, and the Government agreed. It cannot be common sense to continue to pay owners to leave their properties empty, to be subsidised by taxes paid by others, when UK rents are among the highest in the world and a hindrance to UK competitiveness. It also cannot be beneficial to seek more land on which to build commercial property when existing land could be put to that use or to alternative uses.

At the same time, however, my hon. Friend makes a very good point, which he describes as theory and practice needing to come together to work. I am very keen, and I know that my Department will also be very keen, to learn from his experience, to help to ensure that theory and practice come together and work effectively.