No one can dispute that the past year has been tough for businesses large and small nationwide. Their future will remain uncertain, as the climate in which they operate continues to be unpredictable, and any signs of sustainable economic recovery are likely to be tentative. One might therefore have hoped that any further tax burden on our nation’s commercial enterprises would be avoided at all costs, but the business rates burden for many companies, especially some of the small, diverse retailers in central London, is deeply disturbing. Business rates in the city of Westminster have already risen by 5 per cent. following an inflation-linked increase that kicked in this April. Although the Government have made the concession of allowing that increase to be spread, I fear that many of the businesses with the most vulnerable profit margins will struggle. Much worse is to come, however. In the financial year beginning 5 April 2010, the average business rates bill in Westminster is expected to soar by 38 per cent. The increase is designed to raise an extra £456 million for the Treasury, provided that those enterprises all stay solvent, as a result of the five-yearly revaluation of commercial properties. In addition, larger businesses face the prospect of paying a supplementary business rate to pay for Crossrail, so many Westminster firms will have to absorb a triple whammy of taxation.
The revaluation exercise has been spread across the nation and is designed to be fiscally neutral, creating a system of winners and losers. London’s businesses have traditionally subsidised other regions—the net outflow of tax from the capital in 2007-08 was estimated at somewhere between £14 billion and £19 billion—but companies in my constituency are being plundered to such a degree that their success is being taken for granted. Central London’s businesses are not a cash cow, and as the Member who represents both the City of London and the city of Westminster, I cannot ignore the huge burden that is about to be placed on local businesses, largely as a perverse penalty for the district’s long-term success. With trading conditions so tough, such taxation could scupper the city’s fragile economy. Given that London is the ongoing engine of the nation’s economy, this is not simply a parochial issue, but one of national importance.
The impending burden on businesses in my constituency was brought into sharp focus when I was informed earlier this year about the dire situation for the booksellers of Cecil court. It would be difficult to represent my constituency and to love it the way that I do without being sentimental. Amidst the brash modernity of a global financial city, with its fast-moving cosmopolitanism, lies a timeless history, seeping from every last court and alleyway. Antiquarian booksellers and map shops pepper some of the busiest tourist streets at the heart of Westminster—nowhere more so than in Cecil court, which is literally a stone’s throw from Leicester square and the world-renowned Charing Cross road.
My first encounter with Cecil court came a decade and more before I entered Parliament. As a fresh-faced graduate, I would frequently meet friends in Leicester square, but I usually contrived to arrive a few minutes early in order to pop in to Cecil court or wander down Charing Cross road. Its most famous address, No. 84, which was immortalised by the touching, eponymous Helene Hanff book, has long since ceased to be a book shop, but the plaque to Marks & Co. and the delightful Frank Doel stands there proudly to this day. Anyone who loves books will adore reading about the sentimental journey of British and US life together in the 1950s and 1960s that it so beautifully describes.
Among others, the famous actor, Simon Cowell—I am sorry, I mean Simon Callow; I am getting my X Factors mixed up—shares my fondness for that corner of London. Back in April, he highlighted in his Guardian column the plights of Cecil court tenants who are struggling with business rates. I thank that newspaper for doing such sterling work in highlighting this issue, which is particularly important because we will host the Olympics in 2012, and culture is an integral part of the Olympics. I very much hope that our Dickensian side streets, courts and alleyways will be an important part of our cultural offering to the world at large. Mr. Callow implored readers to write to Cecil court’s local MP to give their support, and I soon found myself inundated with letters from across the country, each with a charming and individual tale to tell about the warm memories that that tiny corner of London evokes. I also received correspondence from other small businesses in my constituency, which informed me of their difficulties in absorbing the impact of new business rate levies on their tiny profits.
As the Minister knows, business rates are collected by local councils but are set by central Government using a complex formula that adjusts the rateable value of a property, which is established independently by the Valuation Office Agency, by a multiplier. For those who are unfamiliar with taxation speak, the rateable value is the official estimate of the value of a property. The multiplier is set by the Government and usually changes each year in line with inflation. Although the main changes in business rates occur around the five-yearly revaluation of a property, the review of the multiplier can inrease business rates significantly for individual businesses. Such was the case for many Cecil court tenants.
Given that the 2009-10 multiplier is based on the retail prices index figure for September 2008, when inflation was 5 per cent.—that was before the recession had begun to bite and before the RPI tumbled to zero—those traders had anticipated a financial shock when April came. They had received transitional business rate relief in the past four years, but that was due to cease as well. I appreciate that there can be perverse results whenever a formula is used, and, clearly, the fast-changing economic situation has played its part in this situation. Thankfully, the Government have taken on board some of our concerns, and there will be only a 2 per cent. increase this year; the remaining 3 per cent. of that inflation element will be spread between 2010 and 2012.
Businesses of the size of those in Cecil court are fragile. Several shops in the court have gone out of business this year and countless niche stores are disappearing from other areas of London. The worry is that such shops will be taken over by Tesco Express or Starbucks. I like both those brands, but we need to protect the integrity of areas such as Cecil court. As the excellent Tim Bryars, secretary of the Cecil Court Association, has said:
“For some years transitional rate relief softened, masked even, what the full impact of the policy of exaggerated business rates would be. We grumbled at small rises, from 5-15 per cent., but absorbed them. Then, with no limit this year, my bill rocketed. In 2008-09 I paid a total of £4,325.72; this year I’m paying £7,696. My rateable value, based loosely on rent, is £16,000 and the multiplier is 0.481—in other words nearly half of my rent again.”
Now that the threat of an up-front 5 per cent. increase for the current financial year has been staved off, a larger threat looms on the horizon—further change to business rates as a result of the five-yearly revaluation. As the excellent magazine, Retail Week, has reported:
“If 2009’s bills are likely to be greeted with a grimace, 2010’s are set to be a horror show”.
Since the system was set up, revaluations have been based on the increase in property values between the April of two years before and the April of five years before that. In other words, the revaluation for 2010 is based on the difference between property values in April 2008 and April 2003—a somewhat notional, random five-year period in which rental values rocketed as the economy seemed to go endlessly from strength to strength. New business rates in Westminster will therefore be levied at a time of economic woe, having being calculated using figures from the peak of an economic high. I fear that when they are eventually issued in April, they will bear little relevance to the ability of struggling businesses to pay. Such rates could put many companies into a kind of negative equity.
As I have said, the revaluation exercise is designed to be fiscally neutral and is not supposed to raise any additional income across the country. Revaluation simply redistributes the burden of taxation—in this case putting it more firmly on the shoulders of businesses in central London, where rental values have increased the most between 2003 and 2008. Understandably, the Government will no doubt proudly declare that the rates of more than 1 million businesses will fall this year, but those decreases will have to be paid for and they are coming out of the pockets of my local business people and, to a lesser extent, of other companies in the capital.
Although London accounts for only 12.5 per cent. of the country’s residential population, around 28 per cent. of business rates are levied here, reflecting the capital’s importance as a place of work and play and as a tourist attraction. With the latest revaluation, the Treasury is expected to collect an additional £565 billion from the capital.
Westminster has the largest economy of any local authority in London and accounts for 2.2 per cent. of national gross domestic product. A colossal £1.1 billion is collected by the Westminster local authority on behalf of the Government, which is more than the combined collections from the City of London, Birmingham and Manchester, although the City of London of course also pays a significant amount in that way. In return, Westminster received only 12 per cent. of that money back through grant funding. I imagine that many people would try to square that by assuming that that money is being sucked only from big businesses based in the city centre, and we all know that some huge businesses and the headquarters of many international companies are based in both the City of London and the city of Westminster, but it needs to be stressed that around 70 per cent. of all business premises in Westminster are occupied by firms employing four people or fewer.
Let us look at some specific examples of how significant the new burden will be. As a result of revaluation, the rates for an average office in Westminster will rise by 38 per cent. in the next tax year, but for somewhere like the Marylebone road that figure will be 72 per cent., and it could be over 100 per cent. in Knightsbridge. For a large store on Oxford street, the estimated increase in the business rates bill will be £3 million a year in the next tax year, in addition to what is already a fairly hefty sum. A small business somewhere such as Soho will face an additional £1,500 on top of an £11,000 bill—I am sure that that is particularly close to the Minister’s heart.
It should be kept in mind that those businesses will receive no extra services for that additional money. Richard Dickinson of the New West End Company—one of the business improvement district creations of recent years—has said:
“The scale of these increases in chilling. Given the West End’s contribution of the wider economy both in London and nationally, this will impact everybody.”
Every business rate system has a transitional relief scheme that runs alongside it, but I fear that there remains a lack of clarity, which I hope the Minister will be able to remedy, over the Government’s plans for the 2010-11 scheme. There will apparently be around £2 billion of support to reduce the average rate increases for nearly 112,000 London businesses, but the increases will be so large for some firms that I find it difficult to believe that that fund will make any significant difference.
As is always the way with these things, there have also been some basic errors in how the transitional relief has been dealt with. The closing date for its consultation was 23 September, predating the release of data from the valuation office for England on the new rateable values. Therefore, those responding could not accurately assess their potential liabilities. That has threatened the confidence of Westminster’s 47,000 businesses in the Government’s handling of the whole business taxation issue. Furthermore, Westminster city council is concerned that the increase of 19 per cent. to the threshold for small business rate relief for London’s companies is still less than the 20 per cent. increase for the rest of the country.
Also, the increase in valuations will push many local businesses above the £50,000 threshold for the supplementary rate to pay for Crossrail, which we hope will be built in the years to come. Before the revaluation, Westminster city council estimated that some 8,979 companies were liable for the supplement, but we believe that that will soar to around 12,448 by April 2010. Although the council supports Crossrail, it is concerned about the additional 3 to 4 per cent. hit on businesses that previously would have been under the threshold.
A supplementary business rate levy for Crossrail, a 5 per cent. increase in business rates and a huge revaluation will conspire to create a triple whammy for Westminster’s businesses in April 2010. That is incredibly worrying for those struggling already with uniquely difficult trading conditions. It also defies logic that rateable values can increase by an average of 60 per cent. in the city and business rates can increase by 38 per cent., while the threshold for receiving small business rate relief has increased by only 18.6 per cent. Those rate increases simply do not reflect the reality of current business activity and serve to highlight the weaknesses of a system that makes revaluations and enacts those changes at entirely different points in the economic cycle. I accept that we are in a very unusual economic situation and do not wish to point out blame as a formula is in place, but there are times when we need to look carefully at whether a formula will have the perverse impact to which I have referred.
Ideally, Westminster city council would wish the rate changes to be deferred until the economy improves and, at the very least, to have the threshold raised to a point where business rate relief schemes apply. With rate relief and revaluation, small businesses will be treated like bigger businesses simply because of the value of the buildings that they occupy. Come April 2010, therefore, many small enterprises in my constituency will find that their premises have supposedly increased so much in value that they will jump over the threshold for rate relief, even though the operation or profitability from March 2010 to April 2010 will not have changed and, indeed, might have worsened. Such a system, I fear, creates a huge disincentive to starting a small business in my constituency. Furthermore, if the Chancellor fails to raise the thresholds, many businesses will find themselves above that £50,000 marker and will be liable for the burden of supplementary business rates. The council believes that it is absolutely crucial that the supplementary business rate be included in the transitional arrangements and that any caps on increases be set at a level that includes those increases.
Overall, the transitional arrangements mask the fundamental flaws in the business rate scheme. The system works in a somewhat perverse way, penalising businesses and local authorities that invest in an area and its infrastructure through schemes such as business improvement districts. For instance, efforts in my constituency to increase street security and improve the appearance through hanging baskets and better lighting are likely to be taken into account during the revaluation process and result in higher rateable values and an increased business rate burden. Therefore, Westminster city council would prefer a complete overhaul of the system, rather than somewhat inadequate attempts to mitigate business rate rises. Should the Government decline that option, I would like to have at least a commitment to the review over the next two years of the transitional arrangements.
In the longer term, I would challenge the sense of a scheme that takes two years from valuation to billing. Surely, it would be better that at least an element of localisation is introduced to ensure that businesses obtain some local benefit from the rates they pay. At a time when the Government are encouraging local authorities to work closely with businesses through schemes such as business improvement districts, the deficit between taxes paid and the link to services provided threatens seriously to undermine the relationship between the public and private sectors.
Put simply, the revaluation of 2008 will lead to a bad tax change that will be implemented at a time of unprecedented uncertainty in the economy. There are so many businesses teetering on the edge of viability that Westminster city council really must ask that the changes be deferred until the wider economy improves, and I reiterate its words. The sums of money already being sucked from central London businesses to other parts of the country are huge, and the latest changes will simply accelerate that trend. Most firms in the capital accept that their location comes at a cost, but if such huge levies are to be imposed, it seems only fair that some part of the business rate is retained locally to give a real link between businesses and local authorities that provide their setting and many of their services. The Government must look urgently at reviewing the rate relief scheme to assist businesses that are being pushed over the threshold simply because of the supposed value of their premises.
Without the kind of changes that I am proposing, the Government are in danger of prolonging and deepening the economic slow-down for Britain’s largest economy. London’s largest businesses will suffer, but those with premises nationwide might have their increases partially off-set by decreases in other sites. For shopkeepers such as those in my beloved Cecil court, small office workers and the burgeoning city centre enterprises, there is no such compensation and their future is grim.
I wish to raise one final point, as representatives of the City of London have asked me to address an issue that arose during a House of Lords debate on the Business Rate Supplements Bill. From a somewhat tangential angle, it relates to a clarification of the tax deductibility of voluntary contributions, as opposed to payments made compulsorily by rate supplements that are made by businesses for the Crossrail scheme. As the Minister may be aware, the Corporation of London is putting in its own money but is also raising money from businesses based in the square mile. We are keen to know whether there will be a tax deductibility element for that. I appreciate that I have not had a chance to speak to her in advance about this, so I would be happy to take a written reply in due course. I hope she will be able to address some of the other issues that I raised today.
I congratulate the hon. Member for Cities of London and Westminster (Mr. Field) on securing this timely debate. The issue exercises my Department and many businesses across the country. Like him, I love London, and I share his interest in and enthusiasm for its many and varied businesses, especially those in Cecil court where, like him, I spent a large chunk of my youth. Sadly, Foyles is no longer there, but I have good memories of it.
The businesses in Cecil court, along with the myriad large and small businesses that make London one of the most important drivers of our economy, use community services such as transport, lighting, the police and education. As I am sure the hon. Gentleman will agree, it is only right and proper that, as they do so, they pay their rates.
As the hon. Gentleman said, rateable values are reassessed every five years. The next revaluation will take effect from 1 April next year and will be based on the rateable values at 1 April 2008. As he explained extremely clearly, thanks to the current economic turbulence and changes, and because London has experienced the highest rise in property values in England over recent years, the city will almost certainly experience the highest rise in rateable values in the country. Unlike the hon. Gentleman, who puts the increases at around 35 per cent., we estimate that they are likely to be about 10 per cent. on average, before inflation and other reliefs are taken into account.
However, before everyone, including me, takes a sharp breath, that does not mean that rateable values across London will all increase at that rate. We estimate that ratepayers occupying almost 45 per cent. of properties in London—about 124,500—will in fact see their rates liability fall as a result of revaluation. In fact, small shops in London such as those in Cecil court could see their rates liability fall by 3 per cent. on average in 2010-11. If the hon. Gentleman would care to look at some of the figures we have that detail that, I would be happy to share them with him. Overall, there would be a reduction of some £6.5 million.
I am glad to say that 56 per cent. of properties in outer London—about 72,000 in total—will also benefit from the revaluation. We estimate that they should see an average decrease of £950 in their rates liability for 2010-11.
Those liable for business rates in London, including me, can also take some comfort from the fact that looking at rateable values in isolation does not always give an accurate indication of the bills that businesses will be expected to pay. The multiplier that the hon. Gentleman mentioned, which is used to calculate bills, is adjusted at the same time that new rateable values take effect. If they go up across the country, the multiplier is adjusted downwards. For example, at the 2005 revaluation, the multiplier was reduced by 4p in the pound.
Then there is transitional relief. There is more comfort here, even though the hon. Gentleman does not see it as a solution to the problems. The Government consulted on the 2010-11 transitional relief scheme over the summer. Under their proposal, rates on small properties will be capped at 5 per cent., and at 12.5 per cent. on larger properties. We estimate that that should reduce the average increase of 10 per cent. in rates in London to about 3 per cent.—in other words, a 7 per cent. drop—and that the businesses that see the biggest rise in their bill as a result of revaluation will gain the greatest amount of relief. In total, we expect that 112,000 properties in London—24 per cent.—will benefit from transitional relief. In fact, we estimate that 16 London boroughs will see the total rates liability fall due to the revaluation and transitional relief.
As the hon. Gentleman knows, the Government do not share his view that business rates should be relocalised. Pooling the proceeds of business rates on a national basis and redistributing them between authorities ensures that the revenue that is raised is allocated fairly. If local areas kept all the business rates they collected, those with a firm business base would be over-resourced in comparison with those with a smaller base.
I am sure that the Minister would not wish to characterise my proposal for an element of localisation as saying that the entire rates amount should be retained. Clearly, ratepayers in both the city of Westminster and the City of London are not unrealistic about the huge amount of money that is at stake, much as many of them do not like the present arrangements, but does she share my concern that, if there is literally no nexus whatever between local authorities and those who pay rates locally, that could do great damage to the whole democratic process, and that trying to introduce an element of localisation would be a sensible way forward?
Successive Governments—not just my own, because this system came in in 1990 under the hon. Gentleman’s party—have tried to ensure that the distribution is as fair as possible. It is obviously not always feasible to make it totally fair, but we believe that at present we have the fairest system possible.
The hon. Gentleman expressed concern about the impact of the Greater London authority’s business rate supplement, which is due to be introduced across London at the same time as revaluation in 2010. As he knows, the supplement will play a key part in funding Crossrail. The London Mayor, who is responsible for levying the supplement, has recently consulted on the detailed arrangements. While it is for him to argue the merits of the case for introducing a supplement in April 2010, I believe that many hon. Members on both sides of the political divide agree that London has waited too long for Crossrail, and that we have to do what we can to reap its benefits. It should also be remembered that businesses are not being expected to contribute something for nothing: Crossrail will bring huge benefits to the London economy.
The hon. Gentleman asked why the Government have not committed to increasing the £50,000 threshold in line with the revaluation in 2010. Rateable values are unlikely to rise equally across the country. Indeed, as I said, in some areas they are likely to reduce, and any upward revision of the threshold would mean that councils saw a reduction in their ability to raise revenue, thereby limiting the size of project that they could fund using the supplement.
I accept that, but, equally, it is widely recognised that the Business Rate Supplements Act 2009 is there, first and foremost, for Crossrail, a project that is already on the stocks. Therefore, this is a London-related issue, not one that necessarily will initially have an impact on other parts of the country.
I understand what the hon. Gentleman is saying, but, again, the problem is getting fairness in a hugely varied picture. Given the regional variations, we believe that the £50,000 threshold sets a minimum level of protection for businesses. Any further exemptions would have to be decided locally, and, to that end, levying authorities such as the GLA have the power to increase the threshold. It could be done, but it would have to be done locally.
I understand that businesses are going through particularly difficult times at present, and that is why my Government have taken steps to ensure that business is supported through the recession—