Before making my remarks, I first declare an interest as set out in the Register of Members’ Financial Interests.
I want to draw attention to the position faced by a constituent of mine, Mr Peter Summers, who visited my surgery a few weeks ago. For many years, Mr Summers operated a business supplying tyres from an industrial unit he had purchased. At 67, he sold his business but retained the premises, and invested in a personal pension fund. He spent some money refurbishing the building, and let it in 2005 at an annual rental of £35,000. In 2008, the tenant occupying the building went into liquidation and vacated the premises, leaving Mr Summers with some arrears and reinstatement costs of some £3,500, but since then he has been unable to find a new tenant.
In respect of the liability to business rates, Mr Summers enjoyed a period of transition for the first six months, from April 2008 to September 2008, but since then he has incurred a significant sum in business rates. In the six-month period from 30 September 2008 to 1 April 2009, he paid £8,628. For 2009-10, he paid full-year rates of £18,066, and for the current year he has paid £16,071. Over that period of two and a half years, during which he has received no services, his total expenditure has been £42,776. At a time when Mr Summers might have expected to contribute £35,000 a year to his pension fund, he has paid net outgoings of £18,000 a year, a difference of £53,000 per annum.
People such as Mr Summers recognise, in holding commercial property as an investment, that by virtue of the economic cycle, which can go up and down, there will be times when such a property may be vacant and there will be no income. Most investors in property must live with that fact. Mr Summers is prepared to live with it, but it strikes me as unfair that in addition to the loss of rental income, he must now bear a further loss in paying business rates when he cannot meet the sum from his income. He is effectively paying for services he is not receiving. He now faces the prospect of selling his industrial unit in a distressed market where prices have been forced down. The downward pressure has been caused partly by other investors’ concern that if they buy the property, they will be liable for the vacant business rate. Mr Summers came to see me to ask for my support in lobbying the Minister to rectify the position, which I believe is inherently unfair. I advised him that I was happy to do so.
The situation arose in consequence of a change to empty property rate relief that took effect in April 2008. For decades until then, the Government had helped struggling businesses through empty property rate relief. Shops and offices received an allowance of 100% relief initially and 50% thereafter, and owners of empty factories and warehouses received a 100% permanent exemption. The Government’s intention in reducing empty property rate relief was to provide incentives to bring vacant premises into use by encouraging rents downward. The change was intended to encourage property owners to re-let, redevelop or sell empty non-domestic buildings and improve competitiveness for all businesses, including small and medium-sized enterprises, in terms of property costs.
I declare an interest as outlined in the Register of Members’ Financial Interests. Has my hon. Friend found, as I have, that the changes, combined with the difficult market conditions, mean that speculative development of office or manufacturing property has stopped? Many small manufacturing businesses are concerned about expanding or taking on extra premises, because if the market weakens, they might end up paying rates on empty properties.
I thank my hon. Friend for that contribution. I will make that point later in my remarks.
On the Government’s original intentions, they recognised some difficulty with the proposals, and the position was changed slightly in the November 2008 Budget report to exempt from business rates commercial and industrial properties with a rateable value of less than £15,000. Regrettably, that is below the value of Mr Summers’s property.
I discussed the repercussions of the change with the previous Government on many occasions. I think that the level is £18,000 now, but in Solihull one cannot rent a broom cupboard for rates of £18,000 a year, as I know to my cost. I criticise the previous Government tremendously for the repercussions. I have constituents in Birmingham who are trying to rent out property for £1 a square foot just to absolve themselves of their problems with the rates. Will my hon. Friend exhort the Minister to consider whether, in this current economic climate, some form of marginal relief might be possible, just for the time being?
I am grateful to my hon. Friend for her contribution. I know that even in areas where rents have been reduced to the level that she mentioned, there are still no takers. If no businesses are willing to take the premises, the price is irrelevant. We know that the situation must change.
The regulations have been in force for more than two years and have had a number of effects, some of which the property industry expected and warned the Government about at the time of the change. On the failure to provide services, it can be argued in the interest of fairness that business rates are a tax on occupation with the intention of raising funds, in the same way as the council tax. However, clearly, if a property is not occupied, no services are being consumed, and it follows quite reasonably that no tax should be payable.
In many cases, the tax has become a tax on ownership rather than a tax on an income stream. Taxes are usually based on income streams, which means that they can be paid from profits earned. Again, where a commercial property is vacant, there is no income stream on which that tax can be levied.
I congratulate my hon. Friend on making an important and compelling case. Does he agree that the imposition of non-domestic rates on vacant commercial premises has led to an increase in the demolition of serviceable commercial premises and in the number of derelict sites blighting our towns?
My hon. Friend, whose constituency neighbours mine, is entirely right. There have been unforeseen consequences, one of which is that it is more sensible for property owners to develop a property rather than retain it for future use.
The rates are almost a form of wealth tax, levied on ownership of an asset rather than the income derived from it, as was originally intended. In times of recession, many small businesses find themselves occupying properties too large for their immediate needs and look for a tenant to take their surplus space. Where they do so, the rents add to their income and the occupier of the business becomes liable for the business rate, but if they cannot find a tenant, they face the burden of further business rates. For most businesses, business rates make up their third biggest item of expenditure, after wages and rents. Also, business rates are a fixed cost. They do not decrease as turnover declines during recessionary times. I am concerned that in many cases, excessive bills are contributing to business failures and leading to higher unemployment.
A further unfairness is that it often takes a long time to find a tenant for vacant commercial property, a fact reflected in the time limit allowed for the non-application of rates. Even in boom times, an industrial property is likely to remain vacant for between 12 and 18 months. In the current economic climate, the loss of a tenant will almost certainly mean additional liability for business rates that might not have been budgeted for.
The effect on rental values has not been what the Government intended. They hoped that rental values would fall, but an April 2009 report by the Royal Institution of Chartered Surveyors suggested that that objective had not been achieved and that property owners were offering other incentives instead, such as rent-free periods. There has also been a detrimental effect on capital values. The same report found that because empty property rates make fewer investors willing to enter the market, investment levels in the sector have fallen.
I congratulate my hon. Friend on securing this debate. The point about property values is important. In my constituency, responsible landlords have found themselves unable to proceed with property refurbishments and renewal work because they are paying rates on empty properties in other parts of the same area. The rates have a knock-on effect on the quality of the offer in towns such as Llandudno in my constituency.
I thank my hon. Friend for his contribution; he makes a very good point. The hope that the application of empty business rates would encourage the property owner to accept lower rents in order to keep their buildings occupied, and that it would support businesses in the economy generally, has not been realised. There is a parallel here with the position taken by Opposition parties in respect of welfare reforms. The Opposition say that there is no point in trying to force people to take jobs because there are no jobs available. Similarly, there is no point in trying to force landlords to let commercial property cheaply if there are simply no occupiers to take up the space. There are absolutely no incentives for property owners to keep their buildings empty and not be active in seeking occupiers. In the case of Mr Summers, his failure over the past two and a half years to find a tenant has not been for the want of trying.
As mentioned by my hon. Friend the Member for Nuneaton (Mr Jones), one way in which property owners can avoid their liability for empty property rates is simply to demolish the property—if there is no building, there is no business rate. The RICS survey shows that the application of vacant property taxes is currently the strongest single factor in determining which buildings are demolished. It is often the older, less attractive properties for which, in times of recession such as now, it is more difficult to find a tenant. However, in most cases such properties are perfectly sound, usable buildings. An unintended consequence of the 2008 changes is that much of such low-cost industrial accommodation will no longer be available. Just as the country starts to emerge from recession, the start-up businesses that will be so important to our future prosperity will not be able to find any premises to operate from.
As my hon. Friend the Member for South Staffordshire (Gavin Williamson) mentioned, given the anxiety of completing a building, not being able to find a tenant and thus becoming liable for empty property rates, it is absolutely no surprise to find that property development companies are no longer developing commercial property on a speculative basis.
I congratulate my hon. Friend on securing the debate. During the past couple of years in Liverpool and Merseyside, there has been considerable regeneration both as a result of speculative build and because people really wanted to put their heart into the city to develop and grow it. The tax on empty properties has stopped that process in its tracks because people wanted to look for secondary investors while developing inner-city areas.
I thank my hon. Friend for that contribution. Clearly the redevelopment and stimulation of our town centres has been brought to a halt by this legislation, which has made that process much more difficult. Commercial property development companies are no longer building property speculatively—by which I mean property being built in the expectation of finding someone to occupy it, rather than having an occupier already in place. No new building has taken place and nothing has been left in the pipeline for later. Again, as the country emerges from recession, the consequence of that is that the accommodation needed by our businesses will still be in the form of paper plans, rather than completed buildings.
I declare an interest in line with the declaration of Members’ interests. Business rates are undoubtedly a tax. When a building is empty, there is no rent. The crux of the matter is that this is a tax on an asset that has no income. As my hon. Friend has pointed out, that is distorting the property market and leading people to make strange decisions. The cheaper properties at the bottom end of the market being used by start-up companies will be the first to be demolished.
I thank my hon. Friend for his contribution. That point has been well made. Many years ago, I recall setting up my own business and occupying exactly the kind of property that would, by now, have been demolished. In my business’s early days, secondary, inexpensive space permitted it to get started with relatively low overheads.
In addition to demolishing existing building, we will end up with no new building. My concern is that, as we emerge from recession, there will be no new industrial units for our businesses to occupy as they grow. That will have a significant effect in delaying our country’s ability to emerge from the current recession. I am particularly concerned about the plight of small businesses and small private investors.
For the record, I would also like to declare an interest in accordance with the register. Is the localism agenda not part of the solution, in that it should be up to local authorities individually to decide what should be charged and what percentage of relief should be given? That would reflect market conditions in different parts of the country.
My hon. Friend makes an excellent point, which I am sure will be taken up by the Minister in his response. We are moving into an era of localism and it should be appropriate for individual authorities to make their own decisions on the matter, rather than having legislation imposed on them from on high.
Returning to the case of Mr Summers, the position of small private investors and small businesses contrasts significantly with that of larger, more established property companies that can absorb this cost in the round and are better able to respond. Of course, the business community fully accepts that the coalition Government need to take decisive action to deal with the country’s deficit, and that any proposals such as those articulated by my hon. Friends this morning need to stand up against many other calls on the public finances at this difficult time. However, I contend that the consequences of the abolition of empty property rate relief on a significant proportion of the country’s commercial property estate means that the matter should be given urgent and special attention.
May I start by saying what a particular pleasure it is to serve under your chairmanship, Mr Davies? I wish you well in this new elevation.
I congratulate my hon. Friend the Member for Rugby (Mark Pawsey) on securing the debate. It is an important topic and he put his case very cogently. I also thank hon. Members who intervened for the various points they made. The Government are alert to those points and want to take them on board, subject, of course, to the circumstances I shall set out briefly.
As I said, this is a very important matter, and I am glad that my hon. Friend has drawn hon. Members’ attention to it because he has given me the opportunity to set out the Government’s position on business rates and the issues surrounding empty property relief. An important thread in my hon. Friend’s comments that I endorse is the importance of the private sector. The Government fully recognise that the private sector is the driver of economic growth. That is why we are committed to rebalancing the economy and supporting business to provide the growth in jobs that the country needs.
Indeed, the Prime Minister’s announcement at the start of this month set out the Government’s plans to help small and medium-sized businesses to flourish and to encourage entrepreneurs. He has appointed Lord Young as his enterprise adviser and asked him to write a brutally honest report on what we, as a Government, can do to help smaller enterprises and start-ups, as mentioned in the debate, to prosper. Business rates are an important consideration, along with several others that I am sure my hon. Friends will appreciate the Government also want to address.
I understand that, Mr Davies, but there are criticisms of the previous Government’s approach that I intend to make, and it is interesting that it is coalition Members who have attended to support the interests of businesses.
The Government, recognising the difficulties that we inherited when we came to power, have done much to support business. In the June Budget, we announced that we would reduce both the main rate and the small profits rate for corporation tax, which is another major outgoing; increase the threshold for employer national insurance contributions; and reduce employer national insurance contributions for new businesses in targeted areas.
That is an interesting suggestion that I will take away. As I will say later in my speech, we intend to give a great deal of thought to finding ways forward.
We have also increased the enterprise finance guarantee, created a new growth capital fund and set up a regional growth fund. All those measures taken in the Budget set out the broader picture. We have also taken important action on business rates. In the Budget, we announced our intention to waive £175 million of backdated business rates demanded of businesses, including some, although not exclusively, in ports. Thanks to that action, many companies across the country, particularly small and medium-sized enterprises, can now move forward confidently, unburdened by those unexpected debts. We will introduce the necessary legislation to achieve that in the localism Bill.
We also took action in the Budget to help small businesses through the business rates system. We are well aware that small businesses provide nearly 60% of our jobs and half of our GDP. We recognised the need to inject new life into that part of the private sector, so that enterprise can drive recovery. We therefore doubled the level of small business rate relief for one year—a measure that is currently saving approximately 500,000 businesses £390 million in taxes. More than a third of a million ratepayers will pay no rates at all for that year.
I congratulate my hon. Friend the Member for Rugby (Mark Pawsey) on securing the debate. Does the Minister accept that business rates have a disproportionate effect on smaller business, which is demonstrated by the rate relief scheme? I accept the generosity of the rate relief scheme that has been offered, but does he not acknowledge its short-term nature? Businesses need to be able to plan over the longer term.
I accept that the measures we have taken are for a targeted and limited period, but they are within the resources available to us, given the economic circumstances we inherited. There are longer-term plans, which I will discuss in a moment. My hon. Friend is right that we need to plan more comprehensively for the longer term in this regard, but it is worth noting that those two measures alone amount to more than £500 million of targeted support for more than 500,000 ratepayers to assist businesses in the current climate.
I would like to mention three other proposals on business rates that are aimed at supporting business and local authorities. First, we will ensure that all future business rates supplement projects, when they fund both more or less than one third of an overall project, will be put to the ballot, so that liable businesses can decide whether to impose the business rate supplement upon themselves. Liable businesses will therefore be able to vote for, and in effect approve, the planned economic development project that they will be funding. That was not available when the business rate supplement scheme was introduced by the previous Government. We think that it is right to ensure that there is only taxation with representation for small businesses in those circumstances.
Secondly, as announced in the coalition agreement, we are committed to finding a practical way to make small business rate relief automatic. We are determined to end that needless red tape that business faces and ensure that ratepayers get all the relief to which they are entitled, and I hope to be able to give hon. Members more details of that before too long. Finally, the Conservative party manifesto proposed that local authorities should be given new powers to introduce further discounts on business rates so that local authorities can respond to local circumstances by reducing business rates bills. The coalition Government are currently considering the scope of such powers. Again, I hope to be able to say something on that before too long.
I would also like to take the opportunity to set out our plans for the local government resource review, which will enable us to look at those longer-term, across-the-piece plans for business rates. We are committed to providing incentives for local authorities to promote economic growth through the business rates system. We outlined our proposals to enable councils to retain locally-raised business rates in the local growth White Paper. The philosophy of that White Paper recognises the point that my hon. Friend the Member for Carlisle (John Stevenson) made in his intervention on the advantage of giving greater local power in the setting of those rates. The proposals are designed to devolve exactly those sorts of freedoms and responsibilities to the local level as part of our decentralisation agenda.
We propose to take the work forward through the local government resource review starting in January, but I would like to reassure Members that that review will ensure that appropriate protections are put in place for businesses. We are clear that businesses should not be subject to locally imposed increases in the burden of taxation. We have made it clear that businesses would have the right to hold a binding vote on any supplementary business rates, as I have already said. A much more significant piece of work on business rates will come along in the new year.
Turning to empty property rates, we recognise that property taxes, in the form of business rates, are among the highest in Europe, and businesses would like us to do more to reduce that burden, which impacts on their growth and investment decisions. Nowhere is that more true than in relation to empty property rates. My hon. Friend the Member for Rugby set out extremely clearly the problems caused by the previous Government’s reforms of empty property rates—problems that we fully recognise. I assure him that the present Government have tremendous sympathy with the position that his constituent, Mr Summers, finds himself in.
As my hon. Friend pointed out, from 2008-09 the exemption periods were restricted to three months for non-industrial property and six months for industrial property, with ratepayers being liable for full rates once the exemption period has lapsed. As he also pointed out, it is true that the previous Government claimed that the purpose of the reforms was to increase the costs of holding empty property, as a way of encouraging owners of commercial property to re-let, redevelop or sell empty properties—or so it was postulated. That argument was based on an economic theory that was not, and is not, fully accepted by the business community or by many Members of this House. The previous Government also estimated that the change would increase net tax yield by £950m.
Faced almost immediately after the introduction of the reforms with deteriorating economic conditions, the previous Government recognised, perhaps surprisingly, that the reforms made things more difficult for owners of commercial property. That is why they introduced the temporary £18,000 rateable value threshold, below which empty property was exempt from business rates. As Members will be well aware, that threshold is due to revert automatically to £2,600 on 1 April 2011.
The economy is coming out of recession and growing again, thanks to this Government’s policies. That should improve prospects for landlords seeking tenants for empty properties, but we recognise that ratepayers would like us to undo the previous Government’s changes or to continue with the temporary measure. We fully understand and appreciate that view; the difficulty is that our ability to take action on the reforms must be balanced against the high costs involved, the targeted support on business rates that we have already provided, and the overriding need, as my hon. Friend recognised, to reduce public expenditure and support the economy by reducing the deficit.
I assure my hon. Friend that we most definitely recognise the problems caused by the previous Government’s unfair changes. We will certainly keep the matter under review in the light of the work that we propose to undertake, and we will keep in mind the position of Mr Summers and others like him. We want to work constructively with the property industry on this inherited problem that we are trying to sort out, and to take appropriate action as and when our national finances allow. I hope that the major actions that we have already taken on business rates and those that we will be taking through the localism Bill demonstrate our commitment to providing targeted support to businesses through the business rates system. I thank my hon. Friend again for raising the matter.