Considered in Grand Committee
My Lords, I am grateful for this opportunity to explain how these regulations are going to help 467,000 business properties with their rate bills over the next five years through the transitional relief scheme.
First, I should begin by explaining a little about the rating system and revaluations as this provides important context for the regulations. The system of business rates is a stable and important part of how we pay for local government in England. Rates have existed in one form or another for more than 400 years but the current system of national non-domestic rating was introduced in 1990. Since then, central government have set the multiplier which is used to calculate rate bills and, between revaluations, that multiplier has not increased by more than inflation. This has provided welcome and valuable certainty for business. The 1990 reforms also introduced a statutory requirement to have regular revaluations of rateable values every five years. Regular revaluations update rateable values, which are based on rental values, to ensure that everyone pays their fair contribution and no more.
The process of revaluation is done independently of government by the Valuation Office Agency, which uses experienced and professional valuation staff. They have collected and analysed more than 300,000 rents nationally, which is more rents collected than ever before. From this rental evidence, they have prepared valuations for all 1.7 million properties and, six months ahead of when bills are sent out, they have published those draft rateable values on the internet. They have also sent out summary valuations so that ratepayers can check for any errors and ensure these are corrected in time for rate bills on 1 April 2010. To date, the Valuation Office has received 82,000 inquiries on those summary valuations, of which almost 60,000 have already been resolved.
However, the rateable value is only one part of the rates bill. The amount payable also depends on the rating multiplier and any reliefs, including the transitional relief which we are discussing today. Despite what we may hear, it is not the case that the high property market at 1 April 2008, on which rateable values are based, will lead to higher rate bills. The rules we have in place ensure that not a penny extra is raised in revenue for the Government from the revaluation. To achieve this, the rating multiplier has been reduced for 2010-11 by 15 per cent, taking it to its lowest level for 17 years.
We are aware that some ratepayers struggle with their rates bills. That is why we have introduced relief schemes such as the small business rate relief scheme, which provides up to 50 per cent relief, and this transitional relief scheme. But these schemes also add complexity to the rates bills. To ensure ratepayers understand how these different types of relief affect their rates bills, my department has worked with the Valuation Office and Business Link to produce a business rates calculator on the Business Link website. This business rates calculator is one of the most popular applications on the Business Link website and to date has received something like 100,000 visits. Measures such as this are ensuring that ratepayers have an accurate understanding of their rates bills for next year.
As I said, revaluations do not raise a penny extra for the Government and more than 1 million business properties—60 per cent of all business properties—will see an average decrease next year due to the revaluation of £770 before inflation. The revaluation will provide a welcome and timely boost to sectors such as industry, which will see rates bills fall by 3 per cent, and regions such as the east Midlands where 84 per cent of business properties will see their rates bills fall as a result of the revaluation. The regulations we are discussing today provide a transitional relief scheme to help the minority of ratepayers who are facing increases. This £2 billion relief scheme will ensure that, after adjusting for negative inflation, no small property will face an increase due to the revaluation of more than 3.5 per cent in 2010-11, or 11 per cent for larger properties. This relief will help 467,000 business properties with their rates bills next year. We have adopted this relief scheme after a consultation exercise in the summer which provided more information than ever before about the revaluation. Our chosen scheme secured widespread support. Sixty per cent of respondents agreed that we should provide relief over the full five years of the rating list rather than the four years adopted for the previous revaluation in 2005. Sixty-eight per cent supported the proposed caps on increases for small properties, including the Federation of Small Businesses, and 55 per cent supported the caps on increases for large properties.
Transitional relief works by placing annual caps on the changes in rate bills. Those caps are contained in Regulation 8 of the draft regulations. For instance, the caps on increases for small properties over the five years, before inflation, are 5 per cent, 7.5 per cent, 10 per cent and then 15 per cent in each of year 4 and year 5. So, if a small property is seeing a rise in its bill of 15 per cent before inflation due to revaluation, its bill would be capped at a 5 per cent increase in the first year and a further 7.5 per cent increase in the second year. By the third year, it will have reached its full bill. Other rate reliefs, such as small business rate relief or rural rate relief, are applied after the transitional relief is calculated.
Transitional relief must be self-financing, which means that relief for some payers must be funded from other ratepayers. We considered this carefully at the consultation stage, and 66 per cent of respondents agreed that we should fund the transitional relief by also placing a cap on annual reductions in bills, rather than by levying a supplement on all other ratepayers. Therefore, the regulations also provide that those seeing reductions due to the revaluation should have them capped to help pay for the relief. For example, the caps on reductions for large properties are minus 4.6 per cent, minus 6.7 per cent, minus 7 per cent, then minus 13 per cent in each of year 4 and year 5.
These regulations also have to cope with the various changes that can happen to a property during the five years of a rating list. For instance, the transitional relief scheme must have rules to decide what happens when a property splits or merges with another property, or where rateable value changes. These rules are sometimes complex, but they ensure that no ratepayer is treated unfairly. The rules are not new and both local authorities and other practitioners are well versed in their application.
To ensure that these regulations can be implemented in time for new bills on 1 April 2010, my department has worked closely with the Institute of Revenues Rating and Valuation and the Local Government Association, and we have maintained good working relationships with the software companies that support local government. As a result, we are very confident that accurate bills will be sent out on time for 1 April 2010. For the majority of business properties, the 2010 revaluation will provide a welcome boost in the current economic climate. As I said, more than 1 million business properties will see an average decrease next year due to the revaluation of £770 before inflation. The revaluation will help important sectors such as industry in regions such as the Midlands, which are vital to economic recovery.
The relief scheme before us will provide help for the minority facing increases. After allowing for the effect of negative inflation in September 2009, which will adjust bills for all of 2010-11, next year no large property will see an increase of more than 11 per cent due to the revaluation, while no small property will see an increase of more than 3.5 per cent due to it. The scheme has been widely supported at consultation and I therefore ask the Committee to join in that support today.
My Lords, I thank the noble Lord, Lord McKenzie, for introducing these regulations and declare an interest, being involved in companies which pay non-domestic rates. Despite much criticism in this place and elsewhere, Ministers are pushing ahead with their planned 2010 rates revaluation. New bills will be issued to businesses in March 2010 for payment in April. Although I of course support the transitional arrangements, I am concerned that the Government have adopted a flawed approach to this. Of particular concern is the methodology that has been adopted. April 2008, which was right at the peak of the property boom, has been the time selected on which to base this revaluation snapshot. Certain sectors which were artificially buoyant in April 2008 will now have boom values effectively baked in to their rates bills for the next five years before the next revaluation. Additionally, many small shops could no longer be eligible for small business rate relief as a result, further increasing their bills. Businesses find themselves being forced to pay boom taxes in bust economic circumstances.
In 2007-08, the Government took in £17.4 billion. Next year, it will be £20.8 billion—a huge increase over the recession. Does the Minister really mean to tell us that all businesses will be able to pay and will not go bust in the mean time, and that those projections are accurate? I very much doubt that he can, as the Government have refused to conduct any impact assessment on the effect of the forthcoming 2010 revaluation to gauge its likely effect on businesses. That seems particularly irresponsible given the potentially destabilising economic impact of making changes to a £20.8 billion tax during a recession, changes which businesses could not reasonably have foreseen.
The consultation on the transitional relief scheme closed before the draft rateable values were published, preventing a considered assessment of the implications by respondents. In the previous 2005 revaluation, all details were published a full month before the consultation closed, enabling informed responses. Even if the figure of £20.8 billion is to be believed, we are told that the Government expect to distribute £21.5 billion back to local authorities in the form of grant. Where will the extra £700 million come from? The Government’s figures are in a mess. There is already a £700 million black hole, which will increase as small businesses go bust.
The Government claim that the revaluation should be revenue-neutral. Some firms in some parts of the country may see a fall in rateable values and business rates, although that may be because of a lack of regeneration in those areas, but a significant proportion of firms—40 per cent, or about 700,000 businesses—will face large and destabilising rises during the worst recession on record. It is those 700,000 businesses which will be financing the rest, regardless of their profitability and of whether they are a going concern. We could do worse than consider the decision by the Executive in Northern Ireland to defer the 2010 revaluation to allow the localised effect of the recession to be taken into account. Noble Lords may wonder if the middle of a severe recession is the time to be rocking the boat in this way.
The background to this is worth considering. Without proper consultation, as Chancellor, Gordon Brown slashed empty property rate relief for commercial and industrial premises to raise £1 billion a year, which came into effect in April 2008. That tax rise is particularly harmful in a recession, as firms are often unable to pay rent out of vacant property due to the lack of economic demand, but they must still somehow find the cost of business rates. That is money that firms could otherwise have used to reinvest in premises or regeneration, to create new jobs and business opportunities.
The Local Government Association has noted that four out of five councils have reported an increase in empty properties in town centres during the recession. Two-thirds of councils warned that these empty properties are having a significant impact on high streets.
Yesterday, when these orders were being debated in another place, my honourable friend Justine Greening pointed out the costly effects of the revaluation that make these transitional arrangements necessary. Petrol stations, for example, are likely to be hit with a 33 per cent increase, while the Association of Convenience Stores has pointed out cases where the hike will be more than 200 per cent. Cricket grounds in England and Wales will owe an extra £62,000 each and rugby league grounds can expect a rise in their business rates of 60 per cent. London Zoo will see a rate rise of 155 per cent, up from £260,000 a year to £660,000—a £400,000 hike.
The urban regeneration companies, established to promote regeneration, have warned Ministers that these tax rises have resulted in the prospect of a pre-emptive demolition to avoid the risk of payment and have a deterrent effect on the slow and painstaking business of assembling sites in multiple ownerships. They also talk of the detrimental effect on new speculative factory or office developments that are essential for securing new jobs in deprived areas. Such regeneration is already commercially risky; the prospect of rates payments on newly built but unlet spaces risks killing off private-sector interest altogether.
The effects of the revaluation are therefore potentially disastrous for many businesses. I and my colleagues in the Opposition have urged the Government to postpone the revaluation, and I do so again. If the Minister does not agree to do so, I have no choice but to back the transitional scheme. However, that scheme is not, as I have pointed out, without its flaws. These regulations have been ill thought out.
My Lords, the noble Earl, Lord Cathcart, has made some of the points that I was going to make so I will not repeat them. I look forward to the Minister’s reply.
I will give a qualified welcome to the regulations. The transitional relief scheme is necessary because we are where we are. I am certain that the Government would not wish to be where they are. Hindsight is a wonderful thing. When this process started, I am sure that none of us would have wished to be in the depths of the recession that we are in now. But we are where we are. We all recognise the effects on businesses, some of which face a significant increase, even after transitional relief. This is a further unwelcome blow.
I shall say it again: I am a London borough councillor. That makes me responsible for paying the business rate as well. It is often forgotten that it is not just businesses that pay but those who run public buildings, those who are responsible for schools and so on. I suppose that I am responsible as a business ratepayer.
I wanted to say a few words about what I am going to call “the London effect”. I am delighted to see that the noble Baroness, Lady Valentine, is here too; she will know far more about that than I do. I see that, before the transitional arrangements, London and the south-west are the only regions that face a huge increase in the valuation. The increase in London before transitional relief is 10 per cent. Because of that, much of the benefit of transitional relief will go to London as well, I recognise that, but can the Minister, or maybe the noble Baroness, tell us what the net effect on London will be? We need to add to that. On the same date—1 April next year—larger London businesses will, in addition, pay what has become known as the Crossrail supplement, the business rate supplement. I believe that I am right in saying that the transitional relief scheme does not apply to the Crossrail levy. I say again: this does not apply to just the large multiple retailers. Some 34 schools in my small London borough will be liable for the Crossrail supplement. No one thinks of them as large businesses. Many of them are relatively small schools, but they have a rateable value in excess of £50,000. Therefore, what someone once called a double whammy will come in on the same date: the revaluation—the greatest effects of which are in London—and the Crossrail supplement in London. I look forward to hearing more about that and anything that the Minister can tell us about its double effect.
In his helpful opening remarks, the Minister talked about good working relationships with the producers of the software. I am pleased to hear that; I have no reason whatever to doubt it, but I understand that there have, perhaps inevitably, been problems. Can the Minister give us an update on the exact position now? Do the local authorities have in place software packages that are tested, trialled and operating in order to implement the regulations and, if not, when will they have them? I know that that is not yet the case in my own authority, although it is expected in January.
I began by saying that I give the regulations a qualified welcome. I repeat that, but only because we are where we are—and most of us wish that we were not where we are.
I should declare that I am chief executive of London First—a non-profit-making business membership organisation.
The 2010 revaluation is based on rateable values at April 2008 and, therefore, as has been noted, reflects property values at the peak of the market. Given that boom has since given way to bust, these figures are a long way from current reality. London will see a 32 per cent increase in its overall rateable value. However, this is not a homogenous rise across London. In the run-up to 2008, the West End in particular experienced soaring rents and, therefore, will experience a huge hike in business rate bills. Many properties’ rateable values will increase by up to 150 per cent. I should be grateful if the Minister could clarify some of these numbers, because mine are slightly different—although they may relate to the application of a negative RPI, if I understood the Minister’s introduction.
The Government’s proposed transitional arrangements will mean that the related business rate increases will be phased. However, under these arrangements they still propose that the business rates for properties with large increases in their rateable values will increase by 12.5 per cent—although I think the Minister suggested 11 per cent—which is thoroughly unhelpful, just at the time that we are all seeking slowly to climb our way back out of recession. Furthermore, 20,000 London properties will experience a 30 per cent increase over the next two years.
The Government could help these businesses and the fragile economic recovery by freezing business rates in 2010. I note that both the CBI and the British Retail Consortium, which represent businesses across the UK, recommend that there should be lower upward caps and that this should be funded by smaller decreases. That is an eminently sensible proposal.
My Lords, I thank all noble Lords who have contributed to this debate. I think that we had a qualified welcome, a reluctant acceptance and a qualified comment on the proposals. A lot of questions were asked, each of which I shall try to answer.
The noble Earl, Lord Cathcart, asked about the timing of the consultation paper. I am aware of concerns that the consultation period for the transitional arrangements finished before actual rateable values were published at the end of September. However, we are required by statute to ensure that these regulations are in force by 1 January. Even on the timetable we follow, it was extremely difficult to secure this debate before the House rose. Therefore, extending the consultation period would not have allowed us sufficient time to make these regulations, and that could have meant that billing authorities and their software providers did not have sufficient time to calculate rates bills before next April. Ultimately, this could have meant that ratepayers would not have received the transitional relief they need and deserve. Nevertheless, we released information on the revaluation at a regional and sectoral level in the summer—more information than has ever been released previously at that time in the revaluation cycle. We believe that this allowed ratepayers to respond to our consultation exercise.
The noble Earl referred to these being exceptional times and asked about help for the 700,000 businesses facing an increase. We are putting in place exceptional measures to help businesses with the revaluation. The transitional relief scheme provides more than £2 billion of relief to 467,000 ratepayers to cap and to phase in rises, and it extends this protection for longer—for five years instead of four. I reiterate that no small property will see more than a 5 per cent increase next year, before inflation, because of the revaluation benefiting 366,000 small properties which, on average, will receive £1,000 per property over the five years. After inflation—the difference between the figures we are talking about is because of negative inflation from the base—the maximum increase for small properties will be only 3.5 per cent and 60 per cent of ratepayers, more than 1 million in total, will see their bills fall because of the revaluation. The Government’s preferred option for transitional relief proposes that the increase for large properties would be capped at 11 per cent after inflation. We have also increased the thresholds for rate relief with effect from April 2010.
We have given a range of other support measures to businesses: we have deferred tax payments, there is an additional £1.3 billion of lending for small and medium-sized businesses and a working capital guarantee for businesses. There is assistance for the automotive industry, health checks for businesses to help them ride out the downturn and prompt payment codes. There is a great deal of support quite apart from these transitional relief provisions.
The noble Earl said that local government settlements show that the Government are increasing revenue from the revaluation. That is absolutely not the case. The distributable amount shown in the local government settlement is not the amount of business rates collected from business in any one year but the amount estimated to be available for redistribution to local authorities as part of formula grant. A change in the distributable amount has no effect on the rates bills paid by businesses. Over the five years of the new revaluation list, the revaluation does not raise any extra money. I stress that. Initially we would have collected 1.5 per cent more in 2010-11, but this would then be reduced in later years because of assumed appeals that arise in the system. Once all appeals have been settled, we would expect the amount collected in respect of 2010-11 to be less than that in 2009-10.
The noble Earl referred to the extent to which rates have gone up since 2005. While revaluations do not raise any extra revenue for the Government, the total amount paid in business rates can vary for other reasons. In particular, inflation can increase the multiplier and therefore the rates’ yield, and the RPI inflation between 2005 and recent times is generally between 3 per cent and 4 per cent. Furthermore, physical growth in the tax base—by which we mean extensions and new properties—will also increase the total paid in rates. These factors will contribute to the increase in rates paid since the 2005 revaluation. However, for those properties whose rateable value has not changed since 2005, the ratepayers know that their rates bill before reliefs will not change beyond inflation.
As to why we have not done an impact assessment, the five-yearly revaluations are required by statute and have been a regular part of the rating system since 1990. They maintain fairness by ensuring that rateable values are based on up-to-date information and, as no decisions were required to proceed with revaluation in 2010, no formal impact assessment has been prepared. However, an impact assessment on the transitional arrangements was available from July of this year and contained a great deal of information on revaluation in 2010. From 1 October, ratepayers have been able to put their new rateable values into the excellent business rates calculator on the Business Link website to see the impact of the revaluation on their property. A great deal of information is available to ratepayers and the wider rating profession on the impact of the 2010 revaluation.
The noble Earl raised the issue of empty property rates. The Government stand by their decision to reform empty property rate relief. A £1.3 billion subsidy to owners of empty commercial properties is no longer justified. The reforms to empty property rate relief introduced from 1 April 2008 are principled and right for the long term. Charging rates beyond the initial rate-free period when properties stand empty increases the incentive to re-let and to reuse empty property.
However, the Government have listened to concerns expressed by property owners. PBR 2008 therefore announced that for 2009-10, the year that we are just about to exit, all empty properties with rateable values up to £15,000 will be eligible for full relief. That has been extended for a further year for properties up to £18,000 rateable value in PBR 2009. It is estimated that up to 70 per cent of properties are rated under that threshold and, if empty, will pay no rates in 2009-10. Introducing relief for all empty property would be costly and not well targeted.
The noble Earl referred to certain types of properties—petrol stations, in particular. I say again that revaluation does not raise any extra revenue, it simply ensures that each business pays its fair contribution and no more. Ratings for all properties, including petrol stations, are based on rental value. In the past five years, alongside rising petrol prices, the profitability and turnover of many petrol filling stations has grown significantly. It is only fair to all ratepayers that that is reflected in rates bills. Rental values for petrol filling stations are determined by the market according to the trading potential of the individual site. That is regardless of whether they are independent or part of one of the multinational chains. As I said, the majority of businesses—60 per cent—will see their overall rates liability decrease because of the revaluation.
The noble Earl asked why we are doing this now. Regular revaluations are important, as they maintain fairness in the rating system and keep bills up to date, which is necessary as relative property values change over time. Postponing revaluation would hit hard those businesses which most need our help, such as businesses in the Midlands and in industry, whose relative property value has fallen since the last revaluation and which therefore should pay less in rates. The noble Earl concentrated on those businesses facing increases, but if we were to do as he urged, many businesses would miss out on a reduction. Businesses facing increases are in sectors and locations which have performed better than average since the last revaluation, such as inner London and such as supermarkets. It is only fair that they should pay a proportionately higher share of the total rates bill.
In particular, I instance the fact that the revaluation was based at the height of the property market. It would have been wrong to delay or postpone revaluation, as to do so would, as I said, deprive the majority of business properties—1 million in total—of a deserved reduction in their rate bills. The high property market of April 2008 does not mean higher bills or more money collected by government nationally in aggregate, because rateable values, as we have discussed, are only one part of the rates bill; the other is the ratings multiplier—which, as I recall it, used to be called the rate poundage—which is applied to calculate final bills.
The noble Lord, Lord Tope, who gave the regulations a qualified welcome, instanced issues concerning software. We are not aware of any software problems connected with the revaluation. As I said in my opening presentation, we do not expect any delays. If the noble Lord has more information that he would like to share with us, I am happy to have a discussion outside the Committee, or we could correspond on the matter.
The noble Lord and the noble Baroness, Lady Valentine, talked in particular about London. Of course, London is a key player in our economy, with the highest concentration of business properties, particularly in inner London and the City of Westminster. It has seen the highest economic growth of any region in the UK, and it is only right that it makes a proportionate contribution through business rates. Nevertheless, nearly 45 per cent of businesses in London—124,600—will see their rate liability fall as a result of revaluation. Small shops are expected to be winners, and could see rate bills fall by 3 per cent on average in 2010-11, an overall reduction of £6.5 million. Furthermore, more than 55 per cent of business properties in outer boroughs in the capital will see their rate bills fall next year by an average of £950 as a result of revaluation. We estimate that 16 London boroughs in total will see their total rates liability fall due to the revaluation and transitional relief.
For those ratepayers facing increases, London will benefit more than anywhere else in the country from the transitional relief scheme to help with future business rate liability. While London is expected to see a 10 per cent increase, the transitional relief scheme would see this reduced to 3 per cent in 2010-11. In total, 466,000 ratepayers will benefit from transitional relief, of whom 112,000 are in London—some 24 per cent. Over five years the transitional relief will be worth £2 billion. Of that, £934 million would go to London.
The noble Lord, Lord Tope, asked about London’s so-called “double whammy”. The business rate supplements provide a new tool for local authorities to invest for the longer-term economic development of their area. The GLA and the Mayor of London have just finished consulting on proposals to levy a BRS as part of the funding arrangements for Crossrail, as I am sure the noble Lord is aware. Under these proposals, properties with a rateable value of £50,000 or less would be exempt from the supplement, which would mean that more than 80 per cent of properties in London would not have to pay the supplement. The Mayor of London also has discretion to set a higher threshold exempting additional properties. Furthermore, London will benefit more than anywhere else in the country from the transitional relief scheme, as I said a moment ago.
The noble Lord asked for confirmation that the transitional relief scheme does not apply to the business rate supplement. He is right: the transitional relief is designed to limit and phase in significant increases in business rate liability resulting from the regular five-yearly revaluation of business rates. The majority of business properties, 60 per cent, will see their rates liability fall as a result of that revaluation.
Transitional relief is a national scheme that is funded by other business ratepayers. Extending it to the BRS would mean that ratepayers in parts of the country where rateable values have gone down as a result of the revaluation could be asked to contribute to relief on an increase that did not result from revaluation but was instead the result of a local BRS that had not been levied in their area and therefore would not bring any benefit to them.
I hope that that has covered each of the points raised. The noble Baroness asked what the levels of potential increase were. The 12.5 per cent is before inflation; it becomes 11 per cent after inflation. The 5 per cent is before inflation and becomes 3.5 per cent after inflation because of the 1.4 per cent reduction.
I did not want to interrupt the Minister when he touched on this point, as he was on a roll at the time and fired up by the subject. In my remarks I mentioned the figure of £20.8 billion, which I believe is the amount expected to be received from all these business rates. In response to a Written Question, the Government said that they expect to distribute £21.5 billion back to local authorities by way of the formula grant. I raised the point that there is a £700 million deficit between the two. I think the Minister tried to touch on that, but I did not get it. How is this going to be funded? How will not doing an assessment on the effects of these rate revaluations affect businesses? Will they be able to pay? How many businesses are going to go bust between October last year and next April? That will reduce the £20.8 billion expected, thus increasing the £700 million black hole. Will the Minister respond to that?
I will try. On the general point about businesses going bust, the recession—from which we are not immune because of what has happened across the globe—has given rise to policy changes and initiatives. For example, we have introduced the fiscal stimulus and rescued the banks; we are ensuring that the banking system is working properly; and £5 billion has gone into the DWP to increase its capacity and to help people move back into the labour market. These are all parts of a package of measures to help dampen the impact of the recession, particularly its impact on employment. Given the environment we are in perhaps I should not press the point, but the noble Earl’s party opposed the fiscal stimulus on the general principle of its effect on business and that recovery from the recession would be made more difficult. On the precise point that he raised, I do not have in front of me that figure of £20.8 billion but I shall write to him on the matter.
In principle, two things will happen: first, the business rate will be paid into the fund and, over time, it will be redistributed back to local authorities. There may well be a mismatch in the early years and I shall write to the noble Earl to explain that in more detail. Secondly, no surplus will come out of this for the Government and no cost will go into it; it will be self-financing. It may help the noble Earl if I wrote to him to give him greater clarity on the timescale.