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Non-Domestic Rating (Rates Retention) and (Levy and Safety Net) (Amendment) Regulations 2017

Volume 782: debated on Monday 20 March 2017

Motion to Approve

Moved by

My Lords, the business rates retention scheme, which was introduced in 2013-14, allows local government in England as a whole to retain 50% of the business rates it collects locally. These regulations change the regulatory framework governing the day-to-day operation of the business rates retention scheme. The changes, which are highly technical, are necessary, first, to ensure that the scheme adapts to the impact of the 2017 business rates revaluation and, secondly, to reflect the fact that from 1 April 2017 a number of authorities will be piloting 100% business rates retention.

Starting with the changes that need to be made because of the revaluation, the business rates retention scheme currently provides that some of the 50% of business rates that authorities retain is redistributed between them to ensure that no area is disadvantaged by having a small business rates base. This redistribution is achieved through what are known as “tariffs” and “top-ups”. Tariffs take money from authorities which are relatively rich in business rates when compared to their spending needs, and this is then redistributed through top-up payments to authorities which are relatively poor.

Tariffs and top-ups were set in 2013-14 based on the difference between the business rates that authorities were expected to collect in that year and their relative need, as established in that year’s local government finance settlement. Thereafter, they were uprated annually by inflation. Any growth, or decline, in local business rates after 2013-14 has not been taken into account in future years’ tariffs and top-ups—hence, authorities have an incentive to grow their business rates bases, as, by doing so, they keep 50% of the benefits of growth.

However, as a result of the business rates revaluation that will take effect on 1 April 2017, the amounts of business rates that authorities will actually collect in 2017-18 will be very different from what they collected in 2016-17. If, for 2017-18, we were simply to uprate the existing tariffs and top-ups by inflation, as we have done in the past, authorities could find their income from business rates substantially changed for reasons quite unconnected to their efforts to secure growth but due to revaluation.

Therefore, when we set up the scheme in 2013, we announced that we would adjust tariffs and top-ups to strip out the impact of revaluations. During the summer we consulted on the methodology for doing that, and new tariffs and top-ups for each authority were approved by Parliament as part of the most recent local government finance report.

Because business rates can decline as well as grow, the business rates retention scheme, under which local government keeps 50% of locally collected business rates, also provides for safety net payments to authorities that see their business rates income fall significantly. These are paid for by charging a levy on authorities whose business rates income grows. Tariffs and top-ups are used as part of the calculation of levy and safety net payments. The detailed calculations are set out in secondary legislation, which currently sets out the “old” tariffs and top-ups due to and from authorities. Therefore, these regulations amend the regulatory framework to ensure that the new tariffs and top-ups are used in these calculations.

The regulations also give effect to the 100% rates retention pilots, which the Government have set up to take effect from 1 April 2017. These were announced in the summer as a way of testing elements of the new 100% business rates retention scheme that will be rolled out more widely in 2019-20. Local authorities in Cornwall, Greater Manchester, the Liverpool City Region, the West Midlands and the west of England will be piloting the new arrangements in 2017-18 and, as a result, will keep all the local business rates they collect, subject to the normal arrangements in the system which redistribute some of their business rates income through tariffs and top-ups. In return, they will forgo some revenue grants from central government—most notably, revenue support grant—and their tariffs and top-ups will be further adjusted to ensure that the pilots are effectively cost-neutral.

The GLA will also keep a higher share of the business rates that will be collected by London boroughs in 2017-18. In return, it will give up its revenue support grant and take on responsibility for funding nearly £1 billion of grant to Transport for London. The regulations will make the necessary changes to the administration of the business rates retention system to ensure that the sums paid and received by the pilot authorities over the course of the year reflect the new pilot arrangements.

To sum up, the regulations make technical changes to the administration of the business rates retention system to reflect the impact of the revaluation and to allow the 100% rates retention pilots to operate from 1 April 2017. Without the changes, authorities would not receive the income from the business rates retention scheme that they are expecting and for which they have budgeted. I commend the regulations to the House and beg to move.

My Lords, I must first apologise to the Minister for missing the first minute of his speech; I hope it was not full of fresh information that I ought to be aware of. As far as I am concerned, and I think the same goes for my noble friend, there is no particular objection to these regulations. It is interesting, however, to hear about the proposed pilot schemes—I suspect that the good citizens of Surrey will be waiting with bated breath to see whether they will be included in the pilot scheme. Although the Minister cannot indicate the outcome of ongoing discussions with other authorities, perhaps he can tell us when a decision will be made.

Part of the problem faced by authorities, and by the Government themselves, is the delay in this revaluation—I think it should have occurred in 2015. Will the Minister tell us whether it will be possible to decide on and then stick to a regular period for revaluation? The longer the gap, the greater the impact appears to be, and that is certainly part of the current reaction.

There is also a real problem, not dealt with in these regulations, about the appeals process. The Local Government Association—I remind the House, such as it is, of my local government interests—points out that there have been more than a million appeals from business rate properties since 2010, and 200,000 of those appeals are still waiting to be decided. This has led councils to hold back £2.5 billion in reserves in case they have to meet their 50% share in respect of refunds; 50% is payable by councils and 50% is payable by the Government. The system is clearly creaking around what it is capable of resolving in relation to the appeals system. I wonder whether the Government will look at that system and at the funding that is required to be put in place when there are appeals.

Finally, one of the reactions to the announcement was to point out the strange apparent outcome that very large operations such as Amazon and Sports Direct, with their massive out-of-town sheds, get a very low business rate, whereas the shop on the corner and the pub in the middle of town pay a disproportionately high amount relative to those very large concerns. Are the Government looking at that anomaly and, if so, when will it be resolved? It certainly concerns anybody living in a city area, where business rates income will now be crucial to the services that the authorities can provide, and yet these large institutions, mainly outside urban areas, will both compete with those in our towns and cities and themselves have very little to pay by way of business rates. That anomaly should surely be addressed.

My Lords, I too am a vice-president of the Local Government Association.

The context of these regulations is one in which there is an increasing lack of confidence in the sustainability of local government finance over coming years. There are several reasons for this, which have been well documented. It is partly about rising demand and it is partly about reducing income. However, there is no doubt that there is simply not enough money to do all the things that local government needs to do.

Despite declining income, however, business rates have not been reducing, and they are very high in international terms. They have become a major burden for many small businesses, even for some that will gain from the revaluation. The situation has become acute for many high street shops and pubs. Competition through internet purchasing from retailers not in shopping centres and that have lower business rate bills has become a major source of concern.

It is true, as the Government keep reminding us, that this revaluation is revenue neutral overall. Three-quarters of businesses will not pay more, but that means, of course, that one-quarter will pay quite a bit more. I acknowledge that there are transitional arrangements, and they will be important. However, the revaluation still means very high bills for some.

Thirty years ago we had a local domestic tax, a local business rate and a revenue support grant from central government, with a strong needs-based element in the government grant regime. I think that that needs assessment is now in danger of being inadequately reflected in government thinking. Much has changed since business rates were nationalised almost 30 years ago, but one thing has not: need remains in both absolute and relative terms and should be fully reflected in government policy.

I draw the Minister’s attention to a comparison that I think is important, between corporation tax and business rates. Business rates raise around £28 billion and corporation tax raises around £43 billion. Corporation tax is being reduced to 17% by 2020, and in my view that reduction cannot be justified when business rates could be made lower. I think that the continued reduction of corporation tax helps bigger businesses—those that pay corporation tax—but smaller businesses that pay business rates but not corporation tax are getting a higher bill as a consequence of their exposure to business rates.

The noble Lord, Lord Beecham, asked about the scale of appeals, and he said there was a backlog with the Valuation Office Agency of some 200,000 cases. I thought there were around 280,000 cases, so it will be interesting to have the up-to-date position from the Minister. However, the current rate of resolution of those appeals is only a quarter of the 280,000 that I think the figure is in a year. In other words, there is already a backlog of about four years. There will then be a huge rise in the number of appeals as a result of the revaluation. Has there been any discussion about the number of staff that the Valuation Office Agency has? It seems that it needs more.

Can the Minister also confirm what the Government have agreed for meeting the cost of appeals? The noble Lord, Lord Beecham, talked about the 50:50 split, but the Government have indicated that they are willing to pay more money as a contribution. I would be grateful if the Minister could confirm the detail of what that means.

I think it is wise to have the business rate retention pilots, and I am really pleased that they are taking place in as many places as is now planned. It is important to understand the impact of government policy, in terms of both need and equalisation, on some areas. I draw the Minister’s attention to HS2, a long-term project. There is clear evidence that where major infrastructure goes in, much of it with government/public-funding support, it raises values. Where the Government decide to invest in infrastructure, values rise; and when values rise, the business rate income for those areas will also rise. One of the consequences is that, because development investment is likely to be higher in the places where the infrastructure investment has taken place, those parts of the UK that do not have major infrastructure investments may find they have lower business rates income, in comparative terms, as a consequence. It is not wise for government policy to lead to a situation in which some parts of the country have greater difficulty in raising money from business rates. For that reason, equalisation will matter in the years ahead. It is not something that will just disappear in the course of the next two to three years.

My Lords, I draw the attention of the House to my entry in the register of interests as a councillor in the borough of Kirklees and as a vice-president of the Local Government Association.

I wish to draw the House’s attention to the significant number of factors that are changing in the system of a 100% business rate retention and the consequences of those changes. We welcome the move to more locally raised funding for local services because it brings with it less reliance on the variation in perception of local government by different national government Ministers. Such a substantial change brings considerable uncertainty, and as local authorities are already grappling with substantial funding changes, this adds to the risks of councils being able to budget to meet local needs. The fact that the move to 100% retention coincides with the significant and overdue business rates revaluation has added to the complexity of what is being considered and how it will work out in practice. Consequently, there is an expectation that there will be a large number of business rate appeals, to which the noble Lord, Lord Beecham, and my noble friend Lord Shipley have already drawn attention. While it is to be welcomed that the Government have established a central fund for payment where appeals are successful rather than the existing system of a 50:50 share with local authorities, it must be fully funded, otherwise it will fall into disrepute.

A 100% business rates retention scheme brings with it both winners and losers. An analysis by the House of Commons Select Committee last year estimated that the winners are more likely to be in all the regions to the south of Birmingham, with the northern regions and the Midlands being net losers. Although government estimates are that local government as a whole will gain by between £10.5 billion and £12.5 billion a year, many local authorities will not gain and will rely on the system of tariffs, top-ups and the new levy system to allow equalisation.

This redistribution through tariffs and top-ups will be absolutely critical if local authorities that are currently not in a position to raise sufficient funding are to be able to meet local needs. This must be done on the basis of an individual council’s needs and not on a regional, sub-regional or combined authority basis as there can be wide variations even between adjacent local authorities, again as the House of Commons committee report of 2016 demonstrated. The safety net is a critical factor and the detail of how this will operate is fundamental to enabling local authorities to deliver essential public services.

The other crucial factor in these considerations is the frequency of the so-called resets—the length of time between business rate revaluations. Obviously businesses, wanting certainty, would want a longer period, but local authorities, reliant on income from business rates and with fluctuation in need, will want a more frequent reset. It will be interesting to hear from the Minister about the lengths of time between resets that the Government are considering. It will also be interesting to hear what action the Government propose to take if, for instance, a large retailing business closes within a local authority and it therefore loses the income from that company’s business rates. Would there be compensation for what could be a significant loss of income?

In addition to these variables, the Government are proposing that local authorities should have new responsibilities as a result of the increase in funding that will be gained by them from the 100% retention scheme. I am relieved that the attendance allowance scheme has now been excluded from the suggestions that the Government originally made, but I hope—perhaps the Minister will be able to give some reassurance—that they will not use the opportunity of local authorities gaining from additional funding to pass on more responsibilities than the funding available. That would be quite a cynical move and would just add to the cuts in local authority funding.

The Government have yet to spell out the arrangements for sharing business rates in two-tier authorities. Perhaps the Minister can throw some light on how that will happen. I would also like to hear from the Government about the central list of major public utilities whose business rates are centrally gathered. It would be nice to know which is on that list, what business rates in total they bring in, and how the money will be redistributed. I have not been able to find a list. I am sure there is one, but it is a little list that I have not been able to find.

A final uncertainty in this major reform of local government finance is the fair funding review, which I hope will live up to its name. The assessment of need referred to by my noble friend Lord Shipley is the fundamental building block for providing local councils and the people they serve with an assurance that councils will be able to meet their basic needs.

The Government are making substantial changes to local government finance at the same time as large cuts are being made to local government funding. This brings with it risks and uncertainty as well as an inability to plan for the long term. We seek assurances from the Government that these changes will not, first, result in even more significant cuts to funding for those councils that will struggle to increase business rate income in the short and medium term. Secondly, can the Minister give an assurance that there will be a fair equalisation mechanism? Thirdly, will he take into account the significant changes in income or, as I have referred to, between the reset periods? Fourthly, will the fair funding review enable all local authorities to meet the needs of the people they represent?

Finally, I look forward to the Government providing information about the one-liner I spotted today in the Local Government Finance Bill:

“The Government will amend the related approach to the setting of council tax referendum principles”.

I have thrown that in in the hope that the Minister will have some information on it.

My Lords, in debating these regulations I refer noble Lords to my entry on the register of interests. I declare that I am a local councillor in the London borough of Lewisham and a vice-president of the Local Government Association.

The first set of regulations, as we have heard, governs the payments to and from authorities and to the Government, while the second set governs the operation of the levy and the safety net for 2017-18, taking into account the revaluation and the 2017-18 business rates pilots. The amendments make provision for the following: allowing the pilot authorities, including in Greater Manchester, Liverpool City Region, West Midlands and West of England and Cornwall, not to pay a central share. There is to be a reduced central share in London to allow for the fact that the GLA will now receive Transport for London investment funding through business rates rather than a grant. The West of England Combined Authority is to receive 5% of business rates as well. There are changes to the baseline funding level for all authorities in line with the 2017 revaluation and the rise in RPI. Changes are made to the levy rates to reflect revaluation and the fact that the levy will not be payable for authorities in the pilot areas.

I have no issues with these regulations as they stand, but I have a few general observations and questions for the Minister. As we move to a system whereby local authorities keep their business rates, the Government need to ensure that the implementation is fair and provides councils with the resources they need to deliver services. Some areas will be able to generate large sums of money from their business rates while others, despite working on and growing their local economies, will struggle to generate sufficient business rate income to meet the demands placed on them. We have heard about the schemes in place to equalise that—the noble Baroness, Lady Pinnock, referred to them. Can the noble Lord comment on ensuring that the scheme to take account of imbalances has a very local focus rather than the focus being at the regional and combined authority level? I agree strongly with the comments of the noble Baroness in that respect. Can the Minister give local authorities some comfort by saying that the Government are aware of this issue and will be responding to it?

Can the Minister also comment on the trend of the Government to place more and more obligations on local authorities but not to provide the funds to meet them? It is a worrying trend that we have seen developing. I would certainly want to see extra business rates income being used to relieve existing funding pressures before we get to the additional responsibilities to be funded through business rates retention.

Can the Minister also say something in respect of business rates appeals, a point raised by other noble Lords in their contributions, and the risks associated with them for local government? My noble friend Lord Beecham and the noble Lord, Lord Shipley, both referred to this issue. I contend that local authorities holding £2.5 billion in case they need to refund money due to successful appeals is not the most efficient way to proceed.

I also agree with the comments of my noble friend in respect of large organisations having little to pay in respect of business rates in comparison with high street shops and the important loss of income to local authorities. The noble Lord, Lord Shipley, made an important contribution about the question of need and the issue of corporation tax paid by large companies falling while the business rates faced by small businesses and the high street rise year on year, as they are doing again today. The noble Baroness made the point about the significant risk to local authorities caused by a number of factors in the larger than normal expected rate of appeals due to the revaluation.

I have also been thinking about the position of hospitals. We often hear about hospital budgets being under pressure, but they too have the potential to be affected by the increase in business rates. Again, I do not know whether schools pay business rates, and if so they could well be affected in terms of pressures on their budgets. It would be helpful if the noble Lord could respond to these points. However, I have no issue per se with the regulations before the House and I am happy to agree to them.

I am grateful to all noble Lords who have taken part in what has been on the whole a consensual debate and I shall try to answer the questions that have been raised. If I cannot, I will write. I did not think that we would get through this debate without Surrey being mentioned. The position is that Surrey County Council informed the Government that it wanted to become a 100% business rates retention pilot area, but was told that that would not be possible for 2017-18. We said that, subject to due process and meeting the necessary criteria, it could participate in the 2018-19 pilot scheme. We explained that other councils had also had discussions with the department about becoming 100% pilots. We went on to announce that all councils will be free to apply to participate in a 2018-19 pilot programme and that the Department for Communities and Local Government would publish more information shortly.

I agree entirely with what the noble Lord, Lord Beecham, said about the need for regular revaluations, both to minimise the turbulence each time you do it and to make sure that we have an up-to-date tax base for local government. We have already said that we are looking at the revaluation cycle with a view to reducing the time between revaluations.

A number of noble Lords mentioned appeals. We are looking at changing the way in which appeals are dealt with under 100% rates retention so that individual authorities do not have to bear the risk of appeal losses. We are currently discussing the mechanics of doing this with the LGA and the sector with a view to removing some of the risks to their income from these appeals. Perhaps I can write on the backlog when I have the most up-to-date figures.

The noble Baroness, Lady Pinnock, asked what would happen if a local authority lost a substantial business rate payer in its area. When I introduced these regulations I mentioned that there was a safety net. There will continue to be one under 100% rates retention. We are discussing the detail of a new safety net with the LGA and the sector and will announce detailed proposals later in the year. The noble Baroness also made the valid point that not all local authorities will gain from 100% business rates retention. That is indeed the case. Redistribution and the timing between resets—in other words, how frequently we assess or reassess the needs of an authority—will be critical. Again, we are discussing the timing of this with the LGA, but we have indicated that we might reset the needs more frequently than under the 50% schemes. I hope that is of some reassurance to the noble Baroness.

We then heard about the anomalies in business rates between large rural businesses and small urban businesses. As noble Lords know, business rates reflect the rental value of the properties that businesses occupying them take. Businesses take decisions on location reflecting those differences. In recent years we have taken a number of steps to reduce the bills of small businesses, including some measures in the Budget and the permanent doubling of small business rate relief. Perhaps I could write about the question raised on the staff of the VOA who are needed to deal with appeals and the resources behind them.

The noble Lord, Lord Shipley, made the point that corporation tax has been going down whereas business rates have been going up. He drew attention to the imbalance. The only point I would make on that is that the rate of corporation tax is important to ensuring that this country remains competitive in an international world. The rate of corporation tax is a barometer of competitiveness in a way that business rates are not.

There was a valid point on Amazon. All businesses pay rates on the property they occupy, including Amazon. It is true that businesses that do not use high-value property or have a high internet profile will reduce their business rates bill, but of course business rates are not the only tax on those businesses. They will pay national insurance contributions on their employees and if they are making a profit they will pay corporation tax.

An issue was raised that is raised in every debate about local government about the Government putting more responsibility on local authorities without giving them the resources to discharge them. I remember making those points back in the 1960s when I was a local councillor. As part of the move towards 100% business rates retention we will give authorities some £12.5 billion of additional resources from which to fund the new responsibilities that they assume. To meet the perfectly valid point raised by a number of noble Lords, we are discussing the functions that will be devolved to local authorities with the LGA and with the local government sector. The new scheme will take account of imbalances through redistribution via tariffs and top-ups, and of the frequency with which, as I said a moment ago, we reassess the needs and reset the tariffs and the top-ups, in response to a point made by the noble Lord, Lord Kennedy.

We have stressed the importance we place on the fair funding review. We have been discussing the methodology of assessing needs with the LGA and with the sector. Again, we hope to publish further details in due course.

The noble Baroness, Lady Pinnock, raised the central list, which brings in about £2 billion per year. Perhaps I could write to her on the details of exactly where that money goes. The noble Lord, Lord Kennedy, raised a number of issues. As always happens when he winds up, I do not always have time to assess the in-flight information in time to respond to him, but he made valid points about hospitals, schools and a number of other issues. Perhaps I could write to him when I have assembled an up-to-date and authoritative response.

These regulations provide for changes to the day-to-day administration of the business rates retention system. The changes reflect decisions already made by Parliament in the Local Government Finance Report for 2017-18 about the percentage share of business rates that local authorities are to keep and the tariffs and top-ups that they are to pay or receive during the course of 2017-18. They deliver on the Government’s commitment to ensure that authorities are not financially disadvantaged as a result of the business rates revaluation that comes into force on 1 April. They also provide for the 100% business rates retention pilots in Greater Manchester, Liverpool City Region, Cornwall, the West Midlands and in the West of England, and, to a more limited extent, in London. They ensure that the agreements reached with those authorities can be implemented and that the Government can learn lessons from those pilots before 100% business rates retention is rolled out more generally in 2019-20. I commend them to the House.

Motion agreed.

Sitting suspended.