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Non-Domestic Rating (Chargeable Amounts) (England) Regulations 2022

Volume 826: debated on Tuesday 20 December 2022

Motion to Approve

Moved by

My Lords, this statutory instrument delivers a transitional relief scheme to protect businesses from large increases in their business rates bill when new property valuations come into effect on 1 April 2023. This will help around 700,000 properties with £1.6 billion of relief over the next three years.

The scheme, which is a significant part of the measures on business rates announced by my right honourable friend the Chancellor at the Autumn Statement, will cap bill increases after the revaluation by a set percentage each year. This will give certainty to businesses and, for the first time, ensure that 300,000 properties with falls in rateable value will see a full and immediate fall in their bills on 1 April.

As the Chancellor set out in his Autumn Statement, revaluations are an important and necessary part of the proper administration of the business rates system. By updating valuations so that they reflect market conditions, we make sure that the tax burden is fairly distributed. The new set of rateable values, which were published in draft last month and will be applied from 1 April, will therefore produce a fairer business rates system in which rates bills follow the up-to-date valuation of the property. The revaluation will build on measures we already have in the system to help ratepayers. Noble Lords will likely be aware that there is already a substantial amount of support through, for example, small business rate relief, which ensures that about 700,000 of England’s 2 million business properties pay nothing at all.

This scheme, at £1.6 billion of the total £13.6 billion package, will help around 700,000 properties transition to their new bills. Unlike previous schemes, it will not require ratepayers to wait years to see the benefits of falling valuations. The results of the Government’s recent transitional relief consultation were published alongside the Autumn Statement and clearly show businesses’ preference for the type of scheme we are putting in place.

The Government have listened to ratepayers and are delivering significant reform to transitional relief by removing the system of downward transition under which caps on increases were funded by restricting falls in bills. By scrapping the caps on the annual reduction in bills, some 300,000 properties with falls in rateable value will see a full and immediate fall in their bills on 1 April 2023.

Nevertheless, under current law—the Local Government Finance Act 1988—we are required, when making these regulations, to have regard to the object of ensuring that they are self-financing. To meet this legal requirement, we have included in the regulations a supplement of 3.3p on every £1 of rateable value to be paid by ratepayers in 2027-28. If, as we are currently required to do, we must include funding within the regulations, we consider this to be the fairest and most reasonable option as it allows businesses five years to recover from the current economic circumstances before having to meet the costs of transitional relief. But it is the Government’s intention—subject, of course, to the will and approval of Parliament—that no business will ever have to pay that supplement. We intend to bring forward primary legislation to reform the transitional relief, allowing us to remove the supplement so that the Exchequer shoulders the cost of capping bill increases after a revaluation.

Revaluations are important. They rebalance the burden of business rates across the tax base, making sure that they are a fair distribution. But, clearly, given the economic climate we are in, some ratepayers need support to transition to their new bills. This instrument, along with the wider support package announced by the Chancellor, provides the support that businesses need to manage the revaluation with greater certainty. I commend the regulations to the House.

My Lords, I declare my interest as a chartered surveyor and valuer once upon a time in the employment of the Inland Revenue Valuation Office, and a member of the Rating Surveyors’ Association, of whose annual parliamentary reception I am pleased to be the sponsoring Peer.

Bearing the mark of Cain in that respect, I thank the Minister for convening a drop-in session yesterday, even though my noble friend Lord Thurlow—who I am glad to see here—and I very nearly missed it. I am grateful that she has moved these regulations and for her explanation. They are very welcome and long overdue.

I warned the Minister, however, that my welcome would include some finger-wagging, so here goes. Although these regulations right an historic wrong, they do not by any test make it all okay. Leaving aside the impenetrable algebra of Parts 1 and 2 of these regulations—I do not recommend any noble Lord to pursue that too diligently—this measure is rendered necessary because of the effects of transition on those who, at revaluation, have their assessments reduced.

As noble Lords will know, transition is designed to smooth the adjustment process and prevent a cliff edge but, due to Treasury insistence on enshrining in law the principle of fiscal neutrality, the phasing in of increases is currently matched and compensated for by a miserably slow phasing down of reductions. In short, those whose assessments are reduced, possibly due to sectoral overvaluation of one sort or another, often do not see the benefits within the lifetime of a valuation list—the five-year life of a revaluation as at present. In fast-changing situations, this matters quite a lot and frankly is objectively unfair.

Although these regulations set out to redress that gross injustice, there is a sting in the tail, in that the £1.6 billion subsidy that enables these regulations to function will be clawed back from business rate payers in the last year of the 2023 revaluation lists, due of course to the question of fiscal neutrality. The only thing that stands in the way and would eliminate that is the long-promised move to a further and as yet undelivered overhaul of the entire system. I am very grateful to the Minister for her comments and hope that other speakers may be able to enlighten us on the likelihood of that. This may not be dealt with before the end of the current Parliament—it may be beyond that—and it will need all-party buy-in.

The business rate pays a huge and disproportionate amount towards local government finances. It is more than nearly any equivalent recurring property tax anywhere in the western world; we ought to bear that in mind. It has gone up by nearly 90% since 2001, far more than any increase in rents and rather more than the increase in profits, one might suppose. Pro rata it is disproportionate by reference to many other comparators as well, including by capital or rental value, floorspace, demands made of local government services and rate of increase—particularly when compared with that other local government source of finance, council tax. It is driving away enterprise, commitment and investment from the nation’s high streets, encouraging moves to cheaper or off-pitch locations, home-based enterprises and internet trading. As an aside, I comment that if the provision for enforced rental auctions of high-street retail property is still in the levelling-up Bill when it gets to us, it will mean, if anything, an admission of failure and an act of desperation that I think likely to backfire.

I welcome this limited measure for what it is, but wag my finger at the lack of action over the elephant in the room that sits behind it. Noting that the 2023 revaluation does not reduce many of what one might suppose the most seriously affected sectors—namely, retail and food operations—by more than about 10%, and bearing in mind that we are talking about 1 April 2021 as the valuation point, I think that we are at a tipping point. If nothing is done and we are not careful, the once-workable business rate system will become so tarnished and broken by mismanagement, lack of care, gaming of the system and denial of any sense of equity that abolition will be the unanswerable endpoint.

The Government’s 2023 revaluation support package is welcome but none the less papers over many cracks. Can the Minister tell us the position on the technical review consultation, which is now more than a year old? Can she give a categoric assurance that there will be comprehensive business rates reform in the life of the 2023 revaluation that can command the support of opposition parties? I will put it another way: when will we get a non-domestic rating Bill providing comprehensive reform and a move to three-yearly revaluations, doing away with transition and the need for a Treasury free bet of fiscal neutrality? Finally, will the Government rein in HM Treasury, address the excessive demands on the tax yield from this source, and move to a fairer tax take before it is too late?

My Lords, I thank my noble friend for bringing forward the regulations this afternoon. If I understood correctly, she said that the burden would be placed on the general ratepayers, which means that the electors would have to pay 3.4p per elector. Obviously this is a time of great concern for local residents and local electors, so they are going to look very closely at any increase on their council tax bills. To what extent can she justify this?

I echo some of the points made by the noble Earl, Lord Lytton, particularly the timescale for those who are going to face lower bills. That is to be welcomed, but could my noble friend say more about the timescale and how it is justified?

Presumably, there will be winners and losers. Can my noble friend say that there will be no pubs, clubs or restaurants in England that will face an increase in rateable value? If there is to be an increase, what is the timescale for it to be rolled out?

With those few remarks, I welcome the regulations, but I have a number of concerns and I look forward to hearing my noble friend’s response.

My Lords, I declare my vice-presidency of the Local Government Association. I too welcome the regulations, with some caveats. I agree with the noble Earl, Lord Lytton, that they are welcome and long overdue, and I agree with many of the points that he made, not least on the need for the reform of the business rates system. I am looking forward to hearing the Minister’s reply to his specific points.

The Government have made the right decision to press ahead now with implementing the revaluation because it reflects changes in market value since 2015, a period now of eight years. The decisions on the transitional relief scheme seem appropriate since they will give targeted support for the next five years to those businesses facing increases in their bills, in very difficult economic circumstances; they will freeze the multipliers in 2023-24; they will give extra, specific help to the retail, leisure and hospitality sectors; they will provide extra protection for small businesses that have lost rates relief because their property has been revalued upwards; and, as the Minister said, they will give some 300,000 businesses entitled to reductions an immediate and full implementation of the fall in their bill by ending the policy of downward caps. Welcome though all that is, it represents a temporary fix to a system that has not been working well and needs reform, as the noble Earl said.

The Government have brought forward the next revaluation to 1 April 2026, just over three years away. In my view that is the right timing because rental values, and thus rateable values, over the next three years may face pressures, given the overall state of the economy. It will also present an opportunity to take further account of online retailing. As part of this revaluation, total business rates paid by the retail sector will fall by 20% but the bills of large distribution warehouses will go up by 27%. That is welcome. As the letter dated 16 December from the Financial Secretary to the Treasury says:

“It is right that those sectors that have seen significant growth since 2015 pay their fair share of the tax burden.”

I agree, but the question remains: are they paying their fair share?

I have concluded that we still need a review of the business rates system. I hope that during our debates on the Levelling-up and Regeneration Bill we can examine how that might be approached, because we need more control of business taxation at a local level. I hope we will discuss how that might be done.

My Lords, I declare my interest as a former chartered surveyor, and one who worked in the dark ages in the world of rating. As a former chartered surveyor, I opened the statutory instrument with interest and excitement, and, as we heard from the noble Earl, Lord Lytton, found it was full of what I thought was trigonometry: pages 4 to 26 were theorems, fractions and things that I certainly did not understand. But the objective of the regulations is clear, and I support them.

The position of non-domestic rates has become, I am afraid, a shambles over a number of years. A failure of the authorities to remain abreast of trends in rental value—rateable value should be based on the revaluations in the commercial property markets—has led to a gross imbalance between sectors and, in some cases, competing users within single sectors. That is gross unfairness. This certainly applies to hospitality and leisure sectors, and, in some cases, competing uses, with traditional retail perhaps being most affected.

For several years now, the Government have failed in their promise to address the unfairness in commercial rates to deal with the likes of Amazon, as we heard from the noble Lord, Lord Shipley, and to allow our high street retailers to compete with these big-box retailers. They have a much lower cost of delivery model, and that cost is further increased by the rateable value system. Although we have heard that a 40% increase in industrial and warehouse rates, and a 20% reduction for retail, are proposed, this is de minimis in real terms—it is tiny, and it is not a percentage on like-for-like terms. A 40% increase in industrial rents of £10 a foot and a 20% reduction in the rent of zone A shops of £150 a foot are absolutely not comparable. That needs to be spelled out and made clear, and the Government need to do a great deal more very soon. This injustice continues to be kicked into the long grass at the expense of our high streets, and the important social benefits that they provide continue to decline.

This statutory instrument accelerates the reduction across the piece in non-domestic rates and feathers the increases for those suffering an increase over several years—both of these are to be welcomed. Similarly, freezing the rate poundage is also to be welcomed. The current levels of approximately 50p in the pound are the absolute maximum that businesses can stand. I support this statutory instrument and request that the Minister confirms that there is to be comprehensive rating reform very soon, as earlier speakers have requested.

My Lords, I thank the Minister for her introduction. As we heard from her and other noble Lords, the SI gives relief to businesses, particularly to help them cope with next April’s increase in business rates. We know that many businesses have been struggling following the pandemic, and this, combined with rising energy bills and high inflation, means that they need further support.

While we very much welcome the Government’s provision of relief, we do not think that the regulations go far enough. The Labour Party has been calling for an increase in the threshold for small business rates relief from £15,000 to at least £25,000, because the burden of business rates is disproportionately heavy on small businesses, as we have heard from other noble Lords. Having said that, we do not want to impede the passage of the instrument going forward.

I will ask the Minister a couple of specific questions. Part 10 of the draft Explanatory Memorandum considers the consultation outcome. It says that:

“A total of 102 responses were received”—

despite the instrument intending to help around 700,000 businesses—and that only “16 local authorities” responded. Can the Minister say whether the department feels that there is a reason for such a low response to the consultation? Because of that low response, what further steps have the Government taken, or are intending to take, to engage with those who are affected? We may hear, in broader terms, many of the concerns that have been raised by noble Lords previously in the debate.

The noble Baroness, Lady McIntosh of Pickering, asked about timescales; similarly, I will ask about the fact that we are debating the instrument only today. The instrument comes into force on 31 December, which means that it needs to receive parliamentary approval before the Christmas Recess. But given that the consultation finished in the summer, why has it been left so late to approve it? The Local Government Association made it clear in its response to the consultation that any transitional arrangements for 2023, whether part of the formal scheme or supplementary, should be announced no later than the autumn that has just gone, when the draft list of provisional multipliers was announced. We are debating this on the penultimate day before the Recess, so can the Minister shed any light on why the House has not been given the opportunity to scrutinise it any sooner?

I will make some brief comments on the points made by other noble Lords. The noble Earl, Lord Lytton, and the noble Lord, Lord Shipley, made very pertinent points; I will not repeat them, but we need to consider much of what has been said here, particularly when we consider the pressures on our high streets. I have seen so many shops close down in my local high street since the pandemic, and there is a real worry about how high streets will get back on their feet again. On that point, the noble Lord, Lord Thurlow, talked about competition, looking, for example, at the costs that Amazon has compared with our retailers on the high street. Those are really serious matters, and, if we are serious about rejuvenating our high streets, we must look at how we manage that through the way they are charged and operated under the business rates system.

I thank noble Lords for their thoughtful contributions and for the cross-party support—although there were some questions that they probably want me to answer.

The statutory instrument delivers a key part of the business rates support package, providing much-needed protection for businesses and delivering the fairness rate payers have been calling for. By limiting bill increases each year, we will protect 700,000 properties from uncertainty and give years for them to adapt to their new bills. Without that measure, hundreds of thousands of taxpayers would face significant and immediate bill increases in just a few months’ time. We are providing this protection in a new way that allows bills to fall immediately and in full on 1 April, benefiting 300,000 properties. With the statutory instrument, businesses will have the certainty they need and the fairness they expect from their Government.

A number of questions and themes came up, the first of which, about the reform of the whole system, was brought up by the noble Earl, Lord Lytton, and mentioned by my noble friend Lady McIntosh of Pickering and the noble Lords, Lord Shipley and Lord Thurlow. The Government remain committed to implementing the outcomes of the business rates review and will bring forward legislation as soon as parliamentary time allows—that is all I can say on timing.

The Government consider a tax on the use and value of non-domestic property an important part of a balanced business tax system, alongside taxes on profits and consumption, and it is a common feature of tax systems internationally. Business rates raise over £20 billion a year in England to fund vital local services, and there is no alternative with widespread support that would raise sufficient revenue to replace them. Trying to raise that money elsewhere in the tax system would create significant trade-offs against the current fiscal background. More generally, there is no merit in radically overhauling or abolishing a tax with such benefits, as has been suggested by what is, I have to say, a minority of stakeholders.

Quite rightly, there was concern about small businesses and the high street. That was brought up by the noble Lord, Lord Thurlow, the noble Baroness, Lady Hayman of Ullock, and my noble friend Lady McIntosh. The Government are committed to supporting businesses and communities that make our high streets and town centres successful, and have provided a comprehensive package of some £400 billion of direct support, including business grants, coronavirus loan schemes, the coronavirus job retention scheme and income tax payment deferral. This builds on long-term investments in our high streets and small businesses, including the £3.6 billion towns fund and the future high streets fund, as well as the £4.8 billion levelling-up fund. We are aware of this issue and are doing everything we possibly can.

As for business rates, there is small business rate relief through which one-third of properties, more than 700,000 in total, will pay no business rates at all, with an additional 65,000 receiving relief of between 0% and 100%. In addition, the supporting small business scheme means that properties losing some or all of their small business rate relief at the revaluation time in April will have their bill increases capped at £600 a year, and the tax rate will be frozen for the third successive year.

My noble friend Lady McIntosh and the noble Lord, Lord Thurlow, brought up the issue of retail, hospitality and leisure. The Government have been clear that they want to support these organisations; that is why there is 75% relief for retail, hospitality and leisure up to the cash cap.

The noble Earl, Lord Lytton, referred to the concern over delivering this policy. Yes, it has to be delivered in two stages, as I explained: first, with the regulations, and later with a Bill to deliver the second part to remove the self-funding requirement, so that no business pays a supplement in 2027-28. There is money—there is the £1.6 billion—but I am afraid we will have to ask the noble Baroness whether, if anything changes, the Opposition will support that. I hope that, in the light of the answer I gave earlier, this will be dealt with in a much timelier manner.

My noble friend Lady McIntosh asked whether pubs would see an increase. Nearly two-thirds of properties will not pay a penny more next year, and thousands of pubs, restaurants and small high-street shops will benefit. Many will also benefit from retail, hospitality and leisure relief, as I have said.

I think the noble Lord, Lord Shipley, was alluding to online sales tax in his question. The Treasury recently undertook a consultation on online sales tax, and the Government have since decided not to introduce such a tax at this time. The decision reflects concerns raised about its complexity and the risk of creating unfair outcomes between different retail business models. That includes challenges of defining the boundaries between online and in-store retail—the click-and-collect type orders. Stakeholders also expect that it would lead to higher prices for consumers. A full response detailing the complexities of implementing an online sales tax will be published in due course, but we should not forget what this revaluation is doing to rebalance the burdens of business rates, as we have heard. Properties that online businesses use, such as the large distribution warehouses, will see average rates increases of 27%, the highest grouping. We are looking at this issue, and I am sure we will hear more about it in this Chamber in the not too distant future. It is complex and needs careful consideration.

The noble Baroness, Lady Hayman, brought up business support packages, which I think I have addressed. As far as the consultation is concerned, I will have to get an answer to that, because I do not know why the figure is so low or whether we will know why. We can go out to consultation, but I will make sure that she knows what we are doing to further that conversation with our businesses, so that we are aware of how this is landing, but also what more we can do.

On the reason for the delay, this is within the usual timescales, as the noble Baroness knows, and we work closely with local government on this. We must remember that they are the people who are going to have to deliver it, and they are accustomed to these timescales. They are not saying that this is too late for them to do the budgeting they need to do, so that is the important thing. I think that is everything. I will look at Hansard tomorrow and if there is anything I have not answered, I will write.

My Lords, will my noble friend write to me about the 3p? Also, if two-thirds of the hospitality sector will see a reduction, does that mean that one-third will see an increase?

No, I am not saying that. The whole hospitality sector will have special consideration, as was said in the Chancellor’s speech and the Autumn Statement. On the 3.3p in the pound, that is what will have to be paid by 2027-28 if we do not change primary legislation in the meantime.

I think that is everything and I hope that noble Lords will join me in supporting these regulations. I beg to move.

Motion agreed.