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General Committees

Debated on Monday 20 March 2017

Delegated Legislation Committee

Draft Crown Estate Transfer Scheme 2017 Draft Scotland Act 2016 (Income Tax Consequential amendments) Regulations 2017

The Committee consisted of the following Members:

Chair: Sir David Crausby

† Aldous, Peter (Waveney) (Con)

† Barclay, Stephen (Lord Commissioner of Her Majesty's Treasury)

† Butler, Dawn (Brent Central) (Lab)

Djanogly, Mr Jonathan (Huntingdon) (Con)

Dugher, Michael (Barnsley East) (Lab)

† Ellison, Jane (Financial Secretary to the Treasury)

† Ferrier, Margaret (Rutherglen and Hamilton West) (SNP)

† Foster, Kevin (Torbay) (Con)

Mahmood, Shabana (Birmingham, Ladywood) (Lab)

Monaghan, Dr Paul (Caithness, Sutherland and Easter Ross) (SNP)

† Morgan, Nicky (Loughborough) (Con)

† Perry, Claire (Devizes) (Con)

Reeves, Rachel (Leeds West) (Lab)

† Reynolds, Jonathan (Stalybridge and Hyde) (Lab/Co-op)

† Shapps, Grant (Welwyn Hatfield) (Con)

† Smith, Jeff (Manchester, Withington) (Lab)

† Thomas, Derek (St Ives) (Con)

† Williams, Craig (Cardiff North) (Con)

Katy Stout, Committee Clerk

† attended the Committee

First Delegated Legislation Committee

Monday 20 March 2017

[Sir David Crausby in the Chair]

Draft Crown Estate Transfer Scheme 2017

With this it will be convenient to consider the draft Scotland Act 2016 (Income Tax Consequential Amendments) Regulations 2017.

It is a pleasure to serve under your chairmanship, Sir David.

The Government are committed to making sure that we work for all parts of the UK. In particular, we believe in the enormous benefits that devolution can unlock. That is why we have already taken action to give a range of new powers to the Scottish Government under the Scotland Act 2016. The statutory instruments will make necessary changes to support that Act; one relates to setting Scottish income tax rates and thresholds, and the other is about keeping any revenues raised from Scottish assets in the Crown Estate in Scotland.

I will address the income tax issues first. The amendments in the regulations will ensure that decisions taken by the Scottish Parliament are fully reflected in wider income tax rules. Last year, the Scottish Parliament was given extensive powers to influence the level of funding available to the Scottish Government, and it now has the power to set income tax rates and thresholds on the non-savings income and non-dividend income of Scottish taxpayers. However, those Scottish income tax powers have implications for a number of areas of wider income tax legislation, particularly those that operate by reference to specific rates or thresholds. We have conducted a detailed consultation on the technical changes needed to support those powers and the regulations will introduce the necessary amendments.

Let me give the Committee a brief overview of the proposed changes. The first relates to pensions relief. The regulations amend the rules that govern arrangements for relief at source, so that they can accommodate any rates and bands of income tax set by the Scottish Parliament. This will ensure that Scottish taxpayers continue to get the right amount of tax relief for their pensions, based on the Scottish rates and thresholds that apply to their earnings.

The second change relates to the pension annual allowance charge. The pension annual allowance rules charge tax on an individual when they make pension contributions over a set threshold in a year; the rate of charge that they pay on their excess contribution is based on the rate of tax to which they are subject. The regulations insert references to Scottish rates and thresholds into the rules to ensure that the charge on a Scottish taxpayer relates to rates and thresholds set by the Scottish Parliament.

The third change relates to the residuary income from a deceased person’s estate. The regulations amend the rules that provide, in certain circumstances, for a reduction in the residuary income of the deceased’s estate and a tax credit where a person other than the settlor receives an annual payment from a settlor-interested trust. The reduction in residuary income and level of tax credit are calculated by reference to income tax rates and thresholds. The regulations will ensure that when the individual concerned is a Scottish taxpayer, the right rates and thresholds will be used in that calculation.

The fourth change relates to social security. Under the Finance Act (No. 2) 2005, people who become entitled to a social security lump sum must pay a charge to income tax. Under the regulations, if they are Scottish taxpayers, the charge that they pay will be based on the Scottish basic rate or any other higher rate set.

Lastly, on gift aid, the regulations will amend section 414 of the Income Tax Act 2007 so that if Scottish taxpayers make donations that qualify for gift aid, the tax relief they get back will be in line with the tax rates that they are paying. The regulations will insert references to Scottish rates and thresholds into the gift aid rules to ensure that the relief available to a Scottish taxpayer who makes a donation is based on the rates and thresholds set by the Scottish Parliament. All in all, across these different areas, the amendments made by the regulations will ensure that the income tax system can fully accommodate the decisions taken by the Scottish Parliament as it exercises new income tax powers as it sees fit.

Let me turn to the Crown Estate Transfer Scheme. It is important to Scottish citizens that revenues raised in Scotland from Scottish assets are accounted for and spent in Scotland. The Smith commission agreement therefore recommended that we should transfer to Scotland the management of any Crown Estate assets that are wholly and directly owned in Scotland, including rural and urban holdings and mineral and salmon-fishing rights. It includes an area that incorporates around half the coastal foreshore and almost all the seabed, covering all the Crown Estate’s activities up to the 200 nautical miles limit.

We have now agreed the draft scheme with the Scottish Government, under which all rights and liabilities connected to managing those Scottish assets will be transferred to Crown Estates Scotland (Interim Management). All revenues will go to the Scottish Consolidated Fund and the commissioners who are currently in charge will have no further role in the management of those assets. Meanwhile, as required by the Scotland Act 1998, assets will continue to be managed on behalf of the Crown and maintained as an estate in land, which ensures that any sale receipts must be reinvested.

Key protections are also provided for under this instrument, which safeguards citizens across the UK by ensuring that the transfer is not detrimental to defence or national security. It also protects other UK-wide interests, for example, by ensuring that there is a consistent approach to telecommunications throughout the UK, ensuring that pipeline rental increases represent market value so our oil and gas industry is not held back, and helping to ensure that what British customers pay for electricity is fair. Finally, the draft scheme protects the rights of existing of staff as they transfer to Crown Estates Scotland. Provisions are in place to cover dismissal, contract variation and pensions.

The two instruments make a range of technical amendments that are important to ensure the smooth and effective transfer of powers to Scotland. I therefore hope that hon. Members will support them.

It is a pleasure to serve under your chairmanship, Sir David. I want to speak about the Crown Estate transfer. Although we welcome the devolution of the Crown Estate in the Scotland Act 2016, that excludes certain current assets, such as Fort Kinnaird in the Lothian region. We feel that is not true to the spirit of the Smith commission, which recommended the full devolution of responsibility for the management of the Crown Estate in Scotland and its revenues.

The Scottish Government are consulting on the Crown Estate and still welcome any responses up to and including 29 March. The aim is to ensure that we achieve our national outcomes. The devolution of the management and revenue of the Crown Estate in Scotland will provide an opportunity to use the capital assets and the net revenue generated in a way that contributes to achieving those outcomes, which are to

“value and enjoy our built and natural environment and protect it and enhance it for future generations”,


“realise our full economic potential with more and better employment opportunities for our people”,

and to

“have strong, resilient and supportive communities where people take responsibility for their own actions and how they affect others.”

The Scottish Government will manage the Crown Estate from April 2017. There is a clear and widely supported case for the devolution of the Crown Estate in Scotland to promote accountability and transparency. Once the UK Government have completed the process of transferring the Scottish assets, the Scottish Government will set out a timetable for reforming the management of the Crown Estate assets in Scotland, including further devolution opportunities. Communities will be at the forefront of managing the land and marine resources through opportunities arising from devolution of the Crown Estate and the implementation of Land Reform (Scotland) Act 2016. The Scottish Government will work with the UK Government to ensure the best possible deal for Scotland during the devolution process. We will also ensure a smooth transition for tenants of the Crown Estate’s four rural estates, at Glenlivet, Applegirth, Whitehill and Fochabers.

We are focused on making this devolution work. The priority is to secure the devolution of powers in relation to the management of the Crown Estate assets in Scotland, so we will not oppose this legislation.

It is a pleasure to see you in the Chair this afternoon, Sir David. I do not have a great deal to say on these rather technical amendments, but in respect of the draft Scotland Act 2016 (Income Tax Consequential Amendments) Regulations 2017, Labour remains supportive of greater Scottish control over income tax in Scotland. The regulations make a series of consequential amendments arising from the Scottish Government’s powers to set income tax rates and bands. As such, there is no real issue of substance to discuss, so we support the changes. Of course we wish that the Scottish National party Government in Scotland would show more willingness to use these powers to differentiate the Scottish tax system from that of the Conservative Government in Westminster, but that is their decision to make.

The transfer of management of the Crown Estate in Scotland and of the revenues it produces is a welcome measure, which Labour supports as a means of ensuring that Scottish people can more directly benefit from their stewardship of the Crown Estate’s considerable assets in Scotland. Labour was a driving force behind the Smith commission, which supported this transfer as the realisation of a long-held aim for Scotland to have control of the use of the Crown Estate north of the border.

I have one question for the Minister, which is about the process for resolving disputes between the UK and Scottish Governments. I understand that this is the most substantive change following the publication of the original draft seen by Parliament in October 2015. Could the Minister say a little about the negotiations with Scottish Ministers, particularly as regards the process for resolving disputes through determination by independent experts, how those experts will be chosen and what the process will be?

If you will forgive me, Sir David, I will write to the hon. Member for Stalybridge and Hyde specifically on the latter point.

On the point made by the hon. Member for Rutherglen and Hamilton West about Fort Kinnaird, the discussion was settled as part of the Scotland Act 2016 and the management of all the Crown Estate’s wholly and directly owned Scottish assets will be transferred under the transfer scheme. Fort Kinnaird is not wholly and directly owned by the Crown. It is held by an English limited partnership in which the Crown Estate commissioners manage an interest alongside other commercial investors, and the partnership also owns property in other parts of the UK.

Fort Kinnaird has never been wholly or directly owned by the Crown. It was brought into the partnership by the commissioners’ joint venture partner, Hercules Unit Trust, and is managed by British Land. Revenues from the Crown Estate’s interest in Ford Kinnaird will therefore continue to be passed to the UK Consolidated Fund for the benefit of the UK as a whole, including, of course, Scotland.

What has become obvious in our brief debate is that all parties in the House acknowledge that these regulations, given their technical nature, will help us to make the powers we have transferred or are transferring to Scotland work more smoothly. Whether they are to income tax or Crown Estate assets, we want to ensure that any changes are effective and that is what these instruments achieve, taking the necessary steps to allow for the full implementation of new Scottish powers. I commend them both to the Committee.

Question put and agreed to.



That the Committee has considered the draft Scotland Act 2016 (Income Tax Consequential Amendments) Regulations 2017.—(Jane Ellison.)

Committee rose.

Draft Electricity Supplier Payments (Amendment) Regulations 2017

The Committee consisted of the following Members:

Chair: Sir Alan Meale

† Brown, Alan (Kilmarnock and Loudoun) (SNP)

† Burns, Sir Simon (Chelmsford) (Con)

† Burrowes, Mr David (Enfield, Southgate) (Con)

Clwyd, Ann (Cynon Valley) (Lab)

† Costa, Alberto (South Leicestershire) (Con)

† Cunningham, Mr Jim (Coventry South) (Lab)

† Debbonaire, Thangam (Bristol West) (Lab)

† Evennett, David (Lord Commissioner of Her Majesty's Treasury)

Garnier, Sir Edward (Harborough) (Con)

† Goodman, Helen (Bishop Auckland) (Lab)

† Hart, Simon (Carmarthen West and South Pembrokeshire) (Con)

Hoey, Kate (Vauxhall) (Lab)

Kerevan, George (East Lothian) (SNP)

† Letwin, Sir Oliver (West Dorset) (Con)

† Morton, Wendy (Aldridge-Brownhills) (Con)

† Norman, Jesse (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)

† Whitehead, Dr Alan (Southampton, Test) (Lab)

† Wragg, William (Hazel Grove) (Con)

Ben Williams, Committee Clerk

† attended the Committee

Second Delegated Legislation Committee

Monday 20 March 2017

[Sir Alan Meale in the Chair]

Draft Electricity Supplier Payments (Amendment) Regulations 2017

I beg to move,

That the Committee has considered the draft Electricity Supplier Payments (Amendment) Regulations 2017.

It is a pleasure to serve under your chairmanship, Sir Alan. This statutory instrument amends regulations concerning the contracts for difference scheme and the capacity market. Those schemes are designed to incentivise the significant investment required in our electricity infrastructure, keep costs affordable for consumers and help to meet our decarbonisation targets, while ensuring security of energy supply.

CfDs provide long-term price stabilisation to low-carbon generators, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers. The capacity market provides regular payments to reliable forms of generation or demand-side response in return for such capacity being available when needed, the purpose being to ensure that enough capacity is always in place to maintain the security of supply. In both schemes, participants bid for support via a competitive auction, which ensures that costs to consumers are minimised.

The next CfD auction, with a budget of £290 million, opens in April and will be available to less-established renewable technologies. That should result in enough renewable electricity to power 1 million homes and reduce carbon emissions by about 2.5 million tonnes per year from 2021-22 onwards. It will thus allow developers of innovative renewable technologies to come forward, while delivering the best deal for bill payers.

There have been three main capacity market auctions, held each December from 2014 to 2016, to secure capacity for four years ahead—that is, from 2018-19 to 2020-21. The latest of those secured 52.4 GW of capacity at a price of £22.50 per kilowatt per year. In January 2017, an early capacity auction was also held to secure capacity for winter 2017-18. That auction secured 54.4 GW of capacity at a clearing price of £6.95 per kilowatt per year.

The regulations will implement a second tranche of minor and technical amendments to improve the efficiency of the CfD supplier obligation—that is, the levy on suppliers that pays for the cost of CfDs. They build on a first tranche of changes that were approved by Parliament last year and became law in April 2016. These further changes are being implemented now to allow time for necessary changes to be made to the settlement system, which determines the way in which CfD payments are calculated and paid. The changes under consideration and those implemented last year were both the subject of public consultation and received a largely favourable response. The regulations also amend the levies that fund the companies established to deliver the CfD and capacity market schemes.

The supplier obligation is a compulsory levy on all Great Britain energy suppliers to meet the costs of clean electricity generation under CfDs. The levy is collected by a private company called the Low Carbon Contracts Company, of which the Government are the sole shareholder. The funds levied are paid to CfD generators for the electricity they have produced. The rates are set on a quarterly basis and consist of two payments: the first paid daily, based on every unit of supply; and the second a quarterly reserve amount, designed to ensure that the LCCC faces as little risk as possible in covering payments to generators. Both rates are set based on forecasts of payments to the CfD generators and levied on suppliers based on their market share. At the end of each quarter, the supplier payments are reconciled with actual payments to generators.

The changes made by the regulations will further improve the efficiency of the supplier obligation mechanism. The most significant changes will speed up reconciliation payments, so that over-collected funds are returned more quickly after the end of the quarter and suppliers face less onerous cash-flow risk. Secondly, they will allow the LCCC to reduce the reserve amount without notice when it has been overestimated, to ensure that suppliers do not overpay for renewable generation and to reduce the call on their cash flow. Thirdly, they will enable the LCCC to recover funds from suppliers when a compensation payment to generators is due in respect of generation that happened more than 10 quarters ago. Finally, they will prevent double counting of the green import exemption and the energy intensive industry exemption to avoid suppliers demonstrating a negative market share, thereby avoiding the payment of levies altogether.

Taking the regulations together with the changes introduced last year, we have estimated that the cost of CfDs to consumers will be reduced by £38 million between 2016 and 2020, which is a small reduction of 40p to 60p on consumer bills. The current set of changes alone is estimated to reduce bills by £22 million over the same period.

The second objective to be delivered through the statutory instrument is to set a revised operational cost levy for the LCCC and a revised settlement costs levy for the Electricity Settlements Company, which is the company responsible for collecting and making payments to capacity providers under the capacity market. Those companies play a critical role in delivering the CfDs in capacity market schemes, and it is important that they are sufficiently funded to perform their roles effectively. The Government closely scrutinise their operational cost budgets to ensure that they reflect the operational requirements and objectives for the companies and deliver value for money.

Both companies have performed well and the cost of their core activities is slightly down from 2016-17. The increase in both budgets is due to the cost of software upgrades to the settlement system, which are necessary to reflect policy changes that simplify and improve the overall effectiveness of the capacity market and CfD schemes. For example, the changes to the supplier obligation will need to be reflected in the settlement system. The software upgrades are being treated as operational costs rather than as funded via capital, which means that they will be charged in full to the levy in 2017-18 rather than being recovered over the lifetime of the asset through a depreciation charge. Overall, there is no difference in costs to supplier.

The operational costs were also subject to consultation, which gave stakeholders the opportunity to comment, and they subsequently remain unchanged. The amendment revises the levies currently in place to reflect the operational cost requirements in 2017-18.

Subject to the will of Parliament, the settlement costs levy for the Electricity Settlements Company is due to come into force by 28 March 2017, the operational costs levy for the LCCC by 1 April 2017 and the changes to the CfD supplier obligation later this year.

The regulations will be enacted today by a vote in the Committee and the settlement costs will come into force at the times indicated: the Electricity Settlements Company by 28 March; the operational costs levy for the LCCC by 1 April; and the changes to the CfD supplier obligation later this year.

Finally, I would like to assure right hon. and hon. Members that the Government will continue to evaluate and monitor the reforms following implementation, ensuring that the measures put in place remain effective and continue to represent value for money for the consumer.

It is a pleasure to serve under your chairmanship, Sir Alan. The regulations are, by and large, sensible, in that they clarify and extend provisions relating to the CfD counterparty that were originally set out, as the Minister has said, in regulations in 2014 and that have been further iterated since, including today.

The regulations change and make coherent references to settlement dates, set a new rate for the operational costs for the CfD counterparty and, interestingly—the Minister fleetingly mentioned this—introduce a new arrangement that allows the CfD counterparty to reduce the reserve fund if, in the opinion of the fund, it has too much in it. I would like to hear from the Minister about some issues relating to that particular provision.

In order to get to that position, we need to backtrack slightly in the narrative and establish why the CfD counterparty was set up in the first place. In effect, the issue arose during the passage of the Energy Act 2013, when it was acknowledged that a counterparty body was needed to hold the ring with regard to the operators, who would expect to receive regular payment for their possession of the CfD. That payment would cover the difference between the strike price at which they settled the CfD and the reference price or prevailing wholesale price of electricity. In order to invest, those operators would need to know that they would get paid from a fund containing the payments and a reserve fund levy paid in by electricity producers in general. The operators needed an assurance that they would get paid, and the other side also needed an assurance that money would go into a fund to enable that to happen. Both sides had to be fully assured.

The question that arose at the time was how to guarantee that transfer and ensure that the operators could be sure of receiving the payments, and that they could be made from a secure fund. The easiest option would have been for the Government simply to guarantee the transfer, but that was deemed not possible by the Treasury, because it would effectively have counted as public spending. A solution was found by the end of the legislation’s passage through Parliament: a separate company, the Low Carbon Contracts Company, would be set up to be the receiving and payment agency, not backed by Government but with a high enough level of probability in its operation to satisfy investors that payments would be forthcoming. That meant that a linking mechanism was needed between payments in and payments out and payments in and the reserve fund, to ensure that payments would continue if there was a hiccup at the receiving end. That was implemented in the 2014 regulations.

A leading law company’s brief synopsis of the LCCC states that

“the CfD will take the form of a bilateral private law contract between the generator and the CfD counterparty, a wholly owned subsidiary of the Government…the obligation of the CfD counterparty to make payments under the CfD is limited by the ‘pay when paid’ principle. This means that the CfD counterparty is channelling payments between generators and suppliers, but has no obligation to make payments if not previously received from suppliers or generator. There is no payment guarantee from the Government…the CFD counterparty will levy funds on a (likely) monthly basis from suppliers under the supplier obligation to cover the difference payments due to generators from the previous month and will transfer these funds to generators once received from suppliers.”

That is the position with regard to this independent company, which is not backed by the Government but is a subsidiary of the Department in its operational life.

Interestingly—hon. Members might think that this is not very interesting, but I think it is—the 2014 regulations, which the regulations under discussion repeat and extend, use probability theory. It is the first time that I have seen defined in law what probability theory has to say about ability to pay and the necessary arrangements that a company should make. Regulation 7 states that the LCCC should work towards, essentially, a 95% probability of being able to pay. That transfers and slightly extends the probability theory statement in the 2014 regulations. As the explanatory memorandum helpfully emphasises, that means that payment will take place in 19 out of 20 scenarios. The regulations do not specify what those scenarios might be; the company itself has to think about them and act accordingly. In other words, at that point the company is the judge of its own probable solvency.

I did not like that formulation in the 2014 regulations and I do not particularly like it now. The scenarios that the company is supposed to consider can be unbalanced, because the law provides no direction. For example, according to the National Audit Office, offshore wind has recently turned out to be far more efficient than was previously thought, so it will require far more CfD payments and draw more from the fund than it might previously have done. That is just one scenario and the explanatory memorandum emphasises another, namely that the counterparty will need to make arrangements for the massive Hinkley Point CfDs when they start being produced.

As I have said, the regulations include a new provision that allows the CfD counterparty company to reduce its reserve fund without any notice, if it thinks it has been oversubscribed, but it has to be in a position to make payment in 19 out of 20 scenarios. The reserve fund is there, among other reasons, to ensure that the payments are made even if there is a hiatus in the money coming in. Under the regulations, the company will decide for itself the sample points that will go into its initial calculation of its own likely solvency. It will then be able to make a further subjective determination of the solidity, or otherwise, of its own reserve fund. As I am sure the Minister will agree, that will add a further subjective factor to each sample point, because of the company’s new ability to reduce its own reserve fund if it thinks it should do so.

All of that makes the provisions look a little wobbly. The regulations introduce a new factor that turns the probability position set out in the 2014 regulations into a further probability scenario of their own. In other words, what is the probability of a company reducing its own reserve fund without notice and therefore compromising its long-term likelihood of solvency?

I do not intend to divide the Committee, but will the Minister tell us whether he thinks that the arrangements proposed by the regulations, which are complicated by the new provision about reducing reserve funds, are a cause for concern with regard to the future solidity of the hard-worked arrangements set out in the 2013 Act, or does he think that everything is hunky-dory? I would assess the probability of getting a clear answer to that at a little over one in two, but of course I could be proved wrong by events, as all probability theory calculations have to acknowledge.

It is a pleasure to serve under your chairmanship, Sir Alan. I will be very brief.

The amendments that the regulations make are mostly technical. Anything that improves legislation and ultimately helps to speed up reconciliation payments is to be welcomed. However, I have a few comments to make in passing. First, I note from paragraph 8.17 of the explanatory memorandum that professional and management fees are increasing because of Hinkley Point C. That seems to me another hidden cost of Hinkley. Secondly, the Minister mentioned forthcoming CfD auctions. I suggest to him that there is still time to reconsider allowing onshore wind to bid in future CfD auctions, given that it is now much cheaper. That would generate good value for the taxpayer. Thirdly, paragraph 8.14 of the explanatory memorandum states:

“Three respondents disagreed with the proposal, arguing that it raised the possibility that a supplier could temporarily default and be excused of their share of mutualisation payments.”

Do the Government have a response to that point?

I am grateful to all hon. Members who have contributed for their comments and questions. If I may, I would like to correct something that I said earlier in response to my right hon. Friend the Member for Chelmsford. Officials have reminded me that regulations 1 and 19 will come into effect the day after the regulations are made. Regulation 14 will come into effect on 1 April, regulation 8 on 1 October, and all others on 1 July. I hope that that will comfort him. I apologise for misleading him earlier. I have been corrected on one other thing: it is not just the day, but the day after the day on which the regulations are made. I am doubly corrected

On the questions raised by the hon. Member for Kilmarnock and Loudoun, I hope he will correct me because I did not quite catch his final point about mutualisation. On onshore wind, as he is aware, the Government issued a consultation in November 2016 and continue to be heavily engaged in discussing the situation with the Scottish Government, developers, island communities and other Members. I hope that gives him comfort.

On the issue of costs, the hon. Gentleman will see that they have been included. We expect the costs for Hinkley Point to be in the region of £1.4 million for 2017-18. It is not at all clear why that should go up, but it is worth saying that Hinkley Point C is a complex contract and the Government’s approach is based on a flexible outsourcing model of getting professional advice to fit the needs, so that may change. If there is an issue of mutualisation, I invite him to come back to me because I did not quite understand the point he made.

The hon. Member for Southampton, Test was right to separate out the fixed levy portion from the lump sum reserve payment, and to point out that the intention of the lump sum reserve payment is to give 95% confidence that that will be paid. In the past, the effect of the previous regulations meant that the LCCC over-collected. The purpose of the regulations under discussion is to allow it to remit more quickly those funds that may have been over-collected, rather than trap them in parallel with the faster settlement process that has been introduced. Therefore, the question whether the organisations are under-constrained does not arise. As I have said, their operating costs are scrutinised by the Government, and of course they are subject to mutualisation and are therefore undoubtedly subject to question by the suppliers who pay their costs.

I am sure the Minister will agree that the existence of the reserve fund still has some salience in this process, in so much as it functions as a backstop when there have been hiatuses—if that word exists—in payment or collection. The reserve fund can, in such circumstances, be brought in to smooth the passage and allow for the continuation of business, even if there are problems at either end. The question of reducing the reserve fund unilaterally and with no notice, which is in the regulations, is not just a technical issue; it is a real issue that has a bearing on how the rest of the company works, and therefore the probability within which it works overall.

I take that point, but I think the hon. Gentleman has got the incentives the wrong way around. The incentives are to maintain a large reserve fund because that gives a degree of comfort and prevents challenge. The point of the provision is to create an inventive if it is perfectly clear that more money has been accumulated than is required to be paid out. In general, the companies concerned will have a tremendous incentive to retain what reserves they can, precisely for the reasons he suggests. In reality, I do not think there is any real danger.

Question put and agreed to.

Committee rose.

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

The Committee consisted of the following Members:

Chair: Phil Wilson

Ali, Rushanara (Bethnal Green and Bow) (Lab)

† Cartlidge, James (South Suffolk) (Con)

† Chishti, Rehman (Gillingham and Rainham) (Con)

† Davies, Chris (Brecon and Radnorshire) (Con)

† Foxcroft, Vicky (Lewisham, Deptford) (Lab)

† Harris, Rebecca (Castle Point) (Con)

† Johnson, Gareth (Dartford) (Con)

Jones, Mr Kevan (North Durham) (Lab)

† Jones, Mr Marcus (Parliamentary Under-Secretary of State for Communities and Local Government)

† McMahon, Jim (Oldham West and Royton) (Lab)

† Opperman, Guy (Lord Commissioner of Her Majesty's Treasury)

† Pow, Rebecca (Taunton Deane) (Con)

† Smeeth, Ruth (Stoke-on-Trent North) (Lab)

† Swire, Sir Hugo (East Devon) (Con)

† Warman, Matt (Boston and Skegness) (Con)

† Winnick, Mr David (Walsall North) (Lab)

Dr Glenn McKee, Committee Clerk

† attended the Committee

Third Delegated Legislation Committee

Monday 20 March 2017

[Phil Wilson in the Chair]

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

I beg to move,

That the Committee has considered the draft Non-Domestic Rating (Rates Retention) and (Levy and Safety Net) (Amendment) Regulations 2017.

It is a pleasure to serve under your chairmanship, Mr Wilson. These regulations make changes to the Non-Domestic Rating (Rates Retention) Regulations 2013 and the Non-Domestic Rating (Levy and Safety Net) Regulations 2013. Those are the two principal sets of regulations that provide for the day-by-day operation of the business rates retention scheme, under which local government currently keeps 50% of locally collected business rates. Because these are technical regulations and they make amendments to two sets of technical regulations, they are not necessarily simple to follow, but what they do, rather than how they do it, is straightforward.

The 2017 regulations do two things. First, they make changes to the operation of the business rates retention scheme to reflect the wholesale changes to tariffs and top-ups made by the recent local government finance report, following the 2017 revaluation. Secondly, they make changes to the administration of the business rates retention scheme to give effect to the 100% rates retention pilots that will operate in Greater Manchester, the Liverpool city region, the west midlands, the west of England, Cornwall and, to a more limited extent, London from 2017-18. I will deal with each set of changes in turn, starting with the changes that need to be made because of the revaluation.

When the business rates retention scheme was set up in 2013, it put in place arrangements for the annual redistribution of business rates among authorities by means of what are known as tariffs and top-ups. Those authorities that have the most business rates income compared with their relative needs pay over some of that income as a tariff. That is then distributed as a top-up payment to those authorities that have less business rates income than their relative need.

Tariffs and top-ups were set in 2013-14, based on the difference between the business rates that authorities expected to collect in that year and their relative need as established in that year’s local government finance settlement. Thereafter, tariffs and top-ups have been uprated only by inflation. 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 we had simply uprated the existing tariffs and top-ups by inflation in the usual way, authorities would find that their income from business rates under the rates retention scheme would change—in some cases very considerably—between 2016-17 and 2017-18 solely as a result of the revaluation. That is why, 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, and why during the summer we worked with local government to design a means of doing just that. The new tariffs and top-ups were approved by the House as part of this year’s local government finance settlement; and in 2017-18 authorities will pay or receive the amounts set out in the local government finance report for 2017-18.

However, tariffs and top-ups are also used as part of the calculation of levy and safety net payments under the rates retention scheme. That calculation is provided for in the Non-Domestic Rating (Levy and Safety Net) Regulations 2013. The changes made by regulations 13 and 14 of the 2017 regulations ensure that the new 2017-18 tariffs and top-ups are used in future levy and safety net calculations. That is instead of uprated 2013 values, which would, if used, produce entirely perverse results.

I will now deal with the 100% business rates retention pilots. We have announced that ahead of the general implementation of 100% business rates retention in 2019-20, we will pilot parts of the new regime in a few areas from as early as 2017-18. Local authorities in Cornwall, Greater Manchester, Liverpool city region, the west midlands and the west of England have agreed to pilot 100% rates retention, and from 2017-18 will keep all the local business rates they collect. In return, they will forgo some revenue grants from central Government—most notably revenue support grant—and their tariffs and top-ups are being further adjusted to ensure that the pilots are cost-neutral, save only that authorities will keep 100% of any growth in their business rates instead of the 50% they currently keep.

We also announced that the Greater London Authority will keep a larger share of London’s business rates—37% instead of 20%—in return for forgoing revenue support grant and taking over responsibility for funding the investment grant for Transport for London. As for other pilot areas, the GLA’s tariff has been adjusted to ensure that the reform is cost-neutral except for the additional share of growth that it will keep.

The changes to the share of business rates that the GLA and pilot authorities will keep, and to the tariffs and top-ups they will pay or receive, were included in the recent local government finance report. However, those changes need to be cemented into the day-to-day administration of the business rates retention system. The 2017 regulations do just that, by making the necessary changes to the Non-Domestic Rating (Rates Retention) Regulations 2013.

In summary, the regulations before the Committee make technical changes to the regulations governing the administration of the business rates retention system to ensure that the scheme works properly following 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, indeed, have budgeted for. I commend the regulations to the Committee.

It is a pleasure to serve under your chairmanship, Mr Wilson.

The much anticipated calculation is here; it takes a certain degree of genius to work out what it means in practice, but it is good to have that detail. Clearly, we are talking about the pilot authorities today, and we have been keen to see a bit more detail on those to understand how the measure might work when the Local Government Finance Bill is enacted. Rates retention affects every local authority in the country, particularly when we take into account the top-ups, tariffs and the safety net regime that is currently in place, as well as the deletion of the revenue support grant and what that means for councils’ baseline funding. Although we talk about this issue in a technical way, it has real-life consequences. When we talk about the calculations in this Committee, we are talking about whether local authorities will have the money to pay for adult social care, safeguarding services and the more than 700 public services that people rely on in localities.

When I became council leader in Oldham, revenue support grant in that year was £80 million; under this arrangement, revenue support grant will not exist. In terms of 100% retention, a town such as Oldham is in a net position from revenue support grant—it used to give back roughly what it now receives from business rates—so, from net position, it has lost £80 million of revenue support grant under this deal. We should not try to pretend in any way that this is about the Government being generous and giving money away. What councils have decided is that it is far better to have certainty and to plan for the long term than to plan continually in a short-term way, not knowing what their finances will be like in two, three or five years’ time. The measure provides a degree of certainty, but the jury is out—indeed, there is a great deal of scepticism—about whether it will provide the money that is required to provide the decent public services on which our communities rely.

There is a lot of detail that we expect to see, and have not yet seen, about local arrangements and local agreements for the growth element of business rates retention. What we see here is effectively the baseline retention—what local areas can expect to receive—but where local areas grow their business rates baseline far more than that, under these arrangements it will be retained at a local level, usually in combined authority arrangements. However, there is no detail about what agreements have been reached between individual local authorities. For example, of the 10 local authorities in Greater Manchester, only one is forecast to grow its business rate base to a net position and pay back into a pool. For a number of years, that council has negotiated greater retention of that money before any growth goes back into the business rate pool, which goes against the spirit of combined authorities and of generating economic growth in city regions. Local authorities with historically healthier tax bases can negotiate from a stronger position to achieve special arrangements that other places in combined authority areas cannot secure. Given that the measure lays the foundation and framework for retention, we expect that level of detail to be provided in the regulations, but it is missing.

We wait to see, too, what this means for the rest of the country, and whether Third Reading changes that. We have selected pilot authorities to test the measure—I agree that sometimes that is better than a big bang approach when we do not fully know the consequences. The baseline calculation will affect the whole country when the Bill is enacted. What will be the impact on local authorities across the country, and what will it mean for areas with historically low council tax bases? There is a requirement for areas to pay above their assessed needs into the pot to be redistributed. What will be the position of those local authorities if, after 100 years of changing economic circumstances in their area and—not for want of trying or because of a lack of local or civic leadership and modern-day investment in economic development and growth—they simply cannot generate enough money to fund decent public services in their area?

We have yet to see what type of top-ups or tariff system will be in place. We do not know what safety net will be in place for any mid-year shocks that might result. I hope that, once we introduce the measure and pilot areas test it on the ground, we see greater detail about what it means for the whole of England.

In the devolution deals, individual areas have been picked off in pilot arrangements, leaving a fragmented picture, with many parts of England outside a devolved settlement. That is bad enough for civic leadership and the question of where power sits in the country, and it certainly should not be allowed to be the case when vital public services depend on assured funding for the long term.

In the spirit of supporting the direction of travel on devolution, and recognising that local authorities have agreed to the arrangement—that is why the measure has been introduced—we do not propose to divide the Committee. We will keep our powder dry and hopefully there will be more detail on Third Reading.

My hon. Friend said that it was important that local authorities agreed with the measure, and I understand why. The local authority in my borough in the heart of the west midlands and of the Black country faces an acute financial crisis, with substantial services such as libraries being reduced in location or removed altogether simply because there is no money. It is against that background that we should consider the measure.

My hon. Friend makes a forthright and relevant point. Local authorities are not there to simply justify their own existence—they are there to provide a public service that depends on public need. We are still waiting for an assessment of what local authorities need for baseline funding to provide public services for their locality. We have been promised that that calculation will be produced as we approach Third Reading. We have not yet seen it, so in some ways we are dealing with pilot authorities in isolation. The truth is, whether we agree to the pilot areas or not, when the Bill is enacted, the revenue support grant will disappear completely. Areas that are not part of the pilot authorities will be disadvantaged whether the regulations are introduced or not. That is why we are not seeking to divide the Committee, because it is important to recognise the financial circumstances of local authorities. The measure allows them, to a certain degree—not to the extent that we would like—to become the masters of their own destiny in what is a fairly horrible financial settlement from central Government.

I have one final point that it would be helpful to clarify today. We have been told that the RSG will be deleted and that local authorities have agreed to forgo its receipt. I suspect many of them did so because they recognised it will not exist in 12 months’ time anyway. However, the context for discussions about the Local Government Finance Bill is that there will be 100% retention in exchange for local areas taking on additional powers and responsibilities. We have not seen through the pilot agreement what additional responsibilities local authorities will be expected to take on, as will happen across the whole country. If the Minister could go into a bit of detail about that, it would be extremely helpful.

Finally, I want to clarify whether the local areas have agreed to forgo any other central Government grants in the same way that they have forgone the RSG—for instance, the better care fund, the early years intervention grant or the independent living fund. Will those be retained as part of this arrangement or will they be forgone in the same way that the RSG is being taken away?

I recognise that this is a very technical Bill, but it would be helpful to have a bit of information on those two matters. I repeat an offer that I have made in Committees like this on a regular basis. We believe in devolution, and quite a lot of these issues are not partisan at all; they are more about getting the framework in place to enable things to happen than about the politics of how much money gets put where. Again, if the Government have the will to work in partnership to prepare a framework for devolution for the whole of England, I would certainly be up for a discussion on that basis.

It is always a pleasure to respond to the hon. Member for Oldham West and Royton. Indeed, we have just spent a number of weeks in this very room debating aspects of the Local Government Finance Bill, which will come back before the House on Report in due course. As he did during many of those debates, he chose to discuss contextual issues that did not necessarily relate directly to the provisions of the Bill and spent time speculating on what things may or may not mean.

I want to be clear with the Committee that what we are debating today has two distinct outcomes, both of which have been agreed by this House through the local government finance settlement: first, the changes to top-ups and tariffs that are required as a result of the 2017 revaluation and, secondly, the changes to the 2013 legislation that are required for us to take forward the 100% business rate retention pilots.

I would like to respond to the hon. Gentleman’s comments. First, he mentioned baseline funding, which is extremely important. We are not resetting the baseline funding. It will be reset for 2019-20, when 100% business rate retention comes into full effect. We are currently working with the local government sector through a working group, with which the Local Government Association is involved, and undertaking a fair funding review that will feed into setting that baseline. A number of other groups are involved.

The hon. Member for Oldham West and Royton mentioned risk. We are doing a lot of work on how the safety net will work. He questioned the outcome of the new arrangements for authorities in which there is a declining business rate base. We are still working out the arrangements for the 100% scheme, but the pilots will help. There are a range of authorities—some are growing their business rate base significantly, but some are not—which we will recognise in our work.

The hon. Gentleman mentioned the revenue support grant—that is rolled into the arrangements we are making with 100% retention pilots—and extra responsibilities. The best example to give him from the pilots is Greater Manchester. The RSG has been rolled in, but the public health grant has been, too. Those additional responsibilities are being taken on by that area.

That brings me to the end of my response. I hope members of the Committee reflect on the fact that these are technical regulations and, in the context, very simple proposals that have been agreed by the House in the local government finance settlement. I therefore hope that the Committee supports them.

Question put and agreed to.

Committee rose.