My Lords, Members are encouraged to leave some distance between themselves and others and to wear a face covering when not speaking. If there is a Division in the Chamber while we are sitting, the Committee will adjourn for 10 minutes.
Clause 1: Determinations in respect of certain non-domestic rating lists
Debate on whether Clause 1 should stand part of the Bill.
My Lords, I beg to move that Clause 1 does not stand part of the Bill. Of course, I hope that in the end Clause 1 does stand part of the Bill, but I want to use this as a way of raising issues I would have raised at Second Reading; noble Lords will recall that its timing was moved at very short notice indeed. I would like to register my protest to the usual channels about that, and the fact that none of us who had put our names down were consulted, which is a very poor show indeed.
My primary interest concerns the Government’s decision to establish a £1.5 billion fund to support further reliefs from business rates in the 2021-22 financial year for those businesses that have not received business rates relief. It is absolutely right to support those left-behind businesses, as I call them, but I have questions, which centre largely around the process of releasing this money. The businesses that this is aimed at are arguably some of the most in need, and yet they are having to wait much longer than is acceptable to have a chance of receiving any of this money.
In March, the Government announced the fund and said:
“This is the fastest and fairest way to support businesses outside the retail, hospitality and leisure sectors who have been adversely affected by the pandemic.”—[Official Report, Commons, 25/3/21; col. 78WS.]
But here we are in mid-November, eight months on, and still not a single business has received any money.
To give one example of the real-world impact of not releasing these funds any sooner, English UK, the body representing the English language schools sector, has informed me that, in the last month alone, no fewer than five English language schools have been forced to close, largely because they were excluded from business rates relief. Indeed, 38 English language schools have closed since the pandemic started— 15% of that trade body’s membership. It is hardly surprising: some schools had to pay £300,000 in business rates over the last two financial years, with virtually zero customers.
So, the need for speed is very apparent, but there is a problem in that the guidance to local authorities over the distribution of the money is still awaited. Many businesses do not know whether they will qualify for the fund, given that, as I understand it, the criteria have not yet been published. We just have to go on the March announcement:
“The £1.5 billion pot will be distributed according to official data on the impacts of the pandemic on different sectors, ensuring an even and more proportionate allocation of support across England based on the economic impacts of COVID-19 and not on estimates of the impact on a property’s value.”
As I have already said, there is a real risk that many businesses will not survive long enough to take any benefit from the fund. We do not have the guidance, and my understanding is that the Government’s intention is that it will not come at least until the Bill has received Royal Assent. Surely, given the urgency of the situation, the draft guidance could be issued so that local authorities can begin to prepare their schemes. How long are businesses going to have to wait to get this relief? Of course, I understand that the guidance has to be prepared carefully; there are matters to be enunciated through that guidance, but the policy announcement was made in March. Eight months later, we are still waiting to know what the criteria are for the distribution of these funds.
In addition, for English language schools a complex situation arises because a small handful of councils interpreted the expanded retail discount differently and awarded business rates relief. Consequently, it has been something of a lottery, depending on where the schools are situated. I do hope that the Minister will confirm that just because some councils took the bold step to offer business rates relief to English language schools, this will not jeopardise the chances of those that did not to receive additional funding.
Obviously, I welcome the Government’s existing pandemic support for businesses via the expanded retail discount focused on helping businesses in retail, leisure and hospitality. The release of the additional funds is also welcome, although it is a tacit admission that the previous relief did not reach all those businesses, which, as I said, could show a catastrophic impact due to the coronavirus restrictions. However, the lack of guidance to local authorities suggests to me that it will be many months before businesses receive any of these funds. I am using this opportunity to urge the Minister to sort this out, to get the guidance out quickly and to make sure that local authorities understand that the money has to be distributed as quickly as possible, according to fair criteria. I beg to move.
My Lords, noble Lords will know of my professional interest in business rating and that I was at one time an employee of the Inland Revenue Valuation Office Agency. I added my name to this clause stand part debate for reasons very much along the lines that the noble Lord, Lord Hunt, set out in making an excellent case for why this clause should be challenged.
I give the Government their due: they have made a massive commitment to the relief of business rates during the pandemic, but I do not believe any business thought, following a relatively modest individual level of relief, and given the overall scale of the impact of the pandemic on business activity, that the Government would then make an arrangement such as to eliminate a main ground of material change of circumstances for everyone.
That is the purpose of Clause 1. It is a binary choice; it is either in or out. My understanding is that the Government are not going to concede on the point so this will probably be my last comment on this bit of the Bill. Clause 1 is the only bit of the Bill that concerns me.
Although I welcome the Chancellor’s further business rates announcements, the fact is that the underlying problems have not gone away. I have very little doubt that someone in HM Revenue & Customs thought quite hard about this and concluded that the removal of a Covid clause for material change of circumstances also conveniently eliminated many other forms of material change, in so far as it would probably be impossible to make a reliable distinction between one and the other. I guess they calculated that those who had not benefited at all could be ignored—that they could afford to concede a short-term position but recover, no doubt with added interest, in the longer term—something they would keep quiet about in the interim. HMRC would thus hold to the mantra of fiscal neutrality, which I have mentioned in the House before, and reinforce its view that there are too many appeals, that managing appeals does not sit easily with the general direction of travel, and that making things administratively cheap to run trumps fairness and equity to ratepayers in a system that has become overstretched, if not overstressed, by the demands made of it over many years. This of course has followed the earlier massive reductions in the capacity of the Valuation Office Agency.
Whatever may be promised by way of additional resources to that agency, which is a critical part of all this, it will be years before the capacity and technical excellence of a once venerable body of professionals gets back to anything near its former self, always assuming that the new resources—if indeed they are new—are other than a race to develop some automated valuation algorithm.
The Government are particularly good at window dressing, but in making a promise of £1.5 billion to be spent by local authorities for further relief of certain business rate payers, they make no reference to the manner, timing or precise purposes to which this relief will be put, so it remains, to some extent, a “jam tomorrow” aspiration. The Minister might like to enlighten the Committee—here I follow the noble Lord, Lord Hunt of Kings Heath—on the origins of the £1.5 billion figure and how it has been calculated, just as every business rate payer and every billing authority would like to know how it will be distributed in practice.
While I am at it, perhaps the Minister can also tell us when the promised further guidance that relates to that distribution will be published. I may be accused of harbouring dark suspicions, but I suspect that it will be too late do anything about it for the 2022-23 fiscal year. This will also be the assumption of local government finance officers and businesses alike, if the Minister cannot assure us of an early date, this side of mid-January 2022, when finance officers will be fixing their budgets and businesses considering their forward programmes. A company that got hammered—excuse the term, but I think it is right—in 2020, may not get any help until 2023. If I am right, that will be just another facet of the creative accounting by the taxman which ultimately costs jobs, blunts enterprise, discourages investment and dents productivity—end of homily.
On previous occasions, I have mentioned the total lack of trust and confidence among those medium-sized and large businesses whose rates bills do the heavy lifting in this area of local government finance. I have previously pointed out the business rate unfairness, its asymmetry with regard to the use of local government services and the dangers of gaming the system of valuation and fair access to appeals, which have now gone on for many years. The Government may consider that the fundamental review that they have responded to will save business rates as a tax, but I am fairly confident that, economically and practically, it is probably too late.
I believe that the Minister is an honourable man. I do not blame him: he inherited this situation, so I give him the benefit of the doubt in suggesting that he can do something about rolling back a bad position in his response today, which I await with interest. That is why I oppose Clause 1 standing part of the Bill.
My Lords, I endorse what the noble Lord, Lord Hunt of Kings Heath, said—not for the first time, on a variety of subjects. When we debated in Grand Committee a couple of weeks ago, it was a very peculiar and unsatisfactory situation. The date had been changed twice. I do not particularly complain about that—it was nothing to do with the ghastly, terrible tragedy of the murder of Sir David Amess; it was changed irrespective of that—but there should have been a proper Second Reading and there should have been proper consultation with those such as the noble Lord, Lord Hunt of Kings Heath, and others who had indicated an interest in the Bill.
My interest is entirely with Clause 1, and I will not say anything later, because I will not move my amendments. They were tabled with advice from the clerks, for which I am extremely grateful, merely to try to ensure that the Bill would not come into force until at least six months after we knew about the distribution of the £1.5 billion. We may return to that on Report—I take it that there will be a proper Report on the Floor of the House, because we are not allowed to vote in Committee, for reasons we all know, appreciate and understand.
I declared an interest at the beginning of the last debate when I pointed out that, for almost 50 years, I have from time to time given advice to the Machinery Users’ Association, which has been in being since 1884. I know that the noble Earl, Lord Lytton, knows about it. It has a variety of members from commerce and industry, and a number of chambers of commerce. I cited a couple of instances of those who were suffering because they do not know what would happen.
Since we had the substitute Second Reading, as I will call it, I have had a very interesting letter from the public affairs manager of Heathrow Airport, an organisation with which I have no connection whatever. This is very germane to our discussions, just as the language school that the noble Lord, Lord Hunt of Kings Heath, referenced was. She points out that the £1.5 billion business rates relief fund is to be split between 170,000 businesses, and that would work out at an average of £9,000 a business. As she points out, this pales into insignificance
“in comparison with Heathrow’s £120 million annual business rates bill.”
It has had, from the airport and ground operations support scheme, roughly 7% help in that.
I know it is not fashionable to speak up for airports, particularly this week, but we do depend on them. As we move to tackle climate change properly, we shall depend more and more on them and the development of more fuel-efficient aircraft, et cetera. It is a serious matter if our greatest national airport—please do not misunderstand me; I am not arguing for another runway —is put in jeopardy in any way.
The public affairs manager goes on to say, and I make the plea to my noble friend the Minister, that it really is important that details be provided “before legislation is passed”, or at least, as I mentioned, before it comes into force. There is an element of retrospective legislation here. Any decent parliamentarian is fundamentally opposed to retrospective legislation. It is “a bad thing”, in the words of 1066 and All That, compounded by an uncertainty that touches every business or payer of business rates in the country. It really is as serious and wide-reaching as that.
My view is that there should have been two Bills before your Lordships’ House, one dealing with this issue and the other dealing with the very important issue of those who defraud the system. I totally accept its importance; as I said when we had our substitute Second Reading, you cannot get much lower than defrauding help intended for business in a pandemic. Of course it needs dealing with, but there should have been two separate short Bills, not this one effectively hybrid Bill. I do not like it or anything to do with it as far as the constitutional position is concerned. We had great rows over hybrid Bills in the other place when I was there. It is not good and neither is retrospective legislation.
I say to my noble friend, at the very least put out of their misery those who are going to be affected. This applies to local authorities, which are the beneficiaries, as well as the companies paying the business rates. Please let us know before this Bill comes into force how this money will be distributed, and please tell us when an announcement to that effect will be made.
My Lords, I draw attention to my relevant interests as set out in the register, as a vice-president of the Local Government Association and a member of Kirklees Council.
My noble friend Lady Garden is not able to be here today, due to another commitment over the way, but she asked me to speak briefly on her behalf. My noble friend is especially concerned about the impact on English language schools. It is a significant issue that these and other businesses may not even qualify for the relief or the grants set out by the Government during the pandemic. The criteria for the qualification of grant funding are desperately needed—the noble Lord, Lord Cormack, has just expanded to that effect. This is a concern that I intend to raise when I speak on the second group in more detail, with its amendments in my name and that of my noble friend Lord Fox.
The noble Lord, Lord Hunt, and the noble Earl, Lord Lytton, have made a compelling case for the Government to move—to quote their favourite phrase—“with pace” to respond to the significant concerns raised. The failure of the Government to act swiftly since the announcement of this potential grant funding in May, and then its confirmation a couple of weeks ago, is putting businesses in jeopardy through no fault of their own. I do not think any Member across the House would do other than condemn that situation. These businesses need to be able to apply for the grants, and for rate relief, to enable their businesses to stay afloat. That is the bottom line for all.
I support what has been said regarding Clause 1 standing part, although I also agree with the noble Lord, Lord Hunt, that we want the Bill to succeed and are using this opportunity to raise these serious points. Those are the words that my noble friend Lady Garden would have said.
My Lords, I thank noble Lords for drawing attention to the inadequacies of the situation that we are in. Until February this year, I was leader of Leeds City Council and we had the difficult job of working with businesses, when the complexity of the welcome resource that was available was challenging, to decide who was worthy of getting the relief and who was not. The comments made today just highlight the difficulties that local authorities are still having to face. I speak now as a vice-president of the LGA and am mindful of its input to this debate.
I thank my noble friend Lord Hunt for focusing on one specific sector and area, because that helps us to understand just what particular sectors are going through. We know that language schools are not the only area having problems but the noble Earl, Lord Lytton, referred to the loss of expertise, knowledge and experience. All those things add up to what we hope will be viable businesses as we emerge from this. In line with the comments they made, and continued by the noble Lord, Lord Cormack, we are faced with a situation across business and local authorities where there is now a lack of confidence, and concern at the lack of consistency and certainty. I hope that the Minister will be able to put our minds at rest on this.
We have had a good discussion regarding our concerns about how the figure of £1.5 billion was achieved. My concern here is that while we talk in terms of billions, we actually need to drill it down to the cost for businesses. I think what we are looking for collectively in the answers is a recognition of the urgency and the detail, and to hear when and how this is to be brought forward.
My Lords, I am grateful to noble Lords for the opportunity to speak to the benefits of Clause 1 of the Bill, which has received broad support throughout its passage. I will shortly come to the particular concerns of the noble Lord, Lord Hunt of Kings Heath, and the noble Earl, Lord Lytton, as well as those of the noble Baroness, Lady Garden of Frognal, so ably put by the noble Baroness, Lady Pinnock. They eloquently set out their objections, wanting to promote a wider debate about the need for clarity around guidance and the urgency of this measure. I will endeavour to respond to those concerns.
Clause 1 provides that coronavirus and the Government’s response to it should not be considered a legitimate basis for a successful material change of circumstance appeal. There are many thousands of these appeals currently in the system; the passage of the Bill will ensure that they do not stand. It is important that we clarify through this legislative measure that the impact of coronavirus will be accounted for at the next revaluation, rather than becoming a legitimate ground for appeal between revaluations. Failing to do so would clog up the courts, undermine local government finances and cause the MCC legislation to be used in a way that was not intended when it was passed. As noble Lords will recall, the provision for MCCs was not intended to reflect market-wide economic effects, which are rightly considered at general revaluations, the next of which will be in 2023.
The Government have received widespread support from parliamentarians in both Houses for this measure. There has been general approval of Clause 1 as a necessary measure to remove a significant source of financial uncertainty from local government, as well as to ensure that the law relating to business rates appeals operates as intended. The noble Lords who tabled this amendment provided by way of explanation that they wish to prompt a wider discussion of the Government’s plans relating to the £1.5 billion of business rates relief that we have promised, on top of the £16 billion of relief already provided to businesses throughout the pandemic.
As the Government have made clear, the £1.5 billion is intended to enable local authorities to provide targeted support to the sectors most affected by the pandemic but which have not benefited from support linked to business rates. Within those sectors, the relief will enable councils to award relief to businesses that they consider the most affected by the pandemic, using their local knowledge and, obviously, having regard to the government guidance. I am confident that it will prove to be a far more effective and faster way of directing support to businesses impacted by the pandemic than the MCC challenge process. That is in part because councils use their local knowledge of their area and ratepayers will ultimately be responsible for decisions on the award of relief. It would not be right for Ministers here to say whether particular ratepayers or types of ratepayers will benefit from the £1.5 billion scheme.
Work is ongoing between my department, the Treasury, the Valuation Office Agency and local authorities to prepare guidance to support the relief process. The shape of the final guidance, and how in practice we will smoothly pass decisions on this relief scheme to local authorities, will need to reflect various factors, including the existing framework of government support, information held by local authorities and their capacity to administer schemes quickly. We will continue to work on the relief fund and prepare the guidance for publication as soon as the Bill receives Royal Assent. We are of course mindful of local authorities’ need for an effective set of parameters within which they can design their local schemes. Local authorities should stand ready to develop and deliver their schemes as soon as they are able.
The noble Earl, Lord Lytton, wanted to know where the £1.5 billion figure came from. It is quite clear that local government made provision, as reported, of almost £1 billion for Covid MCC challenges for 2020-21. That was, in effect, being held in reserve rather than being spent on local public services. This measure enables that £1 billion that is currently provisioned to deal with challenges to go towards the effective delivery of local public services. Of course, it is a matter for local authorities themselves to determine. That certainly gives them the freedom to release that money that is currently tied up if we do not proceed with this piece of legislation.
My noble friend Lord Cormack is calling for a delay: he is seeking to ensure that the business rates measures in the Bill will not come into force until six months after Royal Assent. I recognise that sometimes a pause in the coming into force of a Bill is useful in ensuring that its measures can be implemented effectively. However, the measure is one which retains the status quo. The Valuation Office Agency has not changed any rateable values as a result of the MCC appeals lodged on account of the pandemic. No ratepayer has seen, or will see, their business rates liability change as a result of Clause 1.
The objective of this measure, which is to ensure that successful MCC appeals cannot be made on the basis of coronavirus, providing certainty to local government and all parts of the business rates system, will be met at the point of enactment. Therefore, delaying the point of enactment will simply prolong the uncertainty for everyone. However, passing this measure with effect from Royal Assent will provide swift certainty for local government and ensure that these MCC cases do not need to trouble the Valuation Office Agency or the tribunal system, with all the unnecessary costs, uncertainty and operational challenges that that would present. I therefore urge my noble friend to not move his amendments.
My noble friend also raised the concerns of Heathrow and other airports, which have suffered, as we know, throughout the pandemic. I point out that airports have received support for their fixed costs during the last year from the Airport and Ground Operations Support Scheme. In his recent Budget, the Chancellor announced a further six months of support for airports, up to the equivalent of their business rates liabilities, for the first half of the 2021-22 financial year, subject to certain conditions and a cap per claimant of £4 million. So there have been measures designed to support airports. We need to recognise, however, that market-wide economic changes that affect property values, such as the pandemic, can and should be considered only at revaluations, rather than in between them. The next revaluation, as I have said, is due in 2023 and will be based on the market as at 1 April 2021.
I hope I have addressed most of the points raised by noble Lords. I should also have declared my relevant commercial and residential property interests. I have received no relief for any interests that I hold but for completeness I declare those interests.
My Lords, I am grateful to the Minister and to other noble Lords who have spoken. We enjoyed an expert intervention from the noble Earl, Lord Lytton, who raised some very pertinent questions. I am also grateful to the noble Lord, Lord Cormack, for his support. He may speak later on his own amendments but I think he was making a point of principle rather than seeking to delay the distribution of this much-needed fund. The noble Baroness, Lady Pinnock, eloquently spelled out the plight of the language schools. My noble friend Lady Blake had an interesting insight into the challenges local authorities will have in administering the fund. I agree with her. I used the language schools as an example but there are many other sectors which face similar challenges.
The Minister certainly put up a very able defence of Clause 1. I have no argument with that at all. However, when it comes to the £1.5 billion, and the questions which have been asked, both here and outside, as to whether it is enough, who is eligible, how it is to be distributed and how long it is going to take to get the money out, we are still lacking detail and information. When he said that work was ongoing to prepare the guidance, which needs to reflect various factors, that did sound like an officialese way of saying, “We hope it will be as soon as possible after Royal Assent but I would not bet on it.”
This is a serious point. We are talking about very vulnerable businesses. It seems that the guidance will take some time, then local authorities will draw up a scheme and consult on it, because this will be a very sensitive issue locally, and they will need administrative processes, because clearly they have to make sure that public money is used effectively. When the noble Earl talks about 2023, I fear that may be the case. It is a matter of regret, and I hope that the Minister will reflect on this as the Bill goes through. Having said that, I am very grateful to all noble Lords who have taken part in this debate.
Clause 1 agreed.
1: After Clause 1, insert the following new Clause—
“Review of the impact of section 1 on small businesses
(1) Within six months of the day on which this Act is passed, the Secretary of State must carry out a review of the impact of section 1 of this Act on small businesses.(2) The review in subsection (1) must cover, but is not limited to, the impact of the changes to the system of determining a material change in circumstances introduced by section 1. (3) The review must make a recommendation as to whether further financial support is needed to support small businesses in light of the changes made by this Act.(4) The Secretary of State must lay a copy of the review before Parliament.”Member’s explanatory statement
This amendment would require the Secretary of State to carry out a review of the impact of section 1 on small businesses.
My Lords, I shall speak to Amendments 1 and 2, which are tabled in my name and that of my noble friend Lord Fox, and to Amendment 6, which is tabled in the name of the noble Baroness, Lady Blake. They refer to Clause 1, which is the only clause relating to changes proposed in non-domestic rates as a consequence of the pandemic.
My colleagues and I support the purpose of the proposals in relation to non-domestic rates—I hope that gives some cheer to the Minister. The Valuation Office Agency is being inundated with requests by businesses for material change of circumstances checks which cite the impact of the pandemic. There is such a large volume of such checks that if many of them are successful the balance of the business rates system would be fundamentally altered, to the detriment of the total income available for local authority funding.
The proposals to address this are reasonable, except for the issue I and other noble Lords raised at Second Reading, which forms the basis of Amendments 1 and 2. The Bill proposes not to allow a material changes of circumstances check if the pandemic is the sole cause. As we have already heard, in its place there will be a grant system worth £1.5 billion. That figure was confirmed in the spending review but it was announced much earlier this year. As we have heard, there is no clarity about the calculation of that sum.
During the debate on whether Clause 1 should stand part of the Bill, the noble Lord, Lord Cormack, said that the calculation is of a mere £9,000 per potential business, which would probably cover a small shop in small town centre, if it is lucky. That raises serious questions about whether the funding available will cover the very large number of requests that have already been made to the Valuation Office Agency. Does the Minister have any statistics on the number of such checks? Are there any figures relating to the monetary value of the checks that have been made? That would help us to understand whether £1.5 billion is anywhere near sufficient. Many of us think that it is not.
Then there is the question of the criteria that will be used to disburse the funding to local authorities, and then by local authorities to businesses. As the noble Lord, Lord Hunt, said, local authorities will need time to consult. How they intend to distribute the funding will depend on the balance of businesses in their local authority area. As we have heard—perhaps it was in something I read from the English schools people—Bournemouth has a great number of English language schools in its area; its system for disbursing funding will therefore be very different from somewhere where there are no English language schools or other similarly affected businesses.
Those are two big questions that need to be answered. The Minister has said that this Bill will provide “swift certainty”—I think I quote him correctly—for local authorities. I must say, I am missing both the swiftness and the certainty. Perhaps he can tell us how swift “swift” is and how certain “certainty” is.
Can the Minister shed some light on the distribution of the grant funding, including which businesses will be eligible? Clearly, not all businesses will be; otherwise, there is definitely not sufficient funding. Amendment 1 is an attempt to get answers by asking for a review of the impact of the new system on businesses after six months, and for that review to state whether sufficient funding has been made available. I look forward to the Minister giving us some answers on that, I hope, because at the moment, as was said in the debate on the previous group, it is very unsatisfactory for businesses to find that their route to addressing losses as a result of events well outside their control has been cut off, unless the substitute system is as good in terms of compensation.
Amendment 2 takes the opportunity to raise once more the completely unfair business rates system, whereby—I have used this example before—a small town centre shop will, in relative terms, pay many times more than an out-of-town distribution warehouse, which thus gains a considerable competitive advantage while also making greater use of local roads and other local services. This has to be put right. Dare I cite Amazon? I am going to do so. Amazon, because it does retail out of town and in a warehouse, has a relative value in my area of roughly £45 per square metre, whereas a small shop in my little town centre pays perhaps £250 per square metre. That just is not right. They are both doing retail. For one, folk go to the shop to buy; for the other, the warehouse delivers to them. It is just turning the system around. The Amazons of this world do not pay their fair share. Until we get that right, we will not get healthy town centres back again.
It was, I think—again, the Minister will put me right if I am wrong—way back in 2017 that the first reform of business rates was proposed. Four years on, we are still talking about business rates reform, inequality in the business rates system and the need to regenerate our high streets, yet that is the one thing that could help enormously. So Amendment 2 asks for an assessment of the impact of the changes in the Bill in the non-domestic rating system and, crucially, an assessment of whether the changes support our town centres and high streets.
Finally, the amendment seeks a recommendation on whether the business rating system is fair as far as town centre businesses are concerned. There is concern, expressed in both my Amendment 2 and Amendment 6 in the name of the noble Baroness, Lady Blake, about the impact on local government finances. I trust that the Minister will be able to give a categoric assurance that no hard-pressed local authority will lose out financially by the Bill. I look forward to the Minister’s response to the questions I have asked. I beg to move.
My Lords, it might be of assistance to the Committee if I offer a few words of clarification, because the noble Baroness, Lady Pinnock, has given us some extremely perceptive insights into the whole issue.
With regard to Amendment 1, the issue here is that the Government have chosen to replace what would have been the objectively and judicially managed process of appeals against the assessment of the value of the real estate with what is, in fact, a wholly discretionary sum, with all that that entails, which will, as we heard from the noble Lord, Lord Cormack, be spread thinly across a huge number of non-domestic ratepayers, who will presumably plead some sort of hardship. That seems to transfer a load of administrative activity on to local government and away from what one would normally expect to be the longer-term process.
The Minister made a comment about the pandemic never having been in focus in terms of dealing with material change of circumstances. I am not sure he is entirely right in that interpretation. The acid test is fundamentally one of the perceptions of the longevity of the problem. It is quite clear that this will be a multi- year factor.
The noble Baroness’s second amendment points to the lumpily uneven nature of what has now become the business rates system. She referred to the online retailers, many of which operate out of enormous distribution sheds. Their shop window is a website with a virtual walkaround operation, their stockroom is somewhere between a number of vans on the road and their fulfilment centres, as I believe they are called, and the till is PayPal or the equivalent.
The situation regarding the principle of business rates is that it was always supposed to be the benefit derived from the occupation of those premises. Over the years this has morphed into being, “You’re the owner so you pay up.” That is the principle behind the invidious situation we have now to do with empty rates. I add those who have high street premises that they cannot let; they cannot find an exempt or partially exempt occupier such as a charity to come and occupy it for them. They are stuck with this situation. There is no relief for them. Not surprisingly, they get boarded up and, in street frontage speak, they become a missing tooth in the jaws of a pretty girl, as it was once put to me. That needs to be sorted out.
The fundamental review I referred to earlier is, I think, trying to do the least it possibly can. When I said that I thought we were getting—or had got to—the point of no return, I meant it, because if this is not taken seriously and is not taken in hand, the only show in town will be what I understand is a bit of Labour Party policy, which is to abolish business rates and have some sort of sales tax instead. We know what has happened in the past—I cannot remember if it was the first or the subsequent Government under Mrs Thatcher that was elected partly on the premise that they were going to abolish the unfair ratings system.
If we are not careful, this simply becomes another mantra where, historically, a perfectly good, cheap to run system gets trashed. The Government will rue the day that they allowed this process to continue and allowed the forces within the revenue department to erode the system of fairness and confidence—this will be the net result. It affects everybody—businesses and local authorities—and prospects all round, because doubt, uncertainty and risk are corrosive of the entire process.
I very much take the point that the noble Baroness made in moving this amendment, and I hope that the Minister is taking this on board, because we are pretty much at a tipping point and many people have said to me that it cannot go on like this. I just felt compelled to make that intervention at this stage.
Thank you for those contributions. There is no doubt among any of us about the real sense of urgency and the importance of the amendments that we are discussing in this group. Again, it is inevitable that the question of the £1.5 billion comes up, but we also need to keep a very close eye on the economic prospects as we go forward. I have to say, the confidence around that is not as great as perhaps we are being led to believe.
Again, I thank the noble Baroness, Lady Pinnock, for putting her name to Amendments 1 and 2, and for the comments of the noble Earl, Lord Lytton; he really got across that sense of urgency. I can confirm that Labour has called for the longer-term abolition of the current system of business rates, to be replaced by a new system that is better balanced between high-street businesses and the out-of-town online giants, as we have been hearing.
On Amendment 2, does the Minister agree with the assessment that we are in a very lumpy situation, and will he be looking at how the playing field can be levelled out? That is a really important question that we need some certainty on. Again, Labour has called for an increase in small business rate relief next year from the current threshold of £15,000 to £25,000. Does the Minister accept that we need an increase in relief to help small businesses cope?
I turn to the amendment in my name. It is important, at every opportunity that we have in this House, to really spell out the dire situation facing local authorities, particularly regarding the financial position that they are in. This is one reason local authorities are asking for clarity and a sense of urgency. They are also asking that, once the criteria are established, the way that this unfolds is kept under review, and for local authority guidance to be published as soon as possible. We made a very strong case for that at Second Reading.
We know that Covid-19 has had a devastating impact on local authority finances, with a combination of income falling and costs rising. The income element for local authorities, I am afraid, is one which the former Secretary of State would not take into account in terms of the losses that local authorities have been facing. This is on top of the fact that Conservative Governments since 2010 have cut £15 billion from central government funding to local authorities.
We are looking at a situation, according to the LGA, where councils in England will face a funding gap of more than £5 billion by 2024 just to maintain services at current levels. It estimates that the Government will need to find an extra £10.1 billion per year in core funding to local authorities by 2023-24 just to plug the existing funding gap. New research by the BBC, I understand, has shown that UK councils have found a £3 billion black hole in their budgets as they emerge from the pandemic. Put in that context, I think we can all understand why there is so much concern from local authorities about how much is going to be available to them to distribute, to enable businesses in their areas to survive and to continue to pay the rates due to them. Again, I ask whether the guidance can be issued to local authorities as a matter of haste and whether it is possible for us to have an understanding of when that will be.
I was actually in the room when the former Secretary of State told local authority leaders that the Government would provide
“whatever funding is needed for councils to get through this and come out the other side”.
Again, I ask: does the Minister believe that this promise has been kept? I do not think we need a list of all the different resources that have been given to local authorities, welcome though they have been. Unfortunately, they do not match the need and we know from the impact of the pandemic that need in our communities, through a whole raft of measures, is really going through the roof.
In that context, I hope that everyone will recognise the urgency required to resolve these matters but also the enormous challenges facing local authorities in the years ahead.
I will start with the new clause proposed by the noble Baroness, Lady Pinnock, and the noble Lord, Lord Fox. This would require the Government to carry out an assessment of whether the business rates measure in the Bill improves the wider system of business rates.
I remind noble Lords that Clause 1 is limited in scope. The Government are making a targeted intervention through the Bill to ensure that the law concerning material changes of circumstances operates as it should do as regards the impact of coronavirus on rateable values. The Government are not, by contrast, offering the Bill as a means of introducing significant reform to the business rates system. Indeed, it would be wrong to do so. The Bill is narrow in its focus precisely so that Parliament can deliver certainty on this issue, with minimal delay, to those that need it, particularly local authorities.
I appreciate that many noble Lords wish to see more substantial changes to the business rates system, as pointed out eloquently by the noble Baroness, Lady Pinnock, and I can provide good news in that regard. Noble Lords will have seen the Chancellor’s Budget Statement and may have read the final report of the Government’s business rates review, published alongside the Budget. The Government have committed to changes to improve the business rates system through delivering more frequent revaluations, starting from the next revaluation in 2023. This answers widespread calls from stakeholders and will help deliver a more timely, and hence fairer, distribution of business rates.
We also want to ensure that the material change of circumstance provision remains fit for purpose and within its original intentions, so we have announced that we will legislate to clarify that factors arising from the legislation, licensing changes or guidance are not in scope for MCC claims. We think that this is a sensible, proportionate step to provide certainty and clarity for ratepayers about the impact of legislative and regulatory changes. We will consult on the detail of this in due course and there will be an appropriate opportunity for Parliament to scrutinise the provisions.
The Government have also announced significant new measures to meet our commitment to reduce the burden of business rates on firms. We are freezing the multiplier for another year, saving ratepayers £4.6 billion over the next five years. There is also support for decarbonisation and the improvement of properties, and a relief worth almost £1.7 billion for eligible retail, hospitality and leisure businesses in England. This is all on top of the unprecedented £16 billion of relief over two years provided by the Government for ratepayers. As the Chancellor set out, this means that over 90% of retail, hospitality and leisure businesses will receive at least a 50% reduction in their business rates bills in 2022-23, when taken together with small business rate relief. I hope that it is helpful to set this out, given that these announcements came in the wake of the Bill’s Second Reading.
Of course, we can take opportunities such as this to debate the reform of business rates, and we welcome that, but we will bring forward further legislation to enact the changes to the system that we wish to make once we have gone through a further period of consultation. That will provide the right time to fully scrutinise the wider changes we are planning to the business rates system. Noble Lords can be assured both that the Government have committed significant investment and energy to reforming the rates system and supporting businesses, and that there will be further opportunity to debate the wider business rates system in the coming months. For now, it remains crucial that we give swift effect—to use that phrase again—to this narrow but important measure.
The noble Baroness, Lady Blake, wanted a comment on whether we should be more generous in expanding the small business rate relief scheme. I have pointed out that this is £1.7 billion of extra funding for eligible retail, hospitality and leisure businesses, in addition to the more than £16 billion for that sector already. That means that over one-third of properties—about 700,000— already pay no business rates at all, as a result of receiving 100% relief through that scheme, with an additional 121,000 in the taper. That is a considerable degree of support for our businesses affected by the pandemic.
The noble Baroness, Lady Pinnock, wanted to know how many Covid-19 MCC cases have been lodged to date with the VOA, and how much rateable value these cover. The amount of rateable value which would have been lost as a result of these appeals is a matter for the VOA and not our department or Ministers. However, although some of the legal principles and valuation framework for the MCC appeals have been agreed, many discussions on specific sectors have still to take place; very few discussions have been held on individual valuations. There is, admittedly, therefore limited data on which to base any estimate.
The noble Baroness, Lady Pinnock, also wanted to know about the impact on local government. The possible reductions of property values discussed between the VOA and agents were all subject to further provision of evidence, ongoing discussion, VOA assurance processes and taxpayer confirmation, before an acceptable resolution could have been reached. However, given the volume of checks and challenges which have been made in very high-value locations, such as London offices, it is likely that the impact on local government income would have been very considerable without this intervention.
The big question from the noble Baronesses, Lady Blake of Leeds and Lady Pinnock, was: when will we see the money—when will the £1.5 billion come through? The funding will be available as soon as local authorities have established their own local release schemes; the Government will support them to do this as quickly as possible, including through new burdens funding.
I am grateful to be able to discuss the local government implications of the Bill as they are central to our thinking on Clause 1. The business rates retention scheme allows local authorities to share in the income from the tax. They have a vital role in the business rates system, and the income represents an important source of funding for local services. Business rates are a local tax. We have come a long way from the period before 2013 when most business rates collected by local authorities were merely paid into the Exchequer.
Local authorities now retain a share of their business rates income. That share varies from authority to authority, but some retain the full 100% of the growth in business rates in their area. However, it also follows that with increased retention of business rates income comes increased risk to local government from challenges. The prospect of the significant reductions that might have flowed from business rates challenges related to the pandemic could therefore have had a damaging impact on local government funding and local services. Clause 1 will ensure that the impacts of the pandemic will not be reflected in those challenges.
We have stepped in to protect local services—and not just through Clause 1 of the Bill. We have provided a local tax income guarantee scheme, in which central government will meet 75% of the costs of irrecoverable losses in business rates income for 2020-21. This helps protect local government from Covid-related losses and goes beyond the challenges to rateable values; it also helps to protect local government against, for example, non-collection and bad debts.
We know that the impact of the MCC challenges on local government finances would have been considerable. When making their estimate of business rates income for 2021-22, local authorities added £1.2 billion to the provisions they had made for challenges against rateable values; I believe I have mentioned that already. That is £1.2 billion locked away in local government accounts and unable to be used to support local services. Not all of that will be related to the pandemic, but we believe from our discussions with local government that a large part of it was related to uncertainty around the MCC challenges, which are the subject of Clause 1. The Bill will therefore resolve that uncertainty and allow local authorities to release that funding back to where it belongs: the delivery of vital local services.
The amendment also concerns the advice we are giving to local authorities regarding the implementation of the Bill. Fortunately, in fact, there will be very little for local government to do in order to implement the provisions of Clause 1. We are intervening to ensure that the law regarding valuation continues to operate correctly. Allowing rateable values to fall for economic matters such as the Covid-19 measures would be out of line with the principles of rating, where such matters are reflected at general revaluations. It is right that we ensure that the law continues to follow these principles. In turn, this means that no ratepayers have seen their rates bill fall as a result of the MCC challenges, so we will not be asking ratepayers to return money to local authorities.
Nevertheless, we are of course keeping local government up to date with the progress of the Bill. My officials meet regularly with local government representatives, including the LGA, and have strong working relationships with the LGA, the Chartered Institute of Public Finance and Accountancy, and the Institute of Revenues Rating and Valuation. My department also publishes its advice to local government, which is available in the series of business rates information letters.
I hope that that covers most of the points made by noble Lords.
My Lords, I thank the Minister for his extensive reply. I remind him, despite the detail he provided, that I said right at the start that I support the proposals in the Bill. I just want to make two points.
First, it is amazing to me that we are unable to share information from the Valuation Office Agency about the number and monetary value of the MCC appeals that have already been put in. Surely that must form the basis of the £1.5 billion proposed by the Government. I do not know how else we can have confidence that that £1.5 billion is anywhere near sufficient. Perhaps I will pursue that elsewhere.
My second point is about the reform of business rates, which, as the Minister will have picked up by now, I am very concerned about. I understand that a proposal for more frequent assessments was made in the spending review. That is of course welcome, but it absolutely fails to address the fundamental inequalities in the system. There will be no disagreement about that; the only disagreement is about how swiftly—to use the new word which will obviously replace “at pace” —we can address those inequalities. I know it is not easy. I accept that reform of a major taxation system is not easy. However, it is absolutely necessary and overdue. The prospect of another round of consultation just tells me that the long grass approaches.
With those comments, and with thanks for the categoric assurance—which I will check, but I think the Minister gave local authorities a categoric assurance that there would be no additional administrative costs of dealing with the scheme—I beg leave to withdraw Amendment 1, and will not move Amendment 2.
Amendment 1 withdrawn.
Amendment 2 not moved.
Clause 2: Unfit directors of dissolved companies: Great Britain
3: Clause 2, page 3, line 12, at end insert—
“(ba) after subsection (1) insert—“(1ZA) Where the company in question has been dissolved without becoming insolvent, the court, when considering a person’s conduct under subsection (1)(b), is to take into account that person’s conduct as a director of all previous dissolved or liquidated companies in which they have been a director, and may take account of evidence other than that provided by the Insolvency Service.””
My Lords, I would love to have been a fly on the wall in the two departments determining the structure of this Bill, spatchcocking its elements, which now include one which is under the business and industry department. I understand how it has come about, but it has opened up a rather broad range of issues about directors’ disqualification. This is not an untimely moment to look at that. When we talk about pandemics, there has been a bit of a pandemic of directors learning new tricks in dealing with dissolving companies and coming back with another company, some tax advantages, and so on.
In addition to the removal of the legal loophole precluding creditors from holding former directors of dissolved companies to account, there is a similar and connected issue involving liquidating companies where creditors will be likely to be significantly out of pocket, as the insolvency practitioner—the liquidator—will almost certainly be unable to gather sufficient proceeds from the remaining assets of the company to pay the creditors in full. Creditors suffering financial loss often include HMRC itself. It is therefore logical that the court take into account the insolvency history, of both dissolved and liquidated companies, when deciding whether a director is disqualified. It follows from that —at least it is a very arguable point—that the court should not be reliant solely on evidence from a single dissolved company under investigation.
I add that the House of Commons Library briefing Phoenix Trading and Liability of Directors, which covers starting up a phoenix company following the liquidation of the original company, states:
“The Insolvency Service may also investigate a failed company (and the role of its directors) where there are concerns about either the trading practices of the company or the circumstances surrounding the failure of successive companies.”
The ability of the Insolvency Service to investigate this “failure of successive companies” in a liquidation scenario should logically be extended to investigations into successive dissolved companies, which is the second main point that I wish to elucidate.
This is why we have Amendment 3 as well as Amendment 7, which is a more tactical question of establishing the need for the court to take into account a person’s conduct in all previous dissolved or liquidated companies in which they have been a director, so that the broader picture of their behaviour can be taken into account by the court. Taken together, if the court decided to proceed, any historical evidence of potential malpractice in other dissolved or liquidated companies of which that person had been a director would be taken into account by the court. That is a legal loophole. Since this Bill is miscellaneous to the degree that these matters are before us, it is a good opportunity to reflect on whether this is an add-on that would be rather helpful. Before Report, I am sure the department and the Minister will think about whether this is a good moment to have a look at that.
I suggest that the amendment will ensure that the court’s decision on whether to disqualify an individual from being a director is based on not just their conduct in a single case under review but their track record in past insolvencies. I will stop there, but I hope that the department and HM Revenue & Customs will have taken note of the exponential growth of the eye-watering sums being lost, which could be materially brought down by this amendment, along with my noble friend’s amendment. I beg to move.
My Lords, for the avoidance of doubt, and for the Government Whip, just as the Government have changed Ministers, so we have changed Front-Benchers. I put that on the record. The noble Lord, Lord Cormack, who is no longer in his place, called this a hybrid Bill. Internally, I have called it the “kippers and custard Bill”, because it contains two completely different things, perhaps creating an unpalatable whole.
I also apologise for not being able to speak at Second Reading, for the same reason as most speakers: it was a moving target and most of us were involved in legislation elsewhere. That said, I was grateful to my noble friend Lady Pinnock, who represented my views on the director disqualification part of this Bill very well. I thank her. Noble Lords will be pleased to know that, despite the fact I was not here for Second Reading, I will not do a quasi-Second Reading speech at this point, but I will take a couple of minutes to set out my frame of reference for this group and the next so that it makes more sense.
I read the Hansard report of the Second Reading. As usual, I was struck by the great wisdom shown by your Lordships, but I was a little surprised to see one speech that characterised the whole insolvency and restructuring profession in a universally negative way. Although I am sure there are always examples of bad behaviour, I put on record that that is not my experience. By way of disclosure, I point out that R3, the organisation that represents the profession, has been very helpful in providing technical briefing to me on the Bill.
Businesses, especially smaller ones, rely on these services to get back as much of the money that they are owed as possible. That can be an existential issue for them. As things stand, some creditors are more equal than others. HMRC has always sought priority access to a failed company’s assets. We debated this long and hard during the passage of the Corporate Governance and Insolvency Bill—it seems a lifetime ago—where the Government promoted the interests of the tax authority a little higher. This Bill seeks to introduce powers to enable the Insolvency Service to investigate directors of companies that have been dissolved. Currently, the Insolvency Service can investigate directors of insolvent companies only. We should ask whether it seeks to achieve that on behalf of HMRC at the expense of other creditors. Will the Minister give us a specific assessment of how this new process will affect non-HMRC creditors?
There are accusations that the Government are in danger of not dealing with the loophole to deter fraudulent behaviour because this legislation is so tightly focused on bounce-back loan fraud. While the Government are likely to be a significant creditor in those cases, using this legislation in such a limited way would represent a missed opportunity to tackle the abuse of the company dissolution process more widely. I think that was what the noble Lord, Lord Lea, alluded to. Dissolving a company is a legitimate way of shutting a business down but it is often used to avoid scrutiny, as dissolution does not currently involve examination of the dissolved company’s finances by an external party, such as an insolvency practitioner. The Bill should be a chance to open this issue up.
We broadly support Amendment 3, in the name of the noble Lord, Lord Lea, and Amendment 7, in the name of the noble Baroness, Lady Blake. They both essentially probe when a company moves into dissolution. The noble Lord, Lord Lea, seeks to expose a possible pattern of director behaviour and the noble Baroness, Lady Blake, seeks to gain more data on the possible extent of such abuse through a duty of reporting for the Secretary of State. I do not think any of us would maintain that these amendments on their own would stamp out abuses, but at the very least they would cause a strong light to be shone on them.
I have a couple of other questions for the Minister. What steps will the Government take to ensure that investigations into directors of dissolved companies do not come at the expense of investigations into directors of insolvent companies? How will the Government determine which cases are in the public interest? The Bill’s impact assessment focuses on bounce-back fraud, but there are many other creditors in fraud cases. There is a huge public interest in helping ensure that all creditors are repaid. They are the businesses that contribute to the nation’s economy and without repayment they may become insolvent. This Bill risks becoming a missed opportunity to help this wider body of individuals and business if it is used to recoup government money only. Ensuring that creditors receive their fair share of any assets vested in a company requires the use of the insolvency framework to identify and distribute those assets. At the very least, will the Minister confirm that, where a company’s directors are found to be culpable, dissolved companies will be put through an insolvency process to ensure that returns to creditors can be made?
I start by thanking my noble friend Lord Lea for moving his Amendment 3. I know that we will have further discussions on the issues relating to it.
Like the noble Lord, Lord Fox, I do not want to go over the extensive debate that both noble Lords missed at Second Reading. The points made were so pertinent; I think most of us will have received extensive correspondence around the circumstances in which different creditors, in particular, find themselves.
I will limit my comments on my amendment to drawing together all the expressions of concern from the previous discussions about the lack of scrutiny. There is a real sense about a course of action being followed that enables people who should not be practising an opportunity to continue doing so in other ways. Most of all, I ask the Minister to look at whether we could establish an inquiry into unlawful behaviours relating to dissolved companies.
The other question that has come out of these discussions concerns the capacity of the different organisations. Can the Minister confirm what assessment he has made of the Valuation Office Agency’s capacity to deal with non-Covid-related material changes in circumstances? Continuing on the issue of resource, there is real concern about BEIS and the Insolvency Service. We recognise and welcome the requirement for the Secretary of State to report on the resources and powers available to the Secretary of State, BEIS and the Insolvency Service in relation to this Bill.
I understand that support staff at BEIS, represented by the PCS union, recently announced the possibility of strike action. They called for improved working conditions and an end to low pay. Does the Minister expect that further support staff will be required by BEIS in order to undertake the fulfilment of the new responsibilities?
I thank all the speakers on this group. I will take the points made in turn, starting with Amendment 3 in the name of the noble Lord, Lord Lea. I get the impression that his amendment intends to expand the information that the court can consider when it hears an application for the disqualification of a former director of a dissolved company to include that person’s conduct in all other insolvent or dissolved companies. If that is the case, I am happy to assure the noble Lord that the court is already able to consider such evidence, whether through the report supporting the disqualification application or through the evidence submitted either in defence of the application or in mitigation by the defendant. It is also possible for the Secretary of State to introduce information provided by third parties, such as regulators, in support of a disqualification application. I hope that the noble Lord will concede that his amendment is unnecessary.
Amendment 7 in the name of the noble Baroness, Lady Blake, would require the Secretary of State to announce a public inquiry into unlawful behaviour of former directors of dissolved companies within one month of Royal Assent. It is worth pointing out that, as we discussed, and as the noble Lord, Lord Fox, made clear, the measure in the Bill is there to address an issue that is already known about: the difficulty of tackling director misconduct in relation to dissolved companies. It will expand the current power of the Secretary of State to investigate the conduct of directors and apply for their disqualification to former directors of dissolved companies. It will allow specific instances of misconduct to be identified and addressed, and where that misconduct has caused losses to creditors, it will allow for compensation orders to be sought. In this way, it will target those individuals who abuse the dissolution process and have used it to hide reckless or irresponsible behaviour, and act as a deterrent to others acting in a similar way.
Company dissolution is an important part of the life cycle of registered companies and the measure does not seek to change or review any aspects of that fundamental process. Those are the objectives of the measure. It is my strong view that a public inquiry would have no such targeted effect, while being a very different proposition to what is intended in the Bill. Although public inquiries of course have an important part to play in dealing with matters of national concern, such as when there has been a major incident or accident —a number of inquiries are ongoing—or when something goes seriously wrong inside a government or public body, the question of whether one should be held in relation to the conduct of former directors of dissolved companies is, I respectfully submit, not really a matter for the Bill.
I move on to some of the general points that were made. The noble Lord, Lord Fox, asked some quite reasonable questions that require answers. He first asked which companies will be held and targeted for investigations, and whether that will be at the expense of other investigations. I can tell the noble Lord that the Insolvency Service prioritises investigations according to the seriousness of the misconduct and, in each case, it applies a public interest test to determine which of the complaints it receives should be investigated. This ensures that public money is used effectively and that investigations are not carried out in situations where other regulators have a role or other remedies exist.
Although the changes will expand the investigative powers of the Insolvency Service, this will not incur ongoing additional cost to the public purse because, in any case, cases will be prioritised for investigation according to which is most strongly in the public interest, and always within the resources available for such work. Each disqualification case is assessed on public interest grounds, and the impact on government—and other—creditors will of course always be included in that assessment. I am happy to reassure the noble Lord that the impacts on other creditors will also be assessed. For example, the serious public impact of a company defrauding vulnerable people, such as elderly customers, will be considered by the service when it decides whether to launch an investigation.
On the comment made by the noble Lord, Lord Fox, about the resources of the Insolvency Service, that is subject to separate spending review processes and negotiations with the Treasury, as always. Of course, the Insolvency Service’s resources are not limitless, but I can reassure him that all cases are carefully reviewed and assessed to determine the degree of harm caused to the public and to businesses, with the most serious cases prioritised, as I said earlier.
I think that also answers the noble Baroness, Lady Blake’s question about how more or other resources will be allocated. It is a matter for separate discussions with the Treasury. We will want to ensure that the resources made available to the Insolvency Service for these cases are adequate for investigating the most serious cases and resolving those issues. With those reassurances, I hope that the noble Lord, Lord Lea, will feel able to withdraw his amendment, and that the noble Baroness, Lady Blake, will not press hers.
My Lords, I thank the Minister for those responses. Before I withdraw the amendment, I would add that he dismissed a point I made without looking at the context in which I made it. The House of Commons Library briefing, Phoenix Trading and Liability of Directors, covers the starting up of
“a phoenix company following the liquidation of the original company”.
However, the briefing says:
“The Insolvency Service may also investigate a failed company (and the role of its directors) where there are concerns about either the trading practices of the company or the circumstances surrounding the failure of successive companies.”
The ability of the Insolvency Service to investigate
“the failure of successive companies”
in a liquidation scenario should, logically, be extended to investigations into successive dissolved companies. I am not quite sure whether the Minister responded to that point; maybe he would like to respond now.
I am happy to make it clear for the noble Lord again. The misconduct, or otherwise, of directors of previous companies can already be taken into consideration, and is in many ongoing cases. It can be considered by the court and the Secretary of State can submit further evidence, as can creditors themselves. I assure the noble Lord that evidence of previous misconduct or previous companies can always be taken into consideration.
On this problem of serial offending, as it were, and the limitation of the courts to look into it, I will take time to clarify exactly what issue has been reported. This will ensure there can be no misunderstanding on Report, where it will come out, as to where there is a problem at the moment, so that we are not talking at cross purposes.
This has been a useful opportunity to drill down into some of these matters. We will return to them on Report. I thank my noble friend for agreeing with me; we will both need to composite some of this material into a shorter amendment on Report. At the moment, I trust that the Minister and the department will reflect on the merits of what has been said. I beg leave to withdraw the amendment.
Amendment 3 withdrawn.
Clause 2 agreed.
Clause 3 agreed.
4: After Clause 3, insert the following new Clause—
“Duty to report on directors of dissolved companies
(1) The Secretary of State must lay a report before each House of Parliament no later than three months after the day on which this Act is passed, and during each three month period thereafter. (2) Each report under subsection (1) must include the number of former directors of dissolved companies the Insolvency Service has—(a) investigated, and(b) disqualified both in the three-month period prior to the report being published, and in total since section 1 came into force.”Member’s explanatory statement
This new Clause would place an obligation on the Secretary of State to report the number of former directors of dissolved companies investigated and disqualified by the Insolvency Service.
My Lords, in moving Amendment 4, I will also speak to Amendment 5 in my name. In doing so, I am conscious that I will be talking about some issues that we have already discussed as we have gone through the different stages of the Bill.
“would place an obligation on the Secretary of State to report the number of former directors of dissolved companies investigated and disqualified by the Insolvency Service.”
The purpose of this is to collect data on whether the provisions in Clauses 2 and 3 would work as intended: to help to understand the sufficiency of the Insolvency Service’s funding and resourcing, as we have already highlighted. This relates to Amendment 5, which
“would place an obligation on the Secretary of State to make a statement on the impact of this Act on the financial situation of the Insolvency Service.”
I have tabled these amendments in the hope that the Government will give further information on their plans to fund the Insolvency Service properly and allay our ongoing concerns about its resourcing. At present, the Bill makes no mention of further funding for the Insolvency Service, despite creating new obligations to carry out investigations.
The provisions in the Bill to remove the restoration hurdle mean that the Insolvency Service will now be expected retrospectively to investigate the directors of dissolved companies and then apply to court for a disqualification order to be made against the said directors. Can the Minister estimate how many additional staff will be required to carry out just the retrospective investigations and, separately, how many to apply for the new disqualification orders? I am sure that the Minister would agree that an overstretched Insolvency Service would benefit no one, but there is real concern at the moment around the Government giving new powers to the service without the resources to back it up.
At Second Reading, the Minister responded to these concerns by saying:
“The Insolvency Service’s resources are not limitless.”—[Official Report, 19/10/21; col. GC 55.]
We would certainly not argue that they should be; we are simply asking for a guarantee that the service will be supported to fulfil its new responsibilities. I beg to move.
My Lords, I fully support the spirit of Amendments 4 and 5 and commend the noble Baroness, Lady Blake, on her presentation. I will speak primarily to Amendment 8, which is in my name and those of my noble friend Lady Pinnock and the noble Lord, Lord Leigh of Hurley, whom I thank. As the noble Baroness, Lady Blake, said, we discussed much of the driving rationale behind these amendments during the previous group. I am not going to repeat that, so the Committee will be relieved to know that my speech will be shorter.
The heart of Amendment 8 is simple. It is a reporting amendment, similar in a sense to those tabled by the noble Baroness, Lady Blake, which is designed to help evaluate the usefulness of the approach as set out by the Government in their Bill. It is also designed to demonstrate whether there are adequate resources. I think the Minister is underplaying the concerns around resources, so I will approach it from the other end. If the Insolvency Service had, let us say, resources to investigate 12 cases and, because of the Covid crisis, 12 new and quite high-profile cases that were in the public interest arrive on the scene, then the 12 other cases that would have been examined would not be. That is the problem the Minister has failed to address. There need to be sufficient resources to cover not just the 12 currently top of the list, but the 12 that would have been had the Covid crisis not happened. The Minister needs to address that point. This amendment is designed to expose, or otherwise, the level of success we are having in that.
The success of this can also be judged by how effectively the tools that are available to recover money are working, so Amendment 8 also requires reporting on the appropriate mechanisms available to prosecute directors of dissolved companies. Finally, the proof of this pudding will be in how much money is recovered for HMRC and the other creditors—this is the important bit. That is why this amendment includes the requirement to report exactly how much money has been returned to creditors, which will demonstrate whether the current toolbox is adequate and whether the legislation is working.
It may also incentivise the Government to use the legislation to prosecute directors of dissolved companies and effectively deal with the firms themselves, so that returns can be made to the creditors. I refer the Minister to my previous point: this returned money is existential to a lot of companies. We see companies go down because their customers have done so. This amendment presents another way of shining light on the process and its effectiveness. The process is still unclear, so perhaps the Minister can take the opportunity of this amendment to set out exactly how the Government intend to prosecute culpable directors once they have been investigated. What existing measures will be employed and are new sanctions being considered?
While supporting the objectives of the Bill, I close where I started. There is evidence that the director disqualification regime will not be sufficient to recoup moneys. It will be too weak to deter rogue directors and compensation orders, in particular, will benefit only one creditor: HMRC. That is why we welcome further debate on this because it is important that the Government consider the impact of this fraudulent behaviour on all creditors, not just on themselves. I look forward to the Minister’s response with a view to pursuing this on Report.
I rise to support Amendment 8, to which I have added my name, and thank the noble Lord, Lord Fox, and the noble Baroness, Lady Pinnock, for doing the hard work on the drafting. It is much appreciated. I am happy to support the amendment.
First, I disclose my interests as set out in the register, not least that I am a shareholder and chairman of Manolete Partners plc, which is an AIM-listed insolvency litigation firm. It does not exactly touch the Bill, but it is worth drawing your Lordships’ attention to it. Over many years, I have been a director of a large number of companies and other relevant organisations, one or two of which have become dormant and subsequently been dissolved—although, I hasten to add, with no loss of anyone else’s money.
I, too, thank R3 for its briefing and its perennial helpful guidance and advice. I apologise for not being present at Second Reading. As this Committee now knows, that was due to a last-minute change of date; I associate myself with the remarks made by the noble Lord, Lord Hunt of Kings Heath.
The Bill is sorely needed, and the Government’s proposals in respect of dissolved companies are very welcome. However, there has been much debate on the effectiveness of the measures proposed in Clause 2(6), which is what we are here to discuss this afternoon. I note that there was much debate on this subject in the other place. At that point, proposals were put down for new clauses that are broadly in line with this amendment, which is slightly different in its purpose from the amendment in the name of the noble Baroness, Lady Blake.
I think we all agree that the route proposed in the Bill is better than a criminal sanction because there is a lower burden of proof. On resources, which have been mentioned by a number of noble Lords, it is difficult to know what the numbers might be. It is worth noting that there are some 500,000 company dissolutions a year in the UK, of which some 5,000 might need investigation by the Insolvency Service. That figure of 5,000 has been out there for some time. The reason it has been quoted is that it is the number of companies that have been struck off and where a process has been started to put them back on the register, so we know that there are at least 5,000 companies a year that have gone back on the register. To do that costs a few thousand pounds, so many people are deterred from bothering to go to court to get companies put back on the register, with all that entails. There might in fact be many more cases worthy of investigation under the proposed new, simpler system, which we all welcome. This will be a big increase from the 1,200 cases a year, I think, that are currently investigated, hence the concern that this clause seeks to address.
In the other place, the Minister, Luke Hall, is not a BEIS Minister. That goes back to the poignant points made by my noble friend Lord Cormack that a hybrid Bill sometimes suffers from one Minister addressing parts of the Bill that do not centre on his or her expertise. We are extremely fortunate to be blessed with the great knowledge and experience of the BEIS Minister in front of us this afternoon. Mr Hall assured the other place in Committee that the Insolvency Service produces reports on its own activities, which is correct. However, these amendments would ensure that specific questions we would want answered are addressed in those reports, and with a degree of independence. I am not sure that a report by the Insolvency Service would be able to determine the points we made, as it is bound to be accused of a conflict of interest in opining on whether sufficient powers and resources are available to it. It would be nice to see an independent report laid before Parliament.
As the noble Lord, Lord Fox, said, the acid point we really need to be told is how much money is recovered from directors through this route for creditors other than HM Government. We would all be delighted to see them, through HMRC or any other agency, recoup all the proceeds they are owed, but will the Secretary of State continue to look with quite the same zeal as we know he or she will for government money when it comes to acting for other creditors? Perhaps the Minister will be able to set out—this afternoon or later—exactly how the Government intend to prosecute culpable directors and recoup the funds.
The Minister mentioned compensation orders as the route to recoup funds but, as I understand it, compensation orders can be used to benefit only one creditor, so can the Minister comment on how they will be widened to benefit other creditors? In addition to explaining how the compensation orders will be used, will the Minister set out whether dissolved companies with culpable directors will then be put through an insolvency process?
I hope this might be addressed on Report and a commitment made to look at how Companies House operates—particularly to consider some of the ideas raised during the passage of this Bill, such as not letting Companies House strike off a company until the Insolvency Service has had a good opportunity to look at the exact circumstances of it being struck off.
Finally—and I hope the Minister will allow me to raise this matter in this debate—I wonder whether he feels moved to comment at some point in Committee or later on some of the interesting issues raised by the noble Lord, Lord Sikka, at Second Reading. They were not addressed in our previous sitting, and I think there should be some opportunity, at the very least for a right of reply for the insolvency profession and others on some of the very serious accusations made at Second Reading. It would also be helpful if the Government could commit to set out their view on the insolvency profession and its regulation at some point.
I thank all noble Lords who contributed to what was a good short debate on Amendments 4, 5 and 8. I completely agree that it is very important that we closely monitor the effectiveness of the new legislation and make sure that our departments are adequately resourced to do the work asked of them.
I start with the amendment of the noble Baroness, Lady Blake, on the reporting of enforcement outcomes. I hope that she will be reassured to hear that there is a wealth of insolvency enforcement statistics. They are published regularly by the Insolvency Service and are readily available on this internet thing.
The published data includes figures for company insolvencies across the UK and personal insolvencies in England and Wales, as well as some of the data behind those figures, which the noble Baroness might be interested in, such as regional variations. Those statistical releases are made every three months, but, since the Covid pandemic started, experimental releases of monthly data concerning numbers of insolvencies have been provisionally added by the Insolvency Service. This additional information has been extremely valuable as an indicator of the impact of Covid on insolvencies. From my point of view, the number has been lower than I expected, which is good news.
Specifically regarding the Insolvency Service’s enforcement activities, information on numbers of disqualification orders is published and updated monthly. Those figures include the number of companies that are wound up in the public interest and a breakdown of disqualification orders and undertakings obtained under the relevant section of the Company Directors Disqualification Act under which they were sought. Those monthly figures also include lengths of periods of disqualification and, furthermore, there is an annual report on the nature of misconduct in disqualification allegations.
Perhaps the noble Baroness could have a look at all that published information and check that it is adequate for her requirements. I hope that this reassures her that, when she does the online search, she will find all the information she requires. There is a copious amount of excellent, helpful data. If the Bill is subsequently passed, future reports will include disqualification numbers made against former directors of dissolved companies.
The noble Lord, Lord Fox, made the very good point that it is important to see evidence of returns to creditors, but I make the important distinction that the disqualification mechanism is for deterring misconduct and protecting the public. It is not, in fact, intended primarily to be a method of recovering funds to creditors. However, he will be pleased to hear that compensation orders can be issued in respect of disqualified directors, who may be required to make good financially on the damage that they have caused, which I suspect is the outcome that we all looking for.
Both the noble Lord, Lord Fox, and the noble Baroness, Lady Blake, asked a good question about the numbers of additional staff. I assure them both that the point I made earlier applies: resources are not limitless, the Insolvency Service already has a team set up for this precise purpose, and a complaints portal is waiting to go live, although of course we will not activate it until the Bill is passed and given Royal Assent.
My noble friend Lord Leigh asked about the number of cases that have been referred to. If I may respectfully correct him, the number of cases investigated that he cited was actually the number of successful disqualifications. There will be many more cases investigated where it will have been determined that there was no public interest in proceeding. That is a difficult judgment that officials in the Insolvency Service and, ultimately, the Secretary of State will take.
My noble friend also asked about the regulation of insolvency practitioners. As I think he is aware, we are reviewing the regulatory framework that governs them to ensure that the best possible outcomes are achieved for creditors. He will be delighted to hear that we will publish the proposed reforms to the insolvency profession shortly, which I hope will go some way to assuaging his concerns.
I move on to the figures that we will publish and the impact assessment in terms of a post-disqualification review. Did the noble Lord want to intervene?
I intervene given that the Minister is moving on. I specifically asked what tools would be available to deliver compensation. The Minister referred only to compensation orders; the noble Lord, Lord Leigh, made it clear that there are extreme limitations to those and if you talk to the professionals, they have a great deal of doubt about how effective they can be overall. Will the Minister either address that now or come back to us in letter form to explain how these compensation orders can be used to compensate people more widely or, if they cannot, what other options there are?
I outlined the issue of enforcement orders, but I am very happy to clarify any additional tools available to the Insolvency Service and to other agencies directly—though not connected to this Bill—to help recover funds both for public authorities and individual creditors. I will write to him about that.
As I said, we have already committed in the legislation to conduct a review into how it is working in practice. That will be done within five years of commencement of the legislation, in line with our better regulation requirement. It is too soon to determine exactly how that review will look, but it will likely be informed by overall case numbers and will include an assessment of whether the new powers are being used as intended.
The amendment also seeks to require the Secretary of State to report on the resourcing of the Insolvency Service, which is also the subject of the second amendment in the name of the noble Baroness, Lady Blake, tabled for the insolvency part of the Bill. Again, I hope that the noble Lord, Lord Fox, and the noble Baroness will be pleased to find that information on the resourcing and performance of the Insolvency Service is published and available on the internet. Its annual report and accounts for 2020-21 were presented to the other place just last week, in accordance with the requirement under Section 7 of the Government Resources and Accounts Act 2000, and were made available online on Friday; it is perhaps understandable that noble Lords have not had a chance to check them yet. They include an overview and analysis of the agency’s performance over the course of the year, including how it uses its available resources for enforcement activities and disqualification case studies. The full accounts are also now provided. They include how the funds provided by BEIS, the agency’s parent department, are applied; these are audited and signed off by the Comptroller and Auditor-General. I hope that this reassures my noble friend Lord Leigh on issues of impartiality.
My noble friend also mentioned reporting, particularly that of cases where the court has ordered that disqualified directors must pay compensation to creditors who have incurred losses as a result of the misconduct for which the director was disqualified. I hope I can reassure him that one of the great strengths of the disqualification regime is its effect as a deterrent. To that end, the Insolvency Service regularly publicises successful disqualification actions to ensure that the message gets out that rogue directors will be held accountable for their actions. Successful compensation order applications will also be extensively publicised where they are likely to enhance the deterrent effect.
I can also assure my noble friend Lord Leigh that the legislation is specific that the court can order that compensation be paid to a creditor or creditors—or even a class of creditors. It is certainly not just for the benefit of one single creditor, such as government over private creditors. I hope that reassures the noble Lord, Lord Fox, as well.
The exact method of seeking compensation would vary from case to case, and can include a situation where a director avoids court by agreeing to an undertaking to pay compensation. However, if the misconduct for which a director is disqualified has caused a loss to a creditor or creditors of an insolvent company or a company that has been dissolved without becoming insolvent, and the person has at any time been a director of that company, the Secretary of State may apply to the court for an order that they pay compensation, as I said earlier.
My noble friend Lord Leigh asked me specifically whether insolvency proceedings would follow investigations in dissolved companies. This seems a fairly unlikely scenario, given the remote chance that there would be assets to recover, and that the company would first have to be restored to the register. However, this mechanism would remain available if it was required. I hope this satisfies noble Lords that the information they seek will be published.
I also add that the Insolvency Service uses the resources it receives to carry out its statutory enforcement function to target cases that are in the public interest and have a realistic likelihood of the investigation resulting in sanctions. The Insolvency Service, BEIS and the Treasury continue to work closely on responding to potential bounce-back loan fraud, including determining the resources required to tackle these difficult cases.
With that, I thank all noble Lords who have contributed to this debate for their interest in the Bill and their amendments. I hope I have been able to reassure them enough for them to feel able to withdraw or not press their amendments.
My Lords, I have learned something this afternoon: if there is any doubt about access to the internet, bring along with you a bag of sweets for the army of people the Minister has behind him to assist him in that cause.
On a serious note, I am grateful for the contributions and insight. I thank the Minister for the answers he has given. However, great strength of feeling has been expressed on these issues—from all sides, to be fair. As I said, the continuing contact, particularly from smaller creditors, means that we will revisit this issue on Report.
Some specific questions have been asked today. I would be grateful if the resources available to the department and the answers on those specific issues could be made available to us in advance of Report, because all of us need the highest level of input possible so that we can have a full debate at that stage.
I thank everyone for their contributions. I recognise that, for many people, there is no clarity or certainty. There is a real sense of grievance that many people are losing, significantly, sometimes their entire wherewithal around employment for themselves and members of their companies. With those comments, I beg leave to withdraw the amendment.
Amendment 4 withdrawn.
Amendments 5 to 8 not moved.
Clause 4: Extent, commencement and short title
Amendments 9 to 10 not moved.
Clause 4 agreed.
Bill reported without amendment.
Committee adjourned at 3.07 pm.