Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 820-839)


23 JUNE 2004

  Q820 Chris Mole: You had said that as an association you supported discounts on council tax for specific groups. I appreciate there is a degree of irony in the second part of this question. Who did you have in mind and, after Kent County Council had to backtrack on their proposal of discounts for pensioners, is it still a viable option?

  Sir Jeremy Beecham: Probably not. One of the problems is that the discount which is available, for example for single people and disabled people, is a discount to go down a band. If you are in Band A, you cannot go down a band. That is an issue which needs addressing. There needs to be something below the bottom band, as it were. As to specific other groups, I am really not sure. I do not know whether colleagues have any views about that. If you change the benefit system and change the whole system, the pressure for particular groups, like pensioners and so on, would actually diminish.

  Q821 Chris Mole: Can you say something about what local authorities have been doing to improve council tax benefit take-up?

  Sir Jeremy Beecham: There have been several campaigns around this. For example, my own authority in Newcastle included in the council tax bills a lot of information urging people to claim. We have been working with organisations like Age Concern and other organisations working with the elderly to promote advice sessions. We have had hotlines and indeed the government itself has sought to promote take-up with an advertising campaign.

  Q822 Chairman: What has happened? Has the take-up in Newcastle gone down?

  Sir Jeremy Beecham: No, only the Labour vote has gone down in Newcastle. The take-up has gone up marginally, because the experience is actually that advertising is not enough. The other measures, for example using data matching on claimants for different types of benefits, going to areas where you know people are getting another benefit—it might be attendance allowance or something like that—and talking one to one, helping them to apply, is much more effective, what Peter presumably experienced in Wiltshire. Advertising is background only; you actually need to get to people directly. Another way is to encourage families of people who are entitled to claim, so that the children of the pensioner owner-occupiers might be another group to work with. It is difficult at the moment to increase take-up without direct contact.

  Mr Chalke: We gave grants to the Citizens' Advice Bureaux and we gave them lists of those with benefits and the number of people who then started to claim those benefits was significant; after the second year the take-up was around £4 million.

  Q823 Chairman: This is on other benefits.

  Mr Chalke: No, they go through everything that these people may be entitled to and point it out to them. Obviously you cannot make them claim, but at least it was a one to one which was helpful, it was not queuing up.

  Q824 Chairman: With the national trend of take-up going down, in Wiltshire it is going up.

  Mr Chalke: Yes.

  Mr Clarke: The same in Somerset. We found that investing in welfare rights' support to people generates a tremendous response. May I make a general point, because I wanted to respond to what you said about complexity? The balance of funding review for local government, as the minister made clear, began to look at this issue of gearing because of the way it blurs accountability. If a 1% shortfall in grant has to be picked up by council tax payers, on average it pushes up council tax by 4%. These two issues have now come alongside each other: on the one hand is the issue of fairness and on the other hand the issue of gearing and this is why you have these different dimensions. So the benefit take-up would obviously make a difference to fairness and what people pay, but it would not contribute to the balance. This is why we have come to this view of needing a mixture of things going on: the relocalisation of business rates and the reform of council tax, or residential property tax, to make it fair and local income tax alongside that to move the balance and add a further element of fairness and buoyancy because it directly relates to ability to pay.

  Q825 Mr Betts: That leads me on to local income tax. Reading the Local Government Chronicle a recent article suggested that the LGA is supporting the local income tax proposal set out by CIPFA. Is that the case and if so, why?

  Sir Jeremy Beecham: We were persuaded that it looks—because there will inevitably have to be further work upon it—to be a more feasible approach than perhaps we had first envisaged, thinking in terms of widely different rates with all the collection problems which might ensue. The notion which was presented to us of having a relatively small number of bands which could be applied locally and determined locally and based on a particular day in the year—I would not necessarily go along with the particular date they had in mind—in order to avoid the problems of people moving around, so a fixed notion, would also help in terms of predictability, would make an element of LIT more feasible. We have also thought that this might be phased in, possibly by assigning revenue in the first place and then moving towards this choice of a local band in due course. There would obviously be costs to this process, both in terms of collection by the authorities, bigger revenue for local authorities, and also for employers and that is something which would have to be looked at as well and an effort made to minimise. We think it does become feasible and it looked like a reasonable way forward.

  Q826 Mr Betts: Do you have any idea what balance you would like to see in terms of the revenue raised by local income tax as against the council tax?

  Sir Jeremy Beecham: I am not sure we looked at it quite in those terms, but what CIPFA were talking about was something between three point five pence and four pence, ranges around that. Quite what that would do to the council tax element, I am not sure. Our overall package would produce something like a reverse of the current 75:25 split and it would then be 75% raised locally and 25% nationally.

  Mr Clarke: Roughly equal amounts of residential property tax and local income tax. You have talked quite rightly about equalisation, but in fact the amount of funding needed for equalisation is £16 or £17 billion, whereas grants are £40 billion. So, in effect, transferring that difference across to locally set taxes rather than nationally set taxes would be a key part of moving the balance.

  Q827 Mr Betts: There is still a problem with equalisation, is there not, because the need to compensate still exists?

  Sir Jeremy Beecham: Oh, yes

  Mr Clarke: Yes, it does.

  Q828 Mr Betts: Is not one of the problems with local income tax that the differentials in the tax bases of different authorities, on the income levels, are actually greater than they are on the debt from council tax and therefore the amount of equalisation needed on the local income tax is probably going to be greater than the council tax system and does that not give you problems back onto the gearing issue?

  Mr Clarke: CIPFA actually said that they are quite similar most often, but there are some places where they are very dissimilar. We were hearing earlier that the South West, which is the region where both Peter and I live, is a region of higher than average prices and lower than average incomes. It is apparently the region in which the mismatch is the greatest, but in most other places, there is quite a degree of correlation.

  Sir Jeremy Beecham: We have done some modelling which suggests that the gearing could be reduced pretty substantially across the piece and there would only be a relatively small number of authorities which would be either in negative grant or at the other end in the Newham position. Any system would require a measure of equalisation.

  Q829 Mr Betts: It is generally perceived that income tax would be more buoyant so at one level people might be worried that over a period more and more money would be taken in local income tax and it would be easy for councils to sit back and take the money rather than put up the council tax.

  Sir Jeremy Beecham: Like the government does.

  Q830 Mr Betts: Secondly, there are occasions when the national economy may not be doing that well—not under Labour I hasten to add—but the take from local tax might actually go down. How do councils respond to that situation? Does that not cause major problems, particularly when you cannot borrow for revenue purposes in the short term?

  Sir Jeremy Beecham: That is one of the reasons why we would want a mix of taxes. It would be a mistake to put all your eggs in one tax basket, or, rather, to derive all one's eggs from one tax basket. That is one of the reasons why some of us have never liked the idea of going completely for local income tax. We think a mix is better, because you have more predictability, you spread the risk and we think that is workable.

  Mr Clarke: CIPFA in their second paper said that by taking that date a year early, they would assume the take in the financial year and therefore if there were the dip, if there were a major closure during the actual financial year, the income would nevertheless have been set in the previous year. That gap would give time to give further adjustment in the next financial year through equalisation.

  Mr Chalke: I have to say, just to make the point, that this is the area in which there will be some disagreement, as you would expect, from myself. An awful lot more work needs to be done on it, because the proposal to levy it through an adjustment of someone's code number is hardly transparent; no-one knows what their code number is, whereas the council tax is at least a bill which can be compared between councils.

  Q831 Christine Russell: May I carry on asking you about the CIPFA proposals? I am sure you can all accept that for residents living in Shire counties, two-tier authority areas, there is already considerable confusion as to who does what. My understanding is that part of the CIPFA proposals is that residents would get one bill from the Town Hall, which would cover district council bill, police bill, fire bill and part of the county council bill, but then they would get a separate notification from County Hall about their local income tax. Surely that is going to confuse people even more than the present system?

  Sir Jeremy Beecham: I do not know that it would confuse them any more than the present system. In the two tier areas there is already considerable confusion, as you have already indicated, as to who is responsible for what. It has to be spelled out as clearly as possible, but I do not see that it would be that difficult to do. After all, all of us contribute to central government taxation in a variety of ways which are very lacking in clarity.

  Q832 Christine Russell: Is there any logic in, for instance, the costs of running county council services being split between district and county? What is the rationale, what is the logic behind the proposal?

  Mr Clarke: Yes, this is CIPFA contributing suggestions to reduce the complexity of raising the local income tax, the complexity of collection. I must say that it seems to me that when the detail was being worked through, in the first major paper by CIPFA, they came to the view that with local income tax the optimum would be the level set by local authority and the income collected by the Inland Revenue, because eight out of ten people are in the PAYE system. If the combined option continues to receive further study, I feel it would be logical to look at whether residential property tax ought also to be collected by the Revenue. That method in the first CIPFA paper would save £200 to £300 million a year. Logic suggests the same could apply to residential property tax and that would deal with the complication.

  Q833 Christine Russell: That was the other question I was going to ask you: whether or not the LGA have actually done any analysis of the cost of the CIPFA proposals.

  Mr Clarke: Yes, there is some.

  Sir Brian Briscoe: CIPFA have done an analysis. It is about £300 million.

  Q834 Christine Russell: This is perhaps a bit of a quirky question, as the proposals would only relate to local authorities in England. For those who represent border constituencies, how do you think the feeling is going to be in Wales over these suggestions?

  Sir Jeremy Beecham: We will leave Offa's Dyke where it stands, if we may.

  Q835 Chris Mole: Would the introduction of a local income tax have to coincide with the complete e-filing of PAYE end-year returns, which is not due until 2010, to operate this sort of system?

  Mr Clarke: It has not been identified as such an issue so far. The longest lead time estimated was three to four years.

  Sir Jeremy Beecham: We are only looking at PAYE rather than unearned income; I am not quite sure about self-employed people. I must say that I was sceptical about this, because it did seem to me rather invidious that, to name somebody at random, the Duke of Westminster's unearned income might be untaxed for the purposes of local taxation, but the cost of seeking to tax unearned income is too great.

  Q836 Chairman: And bringing agricultural land into the rating system.

  Sir Jeremy Beecham: Funny you should mention that, because I did actually float that at the end of the last meeting of the LGA.

  Q837 Mr O'Brien: During the questioning of the Economic Secretary and the Minister for Local Government on this issue of business rates it emerged that since it was introduced council tax payers have had an increase of above 100% and over the same period there has been a 30% increase in business rates. Do you think they are making a fair contribution to local services?

  Sir Jeremy Beecham: No and I think their argument, which we have had put very forcefully in the review, is really thoroughly misconceived. As somebody said earlier this afternoon, there is no evidence that location of business is particularly influenced by the level of business rates. On the contrary, the evidence of the Cambridge studies in the 1980s and the experience of the enterprise zones which gave ten-year rate-free periods afterwards was that what is important is the total property outgoing. To the extent that the property tax rises, the rents go down. What we experience, certainly in my enterprise zone, was that the rents rose within the enterprise zone so that the total property outgoings remained the same inside and out. In fact it is another illustration of what Christine Russell was asking earlier in relation to the impact of council tax and property prices. Commercial property tax is a tax on commercial rents in effect and the CBI has completely misconceived that element. Furthermore, they argue that business pays other taxes; well so does every other taxpayer, we all pay a variety of taxes. The other point they seem to overlook is that business is both a huge supplier of services to local government, actually benefits from local government activity in that sense, and they also indirectly benefit from many of the services we provide. We think that at the moment they are not paying a fair share. The final point is that it has to be kept in proportion. Business rates amount to something like 3% of turnover. I am not saying that is insignificant, but a change in that is not of itself hugely burdensome. We do need to revisit the question of business rates. There has to be protection for business of course. Nobody is suggesting they should be singled out for worse treatment than the domestic taxpayer; that cannot be right. Indeed I would go further and suggest that there might be scope for a variation downwards only for business rate in particular local circumstances where the local authority saw that as necessary in the given circumstances of a particular locality. In general, our view is that relocalisation of business rate is important; it is crucial in our view to achieving a better balance. It might be phased in rather than done in one go, if that were to help, but we think it is an essential component of change.

  Q838 Mr O'Brien: The CBI say no vote, no increase in rates. What is your answer to that?

  Mr Chalke: I believe there have to be stronger safeguards and I was pleased to hear the minister say that he thought there should be safeguards as well. We cannot allow the extraordinary increases which have been levied in the past on business; my own factory had 29% increase in one year. You cannot allow that to happen. Business is in a competitive world, it is competing worldwide, not so much within this country even. There should be strong safeguards. I also think that there should be greater involvement of business in local authorities. I believe that the scrutiny role of the larger businesses, scrutinising the council's budget before it is set, with a statutory role for them to report publicly on what they find, could be the sort of deal that the CBI or others might actually believe would involve them. This year is a very easy year to argue; the council tax has gone up on average by 6%; business rate went up by 2%. If the two had been together, it would have been a 4% increase; indeed if you had had a wider base it might have been even less. That is not a price which the business community would baulk at too much. If you go back to last year when it was an average of 12.9% increase in council tax, I do not think we should have been inflicting that sort of increase onto the business community.

  Q839 Chris Mole: Would you have been happy with a link which said the maximum increase in local business tax would be the same as the maximum increase in the domestic tax?

  Mr Clarke: Yes. It is interesting also that if you read the second large CIPFA paper, which clearly assumes, because of the way it is constructed, that local authorities will end up setting the business rate and setting a residential property tax and local income tax, it implies that there is a degree of buoyancy and it implies some kind of flexibility which would create a new kind of sustainable balance. The other point about business is that the first complaint was that they did not have a vote. They still do not have a vote, but there is now no connection at all. Other leaders will have had the same experience as I and I am sure you have had, business is asking what impact this decision will have on business rates and we have to look them in the eye and say that nothing we ever do has any effect whatsoever on business rates. The valuer sets the value and the government sets the rate. It is just totally disconnected.

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