The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister (Phil Hope): I beg to move,
That the Committee has considered the draft Non-Domestic Rating (Chargeable Amounts) (England) Regulations 2004.
I am pleased to be under your chairmanship for the first time, Mr. Conway. I hope that this afternoon's proceedings will be efficient. The draft regulations are made under section 57 of the Local Government Finance Act 1988, as amended by section 65 of the Local Government Act 2003. The regulations provide the mechanism to introduce the transitional arrangements for the business rates revaluation that takes effect in April 2005.
In particular, the regulations establish whether ratepayers should have transitional arrangements applied to their bills. They then provide the calculations to determine the transitional bill. The regulations deal with various circumstances of calculating the bill when a non-domestic property changes through a split, merger, extension or renovation. They deal with the interaction between other reliefs and transitional relief. In all cases, they establish the correct transitional path.
Colleagues might recall some of the discussion about transitional arrangements that was held during the passage of the Local Government Bill through the House. I shall not revisit those discussions today, but I will repeat the key principles that were agreed under the Local Government Act 2003. Section 65 of the Act defines that there must be a transitional scheme. It is an amendment to section 57 of the Local Government Finance Act. In previous revaluations, decisions on whether to have a transitional scheme were left until very late in the revaluation timetable. In exchange for that guarantee, the 2003 Act determines that a transitional scheme must be paid for by other ratepayers without being a burden on the generality of taxpayers. The scheme must work through within the five-year life of the rating list.
The Act also provided the power to adjust the business rate multiplier to make good the shortfall if the scheme proved not to be self-financing. Following a revaluation, some ratepayers face significant rises in their rates bill and others stand to benefit from significant reductions. The purpose of the transitional scheme is to soften the impact of sudden rises in rate bills as a result of revaluation. It provides protection for those ratepayers who might, in the absence of
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transitional arrangements, face significant rises. However, that protection needs to be funded by other ratepayers.
The scheme—the subject of the regulations—will cap increases to some rate bills over a four-year period and will be funded by capping reductions in some rate bills. I shall set out how the caps will be structured. Increases on large business will be capped by 12.5 per cent. in 2005-06, by 17.5 per cent. in 2006-07, by 20 per cent. in 2007-08 and by 25 per cent. in 2008-09. All ratepayers will pay their full liability in 2009-10. Small properties have a more generous arrangement as rates are a greater proportion of the costs to small businesses. Small properties are defined as properties with a rateable value of under £15,000 outside London and under £21,500 inside London. For those properties, bills are to be capped at 5 per cent. in year one and 7.5 per cent., 10 per cent. and 15 per cent. for subsequent years.
The protection is paid for by phasing in the decreases of those who might otherwise have seen significant reductions in their rate bills. That is done by capping their decreases. Large properties will have their reductions capped at 12.5 per cent. in 2005-06 and 2006-07, by 14 per cent. in 2007-08 and 25 per cent. in 2008-09. Small properties will have the reductions phased in at a much faster rate: 30 per cent., 30 per cent., 35 per cent. and 60 per cent. for the four years of the scheme. The scheme will apply only in England.
We have consulted extensively on the scheme and I believe that we have achieved an appropriate balance. Late in 2003, we commissioned a research project to model the likely effect of revaluation prior to actual data becoming available from the Valuation Office Agency, and we established a small stakeholder group to consider the options as they emerged. It was soon apparent that any scheme that lasted one or two years would result in significant rises in rate bills when the scheme ended. In consultation with stakeholders, such schemes were ruled out as a suitable option at an early stage, although some stakeholders favoured a short scheme or no scheme at all.
Some ratepayers groups expected significant rises in their rate bills and pressed for a five-year scheme, but such a scheme would cost more than a shorter one. Moreover, in a five-year scheme some ratepayers will not pay their true liability if they are subsequently affected by the next transition scheme. The aim of the scheme is to cushion the impact of revaluation, not to defer indefinitely the payment of the true liability. A system in which every ratepayer pays the true liability in the fifth year is logical and understandable. Therefore, the three-year and four-year schemes became the preferred options on which we sought specific feedback in the public consultation paper. The result of that process was that most stakeholders preferred a four-year scheme.
The next key decision was to determine the most appropriate method of funding: either a supplement on all ratepayers or downward phasing, as I described earlier. Year one is the most expensive year of a transition scheme, because the highest number of
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ratepayers are being protected and the cost of that protection is greatest. In our initial modelling for the consultation exercise, year one of a four-year scheme costs £740 million. For that sum to be revenue-neutral in each year and paid for by a supplement, a four-year scheme would require a supplement on the rate bills of all other ratepayers of 2.6p per £1 of rateable value in year one, 0.9p in year two, 0.3p in year three and 0.1p in year four. Feedback from stakeholders indicated that any supplement in excess of 1p per £1 of rateable value would be difficult to accept. A 2.6p supplement would mean that every ratepayer would pay an additional 6.5 per cent. on their rate bills to pay for the scheme. However, we did not regard that as acceptable.
A supplement adds some additional complexity to the system, especially for those in transition. We can see in the regulations the complications caused by the small business rate relief scheme. For example, we would have had the complexity of dealing with a ratepayer who was not initially subject to upward transition but who was subject to it once the supplement applied, because that would put them over the cap. We estimated that some 8.2 per cent. of small businesses would have been affected in that way. The alternative approach of downward phasing, which is the subject of the regulations, was favoured in the informal consultation process by stakeholders representing business ratepayers and was endorsed by the formal consultation.
The scheme strives to be consistent and fair in the treatment of ratepayers. The basic structure is based on previous transition schemes. There was extensive consultation on various options. As the scheme is self-financing, there will always be some ratepayers who feel that they are unfairly treated, because they are paying the relief, and those facing large increases will feel that they should have had additional protection. However, the arrangements strike a good balance between protecting those ratepayers who might experience significant increases and not imposing too great a burden on other ratepayers.
The upward caps in the first year are the same as for the 2000 scheme, but the downward caps still allow ratepayers in downward transition to see noticeable decreases in their rate liability. The fact that all ratepayers pay their true liability by the fifth year is also a great step forward and marks an end to the situation where some ratepayers have not paid their true liability since 1990.
I shall not take the Committee through each regulation line by line. The calculations are complex and technical, to say the least, and deal with a range of different circumstances consistently and fairly. However, I will draw the Committee's attention to a few key areas. The caps are in real terms: they exclude inflation. Inflation will be added each year after the transition path has been established. The caps also ignore reliefs such as the new small business rate relief, which is applied to those who qualify for it after the transition path has been calculated. Those who are
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paying for the small business rate relief scheme pay a supplement on their rateable value after the transition path has been established.
If any Committee members have studied the detail, they will have seen that the presence of the small business relief in the calculations has introduced a level of complexity. However, the calculations establish a consistent approach and the regulations ensure that the small business rate relief scheme meets the condition in section 61 of the Local Government Act 2003 that the scheme is revenue-neutral in each year.
The regulations provide a consistent approach to all ratepayers while providing the protection to those who would otherwise face significant increases. I commend the draft regulations to the Committee.
4.39 pm
Mr. Adrian Sanders (Torbay) (LD): I welcome you to the Chair, Mr. Conway. It was interesting to watch the Labour Members sitting behind the Minister hanging on his every word, obviously attentive and fascinated by the detail of this uprating in the business rates.
I do not think that any Committee member doubts that there is a need for reform. However, my party believes that it must go further. There is an urgent need for reform of the present system of uniform business rates, whereby businesses' rates bills are in direct proportion to their rateable value. The system leads to anomalies; small businesses pay much more of their profits in business rates than larger businesses. The Government are seeking to address that.
According to the 2000 Green Paper ''Modernising Local Government Finance'', rates represent 7.7 per cent. of turnover, 13.7 per cent. of overheads and 35.9 per cent. of profits for businesses with a turnover of below £50,000—those are small businesses. For larger businesses with a turnover of between £100,000 and £500,000, rates represent just 2.5 per cent. of turnover, 5.2 per cent. of overheads and 17.2 per cent. of profits. For even larger businesses with a turnover of between £500,000 and £1.9 million, the burden is reduced even more, with just 1.4 per cent. of turnover, 3.7 per cent. of overheads, and 15.9 per cent. of profits going towards business rates. That means that the very smallest businesses can end up paying over five times more of their turnover in business rates than the largest businesses.
That is clearly unfair, as it means that a small shop on a shopping parade could end up paying a higher proportion of its turnover on business rates than a supermarket located in the same area. All Committee members will be familiar with complaints in their constituencies about the change in town centres whereby there are fewer small businesses and more larger businesses, and about the number of small family-owned businesses that have gone into liquidation or have ceased trading in the past 20 years.
The Government recognise the need for reform—hence the consultation that has led to the small business rate relief scheme that the Minister has
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explained. However, that scheme changes nothing very much, except the rougher edges of the system that was introduced in 1990.
The complexity of the transitional arrangements will do little to help public understanding. The one thing that came out of the public consultation was how many business men find it difficult to understand the system of business rates and the connection between those business rates and the services that they receive. There is still widespread ignorance; it is often thought that the business rate is not set by the local authority but by central Government and that it is pooled. If there were any claim that this reform would improve public understanding, I would refer to paragraph 7.14 of the explanatory memorandum that is supposed to explain this. It states:
''If the ratepayer is moving to a higher bill and their notional chargeable amount (the target bill) is more than their base liability multiplied by the appropriate fraction (the transitional bill), then the transitional bill applies. If the ratepayer is moving to a lower bill and their notional chargeable amount (the target bill) is less than their base liability multiplied by the appropriate fraction (the transitional bill), then the transitional bill also applies.''
It is no wonder that small business men complain of the amount of problems that they face with Government documents and understanding what they have to do.
Our view is that this is not reform, but tinkering with the system. It is not the kind of reform that small businesses want. Small businesses are still unhappy. The Forum of Private Business states:
''The FPB still believes that the Small Business Rates Relief scheme needs to be widened so that more small businesses can benefit from fairer business rates.''
The fact is that the qualifying threshold of £10,000 is still too low. It discriminates against small firms occupying large premises because of the nature of their businesses, such as car showrooms, carpet shops, children's nurseries and garden centres. It also discriminates against town centre businesses, as their rateable values are significantly higher than average, and against hotels and the licensed trade, as their rateable values are based on barrelage and are therefore higher than those of similar unlicensed premises. It discriminates too against areas with high residential property values. With an estimated 40 per cent. of firms in England and Wales facing the prospect of financial rates rises—according to the Federation of Small Businesses—there are likely to be fewer businesses qualifying for the Government's relief, even though the Government have raised thresholds.
The Minister argued that the scheme was straightforward, but what could be easier to understand and fairer than a proposal to give all small businesses an automatic allowance? The problem is that small firms have to apply for the relief; it is not automatic. Businesses must find out whether they qualify, and then contact their local billing authority. Worse still, those small businesses in the buffer zone—those that do not qualify for relief—will also need to apply to the local billing authority if they do not want to pay a surcharge.
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I want to ask the Minister a number of questions. First, where are the proposals to allow for more local control—an idea that appeared in the Labour party's election manifesto of 1997? What is his estimate of the number of firms that will apply, and of the percentage of qualifying businesses that might not? Finally, what plans does he have to promote the scheme, and will the cost of promoting the scheme fall on local authorities?
