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Dr. Vincent Cable (Twickenham) (LD):
As this is a pre-legislative phase, where we are asking broad questions rather than making forceful assertions about
legislation that we have not yet seen—I agree with the hon. Member for Surrey Heath (Michael Gove) that that is the best way to approach the measure—I want to start by asking about the process.
The Economic Secretary based his presentation on the Lyons recommendations, and although it is certainly true that the Lyons report recommended precisely what the Government want to proceed with, that recommendation does not quite fit with his recommendation in a later paragraph, which is not a criticism of the Government but of the report. In paragraph 8.6, Lyons recommended:
“The Government should conduct a review of exemptions and reliefs to consider the scope for removing inappropriate subsidies and distortions, and to simplify the system.”
There was thus a firm recommendation, but also a recommendation for a review, so it was not clear how the two would hang together.
Having read through the relevant paragraphs of Lyons, it is fair to say that although he made a firm recommendation, on which the Government have acted, his arguments were more equivocal and balanced than those in the Minister’s presentation—I know that the hon. Gentleman takes economic arguments seriously. Lyons called in aid Tony Atkinson and Stiglitz, who made a good theoretical case for keeping empty property relief, because of the risk-sharing problems. So, there are clear arguments on both sides, which is all the more reason to have proper consultation and consideration.
The other reason why the process—whatever the outcome—needs to be carefully staged is that the feedback that the Government have had from both interested and disinterested bodies is not clear cut either. The Federation of Small Businesses is quite supportive of what the Government said, but it made the interesting recommendation that the legislation should take account of the fact that some businesses are making a genuine effort to fill their property. It is not clear how the legislation will accommodate that. The Campaign to Protect Rural England was, again, broadly supportive of what the Government are trying to do, but it said that the Government must undertake the measure in conjunction with changes to the VAT regime to make it more attractive to improve property. The Royal Institution of Chartered Surveyors and the British Retail Consortium were much more critical. The first issue is about the process and why the Government cannot undertake a process of consultation over the next year or so, which is what Lyons appeared to envisage.
My second set of questions is about the revenue implications. The hon. Member for Surrey Heath has suggested that, whether we call this measure a withdrawal of state aid or a tax, there clearly are major revenue implications. That may indeed be right. First, I would like to be clear what the implications are. In his speech, the Minister referred to various offsets. I want to be clear whether he envisages a full whack of £950 million on the commercial property sector or whether there are any offsets and, if so, what they are.
My other question is about the behavioural implications of the change. I think that the Government are arguing that the measure is necessary both to raise revenue and to change business behaviour to make it more efficient. There is nothing wrong with that. In the context of
environmental taxation, we argue—as do the Government—that it is possible to raise revenue and change behaviour at the same time. There is nothing wrong with the argument, but I want to be clear what assumptions the Government are making. Lyons implies that the cost of empty property rate relief is £1.3 billion. The Government say in the Red Book that they will raise an additional £950 million. Does that mean that the difference is accounted for by improvements in the utilisation of commercial property? Are the Government assuming that commercial property use will improve by a factor of a quarter? Or are the figures completely unconnected?
A related question is: who will pay the tax? As we know, with all business taxation the cost is shifted in one direction or the other. There is an assumption that the tax will be paid by inefficient landlords and over-exuberant speculators, but is that in fact the case? We must assume that, in most cases, the increased taxation of commercial property will, at some point, be paid for by occupiers. It could be paid for by the landlords’ other occupiers or in the form of longer leases.
Mr. Stewart Jackson: The hon. Gentleman touches on an important point. Does he agree that the Government have not looked at the macro-economic impact in respect of the cumulative impact on inflation that this change may well have? As he concedes, the cost will be passed on in the form of higher rents and service charges, which could potentially cancel out any overall benefits to the economy.
Dr. Cable: Whether the measure will lead to more inflation or to less utilisation of capacity elsewhere in the economy is not clear, but the hon. Gentleman is quite right to say that there are knock-on effects. One that has not been referred to and that is potentially rather important is the fact that a large chunk of commercial property is owned by pension funds. Eventually, the measure will feed through into reduced returns for pension funds. There will be a hit on pension funds. Of course, they have had other hits—some of which have been much more important than this—but it would be useful to have some acknowledgement from the Government and some estimate of what the measure will ultimately cost the owners, who are institutional finance bodies.
I have several questions about such a measure’s possible impact on the market. I understand the basic problem involving empty commercial property and have a couple of anecdotes to illustrate it. An appalling derelict Co-op completely blights the whole of one of my local high streets. As far as I can establish, the property has been sitting empty for many years simply because of the lethargy and incompetence of the Co-op management. If a change to the tax regime would persuade the company to do something with the property, that would be welcome. However, we all know of shops in our local shopping centres that were not viable and had to be closed by the occupiers. Those people are often desperate for planning approval to convert the property into a housing development, but local planners refuse to give that because it would change the nature of the shopping centre. Are we going to penalise those shopkeepers? How will they be accommodated following the change?
Anne Main: I am sure that the hon. Gentleman is aware that people who wish to change a commercial building to a different form of development, such as housing, have to market it actively for a considerable time to show that the property has no commercial use. Unless the Minister tells us differently, I assume that such people would be paying business rates during all that time. The planning process can often hold things up for a considerable time, so several years could pass while there was a debate about the matter, or even during the assembling of sites.
Dr. Cable: The hon. Lady is absolutely right and makes the point that I was trying to raise. The Federation of Small Businesses asks what we will do about commercial occupiers who are genuinely trying to do something about the utilisation of their properties. Should they be treated in exactly the same way as companies that wilfully keep their properties unoccupied, or do so due to incompetence? As far as I can tell, that distinction will not be captured. It is possible that the distinction cannot be made because it can be difficult to legislate for such things. However, we should realise that there is a distinction in the real world.
Several issues are being raised by representatives of the property industry. We understand that some of them are self-interested, but it is worth quoting the British Retail Consortium, which has considered the matter primarily not from the perspective of property developers, but in the context of its interest in the retail sector. It comments unequivocally:
“The BRC believes that there has been a fundamental misunderstanding of the mechanics of the property market and this reform will, as a result, fail to achieve its objective of bringing empty property into use.”
Leaving aside the particular problems of retailers, I have received several representations from people who are interested in industrial development in parts of the country that have a regeneration problem. For example, an email that I received from a group in Wales said:
“Here in South Wales we have a number of redundant large industrial buildings. They are a legacy from when previous administrations enticed overseas manufacturers to set up here with offers of cheap land, cheap labour and big grants...By introducing a new rates liability for empty industrial buildings in particular, we fear that...property entrepreneurs will not be prepared to take the risk and these buildings will crumble and die.”
Unless the measures are properly thought through, they will have an impact on entrepreneurial risk taking and development in parts of the country that are badly in need of regeneration.
Let us consider the situation in Yorkshire, which is the part of the country that the Economic Secretary represents. I received a message from an organisation that referred to the fact that King Sturge’s “UK industrial and distribution floorspace today” report—that is a bit of a mouthful—says that almost 50 per cent. of all industrial development is speculative. It said that the measure was bound to have an impact on business behaviour and cited rather marginal Yorkshire towns—Halifax, Keighley, Hull, Goole, Barnsley and Grimsby—that are trying to attract speculative industrial development, yet will struggle to attract the amount of industrial investment that they get now after the introduction of the measure. The people in the
trade who are making these assertions might well have an interest in opposing the Government’s proposal, but it would be useful and appropriate for us to have an understanding of whether the Government have made an assessment of those possible effects.
Finally, I have a series of questions about how the measure would be implemented. One of them relates to a point that I have already made, and to the issue that the hon. Member for St. Albans (Anne Main) raised in her intervention: what will happen to those companies that are genuinely trying hard to market their property and to utilise it, but that are none the less caught by the new provisions? That was the issue raised by the Federation of Small Businesses.
My second question relates to local discretion. The Economic Secretary mentioned that there is a bigger issue to do with whether commercial rates should be localised. As it happens, my colleagues and I want to push that idea as far as it can go, but the current controversy raises the question of how much local discretion should be allowed under the provisions that the Government are proposing. For example, would people in a depressed part of south Wales be allowed to implement the measure over a different time frame and in a different way from people in a more prosperous part of the country? Will local discretion be allowed, and if so, how will it be applied? There are many quite major issues to consider. At the end of the day, the provision may well be sensible—it certainly has endorsement from some authoritative sources—but it clearly needs a lot more thought and a great deal more consultation.
2.46 pm
Robert Key (Salisbury) (Con): I am tempted to say, “What a splendid day to bury bad news,” but I do not want to go there because I want Ministers to listen carefully to what I have to say and to take it seriously. So far, this has been an urban debate about the impact of the change, but I want to change the focus and consider the impact on the countryside and the greater proportion of the United Kingdom’s land area. In other words, I want to focus on the impact on rural economies.
We need to start from the point that my hon. Friend the Member for Surrey Heath (Michael Gove) made, which is that the measure is really no better than a window tax. It is a revenue-raising tax, and it is none the worse for that—Governments of all colours introduce taxes. They need the money and it is amazing, really, that we have avoided the measure thus far, but as a grab on a particularly vulnerable area, the proposal is not much better intellectually than the window tax. Under the window tax, windows were blocked up and light was kept out of the lives of hundreds of people across the country, and I fear that the proposal might have the same impact.
The Economic Secretary pointed out, fairly, that he is making special provision for what he called low-demand areas. Of course, those are not just the assisted areas to which he referred. Indeed, it is only nibbling at the edges to talk about land that qualifies for remediation relief. He referred us to the planning White Paper, and I want to talk about the impact on, and interaction with, planning. It is important to realise that a vacant property tax hike will hit the rural
economy. It will discourage the farming sector from diversifying and from changing old farm buildings into business units.
The Country Land and Business Association has commented that there will be an impact on rural business. It says that the measure will
“slow down and reduce the overall growth of the rural economy”.
Interestingly, it estimates that the measure will reduce the tax take for the Treasury over time. My hon. Friend the Member for Surrey Heath mentioned the consequences of having derelict property, which we experienced in the 1970s—property that is not capable of beneficial occupation is exempt from business rates, and I fear that we could find ourselves staring that same situation in the face again if we are not careful. I am sure that we all wish to avoid that.
The National Farmers Union also has reservations. It points out that the situation in urban areas is different from that in rural areas and that both converted buildings and new build
“can stand empty for months awaiting a suitable tenant in some rural areas.”
There is a fair consensus on that point, but I want to back up my arguments with three cases taken from my constituency that illustrate my fears. The first case concerns hard-to-let village premises. Anyone with a rural constituency will know the problem of a pub closing and the owner applying to convert it into a house. The village usually reacts by setting up some sort of co-operative venture to try to buy the pub and run it. The problem is that if people do not buy their beer in the pub, it does not matter who owns it—if it does not make a profit, it is going to close. There are implications, too, for the village shop and post office, which are in a similar situation.
As someone who spent a very happy nine years living near South Newton in my constituency, I was familiar with the post office in that village. However, it did not thrive. It was run by a wonderful couple—Mr. and Mrs. Hutchinson. Heather was born in the village, so there was no question of a lack of loyalty to the village. However, the Hutchinsons decided that the time had come to retire, so they tried very hard to let the property. As far back as 2001, in fact, they tried to do so. They put the property on the market for six months, as required before a change of use, but they did not make a sale. They waited and they eventually found a tenant. They invested £14,000 to adapt their property so that it could be used as a hairdressing salon, which involved a change to A1 use. Sadly, however, the tenants’ business failed, so the Hutchinsons were left with nothing.
Mr. and Mrs. Hutchinson took professional advice again and they submitted an application to the planning authority. The planning committee agreed, but the regulatory committee threw out the application. They have now been told, some seven years after the original decision, that they must go back to square one. They have spent almost £20,000 because of the planning system, which impacts on such matters, as my hon. Friend the Member for St. Albans (Anne Main) rightly said. I referred the matter to the head of development services and asked which planning policy was causing apparent distortion in the market. It was Salisbury district planning policy PS3, which says:
“The change of use of premises within settlements that are currently used, or have been used for retailing, as a public house or for providing community facilities central to the economic and or social life of the settlement, will only be permitted where the applicant can prove that the current or previous use is no longer viable.”
That is the justification for the distortion. The fear is that as a consequence of the proposals, in the intervening period after the planning authority, acting on behalf of the local community, has decided that people should not be allowed to stop a shop being a shop if no one wants to buy anything there, the owners must pay business rates on the property for years. It is not their fault—it is because the planning system has introduced a distortion in the market allocation of resources. That is a very important issue that I hope Ministers will consider.
My second case concerns redundant farm buildings. Late last year, my constituent, Philip Kitson of Manor farm in Chilmark, referred me to a problem with a unit in his farm buildings. He has wonderful farm buildings, but they are completely useless for farming. They were built in the early 19th century, and one could not get a quad bike in there, let alone a modern tractor. The Kitsons did what the Government wanted and diversified. They sought to convert the property, and they did so professionally and successfully. However, tenants move on, so they were left with a building—in this case, a B1 workshop and office premises. They therefore had to find money for business rates for an unoccupied building . Mr. Kitson pointed out to me:
“We are a farming business, not a property company, and have no alternative sources of income to offset any loss of rental income...we have invested a considerable amount of time and money renovating buildings for rental which have rarely been empty.”
The district council has benefited hugely, at no risk to itself, because those buildings are bringing in business rates.
In the end, the matter went to the desk of the Minister for Local Government—I am pleased that he is in the Chamber today—and he and I have been in correspondence for some months. Referring to the Lyons report, he said to me in a letter of 17 April this year:
“We understand that these reforms will increase the liability on owners like Mr Kitson. However, as the Chancellor’s announcement made clear, the purpose of reform is to enhance the supply of commercial property, reducing rents and improving access for new and existing firms. Downward pressure on rents will have significant benefits for UK business and wider UK competitiveness.”
That is not what the local market says in my constituency, where there is already overcapacity. It is all very well saying that that might be the impact in urban areas, but in scattered rural communities in south-west Wiltshire there is already overcapacity in such units, and I fear that the measure will make matters worse. Can we be quite sure that when Ministers are working out the process and the machinery for introducing the change, they take due account of the need to be careful about rural proofing the measure? The least they should do is introduce it over a number of years and not say, “From 1 April 2008, wham! Bang! You’re going to have to pay the bill.”
My third example is a very particular example.
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