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In accepting Kate Barker’s recommendation for reform, the Government also asked Sir Michael Lyons to consider the case for change from the point of view of local authorities and local authority financing. The nature of the representations that he received from local authorities across the country, which are aware of the local impact of the current empty property relief regime, was very revealing. A number of authorities expressed the strong opinion that it should be reformed. Hampshire county council, in the constituency of the hon. Member for Fareham (Mr. Hoban), said simply “Yes” to the proposal for reform. It therefore came as no surprise when Sir Michael—agreeing with Kate Barker—concluded:

The Chancellor accepted those recommendations in the Budget, and the Bill legislates for the reform.

The Bill, although short, has four principal elements. First, it will increase the empty property rate from 50 per cent. to 100 per cent. of the occupied business rate for all properties. At present empty industrial property is, through regulations, exempted from the 50 per cent. rate. In the light of evidence in Kate Barker’s analysis that holding one type of property involves no difference in risk, those regulations will be amended to equalise the tax treatment of all empty property—albeit with six months relief of industrial property rather than the current three months, which
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will remain for empty retail and offices premises. We believe that that will give owners a strong incentive to re-let, redevelop or sell on empty non-domestic buildings, thus reducing the need for new development on greenfield sites and increasing access to existing premises for businesses, which will help to reduce rents overall.

Secondly, the Bill provides for a zero rate on empty properties owned by charities—as announced by the Chancellor—and those owned by community amateur sports clubs. Many such bodies play an important role in regeneration and heritage projects in all our constituencies, and the Bill will give a significant boost to the Government’s support for the activities and commitments of the third sector and community sports clubs. Thirdly, the Bill provides a power to return the empty property rate from the new level of 100 per cent. of the basic occupied rate to a minimum of 50 per cent. of that rate. It is a reserve power, which will ensure that in future any Government will have flexibility to respond to changing or prevailing conditions in the property market. Fourthly, the Bill provides a power to tackle rate avoidance tactics by disregarding changes to the state of property in circumstances to be defined in regulations. For example, if an owner removed the roof of a property for rating purposes, it could be valued as though the roof had not been removed.

Property development and investment are key parts of the United Kingdom’s economy and the Government are well aware of the role that they play in its present and future success. I therefore want to ensure that we respond to the main issues raised by industry bodies. Since the Budget, we have had received useful representations from professional bodies. In general, they have welcomed the Bill’s intention, and although they have raised concerns about its likely effects I am confident that we can deal with them.

Mr. Andrew Love (Edmonton) (Lab/Co-op): I apologise to my hon. Friend for my absence at the beginning of his speech, and commend him on the authoritative way in which he is presenting a Bill that I hope and believe Members on both sides of the House will approve. However, concern has been expressed to me about property regeneration schemes, many of which are only just commercially viable or will not be so for some years. It has been suggested that the change in the system may well affect their viability. Has the Minister considered that, and is it a concern that has been expressed to him?

John Healey: That is indeed something we have looked at—it was a concern that was expressed to me and on which we have already begun to act. From April this year—we are not waiting for the Bill’s reforms to come in next year—we introduced a business premises renovation allowance, which may be of interest to my hon. Friend. He may have missed my saying earlier that we are consulting on future tax incentives that can help the redevelopment of brownfield land.

May I correct one common concern, namely, that the Bill has something to do with the business rate as a tax? Empty property in the UK has been rated in the UK for tax for well over 40 years. As Michael Lyons made
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clear, business rates are a tax on property capable of occupation. The Government are not intending to bring new property into the rating system; rather, we are looking at the level and duration of the reliefs that are offered to property when it becomes empty.

In the past, a minority of firms decided that deliberate dereliction was preferable to paying empty property rates. The Secretary of State for Communities and Local Government will be publishing next month a consultation on the secondary legislative provisions in this Bill, in which the Government will ask for industry's comments and those of wider groups on a package of potential anti-avoidance measures to deal with such risks. However, I want to be clear that it is not the Government's intention to penalise legitimate development activities that lead to properties being removed from the rating list. On regeneration, it is true—as my hon. Friend the Member for Edmonton (Mr. Love) said—that the Bill has been criticised as a barrier to regeneration and redevelopment. The principal flaw with this argument is that those who make it have looked at the Bill, but not beyond it to the parallel reforms to the system.

A list was published by the DCLG of the top 10 local authorities where property is sitting empty. With the exception of three—Hyndburn, Sandwell and Wolverhampton—the other seven with the highest level of vacancy rates claiming empty property relief are in London, the Thames Valley and the city centres of Manchester and Birmingham. Those are not areas where the demand for land is weak or where there is an excess or supply. All, of course, are areas with high property values, hence the £60 million of empty property relief costs to property in the City.

For areas where demand is low—for example, wards across Hyndburn, Sandwell and Wolverhampton, as well as for wards across all of the assisted areas in the country—we have introduced a new 100 per cent. capital allowance for the renovation of empty commercial property from April this year. The business premises renovation allowance is available now, a year in advance of the reforms proposed by the Bill.

We are ready to go further. I have mentioned the consultation on the future of tax incentives for the redevelopment of brownfield land, which proposes an extension of the 150 per cent. allowance provided for the remediation of contaminated sites to cover long-term derelict land and property, as well as biological problems such as Japanese Knotweed.

Mr. Mark Hoban (Fareham) (Con) indicated assent.

John Healey: The hon. Gentleman nods his head sagely; perhaps he has constituency experience of Japanese knotweed.

A further issue on which we shall consult—the hon. Member for Ludlow mentioned this—is the treatment of leaseholders who have surplus property but are unable to reduce their liability because, essentially, they are bound into what could be termed onerous agreements that do not allow for flexible sub-letting or for assignment of those leases. Our commitment to consult on that has been widely welcomed and many are looking forward to the consultation later in the year.

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Let me sum up by quoting two sources of expertise. The first is a firm that attempts to place small firms into available commercial property. The firm has commented that the

The firm's professional opinion is exactly what the Federation of Small Businesses was hoping for and what the Government intend as a result of this Bill.

The second quote comes from Sir Peter Hall in Regeneration & Renewal last month. He believes that the Bill will provide

In doing so, he echoes exactly the Chancellor's analysis that this measure is about competition and access. Sir Peter also points to the benefits for redevelopment and land supply and in particular for new housing starts. He concludes his article:

Indeed we are, and I hope that the Bill will command all-party support for its Second Reading today.

2.7 pm

Michael Gove (Surrey Heath) (Con): It is always a pleasure to speak in a debate opened by the Financial Secretary to the Treasury. He makes his case with fluency and care and today he has once again underlined his reputation as an asset to the Treasury. It needs every asset it can get. His presence here underlines another fact; the Bill is a straightforward exercise in raising revenue. Despite all the claims made for the Bill as a supply-side reform of the property market, it is nothing of the kind. Despite the eloquence of the Financial Secretary and, indeed, the presence of the Minister for Local Government, we know what this Bill constitutes; it is a straightforward tax demand.

If we look at the Bill as an application to reform the way in which we use land, it simply does not convince. Planning applications need to pass certain robust tests and this Bill fails the tests that any application to change the use of land would have to pass. The measure has been flimsily constructed, buckles under pressure and will not enhance the built environment.

Let us examine how flimsily constructed it is. The basic premise of the Bill is that owners are deliberately keeping property empty and need to be taxed into putting it to good use. When we first debated the issue, I asked what justification there was for the idea that individuals were deliberately forgoing the chance to maximise their income and the return on the capital they had invested. Who were these remarkable individuals or odd companies who wanted to earn less than they could every year? What evidence was there for widespread economic masochism on the part of the commercial property sector? Despite the best efforts of the Minister for Local Government, no evidence was produced at the time. Despite the best efforts of the
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Financial Secretary, no evidence has been produced of the wilful keeping empty of property that could otherwise be filled.

The Minister could not offer us any evidence because there is no robust evidence that landlords are wilfully depressing their balance sheets and turning away eager tenants simply out of perversity or idleness. If the Minister had taken the time to read Propert y Week at any point over the last two weeks, he would have seen how that magazine’s readers have been up in arms at this proposal. They have underlined how unjustified the assumptions behind the legislation are. As one correspondent said:

Let me make it instantly clear that we know that the Minister for Local Government is a frugal guy and that he would never spend anything like that amount of money on a flash motor. [Interruption.] He would if he could, but he will have to wait until he is Deputy Prime Minister before he can spend those sorts of sums on cars. The reason why he would not leave that car rusting in his garage is the same reason why individuals who happen to be property owners want to find tenants. They want to get their capital working for them. It is to misunderstand the commercial property market completely to believe that some individuals who would otherwise fill their property with tenants are sitting back and drawing this relief rather than getting their capital to work for them.

In considering the tax justifications for the measure, it is also important to appreciate that it changes how business rates are levied. The Financial Secretary dealt with that to an extent, but it is important that we return to the core principles of taxation. We discussed them during the first debate on this measure—that on the Ways and Means resolution. Business rates are, like all business taxation, understood by business to be a levy on commercial activity. Unless there is activity, it is hard to justify a charge on the balance sheet. How can we tax no commercial activity?

We also need to understand that rates are a charge on the occupants of a building for the use of local services. The principle behind both domestic rates—the council tax—and business rates is that the occupants of a building are asked to pay for the services that they use. However, that principle is upended in this proposed legislation. There will be buildings that are unoccupied so there is no occupant to tax, and, because they are empty, they will not require the same level of local services as they would if they were fully operational and occupied, and yet their owners will be asked to pay for services that they do not use. That is an unfair and unjustified additional levy on business, and it upsets the delicate principle on which business rate taxation has rested.

Another basic principle is threatened by this proposed legislation: the principle of the retail prices index cap on the business rate. We also discussed that when we debated the Ways and Means resolution; however, although the Minister made his best attempt to address the matter, I felt that it was unsatisfactory. Sir Michael Lyons has been prayed in aid as the godfather of this measure, but in terms of the reform
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of business rates he was very clear that any change to the relief that people enjoyed on empty properties should be granted only after extensive consultation and as part of a broad rebalancing of the business rate system. He did not argue for the introduction of this change in isolation, which is what the proposed legislation will do. Sir Michael explicitly said that any change should occur in 2010 after extensive consultation. It will not have escaped the House’s attention that this legislation is being introduced three years earlier and after merely weeks of consultation. This is not considered legislation intended to rebalance business rates; it is a rush to plunder.

On the RPI cap, the principle that businesses understand in terms of the business rate is that there will be revaluations from time to time and when that happens the rateable value of some properties—such as those that have been suitably enhanced or those in areas of high demand where property values have increased—will increase. However, they also appreciate that if that happens, the multiplier—the amount they will have to pay in consequence to keep their business rate at an appropriate level—will increase only in line with inflation in the rest of the economy. The principle behind that is that business should not be used as a milch cow to subsidise other parts of the local government taxation system or of the taxation system in general. Instead, it should pay its way in accordance with inflation.

This taxation change will lead to business paying an extra £1 billion a year direct to the Exchequer through the business rate system. The basic principle behind the RPI cap will be busted. Business will be paying more than any increase in inflation would merit. The RPI cap can be maintained only if somewhere else there is a compensatory relief or reduction in the amount that businesses pay in the rating system. I would be interested to hear the Minister’s explanation of how we can possibly raise an extra £1 billion from business through the rating system and also maintain the RPI cap; if he can square that circle, I will be fascinated to learn how.

Mr. Dunne: My hon. Friend has elucidated one of the fundamental flaws in the Bill. Would he care to speculate on why the Chancellor has chosen to attack business in this way for such a significant revenue-raising element of his Budget? Might that be because business is disfranchised and has no vote?

Michael Gove: My hon. Friend makes a telling and fascinating point. We must speculate about why business has been targeted. Elizabeth I once argued when talking of this House that we cannot make windows of men’s souls, and I cannot make a window of the Chancellor’s soul; I do not know why he has chosen to target business, and in particular small business, in this way. All I do know from having looked at the Red Book is that in order to make sure that his accounts balance, he has had to mount a smash and grab raid on the business sector, which is what this measure is. Unfortunately, this tax change is built on flimsy foundations and will lead to unfortunate consequences.

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Robert Neill: Is not the concern felt by many in the commercial sector, particularly those involved in small businesses, reinforced by the remarkable fact that this is the only element of the Lyons review that the Government have made great haste to introduce into legislation? Every other matter is kicked back so that there is more consultation, but the one element from Lyons that is immediately seized upon is the element that happens potentially to increase the burden on business. That gives us concerns about the Government’s motivation.

Michael Gove: My hon. Friend makes a characteristically acute point. The Chancellor plucked the plumpest cherry that he could from the Lyons review: £1 billion of additional tax revenue.

The Minister for Local Government (Mr. Phil Woolas) rose—

Michael Gove: Michael Lyons argued that what is required is a balanced change to how the business rate operated. The removal of this relief was justifiable in the context of a balanced package of reforms. Instead of introducing such a balanced package, the Chancellor has chosen the quickest, dirtiest and most effective way of raising £1 billion. Talking of quick, dirty and effective, I am happy to give way to the Minister.

Mr. Woolas: I cannot resist intervening on the accusation that the Chancellor has plucked the plumpest, ripest cherry. The hon. Gentleman ascribes a motive to the Chancellor that he clearly understands, but which we do not recognise. I assure the hon. Gentleman that that was not the plumpest and ripest cherry that Sir Michael Lyons tempted us with. As my hon. Friend the Financial Secretary has said, the Federation of Small Businesses supports this measure, even though the hon. Gentleman and the hon. Member for Bromley and Chislehurst (Robert Neill) have said that small businesses do not welcome it.

Michael Gove: I am grateful to the Minister for telling us about the FSB. I will not at present go into the details of the case made by its head of parliamentary affairs, Mr. Stephen Alambritis. However, I will move on to the broader impact that the measure will have on businesses large and small across the country. One lobby group led by one individual has made the case in favour of the Government’s measure, but many other groups, which cover not only the commercial property sector but also the important areas of regeneration and retail are deeply upset about what is happening. They include the British Property Federation, the British Retail Consortium and the Royal Charter—I mean the Royal Institution of Chartered Surveyors. How on earth I forgot the name of that body when it has been so helpful to me in the past I will never understand—it is a fantastic body. The point stands: we can trade trade bodies at the Dispatch Box for some time, but the balance rests with the Opposition and those who are concerned about the measure. If we are simply going to weigh the number of representations that have been made, the measure will fall, as the total representations critical of the measure far exceed the total representations from the commercial sector that support it.

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