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In my London borough of Bromley, we have a vacancy rate of some 4 per cent. That has fallen from its high of 6 per cent. We are pleased that that is a comparatively low vacancy rate. I hasten to add that that is in no insignificant measure due to the enlightened policies of the Conservative-controlled London borough of Bromley council, working with our private sector partners. The master plan that we have just published for Bromley town centre will, I
hope, build on that. I know from my time in local government, and I agree with the Government on this, that many local authorities seek to encourage commercial development. That is why, as the Minister knows, I favour a return of the business rate to incentivise local authorities in that regard.
However, that is not the whole picture. I know from taking a walk up my high street that, even in Bromley, although we have a thriving centre around the Glades and the southern part of the high street, that 4 per cent. vacancy rate masks the fact that there is almost complete occupation at one end but a much higher rate at the northern end of the town centre, for example, where smaller premises usually owned by individual landlords are struggling to compete because the trade is drawn further south.
Anne Main: The situation that my hon. Friend describes is very similar to that of St. Albans, where many smaller quirky premises within the conservation area are falling empty. It is partly because the high street is attractive, but it is also because those premises are quite small and it is hard to generate the high rents that commercial premises need. It is not as simple and straightforward as having high-rise tower blocks or big office spaces that could easily be let. These properties are quite difficult to let and I am sure that my hon. Friend realises that this is one of the important issues surrounding the Bill.
Robert Neill: My hon. Friend is absolutely right and extremely well informed. I suspect that what she said entirely mirrors the experience of most of us who have medium-sized shopping centres in the towns of our constituencies. As my hon. Friend rightly says, the problem is not due to speculative landlords trying to make a fast buck by leaving premises dormant and hoping for a capital appreciation. These people actually want to let their properties, but for all the reasons that have been specified, they are unable to do so. That is why the caveat to the observations of the Federation of Small Businesses is so important. It was right to read it out, because that caveat is perhaps the most important point.
At the moment, most of us remain convinced that the Government have recognised that
“small businesses who are unable to use or sell empty property for legitimate commercial reasons”
should not be “punished” by the new rules. It is worth restating what my hon. Friend the Member for Ludlow (Mr. Dunne) said about that. Many of us will want to reflect very carefully as the Bill progresses on what the Government say they are going to do to meet that legitimate issue, which is particularly important for people based in the fringe area of north Bromley in my constituency and in many other small shopping centres elsewhere.
It is a mistake to assume that there is one simple cause of the vacancy rates that distress and trouble all of us under those circumstances. That also helps to explain the concern about regeneration and why a number of property experts and people in the industry have expressed concern about the effect of what seems to be a tax-raising measure on regeneration. It will be
interesting to hear what the Minister says in his reply to provide reassurance on that point. We know that, in numerical terms, the vast bulk of the consultation has been unsympathetic to the Government’s proposed changes. It might be interesting if the Minister enlightened us on whether the majority of the urban regeneration organisations that he consulted were in favour or opposed to the scheme. It is important to tackle that issue.
As has been acknowledged, small businesses in such sectors are already under pressure. After all, this measure does not stand on its own. Pressure has already been exerted from the 2005 business rates revaluation, so adding this on top could be enough to push small businesses beyond the point at which they can remain viable. Particularly if the Government’s intentions are genuine and this is not a tax-raiser, it would be a tragedy if the provisions had that perverse effect by over-egging the pudding. Nothing has yet been said by the Financial Secretary—perhaps the Minister for Local Government will be able to clarify the position—about whether the proposals are indeed revenue-neutral. I think that we know the answer: it is pretty obvious that there will be a significant take. The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) made that point very strongly. Against that background, how is what is perceived by many as the imposition of an additional tax likely to increase demand for vacant property or incentivise people to bring property on-stream?
Reference was made earlier to the position in the 1970s. I accept, as the Minister has argued on other occasions, that the economy is different now. It is important that the risk of vandalism and other issues are spelled out and dealt with carefully in the regulations. If the Minister accepts—the Government appear to do so by putting it in the Bill—that there is a risk, who will monitor and assess it? Are we going to create needless bureaucratic burdens? Will it be another obligation that will fall on the local authority? If so—we do not know for sure whether that is envisaged at the moment—will the need for staff to carry out the monitoring be reflected in the financial settlement for local authorities? It seems to me that a number of seriously unanswered questions arise from the Bill.
Danny Alexander: The hon. Gentleman makes a significant point. How should we judge whether, for example, a property has been vandalised or has simply become dilapidated? If the roof comes off on a windy night, was it the wind, or was the wind taken advantage of? Those are difficult judgments, and we have not heard much from the Minister about how that is to be monitored.
Robert Neill:
The hon. Gentleman is absolutely right. I am almost beginning to regret that I no longer practise law, because the greatest business growth might be for those lawyers who appear in rating tribunals, and who argue exactly that sort of neat and interesting point. I am sure that that is not the type of job creation that the Government were intending, but it might be the result. We need to hear a great deal more from the Government on such a serious point. We do not know whether rating appeals are likely to increase
significantly, or what burdens will fall on the system, in addition to the other burdens affecting local authorities.
Generally, those of us who look at our own shopping centres do not believe that properties are deliberately left vacant. It is tough enough for smaller landlords to survive without such burdens being placed on them. In areas such as mine I am concerned that, if smaller landlords find that the additional burden tips them over the edge of viability, they will be forced to sell up. The only people who will be able to take advantage and buy will be the large landlords—Tesco, Sainsbury’s and the others, who will gobble up yet more sites. As has been pointed out, they can bear the cost, proportionately, of land banking. That cannot be what is intended; it is hardly consistent with the Sustainable Communities Bill, on which I am delighted to see the Minister is increasingly a convert. Those of us who want and value diversity of tenure in our town centres would be concerned if the Government’s proposals had such an unintended consequence.
It is also worth remembering that the commercial property sector is important for the UK economy. The retail sector alone has an aggregate rateable value of some £38 billion, which is hugely important to our economic interest. Overall, current estimates suggest that about 7 per cent. of that is vacant. That might suggest an aggregate rateable value for those vacant properties of about £2.5 billion.
That brings me back to my concern about the motivation for the proposal. I agree that the Local Government Association was supportive of the proposals, but for the reason that caused me to support the return of the business rate—that any additional money raised had to stay in the local economy, where it could be used for the benefit of the local community. No such safeguard appears anywhere in the Bill. No algebraic formula ensures that that money will go back to the people of Bromley or any other local authority. The danger is that it will go straight into the hands of the Treasury. The way in which the Treasury has increasingly nationalised revenue raised from local sources is one of the real problems that we face in trying to make our local communities sustainable.
Taken in the context of other Government measures—powers to trim back business rates across the board, and the removal of the exemption on agricultural land and farmland, of which Bromley and Chislehurst has some but not much—there is real concern about the effect of the proposals. Small businesses in my part of the world have been concerned that previous measures enacted by the Chancellor of the Exchequer have damaged them. The fact that the small business rate relief was not automatic led to a considerable drop in take-up. That was a burden placed on small businesses, and they fear another burden of the same kind.
We look to the Minister to act. The only occasion on which I parted company from my hon. Friend the Member for Surrey Heath was when he described the Minister as frugal. As we know, the Minister is capable of acts of great generosity, and we look forward to its being redeemed in due course. My hon. Friend the Member for St. Albans (Anne Main) is not present at the moment, but if the Minister feels inclined towards
the same generosity on this occasion, perhaps she should be awarded a prize for the “champagne moment” of the debate.
I hope that by now the Minister has an answer to the point that I have raised. He nods, so I can sit down.
3.30 pm
Mr. Philip Dunne (Ludlow) (Con): Let me begin by reminding the House of the origin of business rates. They were developed in, I believe, the late 1960s as a way of raising revenue to help fund local services. That is, of course, a worthy purpose, but now a Bill is being introduced whose purpose, far from being to help fund local services, is to help plug holes in national debt. It is highly regrettable that a form of local revenue raising should be used simply to raise revenue.
We have been led to believe by the way in which this Bill was described—or barely described—by the Chancellor in his Budget speech, and the way in which it was introduced by the Economic Secretary in the Ways and Means debate and again today by the Financial Secretary, that it is somehow of benefit to broader society. Indeed, I believe that it has been described as of environmental, social and economic benefit. It is, however, plainly and simply a money-raising measure, and a significant one at that. As was pointed out earlier, the Red Book states that in the first year alone the Bill will raise £950 million, which makes it the fourth largest revenue-raising measure in this year’s Budget. An enormously significant measure is being introduced behind a smokescreen of social good, and I hope that my speech will help to explode the myth. There is another possible explanation. It may—not for the first time—be a case of the Government’s basic lack of understanding of some of the commercial realities that underpin economic activity in large parts of our economy. I shall say more about that later.
The Government claim that the Bill will help to establish a more level playing field between different types of property use. That is true to an extent, but only to an extent, because the Bill maintains the distinction between commercial premises for retail, office and other use and those for industrial and storage use. If the Government were being straightforward, they would have acknowledged that.
My hon. Friend the Member for Surrey Heath (Michael Gove) used an expression that may be common Scottish, or perhaps Surrey, parlance. He said that the Government were “praying in aid” both Sir Michael Lyons and the Barker review to provide justification for the Bill. Indeed they are, although I would use rather more basic and less colourful language. I would say that the Government were hiding behind the claims in those reviews to provide some sort of ethical justification for a tax grab.
There are some difficulties with that approach, not least Sir Michael Lyons’ comment that the Bill would constitute an appropriate reform in the context of other measures that he thought the Government might like to introduce. He was advocating that the Government should wait until the revaluation that he was proposing, which would start in 2010, so the negative effect on business of this increased taxation could be absorbed within the adjustments to rental
valuations and the impact that that would have on business rates and rateable values. He wrote in section 8.107 of his report:
“Depending on the size of complexity of the task involved, it might be possible to remove exemptions from the beginning of the 2010 list in April 2010.”
Of course the Government have leapt upon that suggestion and, as we have heard—notably from my hon. Friend the Member for Bromley and Chislehurst (Robert Neill)—taken it up with alacrity because of the significance of the revenue-raising measure.
Sir Michael Lyons made some interesting observations about the extent of business rates and their impact on revenue raising for the Government and on businesses in general. Rates are a very significant tax revenue raiser—[ Interruption.] I do not know if the Minister for Local Government is intending to intervene—
Mr. Woolas: I was simply pointing out from a sedentary position—perhaps rather rudely, for which I apologise—that this is not Government money; we redistribute the business rate to local authorities.
Mr. Dunne: As I will explain, I am seeking to highlight merely the degree of taxation raised in the measure. I am not suggesting that the Government are doing anything inappropriate; clearly, they have a job in raising tax. It is the manner and extent of the tax and the measure that I am concerned about.
Sir Michael Lyons pointed out in section 8.9 of his report:
“Business rates are a significant tax for businesses—in 2006-07, they are expected to raise about £18.4 billion in England (£20.3 billion across the UK), compared to £47.5 billion (net of tax credits) in UK corporation tax”.
Business rates are now raising almost half the amount that businesses pay in corporation tax. The impact of that is distorting, depending on the sort of business. Many contemporary businesses—recently established businesses that are developing their business as a result of technological change—do not require many premises to operate from. Operating online, it is possible to exist with a very modest proportion of one’s profit going in the form of business rates. I want to develop that point. The suggestion in the Lyons report was that, on average, about 3 per cent. of turnover is paid by business through business rates, but he acknowledged that that varies significantly between companies in different parts of the country and different sectors of the economy.
The impact noted by Kate Barker in her report was:
“The principle behind (empty rates relief) is to create a broadly symmetrical tax, given uncertainty: when a property earns a positive revenue, it is taxed; when it does not, relief is granted. This helps remove what would otherwise be a distortion and helps to share risk between property owners and the government.”
I quote that because the Government are arguing that they are removing a distortion by reducing this relief and are claiming support for that argument in what Barker and Lyons have said. Barker pointed out that the distortion is itself balanced by the relief. Lyons made the point that the impact falls very
disproportionately on different parts of the economy. Therefore, this measure will also fall disproportionately and will have unintended consequences on different parts of the economy. I shall discuss that later.
Let me illustrate the extent of the differential. As my hon. Friend the Member for St. Albans (Anne Main) rightly said, some major supermarket chains can afford to retain land banks and pay rates on vacant property. In responding to the Barker review, it was pointed out that in 2005 Tesco spent 13 per cent. of its profits on business rates, compared with 1 per cent. of profits for a mobile telephone operator, which is a high-street competitor. I therefore contend that the evidence from Lyons and Barker is somewhat contradictory and does not necessarily support the Government’s argument that the measure is not distortive. The retail market is changing so rapidly as a result of the internet that the measure will compound the problems being experienced by many retailers with significant high street presences. Trade is moving online and out of premises, and this measure will exacerbate that. I will talk about the retail sector shortly.
Another impact addressed in the Lyons review and which has been misunderstood by the Government is to do with the timing of rental voids. The Lyons review assumed that properties remain empty for the duration of the relief, but that is not the case. As my hon. Friend the Member for St. Albans said, speculative developments tend to be large and complex and have many occupiers, and there is often a considerable period of time between the point when the property is completed and the point when it is entirely let. I contend that one reason why vacancy rates are higher in areas such as the City of London and Westminster is that they are desirable locations. That draws in speculative development during periods of strong market growth, and it is in the interests of the developer to hold out for the highest possible rent because that will enhance the capital value of the project.
The capital value of a project is what is of greatest significance to the developer undertaking a speculative development, rather than the running rent, which is of most interest to the occupier. It is therefore unsurprising that there are higher vacancy rates in areas of strong demand. This measure will have little impact on that, as it is relatively insignificant in relation to the overall rent that the developer anticipates he will have to forgo for the period until the property is fully let. That was not well understood in the Lyons report.
A British Retail Consortium submission to the Chancellor in advance of the Budget referred to the fact that surveyors conducting appraisals for development in regeneration areas typically anticipate letting voids, following completion of construction, of 18 to 24 months—the voids are, I assume, slightly longer for properties in regeneration areas than for those in areas where there is already a ready demand. That suggests that the duration of relief for retail and office premises is already relatively short when compared with the void periods for such properties, and this measure would exacerbate that problem.
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