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Public Bill Committee Debates

Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008

The Committee consisted of the following Members:

Chairman: Mr. Christopher Chope
Campbell, Mr. Ronnie (Blyth Valley) (Lab)
Cawsey, Mr. Ian (Brigg and Goole) (Lab)
Goldsworthy, Julia (Falmouth and Camborne) (LD)
Healey, John (Minister for Local Government)
Hurd, Mr. Nick (Ruislip-Northwood) (Con)
Jackson, Mr. Stewart (Peterborough) (Con)
Keeble, Ms Sally (Northampton, North) (Lab)
McDonnell, Dr. Alasdair (Belfast, South) (SDLP)
Milburn, Mr. Alan (Darlington) (Lab)
Mole, Chris (Ipswich) (Lab)
Öpik, Lembit (Montgomeryshire) (LD)
Osborne, Sandra (Ayr, Carrick and Cumnock) (Lab)
Soulsby, Sir Peter (Leicester, South) (Lab)
Walter, Mr. Robert (North Dorset) (Con)
Watts, Mr. Dave (Lord Commissioner of Her Majesty's Treasury)
Wilson, Mr. Rob (Reading, East) (Con)
Yeo, Mr. Tim (South Suffolk) (Con)
Keith Neary, Committee Clerk
† attended the Committee

Sixth Delegated Legislation Committee

Wednesday 26 March 2008

[Mr. Christopher Chope in the Chair]

Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008

2.30 pm
The Minister for Local Government (John Healey): I beg to move,
That the Committee has considered the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 (S.I. 2008, No. 386).
I am delighted to move the motion, but I have been caught a little unawares, as I was not entirely sure about the order of speaking this afternoon. The regulations are part of a package of reforms that are derived principally from the Rating (Empty Properties) Act 2007. The purpose of the package is to provide landowners with a stronger incentive to re-let, redevelop or sell empty, non-domestic buildings, thereby reducing the need for new development on greenfield sites and increasing access to existing premises for business. That will help to reduce rents and to increase the UK’s competitiveness. The reforms follow the recommendations in the reports of Kate Barker, who looked at this issue closely, and Sir Michael Lyons, after his inquiry into local government almost a year ago.
The regulations revoke and replace the Non-Domestic Rating (Unoccupied Property) Regulations 1989, and specify which empty properties are liable to pay non-domestic rates. The regulations and the wider reforms to empty property rates come into force on 1 April. The wider changes raise the liability of owners to 100 per cent. of the occupied rate for empty commercial properties, but they also introduce a new zero rate for empty property that is owned by charities and community amateur sports clubs. They also give the Government the power to reduce empty property rates back to 50 per cent. if they decide to do so. Having that power in the regulations obviates the need for future recourse to primary legislation.
The basic policy purpose behind the changes was announced in last year’s Budget. In any table of the most expensive office markets and industrial premises, the UK’s towns and cities have some of the highest rents. To some extent, that might be a sign that companies, internationally, recognise the attractiveness of the UK as a location, but it is also an indication, particularly when one looks at the varying pattern of rents, that our business rental property market is far from operating as it should. A system and structure of empty property reliefs that dates back to the 1970s and early 1980s, when rental values and prices as well as demand for property were falling, not growing, simply is not fit for the business needs and competitiveness requirements of our economy today. It cannot be right in the current economic climate that, after 10 years of strong growth and rising rental and house prices, empty property receives a subsidy of as much as £1.3 billion a year, paid by other taxpayers, so that it remains empty.
Julia Goldsworthy (Falmouth and Camborne) (LD): The Minister talks about the cost of commercial property in the UK. I note from the statistical release of 26 September from the Department for Communities and Local Government that London accounts for 26 per cent. of the contribution to the national pool of domestic rates. Can he give some indication of whether London also dominates in benefiting the most from the current empty premises relief, or are the reliefs actually spent in other areas?
John Healey: The reliefs are widespread, and in many towns and cities outside London, there are empty properties—industrial, office and retail—which attract empty property relief after a certain period, thereby reducing the market incentive to re-let, reuse or redevelop them. If the incentives to bring them back into use are not strong, particularly for industrial land and land that has already been built on, what could be potential brownfield sites for redevelopment and reuse might not be as available as they should be, and that increases the demand for and pressure on greenfield sites for future development.
The reforms to empty property rates should be seen as a tool to encourage the owners of empty properties to bring them back into use and to keep them in active use. Sir Peter Hall stated:
“There are voids all over local shopping centres. As long as they’re getting rate relief, in a rising market, owners are happy to sit it out, waiting for a better offer. But these changes could rapidly change their calculations. They’ll be willing to let units for less than top whack.”
We consulted widely last year on whether to include specific provisions to deal with the potential for avoidance of the new regulations and provisions after 1 April. We took the judgment that the risk of such activity was relatively low. However, I have ensured that plans are in place actively to monitor the impact of the reforms. We will do so working closely with the Local Government Association, the Institute of Revenues Rating and Valuation and the Valuation Office Agency. If evidence comes to light from that monitoring to indicate that avoidance activity is taking place, we will not hesitate to use the powers in the 2007 Act to make anti-avoidance regulations.
Mr. Stewart Jackson (Peterborough) (Con): I have two questions. First, the Minister’s predecessor, who is now the Minister for the Environment, promised a review of avoidance and deliberate destruction or damage of property. I would be interested in the Minister’s comments on those remarks. Perhaps I am prejudging them.
Secondly, the Minister prays in aid the Barker review, which was published in December 2006, and the March 2007 Lyons report. In respect of consultation, have not the Government been rather precipitate in putting a Bill through both Houses, getting Royal Assent for it and laying these regulations less than two years after both of those important reports? There has not been time to assess the impact as indicated by the reports.
John Healey: On the contrary, there was debate about the work that Barker undertook before and after she published her report, and the report prepared by Sir Michael Lyons involved detailed work, consultation and the gathering of evidence over a significant period. It is hard to make the case that last year’s Act and these regulations are somehow precipitate when this has been a live issue of policy examination and debate for several years.
It cannot be common sense to continue to pay owners to leave their properties empty, to be subsidised by taxpayers elsewhere, when UK office rents are among the highest in the world and clearly a hindrance to UK competitiveness. That is certainly the view of the Federation of Small Businesses. Neither can it be beneficial, as a result, to have to find more land on which to build commercial property or, indeed, housing when existing land that has been used or developed previously could be put to that use. In summary, the reforms will deliver important economic, social and environmental benefits, and I hope that the Committee will give them due consideration.
2.40 pm
Mr. Jackson: It is a pleasure to serve under your chairmanship for the first time, Mr. Chope. However, this is not the first time that I have crossed swords with the Minister. I think that the last time was over the fire service—no, it was over neighbourhood funding. My memory let me down there. I was privileged to take part in the Second Reading of the 2007 Act, although it would not be appropriate to rehearse the robust arguments used in that debate—I would run the risk of being ruled out of order if I sought to do so.
The Conservatives agree with the spirit of the Government’s intentions, but it is appropriate to ask some probing questions before the Committee divides—if, indeed, it does divide—so I hope that the Minister can answer some key questions that arise from the regulations. Page 6 of the explanatory memorandum states that the increased administration costs of dealing with the increased number appeals, resulting from the higher burden on empty properties that were previously exempted, have not been estimated. Does the Minister not want, or is he unable, to establish those costs? Does he have any idea of the likely number of appeals that local authorities can expect to receive?
Page 6 also states that the reduction of rents has not been monetised. Does the Minister think that an increase in business rates will be offset by the resulting decrease in rents? Will that be cost-neutral for businesses? Furthermore, he talks about helping small businesses, but he will be aware of the small companies tax rise announced in the March 2007 Budget and of the fact that the Federation of Small Businesses was keen to ensure that small business, unable to use or sell empty properties for legitimate commercial reasons, would not be punished by the new rules and that exemptions would apply in such cases. Will he confirm that there will be no such exemptions?
Page 12 of the explanatory memorandum states that the Government are in the process of preparing a funding package to ensure that the one-off cost, estimated at about £1.66 million for this financial year, to local authorities of introducing the changes will be funded. Will the Minister give us more details on how that will work? Is it possible that the explanatory memorandum is wrong and that it will cost local authorities more to implement the changes? If so, will the Government assist them? Furthermore, on page 12, Ministers rightly acknowledge that there is
“a risk that the reforms to empty property relief could lead to an increase in the dereliction of buildings as some owners seek opportunities to avoid paying rates.”
How does he intend to monitor that eventuality? Will local authorities have a responsibility to report back centrally?
With the current economic downturn, it appears increasingly likely that some owners of struggling businesses will deliberately vandalise empty properties to avoid the tax liability, which happened before the empty property rate relief was put in place. Does the Minister accept that such an eventuality is more likely than when the 2007 Act was debated? That eventuality might not have been properly considered. Ministers have yet to produce an estimate of the proportion of vacant buildings and brownfield land that is deliberately withheld from re-use or development. Does he have any evidence of that proportion?
There were concerns that the reforms would harm the potential for regeneration in some areas, and property experts in the industry were concerned that the tax changes would cause harm. How confident is the Minister that that will not happen? Indeed, if I can press him, how many of the urban regeneration organisations throughout the country were consulted, and how many were in favour or opposed to the Government’s changes?
Businesses were already suffering due to the 2005 business rates revaluation, which the then Chancellor of the Exchequer—now the Prime Minister—fiddled to raise more revenue. How can the Minister justify a yet greater burden on the business community, especially given the current economic downturn? Indeed, why did not Ministers agree to our proposals, which were articulated in considering the legislation, to make the changes revenue neutral? That may be a rhetorical question.
Many people are concerned that the changes will affect the net yield of British pension funds from their property. Given the effect of the dividend tax credit withdrawals and other issues, does the Minister agree that the last thing pension funds need is another tax raid?
2.46 pm
Julia Goldsworthy: I believe that this is the first time that I, like the hon. Member for Peterborough, have served under your chairmanship, Mr. Chope, but it is not the first occasion on which I have been in this Committee Room with the Minister, although previously in both our cases, we had on different hats.
The regulations formalise the empty properties relief changes that were first announced in the 2007 Budget, following, as the Minister said, recommendations from the Lyons and Barker reviews. The Lyons report, however, called for a review; it did not make any specific recommendation. We will see changes to eligibility, but in principle, at the heart of all the legislation—the 2007 Act and the regulations—is a perfectly sensible desire to encourage the more efficient use of property. The question is whether the Act and the regulations achieve it.
On the exemptions, the hon. Member for Peterborough has already said that, when the Act was under discussion in the House, there were other areas of debate, including the implications for businesses that actively sought to have their promises occupied, but for which other obstacles were in the way—whether other planning regulations or simply difficulties in occupying the premises in a difficult local market. It is not clear whether that question has been addressed, so I should appreciate the Minister’s comments on whether he will keep the issue under review and whether there are cases that involve those difficulties.
I have a few other questions on which I should appreciate the Minister’s comments. Why are the recommendations being implemented ahead of a much wider review of business rates? There is a discussion to be had about what should happen to business rates. Should they be collected and retained locally? In fact, if one proposes to make the changes, it would make much more sense for the revenue to be kept locally, so that businesses might be sure that it was kept in the local community. Why are the regulations being pushed ahead of that review? There are significant revenue implications for the Treasury—some £950 million in the next financial year.
Why has the time scale stated in the regulations been chosen—three months for most commercial properties and six months at 100 per cent. relief for industrial buildings—when local government empty property management orders kick in after six months? It would make sense for the regulations to be consistent with one another, because the empty property management orders cite six months as a reasonable period in which to seek the occupation of premises. Why are we operating on a different time scale?
Has the Minister or his Department made any assessment of the differences between small-scale commercial premises and larger, new developments? I understand that the average void rate of larger-scale developments is 9 per cent., whereas I should imagine that developers or property owners would expect a reasonable return of 6 to 7 per cent. What impact are the measures likely to have on those returns? In addition, what impact will they have on new developments where a risk is involved and the development is completed ahead of 100 per cent. occupation of all the premises? It may be years before the entire building is occupied.
On the revenue that will be raised from the measures, I would appreciate the Minister’s comments on his understanding of whom the additional costs will impact on, because the issue is in part portrayed as being a win-win situation for everyone. For example, extra money will be given to the Treasury and the owners of property will benefit from more rent and an increased take up, while the occupiers will benefit from lower rents, which will be a downward pressure. However, somebody somewhere along the line will have to pay. Does the Minister accept that, even if the costs are not passed on in headline rents, they must ultimately be passed on to the occupier—whether through more restrictive arrangements, longer rental agreements or more costly break clauses? I would appreciate the Minister’s comments on that subject.
Most importantly, the Minister has not made clear what the differential impact of the measure will be on different areas of the country and on different types of commercial property. I shall refer again to the statistics provided in the Department for Communities and Local Government release on 26 September 2007. That document gives a regional breakdown of the contribution to the national non-domestic rate board during the last financial year for which information is available and clearly states:
“London accounts for 26 per cent. of the contribution to the national pool while having only 15 per cent. of the population”.
So London is making a disproportionately large contribution to the domestic rate pool compared with its population. Does that read across to the benefit that London currently has in terms of the empty premises relief to the area? We do not have a regional breakdown of the empty premises relief. Are there higher rents in places such as London, but lower rates of empty property; or are there higher rents and higher rates of empty property?
Clearly, the market is not uniform across the United Kingdom, as there will be different issues in different areas. In particular, those living in rural areas have raised concerns about the impact that the measure might have on them. Those in regeneration areas are concerned that businesses will not want to take on the risk of renovating or developing new areas if they cannot be guaranteed an immediate uptake of those premises.
There are real concerns that have not been addressed in our debates. I would appreciate the Minister’s comments on the geographical breakdown of some of the reviews that will take place. He said that he will monitor closely the impact that the changes have. I should like to see a regional or even sub-regional indication of what is happening on the ground, so that we can establish whether particular parts of the United Kingdom suffer or experience disproportionate difficulties as a result of these changes.
Mr. Jackson: This will not be a difficult question for the hon. Lady, but does she agree with her hon. Friend the hon. Member for Twickenham (Dr. Cable) who made the point on Second Reading that these regulations are in isolation of the situation where good owners of rented property are often at the mercy of a slow planning application? Therefore, irrespective of the fiscal situation, those people are often constrained by how quickly their planning applications are heard. That is not taken account of in the regulations.
Julia Goldsworthy: The hon. Gentleman makes a good point that was well made by my hon. Friend the Member for Twickenham (Dr. Cable). A related example involves some tenants who had undertaken a rental agreement with a view to opening a bar in a town in my constituency. They had been advised by the local authority that there would be no problem in getting the planning permission necessary to serve alcohol—in fact, I think it was a licence. That process was delayed and permission was ultimately refused. Those people were locked into a tenancy agreement and had renovated the property so that it could be opened as a pub but were then denied the licence to do so. The process went on for longer than six months. They found themselves in exactly the predicament described by my hon. Friend, even though they acted in good faith at every stage of the process and wanted to occupy the premises.
A final point in the context of the wider economy is that the proposals and the reviews that prompted them were dreamed up when the market was much more buoyant than it is now. We are in a period of great uncertainty at present, and the outlook on the future is much less optimistic. Will the Minister consider whether the proposals reinforce any negative trend in the market and depress falling prices even further? To restate the question asked by the hon. Member for Peterborough, what knock-on impact does the Minister think the regulations may have on areas of the wider economy such as pension funds, which will also face difficulties?
To conclude, we sympathise with the honourable intentions behind the proposals. The system is complex; it needs simplifying, and a much wider review of non-domestic rates is needed. However, the regulations are a very blunt instrument, and I should like from the Minister reassurances that their impact will be kept under constant review. I very much hope that he will also be able to reassure us that this will be the beginning, not the end, of the much wider review of non-domestic rates that is necessary if we are to be convinced that the proposals are something more than a measure to make the sums in the 2007 Budget of the then Chancellor, now the Prime Minister, add up.
2.56 pm
John Healey: I welcome the general approach taken by both Opposition spokespeople. The hon. Member for Peterborough described himself as sympathetic to the purpose of the changes. The hon. Member for Falmouth and Camborne described them as sensible. Let me disentangle the rhetorical and political comments made by the hon. Member for Peterborough and try to answer his specific questions about the regulations.
First, on appeals, it is difficult to be certain ahead of time, but given that the removal of the rate relief does not affect the rateable value of the property, which is what appeals are about, it is hard to understand why there would be additional grounds for appeal as a result of the regulations and, therefore, why there should be any increase in appeals. It is a reasonable question to ask, but the hon. Gentleman need not be too concerned—certainly, I am not—about a large increase in the number of appeals as a result of the regulations.
On additional costs to local authorities, we anticipate a marginal additional cost, confined mainly to the first year, of about £1.5 million to £1.6 million in total. We will work with the Local Government Association to determine a fair split of revenues between local authorities in the event that that is necessary.
On the reduction of rents, we previously discussed in the context of the wider debate and legislation the modelling done by Her Majesty’s Revenue and Customs. HMRC calculated that, because of the added incentive to re-let, reuse or bring property back into use more rapidly, the measure could reduce the amount of property that is empty at any given time by about 15 per cent. in those sectors that are currently covered by empty property relief. We published in the impact assessment of the Rating (Empty Properties) Bill an estimate that suggested that the overall reduction in business rents would be in the order of 0.25 to 0.5 per cent., or £80 to £160 million.
The hon. Member for Peterborough asked a series of questions about avoidance, deliberate damage and vandalism. Candidly, at this point, assessing the risk of those things in the context of the new provisions in the 2007 Act and the regulations is a matter of judgment. Particularly, we must ask what is the risk of deliberate damage, vandalism or other avoidance activities to business property. The representative organisations and property owners have consistently argued that the such risks are low and unlikely. That view came through strongly in the Government’s consultation last year. I took the judgment that, although we have the power under the 2007 Act to regulate for anti-avoidance measures, it was sensible to defer such action and that it would be better to monitor the implementation and the activity as a result. As I explained in my opening remarks, we will do so closely with the Institute of Revenues, Rating and Valuation, the Local Government Association and the Valuation Office Agency.
The hon. Gentleman also asked specifically about how any increase in dereliction would be monitored. How we work at the moment will give him an indication how we should be able to do that. At the moment, the removal of a property from the list of properties that are liable for rates requires an appeal to the VOA. In other words, the VOA is able to, and will, monitor such appeals and report on examples when it considers that a change in rateable value might be due to deliberate damage. That is part of the monitoring system that we have put in place.
The hon. Member for Falmouth and Camborne was concerned about the operation of markets and the pattern of relief payment, and in both an intervention and her speech, she cited London’s contribution to the business rates pool. Frankly, the contribution is higher, because commercial activity is more extensive and greater in London, which therefore makes a greater proportional contribution. The top 10 local authorities by proportion of the commercial property base that is empty—the most reliable and recent figures are for 2004-05—include some of the fastest-growing local and regional economies, curiously. It includes Slough, Ealing, Birmingham and Manchester. It also includes areas of low demand, such as Wolverhampton, Sandwell and Brent. That is further evidence, and an implication, that we have a system and a market that are not working well. The reforms are designed to improve it.
Mr. Jackson: I hear what the Minister says about the perverse incentive to allow dereliction and to damage property. I am pressing the point because the Minister for the Environment, for whom I have a great deal of respect, was not at his most robust in his argument in the debate in the House. He said words to the effect that—we can see the actual wording in column 451 of the Official Report for 7 June 2007—although there would be consultation on measures to prevent deliberate dereliction, he said that such activity was unlikely because economic circumstances were different from those of the 1970s. That is probably not the most cast-iron and robust analysis of the situation. What is the Minister’s view?
John Healey: I believe that I just described my view. I was fortunate enough to follow my hon. Friend the Minister for the Environment as Minister for Local Government, so I conducted, completed and drew the conclusions from the consultation. The judgment was not based on a comparison with the 1970s, but on responses to the consultation. We judged that the likely risk of deliberate avoidance through dereliction, damage or vandalism to properties was low and that it did not justify introducing regulations to prevent it at this point. That is the position. We will keep a close eye on the situation, with the agencies that I mentioned, with which we are discussing the matter. If there is such evidence, we shall not hesitate to use our powers under the Act.
Julia Goldsworthy: The Minister said that the areas with a high number of empty commercial properties are varied—some are high rent and high demand areas, and some are low demand areas. I can understand how the regulations would encourage higher occupancy in high rent areas, but not how they would incentivise people in low demand areas. Will they not simply further depress demand in such areas?
The main question asked by the hon. Member for Falmouth and Camborne was whether we would monitor the impact of the changes, to which the answer is yes. Will we monitor activity that may lead to avoidance? The short answer to that is yes, we will. The hon. Lady would expect me to say that. We will ensure that we monitor both the general impact and any specific perverse consequence that may require us to take further action.
As I said in my opening remarks, the reforms enable us to change the rate relief, if future circumstances require it, to a limit of 50 per cent. On that basis, I hope that members of the Committee will be content to allow the regulations to go forward. I thank you for your chairmanship of our proceedings this afternoon, Mr. Chope, and hon. Members for their contributions.
Question put and agreed to.
That the Committee has considered the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 (S.I., 2008, No.386).
Committee rose at seven minutes past Three o’clock.

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