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Session 2009 - 10
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Public Bill Committee Debates



The Committee consisted of the following Members:

Chairman: Robert Key
Brown, Lyn (West Ham) (Lab)
Cairns, David (Inverclyde) (Lab)
Dunne, Mr. Philip (Ludlow) (Con)
Engel, Natascha (North-East Derbyshire) (Lab)
Ennis, Jeff (Barnsley, East and Mexborough) (Lab)
Follett, Barbara (Parliamentary Under-Secretary of State for Communities and Local Government)
Goldsworthy, Julia (Falmouth and Camborne) (LD)
Greening, Justine (Putney) (Con)
Gummer, Mr. John (Suffolk, Coastal) (Con)
Ingram, Mr. Adam (East Kilbride, Strathaven and Lesmahagow) (Lab)
Laxton, Mr. Bob (Derby, North) (Lab)
Leigh, Mr. Edward (Gainsborough) (Con)
Moffatt, Laura (Crawley) (Lab)
Purchase, Mr. Ken (Wolverhampton, North-East) (Lab/Co-op)
Rogerson, Dan (North Cornwall) (LD)
Yeo, Mr. Tim (South Suffolk) (Con)
Anne-Marie Griffiths, Committee Clerk
† attended the Committee

Fourth Delegated Legislation Committee

Tuesday 8 December 2009

[Robert Key in the Chair]

Non-Domestic Rating (Deferred Payments) (England) Regulations 2009
10.30 am
The Parliamentary Under-Secretary of State for Communities and Local Government (Barbara Follett): I beg to move,
That the Committee has considered the Non-Domestic Rating (Deferred Payments) (England) Regulations 2009 (S.I. 2009, No. 1597).
It is a pleasure to serve under your chairmanship, Mr. Key, on such a beautiful day. I am grateful for the chance to address issues raised by the regulations, which are dated 30 June 2009 and were laid before the House on 6 July.
I would like to begin by putting the regulations in context. We all know that we are facing a challenging economic time in this country and in the rest of the world. We also know that, during this time, businesses need support, which the Government have acted to provide. The regulations should be seen as part of that package of support as they provide targeted help that ratepayers need with the increases in their 2009-10 business rates bills.
It might also help if I provide some background as to why the Government have brought forward the regulations. As with many other rates and thresholds, business rates are increased each April to take account of inflation as measured by the retail prices index in the preceding September. This has been a consistent and generally accepted approach since the introduction of national business rates in 1990. However, in September 2008, the RPI stood at 5 per cent., which was much higher than the March 2009 RPI of minus 0.4 per cent. As a result, ratepayers faced a significant increase in their bills from 1 April 2009.
Some ratepayers’ bills also increased due to the end of the 2005 transitional relief scheme, which was designed to phase in increases from the previous revaluation. The transition period for the 2005 revaluation lasted, unusually, for four years instead of five—it ended in 2008-09—whereas previous transitional periods had gone the full five-year term. The rationale for the shortened period was to ensure that ratepayers paid their correct bill during the life of the 2005 rating list. However, the correction resulted in higher rates bills in 2009-10 for those coming out of transition.
That issue was of much concern to business, particularly in the changed economic climate. In recognition of those factors, the Chancellor announced on 31 March that the Government would enable businesses to defer the payment of a proportion of the increase in their 2009-10 business rates bills and allow them to pay of some that in 2010-11 and in 2011-12. The scheme is about providing practical help for businesses when they need it most.
The amount that ratepayers can defer is 3 per cent. of their total 2009-10 bills—the equivalent of 60 per cent. of the increases that they were facing—and 60 per cent. of any increase caused by the ending of the transitional relief scheme for the 2005 revaluation period. The effect is to provide ratepayers with the opportunity to smooth out some of the ups and downs in the profile of business rates payments over a three-year period. The scheme therefore offers businesses the chance to pay a lower increase in 2009-10, and to make up the payments in the following two years.
The necessary regulations to implement the scheme came into force on 31 July 2009. We provided funding for billing authorities to write to all 1.7 million non-domestic rate payers to offer them the opportunity to defer and, at the same time, to promote small business rate relief. Ratepayers who wish to defer have just to complete and return a simple application form to their local authority.
At the time, there were calls for the Government to freeze business rates. However, freezing rates would have provided untargeted support at a time when we felt that targeted support would be more efficacious. That approach would also have been costly and taken time, because it would have required primary legislation and, as you know Mr. Key, with the best will in the world, the mills of Parliament grind slow.
In addition, the Government’s commitment to the annual RPI cap means that there has been no real-terms increase in business rates since 1990. The good news is that the RPI for September 2009 is negative—minus 1.4 per cent—so that will also have a downward pressure on 2010-11 bills. We believe that the business rates deferral scheme, as set out in the regulations, gives businesses the flexibility they need to manage their payments in the current economic climate. In particular, it allows them to manage their vital cash flows.
With your permission, Mr. Key, I would like to say a few words about revaluation, because it is an esoteric process that is understood by you—as you previously held my post—and perhaps the Opposition Front Benchers, but not many others. I stress that, contrary to some reports, the Government will not collect a penny of extra revenue as a result of the 2010 revaluation. Regular revaluations ensure that the rate that each business pays is fair and reflects changes in the relative value of properties over time. Indeed, the majority of business rate bills—1 million in total—will fall next year as a result of the revaluation. For the minority who have to pay more, the Government are putting a £2 billion relief scheme in place, which will limit and phase in increases. Overall, as result of revaluation and the relief arrangements, 1 million business properties will see an average decrease of £770 in their bills in 2010-11.
I would like to clarify a point about revaluation. It is a mistake to believe that the high property market of 1 April 2008, on which the property values for 2010 revaluation were measured, automatically translate into higher rate bills. That is not the case because there are other features in the bills. First, there is the rateable value of the property, and then there is a formula and a multiplier. The formula resets the multiplier to reflect the overall change in rateable value and to ensure that no more is raised in revenue from the revaluation than the overall envelope.
We want to make it as easy as possible for small businesses to access the relief and have taken a number of steps to achieve that. First, in 2007, we simplified the application process by removing the requirement for ratepayers to apply annually. Secondly, earlier this year we removed the restriction requiring properties to be on the rating list on 1 April in the given year in order to qualify for the relief. Thirdly, on 18 September this year, we announced that we would remove the requirement to reapply at revaluation. That, we hope, will considerably reduce the administrative burden on both small businesses and local authorities. The Government will continue to promote the scheme vigorously in co-operation with the Department for Business, Innovation and Skills, the Local Government Association and the Federation of Small Businesses.
In conclusion, the Government understand that businesses large and small are facing a tough time in the current economic climate. That is why we have introduced a range of measures to help them survive the recession and come into recovery in a stronger shape. The business rates deferral scheme is part of that package. It is designed to help ratepayers with the increases in their 2009-10 bills, and I am glad to say that that is what it does.
10.42 am
Justine Greening (Putney) (Con): It is a pleasure to serve on a Committee under your chairmanship, Mr. Key.
We will not vote against the regulations, but we feel that this Committee gives us an important opportunity to assess the business rates deferral scheme’s effectiveness. As the Minister set out, the regulations are of national relevance. They were meant to help businesses cope with the increases in the business rates bills that they face this year, which is due to not only the 5 per cent. rate rise, which is way above inflation, but the ending of transitional relief.
Our concern is that this scheme has been introduced in a very cack-handed way. I shall give a brief overview of the points that I plan to raise. First, it has taken until December to have a debate about a scheme that was introduced in the summer, which we think represents an unreasonable delay. Secondly, it is worth talking briefly about why the scheme had to come in and the struggles that many small businesses face. Thirdly, I want to talk about the implementation of the scheme and ask why the regulations were not brought in far earlier to help businesses that so badly needed them. Ministers must have been well aware months in advance of the pressures that businesses would face from increased business rates bills in April 2008. It is important to discuss how effectively the deferral scheme is working on the ground and how much its implementation is costing councils and the taxpayer. I was interested to hear a few comments from the Minister about its effectiveness. I submitted a freedom of information request to find out the take-up of the scheme that councils were seeing, and I will set out for the Committee how effective it has been from their perspective.
This debate is long overdue. The regulations, which allow companies to defer business rates bills over the next two years, have been in place since July—five months ago. The regulations are subject to the negative procedure, so we have not had a chance to debate how the scheme is working. Even though it was introduced as an emergency measure before the summer recess, it has taken until well after we came back following the summer for us to have a chance to ask the Minister questions about the scheme’s effectiveness. Will she at least tell us why it has taken so long for us to have the opportunity to debate what is happening to the small companies that need the scheme?
Returning to the origins of the scheme, in the run-up to the 2005 revaluation, as the Minister said, the Government held a consultation on the proposed transitional relief scheme to phase in changes to business rates bills. In a departure from the practice for previous revaluations, Ministers decided to have a transitional relief scheme that ran over four years instead of five. The Government’s logic then was that
“there are considerable benefits in having a scheme where, for the final year, all ratepayers are paying their true liability. For these reasons the Government does not favour a five year scheme.”
The Minister has broadly made that point.
Unfortunately, when some companies are on constant transitional payments and are then suddenly made to pay their full liability, that can lead to huge rises in those companies’ rates bills. The consultation at the time admitted that
“when the rate bill is calculated for the beginning of the next scheme (next five-year period) it has to take into account the previous scheme. This has applied across all the previous transition”
relief
“schemes and has meant that some properties have never paid their true rate liability since the introduction of the NNDR system in 1990.”
Sure enough, when transitional relief came to an end in April this year, what did we see? Some 100,000 businesses—mainly small companies—faced a bill increase of £100 million. That is an average of £1,000 added to the bills of generally small businesses in the heart of a recession that even Ministers now accept is the worst since records began.
Did Ministers not realise that transitional relief was going to end suddenly? Alternatively, did they know about it, but were incompetent by not thinking that they should bring forward a scheme to help badly affected businesses earlier? We did not get a scheme until after companies were paying the year’s business rates bills. Even in 2005, the consultation on transitional relief said:
“There are some groups representing ratepayers who expect significant rises in their rate bills and who are pressing for a five-year scheme”,
so all the evidence was there.
The British Chambers of Commerce had flagged up its concerns by saying:
“Staggering the cost is still an increase and it will be complex. Businesses will still be hit at a time when they have restricted cash-flow and growth...We have said that it’s not an exaggeration to say that some companies could go bust under the strain of the increase in rates and the ending of transitional rate relief.”
It was pretty obvious to many stakeholders in the business community that there was a problem, and the Conservatives raised concerns in March and June.
The impact assessment clearly says that companies that are already unable to pay in instalments will not be able to take advantage of the scheme—they have not been able to do so. The irony is, of course, that many companies that forfeited the right to pay by instalments were those worst hit by rising rates bills. They were the ones that fell into arrears due to the rises and, as a result, were unable to continue paying by instalments. Why were those companies excluded en masse when many would have been in the very group that I presume the Minister wanted to help?
I would like to raise other points about the impact assessment briefly. It has the perverse aspect that it mentions the fact that some companies will go bust before they ever get a chance to pay off their deferred business rates. The impact assessment costs the bad debt at between £20 million and £80 million. Perversely, that is included as a benefit, as if the fact that businesses will avoid paying between £20 million and £80 million, as estimated by Ministers, in business rates because they have gone bust is a benefit. It is not a benefit; it is a cost of failure. The fact is that they will have gone bust because of swingeing business rates rises that they simply could not afford, so calling it a benefit is perverse in the extreme.
I turn now to the actual workings of the scheme. The regulations were implemented just before the summer recess at a time when many council staff who would be implementing the new process were going on holiday. The time that it took to introduce the scheme meant that many companies could not take advantage of it until October. We received feedback from local councils—perhaps the Minister will confirm what discussions she has had—suggesting that changing the software was a challenge. The results of our freedom of information requests show that many councils were still testing the software system even during the autumn. One respondent stated that they had major problems implementing the new system, and many told us that not all applications had been dealt with—that was in October. Some respondents had not even managed to get the scheme up and running at the time that they responded to us.
There were clearly problems with the introduction of the scheme, with the result that many companies were unable to take advantage of it. Moreover, councils were themselves incurring costs, which I understand will be reimbursed by the Government. Will the Minister outline what she expects the scheme’s cost to the taxpayer to be? The impact assessment states that it will be £5.8 million. Will she update us on whether that is still the Government’s estimate of the scheme’s cost?
What is the Government’s assessment of the take-up rate? The results of my freedom of information request suggest that it is around 7 per cent., but what is the Minister’s assessment? If she has not made an assessment, why not, given that I have been able to make one as an Opposition spokeswoman? Which sectors does she think are taking advantage of the deferral scheme?
The explanatory memorandum states that Ministers are considering methods of assessing the scheme’s effectiveness. What are those methods and what does that mean in practice? Is the Minister talking to councils? What have they told her?
How much business rate liability is actually being deferred? The impact assessment mentioned a potential £730 million—split, I think, between £670 million on the inflationary rise and £60 million on the transitional relief scheme liability—being deferred. How much do Ministers now estimate is being deferred?
Finally, bad debt is a concern. Because of the challenges that many companies face in paying their business rates liability, even Ministers accept that some will defer to improve their cash flow, but a number will still go bust over the next two years, before they are able to pay the deferred amount. Ministers assess that deferred liability would become bad debt for approximately one in 20 companies—about 5 per cent. Both the impact assessment and the explanatory memorandum state that councils will not have to find that shortfall in their own budgets. However, there is a clear caveat, which is the statement that they will be expected to show that they have made efforts to collect.
Will the Minister tell us a little bit more about how she will assess whether councils have diligently gone through the process of collection and outline the challenge that they will face? If they are pressing companies that are on the brink of bankruptcy to pay business rates, is there not a danger that we have self-defeating scheme in which local councils are forced to go out and press for business rates deferred liabilities to be paid up in full, and thereby put those businesses out of business? Nobody wants to see that.
We welcome the scheme but it should have been brought in months earlier. It was too little too late. In hindsight, it has cost the taxpayer when, with better foresight by Ministers, that money could have been better spent helping companies directly. I hope that the Minister will answer my questions and perhaps tell us whether she agrees that the scheme has been too little too late?
10.56 am
Dan Rogerson (North Cornwall) (LD): It is indeed a delight to serve under your chairmanship again, Mr. Key—the last occasion was our works outing to Exeter in the summer as part of the new regional arrangements.
We have heard from the Minister and the hon. Member for Putney that this scheme is welcome and should, if implemented properly, offer some help to business. Let us be under no illusion about how tough things are for businesses at the moment, particularly small businesses, as the Minister rightly said.
I recently went to talk to Mr. Jim Sloan at St. Austell Brewery. The brewery is not in my constituency but in that of my hon. Friend the Member for Truro and St. Austell (Matthew Taylor), and it has a lot of pubs throughout Cornwall and into Devon. Many pressures are already bearing down on that industry, which plays a vital role in our local communities in urban settings, and particularly in rural settings. It is very concerned about revaluation and I may return to that later. There are concerns that the way in which the business rates system operates certainly does not help it to provide a service in those communities and to offer employment.
As the hon. Member for Putney said, the scheme, however welcome it is in concept, is late, which undermines its ability to help businesses in need. There were opportunities for the Government to do something about this. They could see that the end of the transitional relief period was going to have a significant impact on businesses at a crucial time. As the financial situation became apparent and huge shocks were running through the economy, something could have been brought forward much earlier to help businesses that were to be affected, such as during proceedings on the Business Rate Supplements Act 2009. I greatly enjoyed my time on that legislation’s Public Bill Committee, in which we considered the business rate supplement as a tool for local authorities. There have been examples of Bills becoming interesting hybrids when important and urgent legislation has been tacked on to other measures, so perhaps something could have been pushed through using that mechanism. There were also other routes that the Government could have taken.
I appreciate that to make the scheme work, not only do local authorities have to feel confident that they can implement it, but software providers have to make sure that the kit can cope with delivering the scheme. If that is important, it is the sort of thing that should be resourced and supported so that a scheme may be introduced in a timely fashion.
Essentially, businesses are being asked to gamble that they will be better off in the future. As the hon. Member for Putney said, they might well not be—they might be worse off as trading conditions are difficult to predict. If the scheme is designed to help businesses, they have to consider seriously whether they would be better off by deferring the costs. When they are faced with the revaluation that the Minister referred to, when she slightly widened her consideration of the business rates issues, they will not feel very confident about their abilities.
Let me return to the pub sector and the business rates increases that some licensed premises are facing. Although I appreciate that the Minister said that the final sum depends on a number of factors, they are looking at 30, 40, 50 or 60 per cent. increases in valuation. The opening up of another premise nearby will immediately impact on the business plan, but the business rates set-up does not cater for that—it cannot be flexible enough. Those premises have potentially great increases ahead, and the prospect of taking advantage of the scheme is a gamble.
I agree with the hon. Member for Putney in that my party feels that while the measure could help, the timing could have been far better. It was indicated to the Government that some such scheme would be necessary, and a simpler method would have been to extend the transitional period to five years, rather than ending it after four. Although I understand that the Government would want businesses to pay the rate at which they were assessed for at least one of those years, there have been unfortunate consequences as a result of trying to achieve that neatness for one year, as other problems have emerged. With a little more foresight, perhaps the Government could have acted earlier to extend that transitional period, which would have overcome the problems in another way.
The Minister also referred to small business rate relief. She is absolutely right that that scheme is crucial and has a big effect on businesses’ viability and ability to develop and prosper. I am pleased that the Government have addressed the anomaly of businesses that are set up during the financial year not being able to qualify for relief until the start of the next financial year. Many small businesses fail early on in their existence, and we need to get them through that first period of trading, so the Minister was right to highlight that issue.
I shall take this opportunity to point out another little anomaly, which has an impact in my constituency. People who own second homes register them as letting businesses without actually advertising or letting them so that they can qualify for small business rates relief rather than paying council tax at a 10 per cent. discounted rate. The Minister has raised that matter in the past, and I hope that the Government continue to look at those sorts of issues.
In summary, while my party welcomes the provision of any tools to small businesses—all businesses—to enable them to trade through the current difficulty, this scheme was perhaps too little too late.
11.2 am
Mr. Philip Dunne (Ludlow) (Con): I had not intended to contribute to the debate—I will not detain the Committee for long—but the Minister chose to refer to the revaluation that comes into force from April 2010, and I could not let the opportunity go of inviting her to consider an aspect of that revaluation that is of considerable concern to one segment of the business community: the operators of filling stations, and in particular those that have independent businesses that do not have the benefit of other sources of revenue and profit to defray the cost.
The situation was brought to my attention by my local garage, which happens to be in a remote rural area. It is the only filling station within an eight-mile radius along the Welsh border with Herefordshire and Shropshire, and it has just been presented with a rates increase of 450 per cent, to which I referred in my contribution to the Queen’s Speech debate. That represents a bill of £26,000 for a single-operator, single-site small business. When the proprietor drew the matter to my attention, he said that, faced with that increase, he was looking seriously at ceasing to sell fuel, because it would not be economically worth while. The margins on fuel sales are very tight, as I am sure the Minister knows. That prompted me to make inquiries of the other filling stations in my constituency, of which there are about 15.
I sent out a brief survey last week, and the first responses came back this week. The Minister will, I think, find them interesting. I thought that the £26,000 figure was bad enough, but I received three responses yesterday from similar filling stations, either in rural areas or on the edges of the small market towns in my constituency, and the most shocking increase was £63,000. That business currently pays £42,000 in rates, and the proposed rates are £105,000. The increase is 30 per cent. of the profit of the business. The business employs 14 full-time and eight part-time staff, and the proprietor indicates that he will have to cut staff as a direct result of the increase.
Another station, which is faced with a 62 per cent. increase—some £12,250—intends to cease selling fuel if the increase goes through, in addition to cutting staff. A third one, faced with a £10,700 increase—58 per cent.—might have to cease trading, let alone cut staff, because the proprietor does not expect to make a profit at all if the increase goes through.
I ask the Minister to reconsider the revaluation methodology for filling stations and to recognise the low margins that they make. If she is not prepared to do so, she will be giving up office—if she is unfortunate enough to do so following the next election—with the epithet of the Minister who hastened the demise of filling stations up and down the country, the impact of which would be particularly keenly felt in rural areas, where there are few alternatives.
11.6 am
 
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