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That 250 per cent. increase in rateable value first brought the matter to my attention. I then undertook a survey of all 15 filling stations in my constituency to
find out whether it was an isolated case or a widespread consequence of the revaluation. Eight of the 15 filling stations responded, and half of those-four-indicated that they were looking at increases of between 58 and 250 per cent. in their rateable values. All four said that if that went through, they would have to cut jobs. Two said that they would have to cease selling fuel, and two said that it would put them out of business. The fact that 25 per cent. of the petrol stations in my constituency were likely to cease selling fuel was so significant that I decided to take an interest in the issue, hence my meetings with the Minister.
Mr. Stephen Crabb (Preseli Pembrokeshire) (Con): My hon. Friend is making a powerful case on behalf of rural filling stations. Is he aware that in my constituency in Wales, I have come across filling stations that are looking at business rates increases of more than 300 per cent., and that no transitional rate relief is available to them? As a consequence, numerous filling stations are considering closure in the next few months.
Mr. Dunne: My hon. Friend is absolutely right, and I was going to come on to the lack of transitional relief in Wales. More than 111 petrol filling stations in Wales have closed in the past five years. The Welsh Assembly intends to follow the flawed revaluation methodology that I shall come on to in a moment, and it has not agreed any transitional relief, unlike the situation in England. That will pose a particular risk to the remaining 572 petrol stations in Wales, of which 206 are in rural areas and are especially at risk. One of those stations faces an increase in its rateable value not of 300 per cent., as in my hon. Friend's example, but of 725 per cent., which is the largest increase for any petrol station in the United Kingdom. It would be hard to conceive of a Government introducing such a measure while claiming to be providing help to business. Clearly, businesses will have to close if they face that kind of increase.
Mr. Geoffrey Clifton-Brown (Cotswold) (Con): I congratulate my hon. Friend on raising this very important subject. As I am sure he is aware, petrol stations are unique in that their business rates are calculated not only on the basis of rental value, but on top of that, on assessments of their turnover. That is one reason why they are facing such huge increases. Petrol stations are the only property class that I know of that is assessed in that way. Does my hon. Friend agree that that is grossly unfair? It is grossly unfair on small petrol stations, particularly in rural areas, which are closing as a result. That will mean that there is even less competition, which will mean that prices for our rural constituents will rise.
My hon. Friend is absolutely right. He has pre-empted remarks that I was going to make about the palpable lack of equity across the retail estate. It makes no sense at all that a convenience store operating on a forecourt faces a rateable value calculation based on turnover when the convenience store around the corner in the local town or village faces a rateable value calculated only on the size of the premises. The difference
is acute-it can mean paying 10 times the amount in rates. I have seen evidence of that, and it is not unusual. Ministers have received letters from hon. Members on both sides of the House to draw that problem to their attention and to ask them for justification, of which, I regret to say, there is none.
I return to my explanation of the decline in filling stations in the UK since 1997. There were some 5,230 fewer filling stations in the UK at the end of 2009 than at the end of 1997. There are 37 per cent. fewer places to fill up with petrol in England, 39 per cent. fewer in Wales and 22 per cent. fewer in Scotland, or some 250 stations. The pace of those closures has accelerated. In the past five years alone in the west midlands, 30 per cent. of rural petrol stations have closed, which is twice the rate of closure in urban areas.
Having presided over a dramatic decline in petrol stations throughout the country, the Government have decided to single out the sector for special treatment at the hands of the VOA. For reasons that it has not tried to justify at any point, the VOA has decided to change the methodology for business rates calculations for each of the three different activities that take place on a petrol station forecourt. The VOA is applying that methodology in England and Wales, and assessors in Scotland intend to introduce a new methodology for calculating business rates, but what that will be is entirely opaque at the moment. I shall therefore focus mostly on what is happening in England.
Before I go into the details of the problems with the methodology, I should say that we are currently facing a spike in petrol prices, which are at record levels. Last weekend, I filled up my vehicle with unleaded petrol and paid 120p a litre. As hon. Members will recall, the last time we paid that much, the hauliers, feeling that their businesses were not viable at that price, threatened to block fuel refineries. Of the 120p a litre we pay today, a 5p increase in February resulted directly from the currency devaluation that we have experienced in the past couple of months, but a further 7p is a consequence of Government increases in duty.
We had the 2p increase last autumn from the escalator. We had the increase in VAT from 15 per cent. to 17.5 per cent. which added almost 3p a litre to the cost of petrol. Another 1p is going on as a result of the biofuel duty rebate being phased out, and another 1p will go on next month, again as a result of the fuel duty escalator. When those increases are added to the currency changes, it is a 12p increase that is extraneous to the value of oil in the marketplace.
"In the last 5 years, alongside rising petrol prices and increasing turnover, the rent paid on many petrol filling stations has grown. It is only fair to all rate payers if this is reflected in rate bills."-[ Official Report, 20 January 2010; Vol. 504, c. 384W.]
That argument is being used by the VOA to justify an increase in rates. But there is little evidence for that increase in rental value because of the structure of the market, although Ministers and the VOA seem to have difficulty in comprehending that.
There are now fewer than 9,000 petrol stations in the UK. Roughly 2,000 of those are owned and operated by the major oil companies. Some 1,000 are owned and
operated by supermarkets. That leaves about 6,000 that are operated by independents. The rental evidence on which the VOA is relying amounts to some 70 cases that it feels are representative of independent fuel stations. That is less than 1 per cent. of the total of petrol stations and is not a representative sample. The trade associations have not even had an opportunity to assess whether it is a representative sample, even on an anonymised basis to respect commercial confidentiality. One reason why the trade associations argue that it is not representative is that most of the independent filling stations are owner-occupied, so rental premises infrequently come up for renewal or review. When such premises do come up for renewal, a goodwill value is included within the rental value, which is standard practice in the industry but is completely ignored by the VOA. That is why basing all the arguments on rental evidence is fundamentally flawed and I urge the Minister to press the VOA to justify that approach, which does not stand up to independent scrutiny. When the results of the revaluation are challenged in rating appeals, which seems inevitable in view of the scale of the increases, it will be on thin ice when trying to justify the changes.
The valuation methodology is flawed. As my hon. Friend the Member for Cotswold (Mr. Clifton-Brown) has said, turnover is being used as the primary criterion for calculating rateable value. That approach was introduced in the 2005 valuation, and it has subsequently been further distorted by the 2010 revaluation methodology, which assumes an increased margin on fuel sales. That fails to take into account changing market dynamics, whereby the growth of low-cost supermarket fuel outlets has depressed the profit margins of independent retailers, which has forced them to diversify to stay in business. They have tended to convert their original kiosks into convenience stores. More and more of the space on the forecourt has been made over to convenience stores, because the margins available to the independent sector from selling fuel are substantially lower than they are for the supermarkets or major oil companies. That point is ignored by the VOA when it makes its calculations. It also ignores the fact that the margins on unleaded and diesel differ substantially. I have received evidence suggesting that the margins on unleaded petrol for a typical independent business are roughly double that on diesel, and yet the average for the entire industry is taken by the VOA as appropriate, when clearly it is not. That is another matter that will come out in the rating appeals.
The average rateable margin from fuel throughput estimated by the VOA is therefore much too high for independent operators, who not only suffer from a lack of purchasing power without any economies of scale, but incur much higher credit costs from suppliers, and higher costs of fuel cards from customers, both of which are not suffered by oil majors or supermarket competitors. It also fails to take into account the higher marketing and distribution costs that independent operators have to pay the oil companies to receive their fuel. That particularly applies in the more peripheral parts of the country, because it obviously costs more to take the fuel longer distances.
As a result, businesses have tended to diversify, as I have said, into two areas-car washes and convenience stores. The VOA decided in 2010 to change the basis
for calculating rates on car washes. In 2005 that became a percentage of turnover, and was based on a banding system averaging 16 per cent. of turnover across the industry. The VOA has decided that that should be increased to 20 per cent., without a banding system. It has increased arbitrarily, and without justification, the percentage of turnover to which rates should apply.
Car wash businesses are regulated, so have the added cost of compliance with environmental legislation, but their competitors down the road, operating hand car washes-often in supermarket car parks and other places-are not regulated or subject to rates, which means that they can undercut the car wash businesses on the forecourts. Consequently, car wash revenues have declined in recent years as the hand car washes have proliferated.
The second area of diversification has been convenience stores, on which, as my hon. Friend the Member for Cotswold made clear, turnover is the basis of calculation. There is no reflection of the size of the premises in the 2010 revaluation. Instead, the calculation is based on increasing bands of turnover, capped at £2 million. Of course, that is of considerable benefit to supermarkets with petrol stations adjacent to their car parks, because invariably their turnover is much higher than £2 million, which means that they are not subject to the same rates. They have a protection not available to small independent businesses. The valuation based on turnover gives rise to rateable values much higher than those applying to other convenience stores trading around the corner, which are subject to valuation based on area. The VOA has made no attempts to justify those changes in its methodologies, and is relying entirely on evidence that, as I have said already, is not representative.
I now turn to the impact of the changes. In answer to a parliamentary question from my hon. Friend the Member for Mole Valley (Sir Paul Beresford), the Government admitted that more than 3,000 petrol filling stations in England-a third of the total-are facing an increase in their rateable values of more than 50 per cent. Half of them, 1,510, to be precise, are facing increases of more than 100 per cent.-double the rateable value-this year. I have come across one business facing an increase of 450 per cent., and I have referred to another in Wales that is facing an increase of 725 per cent.
The significance in my constituency, as I have said, is that several operators in rural areas are likely to cease selling fuel. Some of them, including my own local garage, which was referred to by my hon. Friend the Member for Leominster (Bill Wiggin), regard the sale of fuel as a social service for the community. Mine is hardly making money out of it, but providing the service to attract people to the shop. It is a long-standing activity that the proprietor recognises is vital to the local area.
The Valuation Office Agency is beginning to realise that a problem is brewing, and not just in the level of appeals. It is also aware that the situation will lead to significant closures. In fact, the official from the VOA in the west midlands has told one proprietor in my area that if the revaluation goes through, the economically logical conclusion would be to stop selling fuel. Not only would that lead to a significant reduction in the Government's income from rates based on fuel sales, but the rates on the residual shop businesses would revert to a normal area basis, and therefore be significantly lower, which would be self-defeating for the VOA.
Another petrol station-this is my final point-has already had an approach from the VOA to halve its proposed increase. Will the Minister say whether that is an isolated case? Does the VOA know that it has made a mistake, and is it therefore seeking to negotiate deals? If so, how many deals is it negotiating? Does the Minister accept that that is a methodology that has to change?
Having said that that was my final point, I have one more point to make, picking up on the point about transitional relief-if you will indulge me, Mr. Speaker. The Minister and the VOA are hiding behind transitional relief. They have put a cap of 11 per cent. on the increase in the cash cost of rates to businesses, but we have examples of petrol stations facing much larger increases in the first year, and it is no coincidence that transitional relief applies in this, an election year. The escalation of rateable value increases kicks in faster in subsequent years, with increases of 25 per cent. a year in the final two years of the five-year transitional scheme-a legacy that is a classic Gordon Brown poison pill for an incoming Government. The large tax rises will occur in two to four years, so closures are most likely to fall on the next Government's watch.
The Parliamentary Under-Secretary of State for Communities and Local Government (Barbara Follett): I congratulate the hon. Member for Ludlow (Mr. Dunne) on securing this evening's debate, and thank him for raising some important points about how petrol filling stations are rated and the methodology behind that rating, particularly as part of the rating revaluation for 2010. I also thank the hon. Members for Cotswold (Mr. Clifton-Brown), for Leominster (Bill Wiggin) and for Preseli Pembrokeshire (Mr. Crabb) for raising other points, which I have noted.
As the hon. Member for Ludlow knows, the detail of how petrol filling stations are rated is extremely complex, so if he will permit me, I should like to run through how the business rates system, and revaluations, operate. The business rates system, which has been in its current form since 1990, is designed to ensure that the burden of this tax is equitably distributed across all non-domestic ratepayers. It is estimated that business rates will raise £21 billion in 2009-10. All that revenue goes back to fund local government services such as education, planning and transport.
Business rates are a tax on property that is capable of beneficial occupation, and they are mainly based on the hypothetical rent that a property could attract at a specific point in time. In this year's revaluation, that point in time is a problem. The better the location, or the better the amenities that a property provides, the greater the rent that it could attract. That is reflected in the increased rates that a business is liable to pay. As the hon. Gentleman knows well, the calculation of business rates liability is based on the rateable value multiplied by a figure linked to annual inflation based on the retail prices index, which is negative for 2010-11; that reduces rates liabilities somewhat.
The hon. Gentleman asked why we did not defer the revaluation, but regular revaluations are an important part of the rating system, as they help to maintain fairness by rebalancing the burden within the overall envelope. If we were to defer the revaluation, as he has
suggested, that would hit some businesses that are doing much less well. It is a redistribution, and I do understand that it will involve winners and losers. The hon. Gentleman has spoken eloquently tonight about some of the losers. The next revaluation will take effect from 1 April 2010, and it will be based on rental values at 1 April 2008. The property market has changed a great deal since April 2008, but the multiplier has been brought down to its lowest level in 17 years to try to iron that out.
Rates liability and rateable value are not the same thing, as the hon. Gentleman knows. Rateable values can rise, but rates liability is capped by the transitional relief scheme, which, despite what he says, is not a Gordon Brown scheme. It is built in. The scheme-which, sadly, is not available in Wales-has been built in to try to cap the rises, which can be steep in the areas where there are losers; they are not particularly steep in the areas where there are winners. Smaller businesses will see their rates capped at 3.5 per cent., and larger businesses at 11 per cent. That relief will help about 500,000 business properties with their rates liabilities in 2010-11.
Barbara Follett: If the hon. Gentleman will forgive me, I will not. I have only three minutes left, and I am worried that I will not fit everything in. I apologise, especially as I am already a disappointment for not being a Treasury Minister.
On petrol filling stations, I understand exactly the concerns expressed by the hon. Member for Ludlow about the Valuation Office Agency's methodology, and I will explore that matter in more detail with the Treasury, and perhaps with the hon. Gentleman himself. It is important to note that the Valuation Office Agency does not set the method, but follows industry practices. It has engaged with bodies such as the United Kingdom Petroleum Industry Association to gain a better understanding of the petrol filling station market.
The Valuation Office Agency examined 1,300 rents for petrol filling stations. Although some of those rents were from oil companies and sites run by hypermarkets, many related to independent and rural sites. The agency has analysed the information on rents by reference to the throughput found at petrol stations. I should like to tell the hon. Member for Cotswold that throughput is used because we believe that it is a better guide to value than size, and this is the practice of the petrol filling station market. This approach is not new, and it reflects actual practice in the market when private sector surveyors negotiate rents for petrol filling stations. Some petrol filling stations will face increases in rateable values, thanks to rises in rents. However, the revaluation will also ensure that 960 petrol filling stations will receive reductions in their rates liabilities.
It is right that the Valuation Office Agency should assess rateable values independently, because that maintains fairness and transparency in the rating system. That is why Ministers do not intervene. There is an appeals system which provides the appropriate avenue for any sector-