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Let us take the first potential benefit, that businesses will become more competitive because rates will fall. Clearly, the Bill will give property owners an added incentive to let their buildings as quickly as possible, so deals might be done on better terms for the tenant to get them into occupancy more quickly. However, when I worked for a major property developer in the late 1980s and early 1990s, there was always considerable pressure to let property at the earliest possible moment, not just from the developer but also from its agents, who were desperate to see the property let so that they could get their fees. I have seen no evidence, and have no reason to believe, that these motivations have changed, or that owners of non-domestic property in the country are deliberately hoarding it. That flies against any market sense.
If rents fall at all, it will be by only a small amount. In some parts of the country, rents are so low already that there will be no discernible effect. A fall in rents generally, as the noble Earl said, will adversely affect both the income of pension funds and the capital value of their property assets. My noble friend Lord Oakeshott has estimated that the loss of income to pension funds could be £150 million per annum and that the fall in their capital values could be about £3 billion. Any fall in rents, therefore, is by no means an unambiguous benefit.
In terms of efficiency in the use of land and existing property, the benefit will again be small at best. In some areas and types of property, the change could well have a negative impact. It seems prima
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Despite those problems, the legislation is not necessarily fatally flawed, because it could have beneficial effects in the major cities, where rents are high by international standards and where for the foreseeable future demand for space looks set to remain tight. What changes, then, could be made to maximise the benefits, but, just as importantly, minimise the potential costs, of the Bill? The first relates to the proposal to levy the full rates after three months of the property being unoccupied. Three months is too tight. If there are significant levels of dilapidation to deal with, or if the previous tenant has gone bust, it will be simply impossible, even with the best will in the world, to rent the property again within a three-month timetable. We suggest that three months should be extended to six. This is not a concession to the industry, but recognition of the way it works, which is sadly lacking in the Governments detailed plans to implement the Bill.
Secondly, the Bill, or its implementing legislation, needs to deal with other specific cases where a property owner attempts to use their property, but is unable to do so as a result of official hurdles. A typical example would be where a shop is no longer viable, but the building could be used as an office or fast-food outlet. To qualify for change of use, the owner must demonstrate to the planning authority that, over a substantial period, the shop is not viable. Under the Bill, he could find himself paying full rates on a building that the local authority would not allow him to bring into remunerative use, even though there was another remunerative use into which it could be brought.
Thirdly, the Bill fails to acknowledge the different circumstances in the overheated cities and those parts of the country where demand for property is weak and where there is often an overhang of existing buildings. All the evidence from the industry is that the Bill will make regeneration in areas of low demand more difficult rather than assist it. A typical example of the problems that the Bill will cause was exemplified in a recent letter to Property Week. The author develops business parks in the north-west. He bought a former Ministry of Defence establishment in Carlisle and he has been letting it at the far from palatial rent of £1.50 per square foot. He says that the Bill is,
There are a number of ways in which the Government could shape their plans so that they helped rather than hindered regeneration. They could apply them only in those parts of the country where demand for property is buoyant, such as London, the south-east and the other major cities. They could exempt properties with a very low rental value. They could introduce special provisions for business centres, which otherwise stand to be hard hit. They could use the money that they raise to promote regeneration, rather than just losing it in the overall government coffers. I hope that the Minister might be able to say whether any of those ideas will be considered by the Government.
That brings me to the second area that I wish to mention, which relates to the way in which Parliament is able to deal with the Bill. Leaving aside the fact that as a money Bill we can deal with it only at Second Reading, and therefore our debate today is the only chance that we will have to deal with it, all the implementing measures in the Bill will be dealt with in secondary legislation. That means that there will be very limited parliamentary scrutiny and there will be no chance whatever for any amendments to be made, whatever implementing legislation the Government bring forward.
I know that I have become a scratched record on having amendable secondary legislation, but this is a classic case where amendable secondary legislation is necessary if Parliament is to be able to have any sensible impact on the way in which the legislation is developed. At the Committee stage in another place, there was virtually nothing that Members could bring forward as amendments, and when they tried to do so, Ministers basically said, That is all very interesting, but we are going to deal with this in secondary legislation. That was the end of it, and they no more than us will have a chance to make a significant contribution to the detailed implementation of this legislation, which will make a very big difference in its overall impact.
We have no objection to the principle of using the rating system to provide an incentive to use property more efficiently and to discourage property owners from having their property lying idle for long periods. However, the way in which the Government plan to implement this measure suggests that it may well not achieve its purpose.
Baroness Noakes: My Lords, it gives me no pleasure to take part in this Second Reading debate. As the noble Lord, Lord Newby, said, the Speaker in another place has certified it as a money Bill, which it is because it raises nearly £1 billion a year in revenue. The effect is that your Lordships House may not alter so much as a comma in the Bill. We are allowed just this one outing to record our distaste for the Bill before it receives its formal Third Reading next week.
This Bill is nothing but an additional tax on business. It was the biggest single hit in the corporate sector in the Budget this year. There were other hits, which we shall come to when we debate the Finance
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The Chancellor announced that from next year the headline rate of corporation tax for larger companies is to come down, but that is offset by other changes to capital allowances. He has delivered a body punch to smaller companies with his hike in the smaller companies rate. I very much doubt whether our ranking in tax competitiveness will have improved as a result of those changes; and indeed this Bill may herald a further decline in the UKs tax competitiveness.
The Government like to say that they are simply implementing the Barker and Lyons reports in their changes to business tax relief for empty properties, and the Minister has said as much today; but that does not stand up to close examination. The Barker review made no specific recommendations, which was very wise because Miss Barker has clearly done no more than scratch the surface of the practical issues that arise in relation to empty property. The Lyons report recommended that changes to empty property relief take place as part of the package of changes to business rates generally, to take effect from 2010, not to be cherry-picked to fill a fiscal hole in 2008. Perhaps the most important bit of Lyons that the Government have spun out of their version is that the report envisaged extensive consultation. The Chancellor simply ignored this need to consulta feature of his chancellorship with which we have become all too familiar.
The Lyons report and, to an extent, the Barker report seem to rest on an assumption that property owners are wilfully keeping their properties off the market, thus reducing the supply of available business premises and forcing business rents up. There is no evidence that this is a feature of commercial property ownership in the UK, or, at least, no evidence that would support the imposition of this additional tax burden. There is no evidence whatever that property owners and developers keep property empty in order to force up business rents. My noble friend Lord Liverpool shared his considerable experience of the reality of property lettings earlier.
The Government have not explained what drives differences in vacancy rates across the UK. Why has the level of vacancy been gently rising since 1998, to about 9 per cent in 2004-05? Surely it is not because there are more property owners waiting for more prosperous times ahead when they can extract higher rents? It is much more likely that there is simply not enough demand at present. Have the Government any explanation for the vacancy rate in the City of London virtually doubling in that period? Does the Minister think that, with property prices the way they are in the city, some scheming on the part of big landowners is taking place? If so, will he name the
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Let us take the borough of Hackney, which had a vacancy rate starting at 30 per cent in 1998 and six years later was only 2 per cent lower. Do the Government have any evidence that the owners of the remaining 28 per cent are deliberately withholding property from the market, or that it would be let and occupied at lower levels of rent?
Economic theory is very nice: let us use the tax system to force companies to reduce the price at which they are prepared to let their properties, thereby increasing supply. Perhaps there are other factors involved which the Government have not taken account of. Is it the case that there will be tenants willing to occupy the properties at lower rent levels? In rural areas, there can be a complete lack of demand. It is simply not the case that there are long queues of tenants, waiting for rents to drop by a pound per metre or more. If there is some pent-up demand, have the Government considered whether the covenant of such tenants would be good enough to induce property owners to lease their property out? Surely the Government do not expect landlords to take unacceptable tenant risk.
We are not convinced that the Government have even thought about the impact of the Bill on regeneration, especially the regeneration of the most disadvantaged areas. Getting private sector developers involved can be hard enough, but if they then have to face not only the economic risk of letting their developments, but a fiscal penalty for not doing so, it is quite likely that some will think again. That will mean a delay in economic regeneration, as well as an increased dependency on public-sector providers of regeneration capital, which we do not believe to be a healthy way to pursue the regeneration of our disadvantaged areas.
Similarly, farmers have been encouraged to diversify and to make their buildings available for alternative use. Have the Government thought about the impact that this Bill will have on their willingness to run the risk of a rates penalty if they cannot fully let their properties? This is not a fanciful proposition; such farmers often have problems in achieving full letting of properties that have been taken out of agricultural use and renovated for alternative industrial or commercial purposes.
The Government have not taken the trouble to work out how property development takes place. It can involve the assembly of several sites, which generally have to be left vacant during the assembly period. The planning process can then add extra delays. These are not properties that can find a ready use pending redevelopment. The extra costs that this Bill will impose may well alter the economics of the development adversely. Does that help the renewal of business premises in the UK?
We have received representations from the Royal Institution of Chartered Surveyors that the business-centre sector, referred to by the noble Lord, Lord Newby, which provides flexible accommodation, especially for small and medium-sized businesses, will
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There will be other effects, which I will generously call unintended consequences on the ground that the Government may simply not have worked out what will happen. In particular, the Government have been promoting more flexible lease terms, which will help all businesses to rent property. If the risk of a property vacancy will now carry a tax hit on top of a potential void income period, why on Earth would landlords want to make it any easier for tenants to move on? Indeed, why would landlords ever be prepared to negotiate surrenders in difficult market conditions?
Lord Davies of Oldham: My Lords, I am grateful to noble Lords who participated in this debate and accept the ritual complaint that the House has limited opportunities to debate the Bill because it has been defined as a money Bill. That settlement goes back over many decades. I imagine, although I have not had the benefit of being in opposition in this Housenor am I likely to, I might addthat that cry has been emitted by members of all parties on the Opposition Benches from time to time. I recognise the frustration of articulate and well informed Peers in this House in this regard. Nevertheless, the noble Baroness would not expect me to advocate a constitutional revolution of that nature at this stage, even if she thought that she had the persuasive powers to tell me that it would be advantageous for the upper House to have greater powers with regard to finance and Treasury matters. I could not be persuaded on that.
This is a short but important Bill. I hear the argument that it represents a tax grab. Of course it brings revenue to the Treasury. As the noble Baroness and the noble Lord, Lord Newby, recognised, it will bring revenue of £1 billion to the Treasury. Its purpose is to free up land. The noble Baroness gave me a small insight into economics and suggested that I should accept that there is no indication that a fall in the cost of renting buildings would be of any benefit to the potential person paying the rent. That is an interesting economic proposition. I should have thought that we would be safer following the general perspective established as long ago as Adam Smith on these issues. She should recognise that in this attempt to get costs down, we will seek improvement in the use of property that is already available.
Baroness Noakes: My Lords, the Minister may have misunderstood my argument. I said that there was no evidence that if rents came down, there would be pent-up demand. I also indicated that if rents came down, only tenants who were waiting for property at that rate might have a poor tenant covenant, which would raise its own problems.
Lord Davies of Oldham: My Lords, those issues are of course a danger; the markets are far from perfect, as we on this side are more prone to argue than are the noble Baroness and her supporters. However, the Governments case is that, in general, economic advantages derive from our attempts to ensure that our land and property are more effectively used. I have some pretty weighty evidence behind my argument.
The noble Earl, Lord Liverpool, was very critical of Sir Michael Lyonss report and the noble Baroness and the noble Lord, Lord Newby, said that the Kate Barker report left something to be desired. Such reports are always open to criticism. We recognise that when reports of that weight and significance are put forward, there are points at which challenges can be adumbrated. Nevertheless, these two reports are very important. Both come to the conclusion that we could use our existing resources more effectively than at present. The purpose of the Bill is to achieve that.
I heard what the noble Earl, Lord Liverpool, said about damage to pension funds. Of course, I recognise the limited point that he makes, but he will recognise the far more significant point that the health of pension funds, the development of equity and the whole question of returns to investors depend a great deal more on the success of the broader economy. If this measure plays its part in improving the position of the broader economy, such pension funds will benefit from it.
I emphasise that the Bill was introduced in a Budget that reduced corporation tax by 2 per cent. I noticed that the noble Baroness was extremely dismissive about thatabout as dismissive as anyone would be who had a carefully selected fox to run and became upset when someone else shot it. I believe that that was the position of the opposition Benches on corporation tax.
The Earl of Liverpool: My Lords, I am grateful to the Minister for giving way. I want to pick up on his point about pension funds. Although I mentioned it, it was mentioned in far greater detail by the noble Lord, Lord Newby, who cited a figure that absolutely staggered me; namely, that property values within pension funds are likely to reduce by £64 billion. I would like to refer to Hansard tomorrow on that but
Lord Davies of Oldham: My Lords, I recognise that the noble Lord, Lord Newby, never speaks without consideration and careful analysis. However, it does not detract from my point that in this Bill we are seeking a broader span of measures to guarantee the expansion of the economy in such a way that these potential costs on pension funds become limited against the obvious advantage that the funds would develop from a rapidly expanding and growing economy.
The noble Earl introduced the issue of secondary legislation, and the noble Lord, Lord Newby, dwelt on it, too. I, of course, accept the limitations on secondary legislation. The Liberal Democrats can sustain their arguments until they are blue in the face about the desirability of being able to amend secondary legislation. However, I cannot imagine that anyone who is serious about government will concede that point; we will not. I have not seen the slightest indication that, if the faint hopes of the Opposition of occupying these Benches were ever realised, they would think that secondary legislation should follow the pattern that the Liberal Democrats put forward. Nevertheless, I respect the point that secondary legislation should be considered legislation. That is why we have clearly indicated our intention to consult on the way in which we deal with these issues. There is no question of rushing our fences on those points.
The noble Lord is right that secondary legislation cannot be amended. However, it certainly could be subject to scrutiny and criticism, as indeed it is in the other place; from time to time, it has not been unknown for it to be subject to fairly intensive scrutiny here. If the noble Lord wants me to do so, I will enumerate the list of occasions on which his party has rather departed from past conventions and voted against secondary legislation. We will have that argument in due course. I do not think he can pray it in aid now and say that somehow because this legislation adumbrates general propositionswhich of course it does under the secondary legislation to deal with the detailthe way in which the Government are tackling matters is unfair and improper.
The noble Lord also suggested that the increase in revenue was certain but that the impact on the supply of property was a good deal less certain. We contend that this measure will have beneficial effects on the property market, on competitiveness and on the environment. It will be a stimulus towards ensuring that property does not stand empty and idle. I would have thought he would recognise the advantages derived from that framework.
The noble Earl, Lord Liverpool, challenged the Government on sustainability. If we are able to make more extensive use of existing property, the demand on the other land necessary for social purposes ought to be eased. I do not under-estimate the pressures of that demand. We recognise the pressures upon our land. An expanding economy and the amount of business premises it requires, and the housing crisis, lay heavy burdens potentially on the land which is available and present real challenges not only to brownfield sites but to protected greenbelt land as well. The thrust behind the Bill is to reduce elements of that pressure by using more effectively the assets that are available but not fully in use at present. I hope the Government will not be criticised for the lack of a sustainable position but commended for the fact that this measure fits well within the general perspective.
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