5 July 2012 : Column GC393

5 July 2012 : Column GC393

Grand Committee

Thursday, 5 July 2012.

Arrangement of Business

Announcement

2 pm

The Deputy Chairman of Committees (Lord Colwyn): Good afternoon, my Lords, and welcome to the second day of the Local Government Finance Bill.

Local Government Finance Bill

Committee (2nd Day)

Schedule 1 : Local retention of non-domestic rates

Amendment 18

Moved by The Earl of Lytton

18: Schedule 1, page 21, line 30, leave out “major”

The Earl of Lytton: My Lords, in moving Amendment 18 and speaking to Amendments 28 and 29, my purpose is primarily to flag up an issue of principle. I remind the Committee of my involvement with the first tier of local government, as president of the National Association of Local Councils, the national body representing parish and town councils, and whose assistance in this matter I acknowledge.

My support for the idea of a larger share of business rates going to billing authorities under the business rate retention scheme which we discussed on Tuesday was, I have to admit, not entirely altruistic. It was founded on the belief that too little was being channelled back to the billing authority given the many other claims on the funding stream implicit in that arrangement, certainly if we are to have any real incentive flowing from it. By implication, therefore, little or nothing would be available in practice, even if the principle of my amendments was agreed, to flow to the first tier of local government.

The Bill is—in part, at any rate, or so we are led to believe—about introducing the financial aspects of the Government’s localism agenda, which I support wholeheartedly. It is a process of trickling down powers and responsibilities from central government to local government and from local government to neighbourhoods and parishes. I hope that that is a given—I am glad to see the Minister nodding. At Second Reading, I flagged up an issue concerning a defect in the Bill, namely that the process of financial trickle-down seemed to halt at the principal authority level. There is nothing in the Bill for parish, town and neighbourhood councils. In short, and viewed in very local terms, the financial benefits do not flow to the very local level where the properties on which the tax is raised are actually located and in which locality exists a neighbourhood-based, statutorily constituted and precepting local authority.

5 July 2012 : Column GC394

I remind the Committee that local initiatives which would raise revenue in business rate terms are not by any means confined to principal authorities. Parish and town councils up and down the country are, and continue to be, involved in schemes to encourage retail, commercial and other value-added activity.

These amendments are framed in what I admit is a deliberately crude fashion with a view to highlighting the complete absence of a local council share in the retained element of the BRRS and to ask why, in the name of all that is called localism, the redistribution of this is limited to major precepting bodies only. Removing the word “major” from various provisions as a qualification to the beneficiary precepting bodies is intended thereby to include local councils which also have a precept in the redistribution benefit.

Before 1989—I think that was the date, but my memory may have failed me—parish and town councils did get such a share, but it was scrapped when the community charge was introduced. While that denial of benefit might have been appropriate at the time, local councils have made enormous advances and shown what they are capable of doing. Indeed, I have a list with me of the very many initiatives up and down the country which all show how much can be achieved with tiny sums of money. I think that the Minister would be amazed at just how much can be done with very little money if the collaborative ethos and common purpose that particularly hallmark neighbourhood and parish initiatives are given a fair chance. However, that cannot be done without any resources at all.

Many of these initiatives are specifically aimed at business activity. The demise in the ability of principal authorities to fund many services, let alone any new initiatives, leave the local council—often a parish or town council with quality council status and a real drive to benefit their community—to pick up the reins. As I have said, this cannot be achieved without some resources. We already know the common practice of principal authorities agreeing to pass services and functions to parishes yet simultaneously claiming that there is no budgetary allocation to pass on to enable those services to be provided in practice.

I do not entirely blame principal authorities. In fact, I have been involved on and off with principal authorities for rather longer than I have been involved with parish and town councils in many respects. Principal authorities have been caught financially between what can only be described as a rock and a hard place. However, at local council level it looks bad and in neighbourhood terms it seems almost like a financial sleight of hand, which is known in the jargon of the sector as double taxation; namely, the service is passed further down the line but none of the resources—which are somewhere implicit because there is a cost element in a principal authority’s budget—get passed on. The closure of public toilets in resort towns that rely heavily on coach loads of day visitors and attempts by the town councils to keep them open is just one exemplar of that situation.

I cannot know what the Minister’s response will be, although I have my suspicions. Probably the least likely outcome is that she will accept the amendment. The question then is: what does she propose? Will

5 July 2012 : Column GC395

there be a line of funding that will benefit the local council sector, and what guarantees can she give that, if that money is made available via a principal authority, it will be passed on?

I am realistic about funding things at neighbourhood and local council level. I accept that the question of how to distribute such a local council share will arise if the principle is accepted, but that is further down the line. Furthermore, I also accept that the last thing that we need is a plethora of very small schemes or even those which are not worth while just because money is available or because it will be lost if it is not spent in a particular financial year. Worthwhile projects, unfortunately, have lead-in periods that do not sit conveniently into a fiscal year template. I am familiar with the undesirable effects of an overrestrictive “use it or lose it” regime.

The Government’s message regarding local government finance is clear: not only is there no new money but there will be a 10% cut. However, if anything is to work at neighbourhood, parish and town council level, there has to be some redistribution of resources, unless the Government are willing to stand accused of some sort of large-scale deception by the very constituents they promised to assist. I hope that that is not the case. However, given that the maximum effect can be achieved with tiny resources and the ability at local council level to leverage a huge amount of voluntary commitment, there is a very good reason to make a modest redistribution. I look forward with interest to the Minister’s response on this matter, which I believe is critical to the objectives of true localism. I beg to move.

Lord McKenzie of Luton: My Lords, this is an intriguing series of amendments, and we have a degree of sympathy with them. The amendments would include parish and town councils within the scope of those for whom billing authorities must share their portion of the business rates. I suspect that the difficulty with this is that other parts of the components of the scheme for business rate retention would have to be applied as well. You could not just make the payment without the other bits and apply it potentially to many thousands of authorities.

Under the current local government arrangements business rates are paid to central government and come back via the formula grant, not, I understand it, to local precepting authorities but to billing major precepting authorities. However, this does not work under the business rate retention scheme. The retained business rates have to be allocated between authorities and the proposed basis is that, with two-tier arrangements, 80% of the business rate would be allocated to district authorities and 20% to major precepting authorities—police and fire and rescue included. As I understand it, the rationale for the 80/20 split is that lower-tier authorities are typically responsible for planning and more able to influence economic development.

The noble Earl might well argue—he touched on this—that the new regime for neighbourhood planning opens up that opportunity more to parish and town councils. Some are already very much involved in a drive to improve the economy of their areas. However,

5 July 2012 : Column GC396

if such councils are not to be encompassed within the tariff top-up arrangements for billing authorities, it would seem to follow that they should have their own calculation. It might not be difficult to establish the business rate base but to derive a funding amount would presumably require some breaking out of the formula grant, and I am not sure how easy that would be to do.

In passing, we should note that there will be a requirement for billing authorities to work with local precepting authorities to address the council tax support funding. If I have read the documentation correctly, it is envisaged that this could well involve a payment from such authorities to town and parish councils.

While I understand where the noble Earl is coming from on this, the practicalities make the amendment difficult to accept. However, I will be interested to hear the Minister’s response. There is the germ of an idea here that needs support.

Lord Shipley: My Lords, I think I agree with the comments of the noble Lord. There is an issue here that relates to the deletion of “major”. Will the Minister respond on the content of the Localism Act? On the rights and powers of precepting authorities, my memory is that some crucial amendments were made to the Bill on Report, which enabled the protection of the rights of parish councils and neighbourhood planning councils. Is the Localism Act sufficient to deliver the resources that should lie within the money, particularly that raised through the community infrastructure levy, to very small neighbourhood areas? I would appreciate the Minister’s guidance on that point.

The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham): My Lords, I thank the noble Earl, Lord Lytton, for introducing this little amendment. Neither he nor other speakers will be totally surprised when I say that it is not acceptable in its current terms. I shall tell him and the Committee why.

We recognise that parish councils underpin many neighbourhoods across England. They have been given a specific role under the Localism Act. Local, parish and town councils are specifically mentioned as being able to generate neighbourhood plans. As has been said, they are the focal point for a wide range of local involvement and action under the Localism Act. For some parish and town councils, that range of activity and involvement will include promoting economic growth but they do not have the same financial levers to deliver growth as principal authorities do. I know—the noble Earl has just said so—that some town and parish councils are keen to receive a share of business rates. That was evident not only from what the noble Earl said but from the Government’s consultation on rates retention last year, when several parish and town councils expressed in their response a desire for a change in this matter.

However, the local government resource review was set up to look at how principal authorities are funded, with a view to giving them greater financial autonomy, strengthening the incentives to support growth in the private sector and the regeneration of local economies, and reducing their reliance on central government funding. The funding of parish councils is therefore

5 July 2012 : Column GC397

outside the scope of the review’s terms of reference. The Government’s proposals for business rates retention are focused on changing the allocation of business rates, which previously fed into formula grant, which is not paid to parish or town councils. Therefore, allocating parish and town councils a proportion of business rates would be at the expense of the principal and major precepting authorities, thus weakening the growth incentive. I just add that of course all parish and town councils have a precepting power so that in general they are able to cover their costs. Although I accept that that may not be a great contribution to growth, it is certainly something that they are able to do.

The Government consider that it might be appropriate to reassess this position in the context of an untimed, unnamed and unexpected fundamental review of the business rate retention scheme, but I would advise noble Lords not to hold their breath on that.

As I said at the outset, the noble Earl will not be surprised when I say that I cannot accept the amendment.

2.15 pm

The Earl of Lytton: My Lords, I shall not profess to any great surprise at what the Minister has just said. Notwithstanding the point made by the noble Lord, Lord McKenzie—that this would have a knock-on effect on other issues—I would have hoped that the principle of making sure that there was an adequate stream of funding somewhere or other would be accepted. I know that in other parts of the Bill there are proposals for a degree of funding, and this will undoubtedly come up at a later stage in our discussions. None the less, the principle of linkage between having a stake in the income and, as it were, presiding over the geographical area in which part of this revenue is drawn seems to be fairly inescapable.

Nor should it be assumed that, for instance, parish and town councils are necessarily small, parochial—with a small “p”—bodies; some town councils around the country have larger budgets than a principal authority. I suppose it is fair to say—and to some extent I say this in the Minister’s defence—that one problem is the huge diversity in the size and complexity of parish and town councils. None the less, if we do not have some sort of aspirational link between the funds generated and what is done at local level, it seems to me that that will be a fundamental failing. Perhaps the review did not look far enough down the trickle-down waterfall to pick up some of the things that concern me.

These were intended as probing amendments. I have made a note of what the noble Baroness has said but I shall reserve my position in seeking leave to withdraw the amendment because this is something to which I may well need to come back at a later stage. With that, I beg leave to withdraw the amendment.

Amendment 18 withdrawn.

Amendment 19

Moved by Lord McKenzie of Luton

19: Schedule 1, page 21, line 31, at end insert “, and

the percentage referred to in paragraphs (a) and (b) shall be determined following full consultation with local government”

5 July 2012 : Column GC398

Lord McKenzie of Luton: My Lords, I shall speak also to Amendments 32 and 40 in this group. Amendment 19 relates to the determination of the central and local shares and requires them to be set after full consultation with local government. It is accepted that this determination must currently be specified in a local government finance report and thus be subject to a parliamentary process, but that is not a substitute for engagement with local government.

We accept that there has been extensive engagement in relation to the Bill but what does the Minister see as the regular process going forward in this regard? Perhaps she could outline for us an anticipated timeline of events in future years after the introduction of the business rate retention scheme, although I hesitate to call it a steady state.

Amendment 32 relates to tariffs and top-ups. The local government finance report will spell out the basis of the calculation of these payments, but before it is laid, the Secretary of State must notify such local government representatives as he sees fit. The amendment requires there to be a consultation rather than local government just being notified. Amendment 40 is a parallel amendment related to the process for amending reports.

I will just touch on the amendments in the name of my noble friend Lord Smith, who is unable to be here today. Amendment 20 mirrors our Amendment 19 and is identical. Amendment 23 causes the finance report to give details of the consultation; a proposition which we support. Amendment 25 requires the report that should be sent to local authorities to be there by the end of November, for obvious reasons. Amendment 33 mirrors our Amendment 32 and is a duplicate. Amendment 34 requires that the Secretary of State must consult on the detail and not just on the general nature of the proposals, which is the requirement at the moment. These amendments are all about proper engagement with the local government sector. Perhaps the Minister will let us know the Government's intention. I beg to move.

Lord Shipley: My Lords, I first declare my interest as a vice-president of the Local Government Association, which is the first of the afternoon. I apologise for missing Tuesday's Committee when large numbers of noble Lords were making a similar declaration.

Baroness Hollis of Heigham: Could we take it for granted that we do not need to continue to declare? If we have done so on our first Committee day it should stand for the rest of the Committee stage.

Lord Shipley: I agree.

Lord McKenzie of Luton: Could we just declare if we are not?

Lord Shipley: That would actually be a quicker way of proceeding.

I agree with the amendment moved by the noble Lord. The Localism Act was about devolving power and decentralising decision-making. This set of amendments

5 July 2012 : Column GC399

makes it clear that there should be full consultation with local government before decisions are made. When decisions are made, that cannot just be about notifying those decisions but should clearly explain through consultation first but secondly explanation of the decision that has been made, particularly in a matter as complex as tariffs and top-ups. Thirdly, there has to be consultation on the detail not just on the general nature of things.

I hope that the Minister will take on board that feeling because the Localism Act has changed the balance of responsibility between central and local government. It would help enormously if it were not just left for the Secretary of State to have a set of powers whereby things can be announced but not actually explained.

Lord Beecham: My Lords, I entirely support the amendment moved by my noble friend and supported by my erstwhile colleague on Newcastle City Council and fellow vice-president of the Local Government Association. It clearly makes sense, and, as the noble Lord, Lord Shipley, said, it is clearly in the spirit of the Localism Act.

However, there is another aspect. The Government set much store on the proposals in relation to the business rate as part of an approach to incentivise and increase local investment by business, growing the local economy and all the rest of it. In that context, it would surely be sensible if, in addition to consulting local government perfectly properly on these topics, they also consulted business. That cannot be done at every local level by the Government and councils will no doubt continue to have discussions with their own local businesses. However, as I pointed out on our first Committee day when I quoted the London chambers report, some 53% of businesses believe that councils set the business rates now. So there is a certain amount of education to be done here. But at the national level, I would have thought it important for government to consult, particularly about that proportion of the business rate that is to be held centrally rather than devolved locally, because that clearly would be a matter of concern to the business community.

Without the necessity of moving anything formally, it would be helpful if the Minister could put on the record an intention that in any consultation about the business rate and the various elements, resets and proportions and so on, the Government will consult the business community as well as local government.

Lord True: My Lords, I apologise for leaving the Committee early last time. I had a meeting of my council to attend. I must also explain I am not a vice-president of the Local Government Association but I am in receipt of a very kindly letter from it inviting me to become one.

Noble Lords: Oh!

Lord True: I shall be able to join other noble Lords.

As I said when I spoke briefly yesterday on another matter, I do not think that everything has to be prescriptively set out in legislation. I will be listening very carefully to what my noble friend the Minister

5 July 2012 : Column GC400

says about consultation because the points that have been made by other noble Lords are very well made. It is obviously vital, particularly in the first stages of a new process, that a real and meaningful consultation takes place. We will be very interested to hear what my noble friend says about whether or not it is necessary to put this in the Bill.

I would like to refer to two amendments specifically. I will not follow the comments made by my noble friend Lord Shipley, but the points he made about “general nature” in Amendment 34, tabled by the noble Lord, Lord Smith of Leigh, were well made and I agree with him. Amendment 25, also tabled by the noble Lord, Lord Smith of Leigh, which inserts,

“no later than the end of November each year”,

is also interesting. I have no doubt that officials in the department will say it is very unwise to put something such as this in the Bill because you never know what is going to happen, et cetera. But everybody in local government is aware that these things seem to be creeping later and later. It was always November, and you knew what was going to happen; then it was December. Now we are facing a whole range of legislation, specifically this one, with very short timescales, which we discussed at Second Reading.

I know that it is not only my noble friend’s department that is involved in these discussions, but some earnest by the Government to inform local government rather earlier than has become the norm would be highly desirable. Even if my noble friend cannot accept Amendment 25, I hope she will accept that many in local government would like to know where they stand a little earlier in the financial year than has been the case all too frequently in recent years.

The Earl of Lytton: My Lords, I follow what the noble Lord, Lord True, has said. I have been involved on and off for many years with various organisations that are reliant on sums of money coming from local government, and if local government is pushed to the wire in terms of setting its budgets, this has a knock-on effect in every allocation it might make to any other body. I am not involved with any organisations that receive money by way of grant at the moment, but in the past I have attended meetings at which finance officers and chief executives of these small bodies have been absolutely tearing their hair out because they do not know where they stand; they do not know whether they are going to have the budgetary allocation to enable them to keep core staff, and so on.

Leaving these things to run until a very late stage is pernicious because the downstream effects are incalculable and affect employment and the viability of schemes. So I would like to reinforce what the noble Lord, Lord True, has said about that: there needs to be a better lead-in period to deal with these things and it should not be left to the last minute on the basis that it does not matter. It matters very much and I wish to impress that on the Minister.

2.30 pm

Earl Attlee: My Lords, I would like to declare that in terms of local government, I am still in short trousers.

5 July 2012 : Column GC401

Baroness Hanham: The noble Earl is not a vice-president of anything.

Earl Attlee: I thank noble Lords for their helpful explanations of these amendments. They deal variously with aspects of the local government finance report, particularly around the consultation arrangements that will apply. I agree that proper engagement is very important to ensure a successful outcome.

The Bill provides that the central and local shares, and the basis of calculation of payments flowing to and from local authorities, will have to be set out in the annual local government finance report. As we do currently, we will continue to consult local government on a draft local government finance report in the autumn before laying the report before the House of Commons in January or February each year. The noble Lord, Lord McKenzie, accepted this point in his opening remarks.

Amendment 25, tabled by the noble Lord, Lord Smith, and I think spoken to by the noble Lord, Lord McKenzie, seeks to bring forward the laying of the final local government finance report. Although I can sympathise with the good intentions of the noble Lord in bringing forward this amendment, I cannot recommend that the Committee accepts it. Amendment 25 would bring forward the process by three months from the current timetable.

The Government have always endeavoured to give local authorities the information they need as early as possible. The noble Lord, Lord McKenzie, asked me about the timetable. The current process for the local government finance report is as follows: the summer consultation is in about July and sets out the basis of calculation; the draft report comes out in approximately November and has the detail; and the final report comes out in January 2013. As for the future process, we may not need to carry out the summer consultation in future years unless there are substantial changes to the calculations.

In the past, the local government finance report timetable has been driven by the availability of up-to-date data to make the necessary calculations. Under a rate retention scheme, this will still be the case. For example, the September RPI figure, which will be used to uprate tariffs and top-ups, will not be available until later in the year. In reset years, the need for updated data will increase.

Although I cannot accept the noble Lord’s amendment, I can assure him that the Government will continue to use their best endeavours to ensure that local government, as far as possible, has the information that it needs to undertake its budgeting processes. Although I understand the intention behind each of the amendments in this group, I ask noble Lords to withdraw them. I believe they are either unnecessary, since, in practice, consultation with local government will continue to take place as it does now as a matter of course, or, in the case of the timing of the report, undesirable, since they may limit our ability to use the most up-to-date data for calculations. I am sure that that is not what the Committee desires.

Lord McKenzie of Luton: My Lords, I thank the Minister for his reply and all noble Lords who have spoken in this short debate. Nearly every one who spoke was sympathetic to and in agreement with the

5 July 2012 : Column GC402

thrust of these amendments. Indeed, that was the tenor of the noble Lord’s comments. I understood from what he said—it seems to be on the record and we will read it in

Hansard

tomorrow—that there is the clear intention to continue to consult with local government on a timely basis. That is very important.

We have to reflect a bit on the issue around getting that information available in November, but the noble Lord, Lord True, and the noble Earl, Lord Lytton, made some very powerful points in support of the amendment—in particular, the sooner you know what your resources are, the better able you are to deal with those who are looking to you for support and engagement.

I agree with my noble friend Lord Beecham, as ever, that there are other interested groups here, particularly concerning the central share and how that is going to be dealt with. I think that the noble Lord, Lord Shipley, was right when he said that the Localism Act has basically changed the scene so far as this is concerned. I take a degree of comfort from the Minister’s response—particularly the commitment to make sure that the consultation continues.

I guess that we will have to see what the nature of the components is. We will be coming later to what is likely to be in a local government finance report, given that formula grants are going to be less important, if not disappear altogether. We will also be dealing with what is in the document to consult on. In the mean time, I thank the Minister for her response and beg leave to withdraw the amendment.

Amendment 19 withdrawn.

Amendments 20 to 25 not moved.

Amendment 26

Moved by Lord McKenzie of Luton

26: Schedule 1, page 22, line 14, leave out “, if the authority acted diligently,”

Lord McKenzie of Luton: My Lords, I shall speak also to Amendments 27, 30 and 31. Amendment 26 relates to payments to the Secretary of State of a billing authority’s central share. Regulations can define the non-domestic rating income and include, among other things, an assumption of an authority acting diligently. Ministers may well say that this term is well embedded in the local government finance legislation, and doubtless the Minister will be able to point us in the right direction so far as concerns its meaning and why it is necessary. However, perhaps we can just recap. Whose judgment will determine whether an authority has acted diligently and what regard will the judgment have to what might be varying policy frameworks? Are the Government looking for something here which goes beyond efficient billing and collection arrangements?

On Tuesday, we heard from the noble Earl, Lord Lytton, about the maintenance of the business rating system and the challenges faced there. He highlighted the fact that collection risks are on local councils but that maintenance obligations lie with the Government.

5 July 2012 : Column GC403

Perhaps the obligation for authorities to act diligently will be matched by an obligation on the Government properly to fund the valuation service.

If the Secretary of State deemed a council not to have acted diligently, what would the consequences be? Would the council have a right of appeal? If the Government are confident about the benefit of the incentive in these provisions, why is it not enough to encourage councils to act diligently?

Amendment 27 is a minor probe concerning payments of the central share. Paragraph 7(2) of Schedule 1 contains the words,

“in the course of the year”,

which suggests that all payments, even if subsequently adjusted, will be made during the year rather than later and in respect of the year. The amendment of my noble friend Lord Smith suggests that it should be paid in two instalments. Perhaps the Minister can enlighten us about the Government’s intent on that.

Amendment 30 refers to payments to major precepting authorities. This provision again deals with an authority’s non-domestic rating income, which will be defined in regulations as the amount payable to it,

“subject to such adjustments as may be specified”.

It is understood that the adjustments that would be made will include such matters as mandatory, discretionary and hardship reliefs, and the cost of collection, et cetera.

The noble Baroness will be aware of representations received from Sporta concerning the impact of the new system on mandatory and discretionary relief. Sporta represents charitable, leisure and cultural trusts. Under current arrangements, the Government meet the cost of mandatory relief and a proportion of discretionary relief, which is recognised in the government’s technical paper 2, Measuring Business Rates. I have the authority of the chief executive of Sporta to quote from the letter. It refers to the business rate retention scheme and the central and local shares. He says:

“The effect of this approach will dissuade many authorities to set up, extend or support leisure and cultural trusts—for two main and exceptional reasons. First, leisure trusts operations can involve large amounts of buildings and facilities, and therefore business rate concessions are significant. Therefore any transfer to them, or new investments by existing trusts, would impose substantial unfunded costs on the local authority. Second, unlike with the position of most other charities, local authorities can themselves directly influence the creation of trusts—by deciding or not to transfer assets to them on a lease and by awarding, or not, a contract to them for operation of facilities. The disincentives created by unfunded concessions could therefore be great and thus the benefits of having more community facilities run by trusts would therefore be lost—and this is happening now as local authorities react to the statements which the Government has already made”.

It goes on to say:

“We understand that the DCLG Working Party which is considering the regulations recognises in principle the problems for the charitable sector which the prospective loss of compensation for local authorities will create. However, we should like to ensure that DCLG are fully aware of the special problems which will be faced by leisure and cultural trusts, because of their scale and as a result of the fact that the formation of the trusts can often be dependent on the decisions of local authorities themselves”.

5 July 2012 : Column GC404

The concern relates to new or extended provision, as it seems that existing provision would be reflected in calculating the baseline and, therefore, the tariffs and top-ups. Those will not be changed—apart from RPI adjustments—until resetting. In the mean time, local authorities will take a 50% hit for any relief granted. Perhaps the noble Baroness can give us an update on current thinking because this seems to be a particularly serious issue. I would be interested to hear if there is a solution in hand.

Amendment 31 is again a minor probe. This is about certified accounts. It makes reference to the use of certified calculations or information, which is related to payments to the major precepting authorities. Can the Minister expand on what use is anticipated of these accounts and information? There is a broader issue, which I do not propose to press, about what is being certified by auditors and what the nature of that certification is, but perhaps that is a matter that I might take up outside of the Committee.

Amendment 39, in the name of my noble friend Lord Smith, requires the Secretary of State to make top-up payments in two instalments, which seems an entirely reasonable proposition. I beg to move.

2.45 pm

The Earl of Lytton: My Lords, I shall speak very briefly on Amendment 26. I am sure that the noble Lord, Lord McKenzie, would not thank me for sitting silently when the matter revolves around the question of non-domestic rating. There are two words in the clause that the proposal seeks to amend. One is “diligently” and the other is “payable”. A great deal hinges on those two words.

I previously explained at Second Reading and in comments made in the debate on the Queen’s Speech that there is a problem with the management of the tax base, which is implicit in the bundle of rateable values that afford the basis on which this particular bit of local government finance arises. I would have to say that diligence may be there in abundance, but efficacy is not. Later on—although I suspect not today—we will come to amendments that I have tabled where I set about trying to deal with some of the shortcomings implicit in the present system.

There is no unwillingness to implement a proper and fair system at all levels of central government, government agency and local authority. But if the system is underfunded and suffers from a lack of degree of care and maintenance input, problems will arise. What may be diligence to one body of people may look like neglect to others. I am particularly concerned that if the term “payable” means what would otherwise have accrued to the billing authority in this sense but does not for whatever reason, that represents the horns of a dilemma, bearing in mind that, as the noble Lord, Lord McKenzie, said, the billing authority has no responsibility for the maintenance of the tax base. In other words, it has no stake. Some of my amendments try to address that. As matters stand, the billing authority has no role in the accuracy of the list or indeed whether something is in the list as a non-domestic hereditament or not.

5 July 2012 : Column GC405

It concerns me that, if the Government’s own Valuation Office Agency cannot catch up with this, to try to make that somehow by implication the responsibility of the billing authority must be wrong in the absence of additional resources in which to achieve it. Clearly, there are no additional resources because we are talking about a 10% cut. If it came to be interpreted by the courts, although I am no lawyer, I fear that the words “diligently” and “payable” may have the sort of meaning that I rather fear and the noble Lord, Lord McKenzie, fears might be attributable to them.

It could put the billing authority in an extremely difficult situation and could have knock-on effects throughout a large number of billing authorities with the potential for what I can only describe as a large degree of mayhem in local government accounting for any given year until it works through the system. I support the principle of what has been said.

Baroness Hanham: I thank the noble Lord, Lord McKenzie, for moving the amendment and I hope that I can reply to most of the points that have been raised. Amendment 26 seeks to remove the obligation on local authorities to act diligently, which are the words that have been questioned regarding the collection of the non-domestic rating income due to it under Sections 43 and 45 of the Local Government Finance Act 1988.

This section focuses on the need to establish the payment that will have to be made by the billing authority to the Secretary of State in respect of the central share that is due. It is obviously important that there is a clear understanding of what is meant by non-domestic rating income in this context, and this paragraph confirms that the Secretary of State will introduce regulations that provide that clarification.

In preparing those regulations, we are clear that the Secretary of State should be taking into account not just the income that the billing authority receives, but the amount that it would be reasonable to expect any authority to collect if it acted diligently. That is the amount that is due to it, and if it does not get that and its collection rate is below 100%, it is still being assessed on the former amount. This is not a new concept. The principle of diligence is well established, as the noble Lord, Lord McKenzie, intimated, in the 1988 Local Government Finance Act in its treatment of a billing authority’s contribution to the business rates pool; for example, Part 2 of Schedule 8.

Local government is therefore familiar with the principle of due diligence as part of its responsibilities for collecting non-domestic rating income. It would send a rather unfortunate signal if we were to suggest a lessening of the responsibilities of local authorities to ensure that the business rates that are due to them are actually paid. I think that most local authorities understand and make enormous efforts to ensure that they get the maximum amount of business rating that they possibly can. I certainly remember being challenged when we got up to 97%; now we want to get to 100%.

Amendment 27 relates to the regulations that will be introduced to establish the administrative arrangements to be put in place for processing payments of the central share. We are clear that we intend to be as accurate as possible in making the calculations for the

5 July 2012 : Column GC406

amount of the central share. However, it is obviously prudent to ensure that mechanisms are put in place to deal with those scenarios where it is subsequently determined that the payments to the central share that have been handed over by billing authorities are either lower or higher than those required. Paragraph 7(2)(b) of Schedule 1 makes it clear that the regulations to be introduced by the Secretary of State on the administration of central share payments may make provision to deal with under or overcontributions. Having reflected on that paragraph, and the proposed amendment, it is not clear to me in what way the proposed amendment will improve the clarity of the intention of that paragraph.

Amendment 30 would prevent the Secretary of State including, within regulations governing the calculation of payments to be made by billing authorities to major precepting authorities, adjustments to reflect either costs that fall on billing authorities or different circumstances that will need to be reflected in any payment schedule; for example, we envisage that, in defining non-domestic rating income, the regulations will make an adjustment for the cost of collecting the business rates income. Otherwise, there is an obvious undesired outcome that the billing authority has to absorb the cost of that administration alone. Similarly, the definition of income will reflect specific circumstances where the rates collected may be apportioned slightly differently; for example, as we confirmed in our statements of intent, it is our intention that all the business rates income from new renewable energy projects will be retained by the planning authority. The regulations would enable the relevant adjustments to be made to reflect such circumstances.

Amendment 31 relates to the circumstances that might apply following an audit of a billing authority’s calculations for the purposes of making payments to its major precepting authorities. We hope that there will be few, if any, occasions, where the audit of a billing authority’s calculations and information certified by the audit did not match what was supplied to the major precepting authority. However, there might be occasions when this is the case. Paragraph 9 confirms that regulations may make provision for the use of the certified information in relation to payments to the major precepting authority. Use of certified information in this way would mirror the arrangements set out in paragraph 40(6), which provides that the Secretary of State should be able to rely on certified information and existing non-domestic rating pooling.

Transparency over the funding to be available, and the basis of the calculations used to determine that funding, will clearly be important to everyone to establish confidence. This section sets out that the regulations may include provisions to establish what might happen where there is a mismatch between the information supplied and the certified information produced by the audit. In such a scenario, we envisage that all parties would want to understand the nature of the difference and how the certified information and calculations might be used to correct, where necessary, any mismatch. In my view, the regulations are absolutely the right place to provide that additional clarity on the use of the certified calculation or information.

5 July 2012 : Column GC407

Amendment 39, tabled by the noble Lord, Lord Smith, and spoken to in his absence by the noble Lord, Lord McKenzie, would replace the current flexibility in the Bill and instead require payments from central government to local government to be made in just two instalments. I hope that I am able to reassure noble Lords that it is our intention, subject to consultation with local government, to spread payments in respect of the rates retention scheme, both to and from local authorities, over the course of a year. We intend to do this by setting up a schedule of payments over the year. We will consult on the number of instalments over which the payment should be made. However, we believe, at this stage, that the two payments envisaged in this amendment would be too restrictive under these circumstances. I ask the noble Lord, with this explanation in mind, to withdraw the amendment.

The noble Lord, Lord McKenzie, asked about mandatory payments. I understand that will be outside the central charge. I may need to write to the noble Lord, but mandatory payments are clearly important as they cannot be ducked. I understand the question of sports and leisure clubs is still under discussion, and perhaps we may be able to deal with that at a later stage.

The Earl of Lytton: My Lords, can the Minister clarify something further for me following what I said a short while ago? Let us imagine the situation of a popular coastal town, in which there are a large number of properties that may be used seasonally for holiday purposes. Many will in fact be people’s second homes and may even get a reduction when assessed for council tax because they are second homes. Because of the seasonal nature, it is difficult to track whether these are going to fall above or below what I believe is the 140-day threshold of occupation for holiday purposes. I have to say that I am not sure whether that is for general tax purposes rather than local tax, but the question then is what their whole or main use is. In theory, if one is using the property year-round for holiday lettings, that is clearly a change of use, but there is no requirement to go for planning consent and it probably does not require any building regulations control. There may be some issues to do with health and safety, but how would the billing authority know what stock lay out there and what it was used for?

I appreciate that the Minister may need to come back on this, but in such a situation, how would a billing authority know whether it was behaving “diligently” or whether it was supposed to go around tracking down who all these people are? When I did an investigation last year into holiday homes, I found that a very large number of what I understood to be holiday homes, which were clearly being advertised as such through letting agencies, were in fact subject to a council tax assessment. If we are not careful, we will be putting an absolutely impossible burden on the billing authority, if “diligently” causes it to fall foul of something that is going to be extremely difficult for it to catch up on.

Lord True: Along with the noble Earl, I do not expect my noble friend to answer this point now. The issue of “diligently” is, in law, an important one given that we are framing a new approach. We need to

5 July 2012 : Column GC408

understand how that will be assessed, particularly if it also comes up with reference to the relationship between local authorities and precepting authorities. It cannot be a subjective test. The Secretary of State will not say, “I don’t think they’re doing a good job but those people are”. Secretaries of State have never acted like that in the history of local government, have they?

3 pm

Therefore, there has to be some kind of objective set of criteria. In the example that the noble Earl has just given, will those criteria set out the extent to which local authorities must pursue these matters? Will they be quantitative? If you do not collect a certain proportion, will you therefore, prima facie, be judged to be less diligent than you ought to be? That raises potential difficulties. As noble Lords in this Committee have already said, the criteria certainly could not relate to variations from year to year. For example, my own authority’s business rate take in the past financial year dropped from £77 million to £68 million. You might look at that and say, “Goodness, Richmond doesn’t seem to be operating very diligently”. However, the Rugby Football Union, one of the biggest payers in the authority, had a revaluation so an accumulated adjustment came through in one financial year. Over time, that will average out.

These are all possible sources of uncertainty. Before Report stage, will my noble friend undertake to take on some of the points that have been made and give us some further insight into how this judgment will be made? I was very grateful for the way in which my noble friend responded constructively to the points made by noble Lords. Before Report, perhaps a little more light could be shed on how this assessment will be made.

Baroness Hanham: In reply to the last point of my noble friend Lord True, if I can provide anything useful, of course I will. My noble friend is the leader of a council and, as far as I know, he has been acting under the duress of being presumed to be acting diligently ever since he took over. This has been part of the Local Government Finance Act 1988 since it was passed. It is not new. It is entirely the same wording as local government has been operating under for the past 24 years and it is well understood. Local government finance officers must also understand it. It means that you go about getting in the money that you are required to have to the very best of your ability. The challenge—particularly now, with the economy in the situation that it is—is to get in as much as possible of the amount that you should have.

I am not sure whether the Government will judge the level of diligence but it is perfectly open to someone else to challenge whether a local authority has acted diligently if, for example, its revenue drops substantially. I do not think there is anything more that we can say about it but I will be more helpful if I can. However, this is a very well worn path, which is probably no different from what we will do.

The noble Earl, Lord Lytton, raised the question of holiday homes. I know that he has extensive amendments coming up later. The local authority collects only the

5 July 2012 : Column GC409

money as assessed against whatever the nature of the property is. If a valuation office, which must value all properties, values a holiday let as a normal domestic property, so be it. The local authority does not challenge that. It is left to the valuation office or anybody else to suggest that perhaps a property is being used as a business and might need to be looked at again. Therefore, holiday homes are not particularly relevant to this matter at the moment. I hope that is helpful.

Lord McKenzie of Luton: My Lords, I thank the Minister again for her response to these amendments. On the issue of acting diligently, this is a probing amendment; I did not necessarily want the words deleted from the text. I wanted to understand how they might be applied in the current situation. We are in a different situation. Previously, the collection of business rates was turned over to central government and came back via a formula. That formula drove what local authorities had. It is going to be different in future; that is what the system is about. The Minister said that this is well tried and tested. How many challenges have been made under these provisions in the past three years? Who have those challenges come from? She hinted that they might come from anyone. It would not necessarily be the Government who have to take this view. This is important, particularly in the light of the comments by the noble Earl, Lord Lytton, whose knowledge of the rating system is profound and will be very helpful to us in this Committee. He can spot nuances that would not be apparent to some of us at least. We need more information on this. We will look to bring something forward on Report if we cannot get some clearer idea.

Will the Minister at least deal with the question of whether there is a right of appeal and what the sanction will be? If a local authority was deemed not to have acted diligently, what would the Government do? Would they gross up the business rate they receive in the calculations that are made? What is the sanction? Is it one that only government can apply? Is there a right of appeal against it? This raises lots of questions.

The other amendments were effectively probing, apart from the amendment about mandatory and discretionary rate relief. Quite apart from the specific circumstances that Sporta has written about—I understand there is some discussion on them—there are issues of principle here. How will it work in future for new provision that under the old system, and under the new system, would be subject to mandatory relief? The Government would have picked up the whole of the tab for that, but now it gets shared with the local authority. The local authority picks up half the cost which, other things being equal, is likely to make it less inclined to grant relief, not because it would not wish to, but simply because it would not have the resources to do it. Is that analysis right, or is there a different analysis? I know there are issues about how the baseline is set and how the existing provision features, but can we at least have a bit more about that as well?

Baroness Hanham: Mandatory is mandatory. Mandatory means that you have got to do it. I am more concerned about the discretionary aspect. There are two lots: a

5 July 2012 : Column GC410

mandatory grant and a discretionary grant. As I understand it—I am sort of swinging backwards and forwards here—the mandatory grant will be taken into account in the share. It would not be deducted, as it were, from the local authority’s income. I will write to the noble Lord on that because we do not want confusion. It seems to me that if it is an absolute requirement to pay it, there must be some payoff from that. Local authorities determine what they should collect and what they write off. Their auditors check it. I shall write to the noble Lord further on the mandatory grant because I do not think we are getting anywhere.

With regard to due diligence, it refers in practice to the sums that a local authority writes off as bad debts. It is for a billing authority to determine those sums and for the authority’s auditor to determine that they are reasonable. Due diligence would seem to me to work on the basis that you use your best endeavours. The noble Lord asked whether anyone has ever been challenged on it. I think that is going to be very hard to unearth because local authorities would be the only ones to know. If we have anything useful on that, I will let the noble Lord know, and also whether there could be an appeal. It might be helpful and save the noble Lord a lot of trouble on Report if we lay that out more clearly for him and for Members of the Committee, which I will do.

Lord McKenzie of Luton: I am grateful to the Minister. I am happy to leave to correspondence the issue of due diligence, the consequences, and what appeal rights there may be. I hope that we will know in good time for Report so that we can revisit it if we need to.

I will just have one more go at mandatory relief. I go back to the document that the department itself issued: technical paper 2 Measuring Business Rates. Paragraph 4.22 states:

“The main consultation paper explained that there would be no changes to the current system of reliefs, or to the criteria that determine eligibility. The Government does not believe that, under a rates retention scheme, the cost of mandatory relief should be borne entirely by the authorities in whose area it arises”.

The same follows for discretionary relief.

Particularly in relation to discretionary relief, that must be a deterrent. I presume that that comes because of the 50:50 share. From what the Minister said earlier, are the Government reviewing this issue to reconsider whether there are any changes to the impact of the legislation that they might introduce? This does not affect only sport: I am sure that the department has had representations from a number of entities on this. Again, we would certainly wish to explore this further on Report if we cannot get some clarity or solutions relating to this by the time we get there.

Baroness Hanham: My Lords, the answer to the noble Lord’s point is that it will be part of the consultation in the summer. Consideration is still being given to the position on reliefs and the consultation will produce an answer. I hope that by Report we will know for certain what the answer is. But I take the noble Lord point’s completely about something that you have to do and how that will be shared. Discretionary seems

5 July 2012 : Column GC411

to be more something that is within the ability of the council to decide. But I do not want to dig myself any deeper into a hole here. I will leave it and write to the noble Lord. I understand that the noble Lord is happy about due diligence.

Baroness Sherlock: When the Minister is writing, will she help us to understand not just the impact on local authorities but the consequences for those bodies to which they might have contracted? Also, what impact do the Minister and the Government think that that might have on localism and the big society, for example?

Baroness Hanham: That is a little wider than the amendment, but we will look at Hansard and see.

Lord McKenzie of Luton: I do not think that the Minister is right to categorise my position as ”happy” on this, but I am content that there is a way forward and we will get some further information. Cordially, I beg leave to withdraw the amendment.

Amendment 26 withdrawn.

Amendments 27 to 34 not moved.

Amendment 35

Moved by Lord Tope

35: Schedule 1, page 24, line 33, at end insert—

“( ) A review of the basis on which the Secretary of State calculates payments to authorities must be undertaken in conjunction with any revaluation of rateable values on non-domestic property after 2015.”

Lord Tope: My Lords, in moving this amendment I will also speak to Amendment 36. Both are in the name of the noble Lord, Lord Jenkin. However, as noble Lords will know, he has literally just finished a three-and-a-half-hour debate in the Chamber and I have agreed to speak to these amendments since my noble friend Lord Shipley and I added our names to them. The noble Lord, Lord Jenkin, has promised to return when I have finished.

Amendment 35 refers to the review of the basis on which the Secretary of State calculates payments to authorities. That is probably best known to all of us here as the reset. The reset will review the needs and resources formula on which the local share calculations, such as the tariff and top-up, are based. The Government’s intention, as set out in the statement of intent on the central and local shares published on 17 May, is that the first reset should take place in 2020, which will also coincide with a revaluation; subsequently, as we know, the resets would be at 10-year intervals.

Amendment 35 prescribes that resets should happen at the same time as the five-yearly revaluation of non-domestic rates. The next revaluation is due in 2015 and the following reset would therefore be in 2020, as currently intended. Amendment 36 requires a review of the baseline funding level and changes in needs and resources to be carried out when local authorities are

5 July 2012 : Column GC412

compiling their non-domestic rating lists. This is the same as a revaluation. Section 41 of the 1988 Act provides that this must happen once every five years. Therefore, the effect of both these amendments is the same. I beg to move.

3.15 pm

Lord McKenzie of Luton: My Lords, as we have heard, Amendment 35 requires that any review of tariffs and top-ups must be undertaken in conjunction with any revaluation of rateable values. As I understand it, that is broadly the intent of the Government. However, it would seem that locking into this approach effectively gives fixed reset periods. One of the problems with this, as the Government have identified, is that the further in advance a reset period is known, the more possible it becomes for local authorities to plan on that basis and potentially manage growth and investment in their areas to achieve maximum gains from the reset process. This could result in perverse outcomes as local authorities seek to defer growth in their local areas in the year before a reset is due. It also produces a rigidity in the system and an ability to have regard to how resources in the system are aligned to changing levels of underlying need.

In their response to the resource consultation, the Government have said that it is proposed to adjust each authority’s tariff or top-up following revaluation to ensure as far as possible that their income from business rates retention will be unaffected by the valuation. However, I am not sure whether that necessarily amounts to a full resetting involving the recalibration of the baseline; it seems to be a different process. Perhaps we can have some clarification on this. Indeed, I am not sure that it would be possible to use the formulation to set the baseline at the point of a revaluation because the business rate base would be the historic one, not the updated one. I would be grateful for some clarity as to what is involved in an adjusting of tariffs and top-ups that is not the full reset—I can see from the Box behind the Minister that that probably is the position. Of course, having regard to changes in relative needs in resources is absolutely key, and we support that.

It is a difficult balance between preserving the flexibility of earlier resets so that you can respond more quickly to changes in needs and resources and seeking the benefits of a practical update that perhaps has the benefit of a longer-term incentive. On balance, we would argue for the flexibility to be able to respond more readily, particularly given some of the data about how quickly the council tax base can change over time.

The Earl of Lytton: My Lords, I support the principle of what the noble Lord, Lord Tope, said in moving the amendment because we are in circumstances of unparalleled turmoil in the non-domestic sector. The present—2010—local rating lists are based on an antecedent date of 2008. It will not escape the Committee that that coincides with the peak of the market before much of the fallout of the financial situation had filtered its way though. One of the effects of that has been to produce some significant shifts in the way in

5 July 2012 : Column GC413

which land use is now looked at. It will also be apparent to many noble Lords that there has been a growing level of conversions of properties that were once commercial into residential. This is, for many reasons, to do with the problems of building on greenfield sites, issues concerning the interim arrangements regarding the national planning policy framework and the removal—effectively the abolition—of the strategic planning system when the coalition came into being. I do not apportion any blame. We are where we are.

It is quite clear that a lot of businesses are paying rates on the basis of transitional relief escalation based on 2008 levels of value and are increasingly of the view that they are unsustainable. I have previously pointed out that on a like-for-like basis, non-domestic ratepayers appear to be paying more pro rata for their floor space than residential property owners pay under council tax for equivalent space. That may not be the case in central London—I have to defer to the noble Lord, Lord True, and others with greater knowledge of that—but in the rural shires, that certainly seems to be the situation. This fuels all sorts of things. If something is used for a commercial purpose, it fuels a lack of willingness to make any sort of declaration because people do not want it to go that way. One might say that there is no incentive on a billing authority to point something up as a non-domestic hereditament in circumstances where it gets 50% clawback. If it were under council tax, it would have got the lot, but I leave that for the time being because that is not the thrust of what I wish to say.

Next year we will have another antecedent valuation date for the 2015 valuation. The likelihood is that outside central London large numbers of values will fall. The transitional relief for substantial movement may well kick in, so as they have been counting up year on year towards 2015, after 2015 they may well be counting back down again. I have great concern about the reset not being until 2020 because the turmoil visited upon all sectors, residential and non-domestic, public sector and private sector alike, is making for great uncertainty and a great deal of unpredictability. It seems to me that by 2020, seven years down the road, assuming this comes into force in 2013, it will be so far out of date that something needs to be done about it before that time. I know that the Institute of Revenues Rating and Valuation, of which I am a member, is equally concerned about the long-term effects, given the problems with the arrangements for the reset and valuation being so out of kilter in their degree of modernity.

This is a science. One has to try to work out how many financial criteria dance on the head of one pin, and I might not be the best person to describe this in detail, but I foresee a problem and I would like to hear what the Minister has to say about it.

Lord True: My Lords, briefly, I support what has been said by my noble friends. I understand why my noble friend and her colleagues in the Treasury have put forward this proposal but, without repeating points that I made at Second Reading, the acceptance by many authorities of the transfer from one system to another is an acquired acceptance of accumulated

5 July 2012 : Column GC414

unfairnesses—as some would call them—of all varieties. I hope that my noble friend will consider favourably some of the points that have been made by my noble friends, such as this factor and the kind of turbulence and uncertainty that the noble Earl has just been referring to—and I gave the example of the extraordinary movement in our business rate revenue of about 11% between the last two years—the fact that, in the future, we cannot foresee it and that we are going way beyond the public spending survey period.

Baroness Hanham: My Lords, if the noble Lord, Lord Jenkin, was here, I would tell him that I am grateful for his amendment and the explanations that have been given on his behalf by the noble Lord, Lord Tope.

It might help noble Lords if I remind the Committee—if it needs reminding—how the rate retention scheme will deal with the spending needs of local authorities and how it will handle the changes in rates income that authorities will experience at a revaluation. When the scheme is first set up in 2013-14, we will determine whether authorities have to pay a tariff or whether they receive a top-up payment. To do this, we will compare the local share of the business rates that an authority collects with what I shall simply call the baseline funding level, which is essentially the number that currently falls out of the formula grant process. In other words, it is the share of money that the Government believe each authority should have, taking account of its needs and resources—a calculation that is done currently.

Therefore, at the point that we set up the rate retention scheme, we will have fully taken account of the needs in the same way as we do now under formula grant. Thereafter, we do not intend that the rate retention scheme will take account of needs again until the system is reset, and we have already indicated—and noble Lords have said they understand this—that our aspiration is to have the first reset in 2020 and to have resets only every 10 years thereafter; so 2020 would be eight years after the introduction of the scheme. This is to ensure that there is a sufficiently long time between resets to incentivise growth. If, instead, we were to adjust tariffs and top-ups every year, or every few years, to reflect changing needs, we would completely destroy the incentive effect that this scheme is designed to achieve.

As noble Lords will recognise, if authorities are to be encouraged to invest in growth, they need to be certain about the reward that they will get. As has already been pointed out, authorities will often incur costs as a result of growth and, just as often, those costs are incurred before the rewards from increased rates materialise. If the rate retention system were to be set up in a way that risked authorities incurring costs but then not seeing rewards because tariffs and top-ups had been adjusted, they would have no incentive to invest in growth.

How long the system needs to be stable for is a matter of judgment. Amendment 36 of the noble Lord, Lord Jenkin, would effectively require a reset for needs every five years to coincide with a revaluation. The Government believe that this period is too short.

5 July 2012 : Column GC415

The timeframe over which investment is made and over which costs and rewards materialise will very often be longer than this, a point that was made by many of those responding to last summer’s consultation on the scheme. This is why after 2020 we intend to reset the scheme every 10 years. However, as I indicated last time, we will always retain the ability exceptionally to reset earlier if, for example, we found that the needs and resources had got significantly out of line.

3.30 pm

I turn to Amendment 35, and the points made by the noble Lord, Lord McKenzie. Having said that we would not reset tariffs and top-ups except every 10 years, I must finesse that position slightly. Although we will not reset tariffs and top-ups for need, we will reset them at a revaluation to reflect the resulting changes to authorities’ income. I will not repeat everything that I said previously about revaluations on Amendment 15, but suffice it to say that a revaluation will change the rates income of an authority overnight between 31 March and 1 April. I think that this is a point that the noble Earl, Lord Lytton, was trying to get at. That will happen for reasons that have very little to do with the authority or with businesses in the area.

For example, at the 2010 revaluation, one council saw its rates income decline by several million pounds, even though there had been no changes to the businesses or physical changes to the nature of the property on the ground. This cannot be right, and therefore at a revaluation we will amend tariffs and tops-up to ensure that, as far as possible, an authority has the same income immediately after the revaluation as it had before. We can do this through the mechanism of the local government finance report, as required by Part 4 of Schedule 1 to this Bill. Amendment 35 is therefore unnecessary and I hope that the noble Lord, Lord Tope, on behalf of the noble Lord, Lord Jenkin, will be persuaded to withdraw it.

Lord McKenzie of Luton: That was helpful, as I have been trying to understand the difference between a full reset and a change in the tariffs and top-ups. What factors would be taken into account? The noble Baroness said that need is going to be ignored, which would certainly bother a number of us. How is that going to be achieved?

Baroness Hanham: My Lords, the needs assessment will be the same as the assessments for the baseline that were made initially. As I understand it, you would have to revaluate against that baseline.Any adjustments needed to that as a result of the revaluation would be made on the financial basis that there is no change to the amount a local authority is receiving unless there has been some change in the baseline or in the ingredients of the baseline. I think that is correct as to how the assessment will be made and, again, I will write if it is not.

Lord Tope: I am very grateful to the Minister for that explanation and to all noble Lords who took part in this debate, which raised some interesting and useful

5 July 2012 : Column GC416

points. We will read it carefully in

Hansard

and I am quite certain the noble Lord, Lord Jenkin, will read it with even more care and interest. I do not speak for what he may intend to do when he has done so, but in the mean time I beg leave to withdraw the amendment.

Amendment 35 withdrawn.

Amendment 36 not moved.

Amendment 37

Moved by Lord McKenzie of Luton

37: Schedule 1, page 24, line 33, at end insert—

“(3) Such basis of calculation must take account each year of an assessment of the level of need in each local authority, and in particular their ability to comply with their equality duty and obligations under the Child Poverty Act and homelessness provisions.”

Lord McKenzie of Luton: My Lords, in moving Amendment 37, I shall speak also to Amendment 38. We are still with tariffs and top-ups, which are important because, apart from levies and safety nets, they are the route to seek to address matters of needs and resources. Some local authorities collect more business rates than they currently receive in formula grant, while business rates collected by others are lower than their current funding levels. Hence, there is a need to rebalance resources, a process that we support. However, this requires establishing a business rates baseline for each authority and a baseline funding level. Amendment 37 sets down a general test for this, which requires that the basis for calculation that must be set out in the local government finance report should specifically have regard to an assessment of need. This amendment particularises that local authorities should be resourced to be able to comply with their equality duties, their obligations under the Child Poverty Act and homelessness provisions. The noble Baroness will note that these are the very same issues that central government has pressed on local government, reminding it of its responsibilities in relation to council tax support schemes.

Amendment 38 requires the local government finance report to set out details of the calculation of the baseline position. Establishing the baseline requires establishing the business rate that each billing authority collects and how this is shared between billing and non-billing authorities. The Government have proposed that this is determined by averaging business rates income, although the number of years over which it is averaged has not yet, apparently, been agreed. The amendment requires this to be made explicit in the finance report, but perhaps the Minister can in any case give us an update on this as well as set out the criteria that will determine the final basis of determination. Reverting to our previous discussion, how would this work in relation to a revaluation if the basis of the business rate baseline was an historic average? It would be difficult to do that at the point at which you had a revaluation because you would be averaging on the old basis. There is a difficulty there, but that is an aside.

Establishing the baseline also involves determining an income or funding level, and it is proposed that it is based on the 2012-13 formula grant, subject to some

5 July 2012 : Column GC417

adjustments. It is these adjustments that the amendment also requires to be spelt out. In this regard, we support the decision to update population data, as these are a key driver of the cost of services.

So far as relative needs formulae are concerned, the Government maintain that they have increased the proportion of formula grant distribution going to relative needs at the expense of the central allocation, as this would support the most dependent authorities. For the purpose of the tariff/top-up calculation, the higher the formula, the lower the tariff or the higher the top-up will be. Can the Minister update us on what is happening on these adjustments and tell us the current thinking because the outcome of these deliberations is locked in until a reset and it can be significant? If the proposal is to set the formula grant for the current year, the Government switched data to help the disadvantaged authorities by the central and relative needs shares. If they are thinking of putting that into reverse for the purpose of this calculation, then presumably the risk is that those disadvantaged authorities will not have the benefit that the formula for the current year has given them. I should be very grateful if the Minister could deal with that.

Paragraph 2.47 of the resource review consultation document states:

“In the current settlement we increased the proportion of formula grant distribution going to relative needs at the expense of the central allocation to support the most dependent authorities but made no change to relative resources”.

On the consultation, it states:

“Responses were mixed on this point and we have decided to look again at this issue prior to further consultation, when we will take a decision on whether, or not, to consult on any proposals”.

So the question is: are the Government going to consult and what are those proposals? I beg to move.

Lord Shipley: Perhaps I may intervene for a moment in relation to Amendment 37 to probe the meaning of the word “need”. I should like to raise an issue concerning exempt student households. It is becoming an increasingly serious matter on which I would appreciate the Minister’s guidance.

Student households are exempt from council tax. They are also exempt from business rates where it is a house in multiple occupation but owned by a landlord. The principle has been that councils get reimbursed from the national pot. In the past couple of years, that has not been happening as it should, and in some cases there is around a 25% deficit so that only around three-quarters of the income that would be expected is being received, yet local services are being provided without all the income that is necessary to pay for them.

I understand that the consultation that is taking place over the summer with local authorities will look at this issue, but I am seeking an assurance from the Minister that the matter will be taken very seriously. In the past, need has been taken to include full reimbursement of the loss because student housing is exempt.

Baroness Hanham: My Lords, as I was about to say, the noble Lord, Lord McKenzie of Luton, was asking about the consultation on the needs and the formula.

5 July 2012 : Column GC418

That is part of the summer consultation, so it will be dealt with before we meet again on Report. I am not going to muddy the water before that, so I will leave that there. I do not think there is any intention to change the exemption from council tax for students and business premises.

The first reset will start in 2013-14 and the Government will set out in the local government finance report all those elements sought by Amendment 38, but only in 2013-14 and in any reset year. I do not need to go through again the arguments I have already deployed in relation to Amendments 35 and 36 but, as I have already said, outside of a reset year, we do not intend to reset tariffs and top-ups to take account of need. We have been through this. This is because the scheme is designed to produce, and we intend it to deliver, a significant incentive for local authorities to promote growth. We think that incentive would be destroyed. Instead, we intend that the scheme should give authorities absolute clarity for a period of up to 10 years—clearly it will be eight at the start—about the payments that they will receive or make to central government. This will give them the strongest possible incentive to respond to business concerns, secure the necessary investment and increase their income through sustained growth.

I am sure that the noble Lord, Lord McKenzie, will recognise that, for these reasons, the Government cannot accept either of these amendments, and I hope that he is persuaded to withdraw Amendment 37 and not to move Amendment 38.

Baroness Donaghy: Will the Minister clarify her answer to the question asked by the noble Lord, Lord Shipley? She indicated that the system would not change. Is that the system of a couple of years ago or the system that seems to have been drifted into on student accommodation?

Baroness Hanham: It is as it pertains at the moment, which is that students are not charged council tax and the owner is not charged business tax. I think that is correct, and there is no intention to change that.

Lord Shipley: I should be very happy to have a written note about this prior to Report. It would help us enormously. The issue is that the exemption should be fully refunded to local authorities; as I understand it, in the past few years it has not been. It is becoming a problem for places that have large numbers of houses that are wholly exempt because they are wholly occupied by students. There is simply no income at all.

Baroness Hollis of Heigham: It would be very helpful if the Minister could clarify a position that is increasingly causing concern. There may be a house for students that is completely exempt from business rates and council tax. Then one of the students goes into a part-time job while continuing their degree. My understanding is that if the student’s income from their part-time work is above the threshold, that brings the whole property into council tax, although the student continues to be eligible for a single person discount. That seems to run directly against the concern about work incentives for universal credit and against

5 July 2012 : Column GC419

the need for students to find part-time work, given the increase in fees that they now have to meet for the first time. Will the Minister clarify whether this affects business rates or council tax?

3.45 pm

Baroness Hanham: My Lords, I will write to noble Lords on both those matters. Clearly there is a slight difference of emphasis and it would be more helpful if I wrote to the Committee.

Lord McKenzie of Luton: My Lords, I thank the Minister for her reply. Of course, we are in the Moses Room so I shall withdraw Amendment 37 and not move Amendment 38. Before I do so, I return to the issue of the baseline and needs and resources. Even if one accepts that the formulation used when setting the baseline is a fair and reasonable basis on which to do so, what evidence do the Government have to suggest that it is capable of holding in an appropriate way and that there will not be a divergence of needs and resources over seven years, 10 years or any other period?

Baroness Hanham: My Lords, when I was winding up I said that the Government would keep this under review and that, if there were a major change, the Government would be prepared to look at it on an individual authority basis within the local government finance settlements. Is that what the noble Lord, Lord McKenzie, is asking?

Lord McKenzie of Luton: In part it is. I can see that the Government might feel moved to adjust the formulation following a very significant change. However, we are talking about people’s lives here. Incremental changes to support can have a dramatic effect on them. I have looked at the impact assessment and the assessment of economic benefit, which was a fairly opaque document. I am trying to identify what work the Government have done so that we do not need to worry about resetting after three years, five years or any other period, and so that we are confident that, broadly, those parameters will hold over that period.

Baroness Hanham: I will let the noble Lord, Lord McKenzie, know. Whatever the calculation up to that point, the intention is to ensure that there is a settled time between resets in order to establish growth and benefits from that. I have said that a couple of times. The noble Lord will not expect me to answer now on all the calculations. I shall take a look and, if I can get further information for him, I will do so in due course.

Lord McKenzie of Luton: I am grateful for that and look forward to the further information. It seems that, in all this, the incentive effect takes priority over the needs issue, which is unfortunate. However, for the time being, I beg leave to withdraw the amendment.

Amendment 37 withdrawn.

Amendments 38 to 40 not moved.

5 July 2012 : Column GC420

Amendment 41

Moved by Lord McKenzie of Luton

41: Schedule 1, page 31, leave out lines 37 and 38

Lord McKenzie of Luton: My Lords, in moving Amendment 41, I shall also speak to our other amendments in this group, Amendments 42, 44, 45 and 45A. Amendment 41 is a probing amendment. It concerns regulations about the levy payment calculations. These can be made,

“by reference to such other factors as may be specified in the regulations”.

Will the Minister indicate the type of other factors that it is envisaged might feature?

Amendment 42 would require the Secretary of State to allow 28 days for representations to be made on the basis of the calculation and to implement a process for receiving representations. I am sure that there will be informal arrangements but there should be some formal process by which local authorities can challenge the calculation.

Amendment 44 requires a report to Parliament after three years. The Government have yet to conclude on the safety net but it could be something like a 7.5% to 10% reduction from baseline funding, which, as time goes by, other than being uprated by RPI, would become an increasingly distant figure. Can we have an update on the thinking and on what evidence will be used? A significant diminution in base funding for an authority could be cumulative and we would be very concerned about that. We have debated before a significant loss of the business rate base: we heard from the noble Lord, Lord Greaves, last week. Some of it might be involuntary because of major closures; some of it might be voluntary, such as the discouragement of major regeneration projects. We need a clear path to review how it is working, so we believe that a report to Parliament at three years to see how that safety net is operating is very important.

In similar vein, Amendment 45 seeks to put down some criteria and the need for an evidence base. I apologise for the late tabling of Amendment 45A; it just got stuck in the system. It is a probing amendment intended to focus on the cumulative impact of the safety net, particularly when local authority reserves are being depleted and, in any event, the Government are focusing on levels of reserves.

I have put my name to Amendment 46, which is in the name of the noble Lord, Lord Jenkin, who will perhaps talk to it if necessary. There is something of a hotchpotch of issues there but it is intended to be probing in order to understand issues concerning the levy concept. I beg to move.

Lord Jenkin of Roding: My Lords, this group includes Amendment 46 in my name, to which I am delighted to see the noble Lord, Lord McKenzie, has added his name. We come to this in a splendid example of a total coalition, if I may put it like that to my noble friend the Minister.

5 July 2012 : Column GC421

I will say a word about a special point that affects the City of London in a moment, but the point about Amendment 46 is that it is asking that volatility in local authority income due to rating appeals is formally recognised and “fully compensated”. The justice of this is self-evident. Under the current proposals for business rate retention, local authorities will be unable to benefit from business rate yield growth due to rental increases after revaluation. However, when it comes to reductions, local authorities are expected to manage and absorb funding volatility caused by rating appeals after revaluation, subject to the provisions of the safety net. Of course, volatility in funding will fall entirely on the local authority.

Just as with other matters of this kind, it is not within the control of local authorities because the rating revaluations are all done by the Valuation Office Agency, which is outwith local authority control, and yet the Bill is providing that local authorities must bear the risk. This seems unbalanced and unfair. If it is right one way, it must surely have the converse effect of being right the other way. I should be grateful to hear my noble friend’s answer to that.

Under the current proposals there is what London Councils describes as asymmetry—a view that I entirely endorse. It seems to me that they are wholly asymmetrical and that, in these circumstances, there must be some form of indemnity from the Government against significant VOA errors. Without this, local authorities will simply have to bear the whole risk, which could be quite substantial.

I give notice that the City corporation has raised with me a separate point on which it may wish somebody to table an amendment on Report. It is a slightly different point but it comes up under the same general issue. It is technically distinct from our proposal, which I have just described under Amendment 46; nevertheless, it seems to be in some way similar. Our Amendment 46 deals with appeals founded on some error by the VOA. The City’s difficulty concerns appeals or alterations founded on a subsequent change of circumstances—namely, for instance, a movement in the local property market that produces an oversupply of commercial property. They have had experience of this in the City. Of course, it does not affect just one office or one set of business premises; it affects them all at much the same time. Therefore, it could have quite a serious impact on the City and on other areas where there are high concentrations of high-yield commercial property.

Even after the dispute has been resolved, the refunds can be backdated for several years, which means that the local authority has to wait for them. Here again the argument should be that local authorities should not be exposed to this kind of risk, because the Government have already accepted that they are not to be exposed to bearing the risk of general movements in the local property market. If it is right there, why is the same argument not applied to movements due to appeals from the valuation office? I understand that it would be appropriate to raise a separate amendment if one was going to try to incorporate something in the Bill, so at this point I am just giving notice of this issue to my noble friend. However, I think that there is a

5 July 2012 : Column GC422

point on which she may wish to comment—she probably knows about this—as well as on what I would call the enlarged coalition proposal under Amendment 46 that the volatility of the ordinary valuation process should be borne by the Government and not by local authorities.

Lord Palmer of Childs Hill: I rise to make the coalition complete and show that it is indeed a multi-coalition point. My name appears on this amendment, as does that of my noble friend Lord Tope. Most of what I wanted to say has been covered by my noble friend Lord Jenkin. I just emphasise that the Valuation Office Agency is another separate body and that it will make decisions on appeals. It will decide whether there is any liability but local authorities will have to pick up the pieces. It seems that there is central government on one side and local authorities on the other. To my shame, I am not sure whether the Valuation Office Agency is still a part of HMRC but it certainly was as a valuation office. Local authorities will be caught between a rock and a hard place because things will happen that neither government nor local authorities will be involved with, and local authorities will then just pick up any compensation that might be needed. Although my noble friend Lord Jenkin widened it in many ways, so far as I can see, all the amendment is seeking is to ensure that losses due to appeals are fully compensated from the safety net. We believe that this would be fair and equitable for local authorities.

4 pm

Lord McKenzie of Luton: My Lords, I formally put on the record that I am pleased to be part of this expanded but temporary coalition. The case has been well made. The broader point that the noble Lord, Lord Jenkin, made is well worth pursuing, and I would be happy to talk to, and possibly again support, him and extend this coalition in those limited circumstances.

Baroness Hanham: If the noble Lord is going to join the coalition, why not from the Front Bench, given the way things are going?

This group of amendments presents a good opportunity to discuss the key element of the rates retention scheme; that is, the operation of the levy and the safety net. From the outset, we have signalled our intention that the rates retention scheme will include a safety net mechanism to protect local authorities from significant downward shocks to their income. We did so in recognition of the inherent volatility in the business rates system, to which my noble friend Lord Palmer has just referred, that can see rates income vary from year to year, principally because of appeals, to which the noble Earl, Lord Lytton, referred, which are generally out of the local authority’s control, or a sudden change in local economic circumstances as a result of, for example, the closure or relocation of a major business. The safety net will be funded by a levy on the disproportionate benefits that some authorities would otherwise experience simply because of their high initial business rates baseline. The detailed calculations required to determine whether a local authority is to make a levy payment or receive a safety net payment

5 July 2012 : Column GC423

and, if so, the amount of any such payments will be set out in regulations, which will be subject to the affirmative resolution procedure under paragraphs 20 and 23 of the schedule. In both cases, those regulations will need to set out the precise detail of what is to be measured and how it is to be measured, and the provisions in paragraphs 20 and 23 give the scope to be able to include all relevant items in defining income for the purposes of the calculations. Amendment 41, moved by the noble Lord, Lord McKenzie, seeks to remove some of that scope by removing the ability in regulations to make provision for the calculation of levy payments to be by reference to some factor other than retained business rates income.

I shall lay out how we think the calculations will work. The noble Lord, Lord McKenzie, will be aware that we intend to set a proportional levy at 1:1, which will mean that all authorities can expect to retain up to 1% growth in their baseline funding level for every 1% growth in their authority’s business rates baseline. This will require the authority’s retained rates income for the year to be compared with its baseline starting level. In other words, that is the rates income we initially calculated that the authority would collect—its business rates baseline—plus or minus any top-up or tariff before applying the levy rate to the difference between the two. The initial comparison or the application of the levy rate could be described as another factor.

We are also trying to create a legislative framework that will stand the test of time. Noble Lords have already referred to the need to keep the safety net under review, and we agree with that. A consequence of keeping it under review is that we may at some point in the future want to redefine how the safety net works and we may—who knows?—want to include a reference to other factors. If a future Government were to do that, they would, of course, have to get the agreement of Parliament to those changes through the affirmative resolution procedure, so the right level of scrutiny is clearly available.

There is no secret conspiracy here. We do not intend to take account of some other mysterious factors. The provisions as they stand simply enable the way the levy payments are to be calculated to be set out in regulations. It is true that they may also provide some flexibility, but we have no plans to do anything other than provide for a proportionate levy on retained business rates income, as I have set out.

I have more sympathy with the noble Lord’s Amendment 42—that must be the first time I have said that since we started.

Lord Jenkin of Roding: I should have come back sooner from the Chamber.

Baroness Hanham: Don’t get too excited. The amendment for which I have more sympathy, Amendment 42, seeks to ensure that there is a period during which authorities can challenge the calculation of the levy payment, but I do not believe that it is necessary to set that out in regulations. The basis of the calculations is, as I have explained, to be set out in regulations and local authorities will have ample opportunity to comment

5 July 2012 : Column GC424

on that. Individual calculations will be based on the information supplied to local authorities, so there should be no reason for the calculations to be wrong.

However, I appreciate that local authorities have concerns, as this is something that we have discussed in the working groups that we have with them. Although I am not convinced that a requirement in the Bill is appropriate or necessary, I shall take this away to give further consideration to how we might meet those concerns. That is my sympathetic bit.

Turning to the discussion on the safety net threshold, prompted by Amendments 43, 45 and 45A, noble Lords will be well aware that decisions about the levels of the safety net threshold and the levy ratio are very closely linked. They must balance a range of competing issues and they cannot be divorced. While the safety net needs to offer protection against significant shocks in the local rates base, as I mentioned earlier, it will be funded by other local authorities through the levy. Therefore, the levy ratio must be set at such a level as to generate sufficient income to fund demands on the safety net at the chosen support threshold. Equally, that level must be such that it continues to offer an incentive to authorities to pursue growth.

We have carefully considered all these issues and believe that the levy ratio at 1:1, together with the safety net support threshold in the range of 7.5% to 10% below baseline funding, offers the best combination on balance. We will be consulting local government over the summer before any final decisions are taken. Therefore, although I appreciate the intention behind the noble Lord’s amendments, I am not in a position to accept them.

I think that Amendment 44 tabled by the noble Lord, Lord McKenzie, is unnecessary. I understand his aim but he will no doubt appreciate that we will of course want to keep the operation of the safety net under constant review, particularly during the early years of the scheme. If we believe that it is not offering the right level of support, we will change it.

Finally, with Amendment 46 my noble friend Lord Jenkin seeks to ensure that provision is made for the effect of appeals on an authority’s income—a matter raised earlier by the noble Earl, Lord Lytton. We recognise that the impact of rating appeals on an authority’s income is outside the control of the authority but we do not believe that this amendment is the way to deal with it. Instead, as I have previously explained, we will be building two significant protections into the scheme. First, we will be reflecting appeal losses in the initial calculation of tariffs and top-ups. In other words, we will set the level of tariff or top-up as though authorities have collected less income from rates than is the case, recognising that over time they will lose some income on appeal. Generally, we have put in place the safety net so that, where authorities lose more on appeal than is allowed for in the initial calculation, they will be substantially protected through the safety net payments.

With those assurances, I hope that the noble Lord will feel able to withdraw his amendment.

Lord True: My Lords, I think I understood what my noble friend said and I am grateful for her generally positive response. However, I think I heard her say

5 July 2012 : Column GC425

that the high-income authorities will pay for the funding of the safety net. Of course, I do not know how a high- income authority is defined. If it is a tariff authority—and my authority expects to be a tariff authority—I have just given an example: one appeal has had the effect of knocking 4% off the overall business income. I do not expect the Minister to answer this point now but I hope that there is not an assumption that every tariff authority is necessarily able to bear that sort of short-term turbulence. I should just like to put that point on the record.

Baroness Hanham: Within that, the authorities that will pay the levy are those described as having a disproportionate increase. That is an authority that may have the ability to raise an enormous amount of new money. If the tariff is there and an income is not coming in or is dropping, you cannot be described as having a disproportionate income.

Lord True: I am grateful for that, but that is probably something better dealt with in correspondence. Is anyone from Westminster here? In short-term parlance, we all understand that Westminster is the kind of authority thought of as being disproportionate, with due respect to my friends in Westminster. Could officials let us know about that disproportionate definition tariff? Obviously, if the authority that has to finance the safety net should also be one of those gaining from it, we are in a slightly odd situation as I read it.

Baroness Hanham: I will write to the noble Lord. My understanding is that as long as you have sufficient income left as a tariff authority, you probably would not justify help from the safety net. It is for those who lose an enormous amount of income and are not able to cope with that because it is below the base line. None the less, I shall have the noble Lord written to about that.

Lord Jenkin of Roding: My Lords, I am grateful for what my noble friend said about looking again at the issue raised by Amendment 46, but I am not sure that I wholly understood. I do not want to anticipate the argument that we might have on any amendment that she might bring forward on Report, but I understood that she said that one thing that the Government might do would be to try to take into account the impact of appeals. Is that what she said? How can you know before the appeal has been heard? I just do not understand. It is just another estimate, whereas the amendment is looking for full compensation for that. I am not sure whether I have properly understood what my noble friend said in her earlier response.

Baroness Hanham: It must be extremely difficult to work out in advance how many appeals will be won or lost. There will be an assessment of what that will be and it will be taken into account at an early stage. The noble Lord is asking for full compensation on every appeal that is lost or won—if it were the other way round, we could take money back. At present, if it is likely that a lower amount of rates will be collected than expected because of outstanding appeals, that will be taken into account. That is some form of compensation, it seems to me.

5 July 2012 : Column GC426

Baroness Donaghy: May I ask for further clarification? The Minister indicated that the appeals losses would be included in the initial tariffs and top-ups. Obviously, one accepts, as she said, that you cannot give an accurate figure for something that will happen in the future. However, there must be some basis on which the assessment will be made. Will it be based on an average across the country of previous appeals under another system—a completely different system? Will it be based on a figure plucked from the air, or the rate of inflation? There has to be some understanding of how that assessment will be approached—some framework—even though, as we all know, you cannot forecast the future.

The Earl of Lytton: My Lords, before the Minister responds to that, we are in danger of losing sight of some of the basic geometry of what has happened here, which was alluded to by the noble Lord, Lord True. He talked about an event that caused the complete recalculation of a large part of the rate base for his authority. I have explained before that it customarily takes about two years from when you lodge an appeal against a non-domestic assessment before the valuation officer has the time to start discussions. That is not the time that it takes to get to the tribunal; that is the time in which you might get a substantive response. The time that it takes to get to an appeal may depend on various other things, including whether it is grouped with certain like matters.

4.15 pm

For the sake of example, let us suppose that it takes between two and a half and three years to get the result of an appeal—for a valuation tribunal to pronounce on the matter. Assuming that it does not go beyond that appeal to a higher tribunal, the recalculation can start and might go back many years, as the noble Lord, Lord True, said. Having done all this tariff business, if I may call it that, how many bits of recalculation will be spread over this timescale, which extends backwards as well as into the future? I fail to understand how this can be made to work. My simple arithmetic—I do not regard myself as terribly numerate—suggests that there are too many variables to call the outcome. It has to be simplified.

Lord Beecham: My Lords, we are talking about a safety net, but it seems that both the number of holes in that net and their size are to be estimated. It is quite a difficult position. The formulation of the noble Lord, Lord Jenkin, seems much more rooted in objective fact and would give a degree of certainty. Should the Minister not take this matter back for another look?

Baroness Hanham: My Lords, I am happy to do that. The historic figures, which will be used across the country, will be used as the basis of what we have been talking about. We can try to bottom out the detailed calculations between now and Report. It is probably more helpful if I write to Members of the Committee so that they can see what they are. However, the rates system is not new; we have had a system of business rates for ages. At least some of it will not change at all.

5 July 2012 : Column GC427

There have been rates and appeals for all that time. There is not a huge difference in the mechanism but the results may be slightly different. I will write to noble Lords about that as well; it will be a long letter.

Lord McKenzie of Luton: My Lords, I thank the noble Baroness again for her responses to these amendments. She said that business rates have been with us for a long time. They have but what is before us is a fundamental change in which risk moves from central government to local authorities. It is a lot of risk for local authorities. Like a number of noble Lords who have spoken, I understand that something is embedded in the baseline figures, but I am not convinced that that fundamentally deals with the ongoing problem that the noble Lord, Lord Jenkin, has outlined. Like the noble Lord and others, I will read the record on that. I am sure that it is something to which we shall return.

I was on the point of being overjoyed by the Minister’s response to Amendment 42 but was less so when she was not able to accept it. However, I am grateful that at least the spirit of the amendment is alive and that it will be taken away for further consideration.

On Amendment 44, I accept that there will be ongoing routine monitoring and assessment of how the safety net will work. That is not inconsistent with there being some formal report to Parliament on how it has worked and what its effects will be. We will certainly wish to return to it on Report. In the mean time, I beg leave to withdraw the amendment.

Amendment 41 withdrawn.

Amendments 42 to 46 not moved.

Amendment 47

Moved by Lord Jenkin of Roding

47: Schedule 1, page 36, leave out lines 25 to 31 and insert—

“(2) Before making such a determination, the Secretary of State must consult such relevant authorities and bodies representing relevant authorities as the Secretary of State thinks appropriate about whether the Secretary of State should make such a determination.

(3) If, following consultation under sub-paragraph (1), the Secretary of State determines that the amount referred to in sub-paragraph (1) is to be distributed among one or more relevant authorities, the distribution may not be made unless—

(a) the basis on which the Secretary of State intends to make the distribution (“the basis of distribution”) is specified in the local government finance report for the year in question, and

(b) the report is approved by a resolution of the House of Commons.

(3A) If a report is approved by resolution of the House of Commons under sub-paragraph (3)(b), the Secretary of State must calculate what amount (if any) fails to be paid to each relevant authority as its share of the amount referred to in sub-paragraph (1).”

Lord Jenkin of Roding: We now turn to the issue of the distribution of the remaining balance of the levy fund, which comes on page 36 of the Bill. As the Bill currently stands, it is entirely up to the Secretary of State to decide how that is going to be done: whether it

5 July 2012 : Column GC428

is going to be rolled over or distributed to local authorities. Amendments 47 and 48 propose that this should be a matter of consultation between the local authorities and the Government, and then be subject to approval by Parliament via the local government finance report. Without that, there is no way for Parliament to exercise any control over the distribution of the levy, which could be quite a significant sum at the end of the period to which it applies.

The logic of the system that the Government are introducing is that it is local government money. It should therefore be returned to the local authorities and not be the subject of a further centralisation of control by the department. It is the old question and the department seems to want to retain overall control over the decision as to whether the balance should be rolled over or distributed, whereas in accordance with any sort of localism agenda it should be recognised that it is local government money and it is for local government to decide what should happen. At least it should be the subject of consultation, as the amendment provides, and then be dealt with subsequently in the local government finance report and so be within the control of Parliament. I hope that my noble friend will be able to see the sense of that and how it is in accordance with the Government’s overall policy of localism. I beg to move.

Lord McKenzie of Luton: My Lords, I have added my name to Amendments 47 and 48 and wholeheartedly support the proposition that has been argued by the noble Lord, Lord Jenkin. There is nothing more to say on that matter.

The noble Lord, Lord Beecham, and I also have Amendment 49 in this group, which is a bit of a failsafe proposal. It says:

“Should any part of a balance on a levy account for any year remain undistributed after 3 years from the end of that year, the Secretary of State shall report to Parliament on the reasons therefore”.

If it is accumulating over that period, there is real cause for concern. This is an added protection and certainly does not displace the propositions in the earlier two amendments.

Lord Palmer of Childs Hill: My Lords, the noble Lord, Lord Jenkin, has covered most of this but I wish to add a few words on Amendment 47. This ensures that the Secretary of State must consult on whether the remaining balance on the levy account is redistributed to local government or rolled over to the following year. I really feel that this amendment is trying to prevent this legislation from resembling the National Lottery, where if someone does not win a prize it is rolled over to the next round. Here, instead of there being a balance that is distributed to the people whence it came, we are suggesting that it is rolled over to the next lot of recipients in some lottery-type arrangement. All this amendment is trying to do is to limit the levy to the period to which it relates and to those who have contributed to the levy within that period.

Baroness Hanham: My Lords, we are in danger of amending the amended. These clauses were amended in the other place as a result of some of the concerns there. These amendments would reverse changes to the

5 July 2012 : Column GC429

way that the Government distributes surplus levy income that were made in the other place. I recognise the noble Lord’s intentions in tabling these amendments—indeed they reflect much of the Government’s proposed process for distributing the levy surplus when we first introduced the Bill in the other place. However, as the Bill was amended to meet concerns raised there, I cannot accept these amendments. We have said that any surplus levy income that is not needed to fund the safety net will be distributed back to local authorities. We will not simply hold larger and larger surpluses.

Amendments 47 and 48 propose that the Secretary of State should consult with relevant authorities in advance of determining how much levy surplus should be distributed back to local authorities and set out the basis of distribution of levy surplus in the annual local government finance report. Although I sympathise with the intentions behind these amendments, setting out the distribution of any levy surplus through the local government finance report rather than through regulations is not the best approach. In fact, there are unintended consequences of this approach, in particular for the timings of payments to distribute the levy surplus.

When the Bill was discussed in Committee in the other place, concern was raised that the proposed process for distributing surplus levy was a bit long-winded. Setting out the basis of distribution through the local government finance report would mean that even when the Government had taken a decision to distribute some or all of any surplus back to local government, authorities would have to wait six months to a year before they saw the money. As a result of that, the Government agreed to look into speeding up the distribution and therefore amended the Bill—which is how it stands now—so that the process for distributing levy surplus, and the basis of that distribution, could be set out in regulations, ensuring that the payments can be made immediately after the decision to make them is taken.

Furthermore, to provide appropriate parliamentary oversight, the Government ensured the regulations would be subject to the affirmative procedure and hence subject to the approval of both Houses of Parliament. Regulations will need to be in place well in advance of any levy surplus being distributed, so authorities will have the certainty that the noble Lord is seeking. Once the regulations are in place, they will have this certainty each and every year until and unless they are revoked.

Amendment 49 requires the Secretary of State to report to Parliament the reasons why any remaining balance of the levy account has not been redistributed within three years. Again, although I recognise the intention behind this amendment, I do not believe it to be necessary. I reiterate that it has always been the Government’s default position not to hold back excessive amounts of surplus levy. The levy account will also operate with a high degree of transparency—the payments made both to and from this account will be easy to identify, as will the overall balance. Furthermore, the Comptroller and Auditor-General will report on the account and lay this report before Parliament in the same way as he currently does in the report entitled

5 July 2012 : Column GC430

Pooling of N

on-

Domestic Rates and Redistribution to Local A

uthorities in Englan

d

. This will provide Parliament with adequate opportunity to raise the issue of the levy balance, if required, through the normal processes.

On the basis of these arguments and the fact that this has already been amended, I hope that noble Lords will not press their amendments.

The Earl of Lytton: My Lords, apart from the redistribution of this levy to local authorities, it remains the case that it is funded by what is paid by businesses on their non-domestic premises. I simply wish to have an assurance from the Minister that under no circumstances could this be used or treated as any sort of contingency fund to overcome inherent deficiencies and time lags in the system. As I have previously pointed out in the context of this Bill, non-domestic ratepayers are getting a bit of a raw deal in terms of what they pay per square foot by comparison to other contributors to local government finances. Their values are based on 2008 antecedent valuation date figures, for which they are paying ever more through the processes of transition, in circumstances where their own economic situation is increasingly challenged. Furthermore, I believe that the Valuation Office Agency has admitted that there is an element in the national non-domestic multiplier for losses and adjustments resulting from appeals.

4.30 pm

There is only one adjustment that can be made in such circumstances and that is an adjustment for a decrease in the amount of the tax base. That is the only way that the Valuation Office Agency or the Treasury can envisage such an adjustment. So businesses are paying already for an inherent error factor in the system. It would be quite wrong for me, with my associations with businesses and with the profession of valuation—which is so much at the heart of a substantial outgoing for businesses—if I did not get up and flag up that particular point because at each stage there is going to be some fund that might be redistributed or some element built in as a contingency figure, and increasing numbers of business ratepayers will start to rebel and make common cause about what starts to look like an iniquity. I am asking for some reassurance from the Minister on that particular point. On the levy side, this cannot be used as any sort of contingency fund to add to the ones that already seem to be built into the system.

Baroness Hanham: My Lords, I have already said that if there is a surplus on the levy it will be redistributed to local authorities as soon as possible and in agreement with them. So I do not think that the noble Lord’s comments are valuable at this point. There is a very straightforward intention here. The levy that arrives from a surplus of growth within some local authorities, if there is an excess of it, is distributed back. I must say to the noble Lord that I have 30 pages of response to amendments that he has put down on all these matters, so perhaps we could deal with them all at that stage.

5 July 2012 : Column GC431

Lord Jenkin of Roding: My Lords, I listened to my noble friend with care. Due to the extraneous noise overhead, I am not sure that I heard it all. This Room is rather vulnerable to the helicopters flying overhead. I got the impression that she feels that there is merit in what we are saying and that she understands that her regulations will in fact deal with it. Would that be a fair summary?

Baroness Hanham: I am happy that the changes that were made in the other place will ensure that the levy is redistributed as quickly as possible, in consultation with local government, and that will be laid out in regulations.

Lord Jenkin of Roding: Indeed, if that is going to happen, that is not unsatisfactory.

Can I have an assurance that the regulations that this clause provides for will be available by the time we get to Report?

Baroness Hanham: We have said that we will have all regulations available before we meet again.

Lord Jenkin of Roding: In those circumstances, I hope that my noble friends in the expanded coalition will agree that I withdraw the amendment.

Amendment 47 withdrawn.

Amendments 48 and 49 not moved.

Amendment 50

Moved by Baroness Kramer

50: Schedule 1, page 42, line 21, at beginning insert “The Secretary of State may provide for the designation of areas in which certain non-domestic revenues shall be ring fenced to support infrastructure investment financed using tax increment finance and other mechanisms, and in order to do so”

Baroness Kramer: In moving this amendment, I shall speak also to Amendments 51, 52 and 53. The amendment is in my name and that of my noble friend Lord Tope, but I hope that there is broad sentiment around many of the issues that these amendments contain.

The amendments address tax increment financing. For anyone who remains in doubt, and I know that most here are well aware, tax increment financing is simply a mechanism for using future increases in business rates generated by a project, such as new infrastructure, to finance that project in the first place. In other words, it allows a local authority to trade in future taxation income for the present benefit that will create that taxation stream.

As many noble Lords are aware, this is a mechanism commonly used in the United States, where it has provided extensively for the regeneration of communities, but it dates back to Victorian times in our own country and similar kinds of mechanisms effectively created many of our great cities. It is very British at its core. We are all delighted to see this come back into the framework of local government thinking, but we would

5 July 2012 : Column GC432

also like to see it come into the real economy in an effective way—in fact as well as in framework and description. That is why I tabled these amendments.

Amendment 50 is relatively straightforward and effectively puts tax increment financing into the Bill. It is beyond most of us to understand why it is not there in the first place, particularly when the Chancellor in his Budget referred to TIF, its acronym, frequently and in virtually every debate uses the phrase “tax increment financing”. For the sake of clarity, for goodness’ sake let us deal with that and make sure it is in the Bill itself.

Amendment 51 goes to more substantial issues. Many of us who are concerned about local government and about the broader economy have been looking to TIF as a way to finance much needed infrastructure, particularly in the cities that are the engines of the economy. This comes at a time when the nation needs growth above all things. We are also aware—and anyone can look at today’s Financial Times—that the Government have found it exceedingly difficult to package together infrastructure financing. All of that makes TIF more important.

It is of great concern that the Chancellor has, in effect, capped large projects or TIF 2—I was not going to address TIF 1 very much—at £160 million. Indeed, the Minister will be far better aware than I am of the many applications from the core cities. She will know if there are good quality infrastructure projects that could and should be funded by TIF that exceed that £160 million figure. I do not have any insider knowledge, but I would be stunned if that were not true. A PwC study not that long ago showed that something like double that could be put in train in one year although it would take many years to work its way through. The demand and need are clearly there.

In addition, volume matters in order to create a market. I return to the point that the FT makes about the difficulty of accessing the financial markets for infrastructure finance. Numbers such as £160 million are frankly not worth the candle as far as the financial markets are concerned. To develop the expertise, achieve the understanding, get mastery over the rules and legislation and then go out and build the investor base that will buy, there is a need for a steady stream of substantial projects, not just in year one but going on year after year, to create and build up a market.

We know that the financial markets can absorb this kind of financing because they do it for the US. British banks as well as American banks do it for US cities. Continental banks are doing it for the US and the continent. In other words, there are many players, but they will not do the work, engage themselves in the process and deliver the financing if they are only going to get a trickle. They need a proper volume. On the one hand, we have projects that are positive for the economy and on the other hand we have a mechanism that can fund them and the goal of these amendments is to help the Government to bring these two together.

We recognise that behind much of the Treasury’s resistance to allowing projects beyond a cost of £160 million is the notion that TIF funding will have to be added to the numbers for the deficit. I think that that is highly questionable and many others would

5 July 2012 : Column GC433

consider it to be so. If PFI funding was off books, then, my goodness, this funding is far more off books because you are generating a project whose cash flow returns paid for the project in the first place. It is an absolutely classic example of off-balance-sheet financing. Indeed, it is far less risky than something such as PFI, which included all kinds of variants and complications, whereas, almost by definition, TIF draws together the immediate focus of the initial investment and the tax revenue generated over the life of a project. That link is immediate and direct, whereas it was much more obtuse and diffused with PFI.

As I look at the accounting standards, I wonder whether enterprise zones are being treated differently, even though their financing mechanism is essentially identical. This is something that I do not know the answer to; we asked, but have not received an answer. Are they getting different accounting treatment? If they are, that simply underscores the point.

The amendment provides,

“that any indebtedness incurred against such amount shall not be treated as a liability of the public sector through adjustments to the Accounts and Audit Regulations made under section 27 of the Audit Commission Act 1998”.

When the Minister was kind enough to invite Members from all sides to have discussions with the Bill team about a range of issues in the Bill, I asked whether some justification could be provided for this accounting approach versus forms of accounting used for PFI and enterprise zones. I do not know whether it has been possible to develop that. I also asked whether the Government have talked to the financial markets to understand what needs to be put in place for these to run as live, rather than theoretical, projects. Going back to the FT article, we have a real problem with the gap between theory and practice, but we have an opportunity to close it in this Bill.

The other two amendments follow on quite closely. With regard to Amendment 52, perhaps someone can explain to me why we have to have a specific date on which designation takes place—the first day of a year, or whatever it is. That is completely beyond me. I think that Amendment 52 is just a bit of good sense.

Amendment 53 is another way of approaching this issue. It essentially says to the Treasury that the way to make a decision about whether to do TIF financing is to look at the individual project proposed, decide whether it is a damned good project that needs to be done and can be paid for in the way proposed, and, if it passes the various tests and criteria, authorise it. It takes away the need to set a fixed ceiling and allows the Treasury to make intelligent decisions about the projects that come before it, judging them on their individual merit. At the same time, the Treasury is in a position to look at the overall economy and public finances. That would allow an intelligent, customised approach to these kinds of projects. None of this tackles TIF 1—an area I wish the Government would look at again. However, we talked about that at Second Reading. I beg to move.

4.45 pm

Lord Best: My Lords, I support the amendments in this group. The British Property Federation has said that it and others have been deeply frustrated by the

5 July 2012 : Column GC434

way in which a policy that could have been a significant driver of growth and urban renewal has been watered down to such an extent that it will have very little impact. It seems a real shame. TIFs could be such a valuable mechanism in helping local authorities to play a really serious part in achieving local economic recovery and growth. The disappointment is that the Government are planning to control so strictly the numbers of these projects that could be encouraged by being outside the business rates growth levy or the proposed business rate system resets.

I can suggest reasons why TIFs are necessary and useful. The first is that they will help the construction industry, which is in a very bad state—the worst position it has been in for several decades—to become the engine of growth that takes us out of recession once again. We need the construction industry, and it needs the boost that TIFs could bring. Specifically in relation to housing—my pet interest—TIFs would not fund any new housing development, but they could fund the infrastructure that supports and surrounds such developments. I chaired the LGA/DCLG commission on ways in which local authorities could ease housing shortages, and I was struck by how there is synergy between what TIFs can do and easing housing shortages. A housing development can so often not go ahead because the infrastructure scheme that would surround it cannot be financed. I saw a major site, a large site of derelict land in the London Borough of Newham, which needs a big bridge built to bring it to life and enable it to be regenerated for housing, offices and commercial developments. It needed a TIF infrastructure scheme to get it going, but it would pay for itself over a period.

Then there are benefits to central government: higher stamp duty revenues resulting from rising property values—I am trying to appeal to Treasury self-interest here—higher income tax and higher corporate tax due to the increase in economic activity. Then there are savings to central government as people would get jobs and no longer require the social and health benefits they were receiving and there are the social benefits of regeneration. All these things flow from getting this sorted.

As I understand it, what is worrying the Treasury is that TIF funding goes straight on to the national debt. It is counted as being part of public expenditure because local authorities are at the heart of it. If housing associations were the ones doing the borrowing—they could not possibly be—it would not count at all. It is because local authorities are there in the middle of this arrangement that the Treasury finds reasons to block this, other than on a very modest scale— £160 million is not going to get us going. This is a self-inflicted punishment that the Treasury is insisting upon because it is not commonplace in other countries to regard as public expenditure prudential borrowing that is going to be repaid out of a flow of income that is predetermined, clear and visible. The Treasury has decided this, and it could undecide it without troubling any European agreements. I think the anxiety is that the international banking community will say, “They are changing the rules in the United Kingdom. This will scare the international financiers. The UK is up to something with these new TIFs”. I think the international

5 July 2012 : Column GC435

banking community would like to see the UK economy getting stronger and things happening and moving forward. I do not think that the Treasury is right in holding the line on its definition, which is contrary, for example, to the definition of public expenditure in Germany, France or Holland.

It would seem entirely sensible for the Government to adopt a lighter-touch approach in relation to the approval of potential TIF projects under option 2, enabling TIFs to be a really significant mechanism for investment with minimal bureaucratic interference.

Lord Shipley: My Lords, may I add some further remarks about tax increment financing and say how much I agree with all the comments so far on this set of amendments? For several years, I have been absolutely convinced of the importance of tax increment financing for driving cities. In recent months, I have assisted as an adviser to the Government on their cities policy; I declare that interest. This derives from being convinced by the group of eight English core cities and their secretariat, when I was leader of Newcastle City Council, that tax increment financing potentially unlocked growth in a way that conventional capital infrastructure funding schemes did not and could not. I am particularly struck by devolution in Scotland having led to there being, in various states of preparedness, some six tax increment financing schemes on the drawing board.

The importance of this has been exceedingly well explained so far but it really matters financially. This is not just about business rates; it is about other taxes, too. Once growth in building and development happens, other taxes will follow. For example, there will be stamp duty, income tax, VAT and corporate tax revenues, all of which enable the Government to gain from growth in the country generally.

The PricewaterhouseCoopers 2008 report made absolutely clear the potential for the UK here. It drew on 40 years of US evidence and made it clear that this could be replicated in the United Kingdom. Many professional bodies—this is not just a matter for local government—now say that tax increment financing is now a thing for the future and that we must just do it. However, delivering it means that the reins must be loosened by the Treasury. First, TIF should not be treated as an in-year spending decision. Secondly, the Treasury should not place an arbitrary limit on the number of schemes permitted each year. Its consent should apply to all those schemes that meet the criteria. Thirdly, there must be longer periods, of up to 25 years, over which debt can be repaid because investment requires certainty of income for investors. Therefore, TIF cannot just be prudential borrowing with resets. For many potential schemes, 10 years—or seven in the first instance—will not be enough.

I have shared the concerns of such organisations as the British Property Federation and many others, which all urge the Government to look again at tax increment financing to understand its potential for growth, and to encourage the private and public sectors, working in partnership, to make sure that growth can be delivered. It is through growth that government spending can be maintained at its current levels.

5 July 2012 : Column GC436

Lord Jenkin of Roding: My Lords, I shall add a word or two on this, about which I spoke briefly at Second Reading. I agree entirely with the arguments that have been put forward so far. The speech of the noble Lord, Lord Best, was extremely clear and he made his point with great force.

We have been here before. I introduced in the House of Lords a Private Member’s Bill on business improvement districts, or BIDs. That was based on a precedent from the United States, as is TIF. We got it right though the House of Lords but the previous Government found no time for it in the Commons, so it failed. Two years later, a Bill was introduced by the Government, which the noble Lord, Lord Rooker, presented with enormous pride, saying, “Look at what we’re doing”. It was my Bill, almost word for word, but the noble Lord, Lord Rooker, whom I have known for some time and for whom I have great regard, did not acknowledge that fact at all. I took the view that I was not prepared to make a fuss. The fact is that I was pleased to see BIDs reach the statute book, and they have been quite effective so far, so one has seen this happen.

I have some sympathy for my noble friend at the Dispatch Box, but of course the person who ought to be answering these arguments is my right honourable friend the Chief Secretary to the Treasury, Danny Alexander. That is part of our system. I have been the Chief Secretary so I know and understand the system, which is extraordinarily advantageous to Treasury Ministers. They make the operational department answer all the arguments that are put up. The most we can expect from my noble friend on this is if she says that she is impressed by the strength of the arguments and that she will prevail upon her Secretary of State to have another go at the Treasury. The fact that the Treasury is proposing to treat this simply as an addition to the borrowing requirement in the year in which it is spent is, as the noble Lord, Lord Best, and others have made clear, to ignore totally the reality of what a TIF is. It is not just spending in the year; it uses the prospective revenue from additional business rate income in order to raise a loan which can then be used for infrastructure projects. Many examples could be given, such as money being spent on a housing estate, roads and so on.

That is what everyone expected would happen. When we heard the announcement back in 2010 by the Deputy Prime Minister, enormous hopes were raised. I would suggest that the Chief Secretary to the Treasury might be invited to answer why those hopes have not been met. As I say, I have some sympathy for my noble friend because there is nothing she can do about it except to go back to the Secretary of State and have another go by bearding the Treasury and saying, “Look, this is not a tenable argument. It has to be made to work”.

After all, the Government have made a great song and dance about how one of the ways we can secure economic growth is by investing in our infrastructure. Some very large schemes have been put forward on that basis in the hope that they will be funded by the private sector or even from inward investment. A few hours ago I was discussing foreign direct investment in the Chamber, and this is the same issue. If one can

5 July 2012 : Column GC437

borrow money in order to be able to develop infrastructure in this country, one is creating jobs and building in growth, which is what we all want to see. What is in the Bill—simply having TIF 1 and TIF 2—is what I would say advisedly is simply a form of emasculation. I quoted at Second Reading the view of one of the local authority associations. It has looked at this carefully and does not think it adds anything that will be of any use to anybody. It pains me to have to say this to my noble friend, but I would ask her to go back to the department to say, “We cannot defend this. The arguments are overwhelming and we must look at it again”. Otherwise I suspect that we shall be asking the House to accept amendments on Report perhaps along the lines of those put forward by my noble friend Lord Tope and the noble Baroness, Lady Kramer, tabled today. Again, I feel very strongly about this and share their views absolutely, so I hope that my noble friend may be able to respond.

The Earl of Lytton: My Lords, unlike my noble friend Lord Best and the noble Baroness, Lady Kramer, I am not an expert on TIF, but I can relate to this process, having been involved with development schemes in one form or another. I understand the principle behind this and I strongly support it. I feel like something of a spoilsport in view of what has been said because I have just one slight concern. In normal circumstances if one was looking forward to steady and progressive growth, one would say, “Let’s do it”. However, the information that I have had has indicated that one or two municipalities in the United States have suffered from solvency problems after getting themselves involved in these things because of a larger-scale downturn that was beyond their or probably anybody else’s control. I could understand a Treasury reticence about opening what it might see as a floodgate if it felt that we were in sufficiently uncertain times—and I believe that we are in quite uncertain times—and that, as a long-term punt, it could not foresee a guarantee of growth that would pay that back.

There are many instances right across London. I go back to the early days, when Canary Wharf was being developed. One of the problems that it hit was that, at that time, it could not finance the Jubilee line extension. In effect, it caused the developer to become insolvent. If you imagine that being done on a municipal scale, then obviously it is a very significant issue. The guarantees are not built in. I do not think that any of us would want to find that municipalities involved in TIF schemes would become insolvent. I am sure that there must be safeguards.

5 pm

Baroness Kramer: I will just add a word because the points that the noble Earl, Lord Lytton, makes are important. One reason why we framed Amendment 53 as we did is so that the Treasury can take a look at projects. In the United States no federal approval takes place—essentially, it is the state that decides off its own bat. In the UK, we are saying to the Treasury, “We are not going to just say to local authorities, ‘Do as you will’”. The Treasury has the opportunity to come in and take a serious look and will give permission, but on a project-by-project basis.

5 July 2012 : Column GC438

I was on the board of Transport for London after the Jubilee line was completed. The point the noble Earl makes is the reverse one, and the Jubilee line is an ideal example. Even with overruns, the Government put in something like £3.5 billion to build it and developers walked off with something in excess of £30 billion in profit because of the increased values around the various stations, extra rents, land prices and whatever else. At least now, with the opportunity to capture increased business rates, we can get some of that money in to create the project in the first place.

In effect, what happened in London was that the money did not circulate back and the whole Jubilee line project was delayed for years until the Government thought that they could find capacity within the public accounts. It would have happened immediately, and been of great benefit to this country, if people had been looking at TIF financing structures. That is one of the reasons why they are so valuable.

The Earl of Lytton: My Lords, that was what I was trying to say in terms of the Jubilee line, so I am sorry if I gave a false impression. These things are vitally important to leverage in that sort of level of finance. My only concerns are the times we live in. If one is dealing with a development appraisal in conventional valuation terms, the process contains a high number of price-sensitive variables, so much so that my professional body, the Royal Institution of Chartered Surveyors, does not really advise using that sort of development appraisal, or residual valuation, approach for producing what it calls a regulated purpose valuation because of the inherent number of price-sensitive variables. I do not want to pour cold water on things—I simply wanted to point out that TIF is a tremendously good idea but we must make sure that the circumstances are ones in which it can robustly survive.

Lord Beecham: My Lords, having spent some considerable time searching through the Bill to find where TIF was, I have to congratulate the noble Baroness on discovering it. It is a bit like Higgs boson. The physicist who discovered the Higgs boson will no doubt get the Nobel Prize for Physics. Perhaps we should nominate the noble Baroness for the Nobel Prize for political metaphysics.

Lord Jenkin of Roding: One might also congratulate the House of Lords Library on a very splendid section about TIF in its briefing pack for this Bill. It, too, had to say that TIF was not mentioned in the Bill at all. That point is enormously well made.

Lord Beecham: I reiterate my congratulations to the noble Baroness—and indeed the House of Lords Library.

The noble Baroness was rightly critical of some of the aspects of the public finance initiative with which she lived for around 20 years. I was with an LGA delegation on one of our rare visits to 10 Downing Street when we met the then Prime Minister, John Major, at the very beginning of this process. Of course, it has been adopted by successive Governments with considerable enthusiasm. But it always struck me that, whereas there was a good case for that kind of scheme where you could see a revenue stream, there was very little case where there was not a revenue stream. Schools and hospitals, for example, could not be allowed to

5 July 2012 : Column GC439

close or fail, so there did not seem to be a chance of risk-classing in those sorts of cases, whereas on a more commercial basis it seemed quite appropriate. This, arguably, is a better version of PFI.

Of course, as the noble Baroness said, TIF derives from America, where they have other forms of municipal financing, such as bond issues. At some point we might want to look again at those as opposed to this particular scheme, which is analogous in some respects but tied more particularly to specific projects. There are certainly distinct advantages to this. I note the point that the noble Baroness, Lady Kramer, made about the relationship with enterprise zones. I hesitate to raise—for the fourth or fifth time—the question of enterprise zones and their relationship to various aspects of this Bill. I hope that I will have a reply to some of my previous questions, but I join the noble Baroness in asking about the relationship of enterprise zones to the TIF programme.

I am intrigued by Amendment 51, which seeks to avoid the trap of any such financing being regarded as part of what we used to call PSBR—now debt—and takes it off balance sheet. It seems such a simple solution that I wonder why it has not been adopted before, perhaps in relation to other matters. I hope that it stands up; it would be good if it did. If it does, I think we would be in a similar position to that of former Labour Ministers in 1931, when the incoming Government went off the gold standard and they said, “They didn’t tell us we could do that”. If this proves to be a viable mechanism, I hope that it will have a wider application, and indeed it might.

The noble Lord, Lord Best, referred to his special field of expertise, housing, and rightly pointed out that the schemes will not be available to support housing but will be available to support infrastructure. There are two aspects to that. First, there is surely another way of promoting housing construction. If the Bank of England is going to pump endless billions into the vaults of our esteemed banks, would it not be better to pump that money directly into housing construction? This would have precisely the same effects on the economy that the noble Baroness has alluded to: the net cost after you take off the savings to the benefits system—increased tax income from corporate tax and the like—would be less than the amount devoted. You would have assets on the balance sheet—this is not money for current expenditure—and that might be a way forward. I suppose that is not really within the province of the Local Government Finance Bill, but it raises the question of TIF and its use for infrastructure.

As I understand it, the Government have been looking for investment in infrastructure from pension funds and the like. I recall a recent report, although I cannot remember whether it was produced by the National Association of Pension Funds or the IFS, which indicated that there was little interest thus far in such funding from those sources, whereas this offers a clearer route to making rather more rapid progress, and I very much hope that it will be pursued.

Nevertheless, there are some potential flaws in the present proposals. In particular, the amount allocated— I think the noble Baroness said £160 million although

5 July 2012 : Column GC440

I thought it was £150 million, but it is in that region—is pitiful, as she rightly said. I do not know whether yesterday’s “city deal” announcement dealt with this £150 million or £160 million—whatever the figure is—which I thought was to be allocated to the authorities involved in that city deal but, if so, however it is divided up, it is a very small amount indeed and will do very little. Even in a single authority, it would not do an enormous amount. Spread across eight authorities, it would do very little. I hope that this is seen as a first instalment and that the process will go on to much larger sums in future, and rapidly, if we are to see a real impact on the present situation in the economy.

TIF 1 also has its problems because, as the noble Lord, Lord Shipley, and the noble Baroness, Lady Donaghy, pointed out, the restrictions seem to be quite perverse. The timescale for repayment is particularly so because, if there are to be resets and so on, nobody is going to be taking on large sums that have to be repaid in a very short time, as the noble Lord, Lord Shipley, rightly said. Indeed, lenders may very well be reluctant to lend over those times. I entirely concur with the view expressed by the noble Lord, Lord Shipley, that it is ridiculous to have an absolute limit and for there to be a cap on expenditure in the first year. On the contrary, I would have thought the more the better to get the thing moving in the early stage.

We certainly approve of the concept and hope it can be made user-friendly, if I can put it that way, to lenders and authorities. These amendments certainly go some way to taking us in that direction. Again, the noble Lord, Lord Jenkin, is quite right. We cannot expect too much of the Minister in replying today, unless she has somehow received a blank cheque from the Treasury, which would be a first. I am sure she will report back the strength of feeling among people with considerable expertise in these matters, whether ministerial or professional, and we might see some improvement.

On Report, it would be helpful to have explicit reference to the scheme in the Bill. It has to be very clear what we are talking about and whether there are to be any changes in the scheme as adumbrated so far. It is clear that this is not going to be a panacea. It will not do everything, but it would be a welcome extra tool for local government, which is perfectly capable of using it effectively, as it has demonstrated for generations. It can and does play a significant part in regeneration, very often in partnership with the private sector. I very much look forward to the day when local authorities can get on with schemes under the aegis of TIF—however it eventually emerges from this Bill—and, perhaps, other measures.

I note that Scotland seems to have jumped the gun. That is interesting because presumably—certainly in the present state of affairs—what happens there would impinge upon the national UK debt. Sitting where the noble Lord, Lord Shipley, and I sit, just over the border, it would be extremely irritating if it were found that Scotland was able to do a great deal and we in the north-east were not. Of course, the same would go for many other parts of the country where there is huge need and demand for investment of this kind, and for the contribution that that could make to the economy.

5 July 2012 : Column GC441

I certainly commend these amendments, and I hope that the Government in one form or another can look sympathetically at them and address the very legitimate concerns that have been raised in order to make a good policy work effectively, which is what we must all seek.

5.15 pm

Baroness Hanham: My Lords, this has been, as I thought it would be, a very interesting debate. I am not necessarily going to be able to give noble Lords all the enthusiastic encouragement that they look for but there is no doubt that this is something that will generate more discussion, and I accept that.

I know from the noble Baroness’s Amendment 51 that there has been a search for the words “TIF” and “enterprise zones” to be spelt out in the Bill. They are not specifically identified but I assure the Committee that the provisions under paragraph 37 of new Schedule 7B deliver both TIF 2 and enterprise zones. An amendment that names TIF in the Bill is therefore unnecessary.

Before turning to the substance of the amendments, I want to say that it has been interesting that the whole discussion has been on the basis of TIF 2 and none of it on TIF 1. I need to point out that the measures in the Bill relate to TIF 1, TIF 2 and enterprise zones. For the benefit of the record, I think that at some stage we need to spell out what TIF amounts to.

However, we want to clarify the position and remove misunderstandings about what is possible or not possible within the policy. I think it would be fair to say that noble Lords have not really acknowledged that, as a result of the Bill, all local authorities will have unfettered access to a share of business rate growth to increase their potential borrowing. As things stand at the moment, under TIF 1 it will be possible for local authorities to undertake developments unfettered. They can do so with their normal prudential borrowing.

TIF 1 rests wholly within the business rate retention scheme and the core feature of the rates retention system, including the levy and reset. Beyond that, the Government will not impose any further constraints, and local authorities will be able to get on with it. I know that the criticism has been—

Baroness Kramer: We did not raise TIF 1 here because it is more of a reset issue, but will the Minister acknowledge that, with the way the reset works, the capacity to do TIF 1 will be exceedingly limited because the whole project has to go from conception to completion and complete repayment within a very narrow reset period? The consequence is that certainly by year two or year three it will be absolutely impossible to raise the financing because nobody will have any certainty that there will be a flow of business rates beyond the end of the reset date to complete the payment cycle. Perhaps the Minister will acknowledge that it is a de minimis amendment. The language may not be de minimis but the effect of the way in which the reset period works makes it de minimis.

Baroness Hanham: I will persist with my view that there is an advantage here for local authorities in that they will have the opportunity with tax increment financing within the reset period of seven years, and

5 July 2012 : Column GC442

then, with the longer reset period, 10 years, to help with those projects. In addition, the Government will guarantee long-term certainty over revenues and enterprise zones—as mentioned by the noble Lord, Lord Beecham —meaning that local enterprise partnerships, with which the revenue will sit, will be free to undertake long-term borrowing without any central government controls. Those are the two areas which do not come under TIF 2.

Finally, the Government stated, and made clear, in the 2011 Budget that they will support a limited number of TIF 2 schemes in the core cities, to which the noble Lord, Lord Shipley, referred. The Secretary of State may specify, in regulations made under paragraph 37 of new Schedule 7B, that business rates uplifts, from a very clearly defined area, will be disregarded from the levy and reset calculations for a specified period. The amendments specifically concern this measure.

The Government are fully committed to supporting growth. I noted carefully what the noble Lord, Lord Best, said about housing and about housing construction stimulating the economy. We will continue to have that debate, but the measures to do that are currently in place and are not related to TIF. There have also been a lot of questions about the £150 million in support from TIF for what will amount to a limited number of core cities. Some of those core cities have been announced today and are currently putting forward substantial and interesting proposal bids for this money. I have no doubt that it will work its way through the system.

Amendment 51 seeks a way to get TIF 2 reclassified as non-public sector debt, to which I say, “Oh dear”. Business rates are a tax, and taxes are uniquely established by the tax-raising power of government. Therefore, TIF 2 must be recorded as government borrowing. There is absolutely no choice to be made about how TIF 2 is accounted for—it is not the Treasury sitting on our shoulders here, it is the Office for Budget Responsibility that has made that decision. It is an independent body and has made very clear how this will score.

Furthermore, core cities that are successful in the TIF 2 competition will be undertaking additional borrowing that has not already been reflected in the Government’s local authority self-financed expenditure forecasts. The Government have been clear that we will need to limit the amount of TIF 2 that occurs so that the Government remain within the wider deficit reduction plans.