HL Deb 27 January 1994 vol 551 cc1089-98

3.31 p.m.

The Parliamentary Under-Secretary of State, Department of the Environment (The Earl of Arran)

My Lords, I beg to move that this Bill be now read a second time.

The Bill does two things. It honours the pledge given by the Chancellor of the Exchequer in the Budget on 30th November last year to give more help to business ratepayers in the next financial year. It also gives the Government greater flexibility to introduce transitional arrangements following the 1995 revaluation, if such arrangements prove necessary.

Without the changes announced by the Budget, businesses in transition would have faced increases in their rates bills for 1994–95 of up to 20 per cent. above the rate of inflation. Although there are clear signs of economic recovery, we do not think that businesses should have to sustain such large increases. But neither could we afford again to limit increases across the board to the rate of inflation, particularly when some ratepayers are a considerable way away from their true liability. The Bill will therefore reduce the increases to no more than 10 per cent. above inflation for large businesses and 7.5 per cent. for smaller ones. For small properties which contain both domestic and non-domestic parts, which includes corner shops and sub-post offices in rural areas, the Bill will hold rate increases for the third year running to the rate of inflation. In all, some 360,000 businesses will benefit.

That relief—some £90 million for businesses in England and £5 million in Wales—comes on top of the £1.8 billion provided by the 1992 and 1993 Acts. While the Bill does not affect Scotland, the rates bills of all 220,000 businesses north of the Border will be reduced by £10 million overall under separate powers. Their reductions will, on average, be broadly in proportion to the reduction in England. I am sure that your Lordships will agree that that represents a very substantial package of support.

In 1995 there will be a further revaluation of business property based on market rents at 1st April last year. By the early summer we hope to be ready to consult ratepayers on any proposals for further transitional arrangements which might then be necessary. Parliament will have an opportunity to consider any new arrangements later this year. The regulations which will give effect to the scheme require the approval of both Houses by affirmative resolution and must come into force by 1st January next year.

The Bill will give us greater flexibility to make such regulations. Existing powers require any scheme to be self-financing. The Bill removes that restriction. It will enable the Government to devise rules to reduce the overall burden on businesses. It will, therefore, be possible to devise a scheme for 1995 which would reduce the burden for those facing large increases but without placing the full cost of that relief on other ratepayers. The difference could be made up by an Exchequer contribution to the non-domestic rating pool.

I am happy to repeat the commitment given in another place by my honourable friend the Minister for Local Government and Planning that if we use our powers to reduce the burden on businesses in that way we will make up any shortfall using the pool rather than any other mechanism. That is why we have included in the Bill a power to top up the pool. We are seeking a power rather than a statutory duty because the need to top up any shortfall will occur only if the transitional arrangements are not self-financing. So that it is clear beyond doubt, let me assure the House that if a shortfall to the pool should occur after 1995 because transition was not self-financing, the pool will see that shortfall made up.

Under existing powers it is necessary to make regulations governing the transitional arrangements before the start of each five-year period between revaluations. With the removal of the self-financing requirement, the Government would be required to forecast up to five years in advance the extent to which the arrangements might need to be supported centrally each year. By allowing the regulations to be made one year at a time, the Bill provides the flexibility to take a view each year, in the light of prevailing economic circumstances.

The Bill will also give us the flexibility to ensure that protection against rate increases is not lost under any transitional arrangements after 1995 if a property is altered to form a new property for rating purposes. Rateable values will need to be certified for that purpose. The Bill will allow that and will also give ratepayers the right to appeal if they are dissatisfied with the certified value. We believe that overall these measures will provide a further valuable fillip for many businesses and pave the way for a smoother transition to new rates liabilities in 1995. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(The Earl of Arran.)

3.37 p.m.

Baroness Hollis of Heigham

My Lords, on this side we want to make clear that the Labour Party is not opposed to the principle of business receiving subsidy while the recession continues. But we remain fundamentally opposed to the uniform business rate—that is, the national non-domestic rate—because, at the core, the Government have persistently and perversely claimed "a problem" with business rates. It is a problem which led them in 1988 to abandon the old locally levied business rate and to introduce in 1990 the national uniform business rate.

Since then there has been a problem with the UBR because it was introduced at a time of revaluation. As a result, it has had to be abated annually in the form of transitional arrangements which are again the subject of the Bill. To coin a cliché, as with the poll tax, the solution has become the problem.

Poll tax and UBR were introduced at the same time. The poll tax had to be abandoned rapidly. Each and every year, UBR has had to be muted, abated and amended. That might just suggest that the Government's touch is not entirely secure when it comes to local government finance.

Why was the old system of locally levied business rates abandoned? As a result of a number of fallacies. It was assumed, and indeed asserted, that business rates had, and have, a significant detrimental effect on business. That is not true. The first argument advanced was that because business did not have a local vote, it should not pay a local tax. But let us remember that business rates are a levy for services enjoyed as well as a property tax. In my authority, for example, the business rate contributed towards the cost of housing for key workers, training schemes, refuse collection, street lighting, police and fire protection, roads and public transport, economic development strategies, industrial estates, small rent-free development units and, above all, an airport jointly run by the city and county council which was a loss leader to promote local businesses. They were all services which business enjoyed, and they were funded effectively by the business rate.

As the operations director of Courtaulds said, local business, whether part of multinational companies or local enterprises, is an essential part of the life of the community. It consumes local services; it requires local supplies; it employs the young people who were educated and trained through the local system; and it is affected by local decisions. We believe that as a result there should be funding by local rates. The question for business is not whether the rates are levied locally but whether they obtain value for money and whether they are predictable in their incidence.

The second point argued against the old business system is that the rates were too high and too unpredictable. Again, that is false. In most firms business rates averaged about 2 per cent. of their costs, the same as for the domestic ratepayer, as Layfield showed, and in many cases rather less than their telephone bills. And whereas they could not get to the phone company they could get to local authorities, It is true that businesses could not reduce their levy any more than they could their rental, but that was because it was a fixed charge. As regards predictability, even if in any one year business rates rose by, say, 10 per cent. when inflation was, say, 5 per cent. that would have added only about 5 per cent. on a 2 per cent. annual charge. In other words, the fluctuations posited on business by local domestic and non-domestic rates were infinitesimal compared to the fluctuations and unpredictability of interest rates produced by government monetary policy, which have totally determined businesses' capacity to invest and to survive.

The third and final argument used against the old business rate and in support of the introduction of UBR is that differing levels of the local business rate had a detrimental effect on business and employment. There is no evidence for that fallacy either. Surveys carried out in the 1980s on a county-by-county basis show no connection between business rates and their incidence and unemployment and its incidence. Indeed, the Government's own Green Paper on rates published in 1986 confessed that, between 1974 and 1981 rates could not be shown to have a significant overall influence on manufacturing employment". It added: It is not possible to detect an influence of rates on the location of employment". As we know, what affects employment is the location, the transport links, the quality of labour and the quality of the environment. The rates have always been largely irrelevant.

It is of course the case that business rates rose through the 1980s, as did domestic rates, and above the level of inflation. But the explanation lay not in the profligacy of local authorities, not in their hostility to local business and not in the extravagance of their agendas. It was because central government grant fell from some 61 per cent. in 1978–79 to barely 45 per cent. in 1985–86. Even for services to stand still both domestic rates and business rates had to rise in compensation. In my authority of Norwich, but for the withdrawal of government grant business rates and. domestic rates would have risen each year by less than the rate of inflation.

In other words, local government was fingered by central government for the consequence of central government's withdrawal of grant. It was central government which forced up the business rates, using that as an argument to nationalise them into the uniform business rate and then having the effrontery to blame local government for it. Added to that we have faced the issue of revaluation due every five years but abandoned in England and Wales since 1973.

With UBR in place in 1990, business rates have been levied by government on local industry but have been returned to local authorities on the basis not of their industry but of their population. Each year any rises have been limited to inflation plus a phased change towards the new revaluation basis.

We quickly learnt that the poll tax was disastrous, and the Government reversed it. In my view, UBR is similarly disastrous, and for three main reasons. The first is that the uniform business rate breaks the link between what business pays locally and what it gets back locally in services. My authority ran a municipal airport as a loss leader. It did so to attract and to keep local firms whose business revenues and employment enriched the local economy. Why now should it bother? Why should my authority produce small starter units at a loss? Why should it produce key worker housing? Whatever we do to aid business benefits our local economy, in terms of revenues, by not a single farthing.

So why spend council tax, which is capped, to enhance business prospects when all the financial returns from it are filtered off and filched by central government to re-allocate on a population basis? Whether my local authority is energetic or supine in adding business makes not a ha'penny of difference, so why should it bother? If I or my colleagues had been the government we should have done all that we could to strengthen and reforge the links between local authorities and the local economy. Instead, government snapped those links, unhooked the connection and divorced the fate of the local business economy from the finance of the local authority. That was folly, absolute folly.

Under the old system statutory consultation was required when rates were set. That was not a formality. My authority of Norwich wanted the chairman of the local chamber of commerce to share its reading of the future of Norwich's economy and work together to enhance it. There was give and take on both sides—but no more. Local authorities find business irrelevant to the task of balancing their finance. Local business finds local authorities indifferent to a plight they cannot afford to aid. Why bother to consult about an outcome which neither party—business or local authorities—can affect? Both sides are the losers. As the British Chambers of Commerce stated in a position paper of December 1990, the incentive for local authorities to welcome and co-operate with business should be restored. It should be restored urgently.

If the first argument against UBR is that it breaks the link between local authorities and local economies, the second is that it is unfair in its incidence. Perhaps I may again cite my own patch, Norwich. Aided by its local authority, more than £30 million-worth of business rates were paid in the 1980s. Under UBR barely £20 million was received in return. Neighbouring rural authorities, which had done little or nothing and had largely coasted off the backs of neighbouring cities, contributed approximately £8 million. However, on a population basis they got back about £20 million. My authority was penalised but its neighbours were rewarded for their lack of endeavour.

I accept that the consolidation of the business rate with central government grant into an aggregate Exchequer finance muted some of the problem. Nonetheless, the combined effect is to inflate the errors associated with population factors in the standard spending assessment. That is a point to which I hope we shall return in Committee.

My third and final criticism of UBR is that it is extremely damaging to the health of local authority finance. In the 1980s domestic and business rates contributed about half of local expenditure. With business rates now hijacked by central government and re-distributed on a population basis, the only independent source of finance that local authorities have is the council tax which raises between 12 and 20 per cent. of local revenues. And even that is capped across the country. The only element that can vary is that tiny fraction of our spending. That means that every £1 of additional spending must be found from only one-eighth of total income; that is the council tax element. The consequent gearing means that for every £1 increase in overall spending £7 has to come from the council tax. Council tax has now too narrow a base to carry increased spending without violent and unnecessary fluctuations from year to year. It is not sufficiently robust because it is not sufficiently broadly based. That must change.

As the Association of County Councils said, there is now no meaningful link between the movement in local tax bills and the changes in local service levels. That diminishes accountability. From the very beginning, all the local authority associations and all the business organisations—the chambers of commerce, the Institute of Directors, the Federation of Small Businesses—were unhappy about UBR, with the exception perhaps of the CBI although even that body criticised UBR on grounds of fairness. That view was endorsed by the Audit Commission, which called for the return of business rates to local decision-making in order to widen the local tax bases and to reforge links between local authorities and the local community.

UBR is designed to end the perceived but fallacious inequalities of the old rating system. It is designed to reduce the load on local business caused by "excessively high poundages". However, because it was accompanied by revaluation, two-fifths of all businesses under UBR faced increases or reductions of 50 per cent. or more in their bills. That is far more than under the old business rates. Therefore, those changes had to be phased in to cushion the losers, who did not like losing at all, while the winners wanted to benefit immediately from their gains. Therefore, transitional arrangements, as the noble Earl rightly said, were adopted to phase in the changes, thus perpetuating the very inequalities that UBR was designed to overcome.

We had a national business rate to reform the inequalities of the old business rate. We then had transitional arrangements to phase that in. Now, with this Bill, we have transitional alterations to the transitional arrangements provided by the original Act. Equity is ever receding and we shall not even have reached the old valuation ratios before the new valuations come into effect in 1995. While those distortions continue, we perpetuate the problems that UBR was designed to overcome. UBR is a bad tax and, as with the poll tax, the Government should scrap it and return to a locally determined property tax on local businesses, brigaded in a responsible way to domestic council tax and underpinned by statutory consultation.

Having said that, we shall obviously not oppose the Second Reading. After all, in the 1970s there were 10,000 business failures per year; in the 1980s, 20,000; and in the 1990s, something like 50,000. Business clearly needs help. However, we shall move amendments so that we can discuss the issues further.

First, we shall try to ensure that the help is better targeted on small businesses, which are proving the most vulnerable during the recession, rather than throwing money at healthy multiples which do not need it.

Secondly, we shall wish to ensure that if the winners receive their gains quickly while the losers are cushioned from increased levies, the shortfall is made good by central government rather than local taxpayers. The noble Earl, Lord Arran, repeated the assurances given in the other place that central government, rather than local taxpayers, will make up the pool. We had assurances before about targets not being for capping and three years later, they became so. Assurances are not enough. We shall seek to have that written on the face of the Bill in primary legislation.

Thirdly, as the noble Earl said, the Bill gives greater flexibility to make regulations. Again, we are uneasy about reliance on statutory instruments in the Bill and we wish to seek to amend that provision. We are concerned also about where the levy falls. We want to look at the position of the utilities—water and so on—and the special situation of the City of London. We have wider worries too about the pattern of change which will result in the North and the Midlands being disadvantaged to aid the South and South East. In the transitional arrangements, manufacturing industry will be disadvantaged to help shops and offices.

We shall return to those and similar anxieties in Committee. At this point, we wish to give an unambiguous message to the Government that we believe that UBR is a bad system of taxing local business. The transitional arrangements proposed by the Bill do not address that central issue. We shall seek to amend the Bill to make it better but at the end of the day the Government must change their system of financing local government through their national business rate.

3.55 p.m.

Baroness Hamwee

My Lords, it is desirable that any tax should not only be fair but it should be also transparent, certain and accountable. This small Bill provides a great deal of material on which to base discussions on those subjects. I shall not detain your Lordships for as long as one might with philosophical and economic discussions to which that could give rise. I shall merely make one or two remarks on those three topics.

The tax itself is clear to an extent, although it is not linked to the services provided to the taxpayers. But I do not believe that the Government could begin to claim that the Bill is clear. I take this opportunity to thank the drafters of the Explanatory and Financial Memorandum, without which I should have been extremely puzzled. I ask that when existing legislation is to be amended, we should see the full amended provision in the Bill, rather than merely the replacement words. It would be extremely helpful to have the full paragraphs.

Is the tax certain? It is not certain for local authorities, given that there may be changes on an annual rather than a five-yearly basis. We know the difficulties of planning far ahead, but we know also of the difficulties that arise when one cannot do so.

Is it certain for the ratepayers? The failure to revalue between 1973 and 1990, with the hike based on 1988 values, which came into effect in 1990, has been a clear problem. Many people are looking forward to the reduction which there is likely to be in 1995 because of the revaluation based on 1993 values. But that could lead into a long discussion about the problems caused by wild fluctuations in property values. Perhaps this afternoon is not the time for that, but there is a clear lack of certainty arising from the structure.

We know all about business bankruptcies and the fragility of small businesses, many of which have made it quite clear that they believe that they have been tipped over the edge by the non-domestic rate. I believe that that applies in particular to small shopkeepers. The average revaluation factor in 1990 for shops was 9.6; it is an enormous increase if that multiplier is applied.

Not only does that cause problems for the individual businesses which are the subject of that revaluation because of the increased burden upon them; it has also caused a major effect on the communities of which they were a part. There has been a change in the character of many communities because of the failure of small businesses, including small shopkeepers. That has been particularly apparent in London and the South East, which have suffered more than other parts of the country from the wild fluctuations in property values which I mentioned. I hope that the Government will at least admit that they recognise the dangers of any increase whatever to businesses which have clung on until this point.

The question of transitional relief is always difficult. It begs the question as to the reasons underlying it. Understandably, questions were asked about whether the imminence of the last general election had an effect on the arrangements for transitional relief a couple of years ago. Questions are asked in the local government world now about the transitional relief "damping", as it has been called; in other words, the extra grant put back into some local authorities because the transitional arrangements had proved to be so difficult and had involved such large and unexpected figures. Some authorities have benefited extremely well from the Government's damping arrangements devised to avoid huge fluctuations. Of course, the authorities which have benefited are the ones which the Government wanted to benefit. They are the Government's friends.

The Minister has alluded to the question of the pool and whether it would be reduced. Of course, I welcome his commitment that the pool will be made up if there is a shortfall. However, I fail to understand his approach. He says that it is not necessary for the Bill to make the provision mandatory because there may not be a shortfall. But if there is no shortfall, the question does not then arise. Therefore, I am unconvinced by the Minister's logic. There needs to be a commitment, and I do not believe that the noble Earl has sufficiently explained the change in the terminology from "shall" in the existing legislation to "may" in the Bill.

The latter raises another very broad question; namely, the centralisation of all our government services. Yet again we have the ability in the Secretary of State to decide whether to take a certain action which will have huge effects on government as provided at local level. It is yet another one of a great series of centralising measures.

Finally, I turn to the question of accountability. The problems as regards the non-domestic rate being unaccountable have been well aired both this afternoon and on many previous occasions. In that regard, I must say that I fear it simply does not matter to the Government.

4 p.m.

The Earl of Arran

My Lords, I think that the comments both of the noble Baroness, Lady Hollis, and of the noble Baroness, Lady Hamwee, are not altogether unexpected. I believe, having read Hansard very carefully, that they have been more or less par for the course in what has happened in the past couple of years in your Lordships' House. They are certainly consistent with their somewhat begrudging acceptance of various measures. The only difference this time is that your Lordships will have more opportunity to discuss the Bill as it goes through the House in all its stages. In particular, the noble Baroness, Lady Hollis of Heigham, cantered over the course of the uniform business rate, as did the noble Baroness, Lady Hamwee.

However, there are just a few brief points that I should like to make about uniform business rates. A return to local business rating would mean that businesses could, therefore, be asked to pay more but still without any guarantees that they would receive more by way of local services. Authorities in areas with high concentrations of businesses have never kept the entire proceeds of the business rate. If they did, many authorities would not need to raise any money from their domestic taxpayers. That would completely destroy local accountability. The fact is that many areas have high concentrations of business for commercial reasons; other areas have industries which are declining.

Resource equalisation has always been necessary to ensure that authorities' reasonable spending needs are met. However, that is not to say that local authorities have no incentives to help business. As the noble Baroness, Lady Hamwee, pointed out, businesses are the lifeblood of the local community. If local authorities ignore their needs, they do so at their peril. That is true, irrespective of whether local authorities can keep part of the business rate.

The noble Baroness, Lady Hollis, also mentioned the fact that the Government grant dropped from 61 per cent. to 45 per cent. during the 1980s. But I should say that, although government grant may have dropped by some 16 per cent. in the 1980s, the average rate poundage increased by 37.4 per cent. over the same period. That is more than double the drop in government grant.

Perhaps I may for the time being end this discussion on Second Reading by making two further points. Over the past two years we have introduced measures worth some £1.8 billion to help businesses with their rate bills during the recession. The Bill provides a further £90 million boost to hold down rate increases. Secondly, the regulations will be introduced after Royal Assent to enable authorities to recalculate their contributions to the non-domestic rating pool. The Bill requires the Government to make good the shortfall to the pool by adding to the amount which authorities receive from the national pool next year. As I said in my opening speech, and I shall say it again, we will make similar additions to the pool in future years if we decide to support any future transitional arrangements centrally rather than through a self-financing mechanism. I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

4.5 p.m.