Business Rates and Levelling Up

Tuesday 13th December 2022 Westminster Hall

00:00

[Peter Aldous (Waveney) (Con)]

I beg to move,

That this House has considered business rates and levelling up.

It is a pleasure to see you in the Chair, Mr Mundell. I am grateful to the Backbench Business Committee for granting this debate. It is extremely apt that the debate is taking place on the same day that the Levelling-up and Regeneration Bill returns to the House of Commons. If we can successfully reform business rates so that they are fair to businesses right across the country, that really will help to deliver meaningful levelling up.

At present, with businesses having to contend with a level of inflation not seen for a generation, soaring utility bills and stubbornly high rents, business rates are a fixed cost from which occupiers cannot escape. They are an impediment to regional growth, and their impact needs to be significantly reduced, with the system being put on a long-term, easily understood footing. In that way, businesses will know where they stand and can then make long-term investment decisions.

To be fair, all political parties have recognised the unfair and unjust nature of the current system and commitments have been made to both replacement and reform. From my perspective, I sense that the former—replacement—is the holy grail that is unachievable in the real world. To address the immediate threat that business rates pose to many businesses in different sectors and in different parts of the country, a wide variety of reliefs and exemptions have been introduced. Although welcome, they have made the system more complicated and difficult to comprehend.

Currently, the Labour party is committed to abolishing business rates and replacing them with a system fit for the 21st century. As I have said, I sense that it will be impossible for it to keep that promise, because, despite the drawbacks that business rates possess, they have inherent advantages for the Treasury: they yield approximately £25 billion per annum, are relatively easy to collect and are difficult to avoid. It is impossible to find an alternative system of taxation that has those advantages, and I believe that it is important to get on with reforming the current system.

Let me turn to the Government’s record. My right hon. Friend the Chancellor of the Exchequer made significant and largely welcome announcements in his autumn statement, which I shall detail later. However, I am mindful that we made commitments in the 2019 Conservative manifesto that we are yet to properly and fully implement. Those include carrying out a fundamental review of the system and reducing business rates in the long term for retail businesses, as well as extending the discounts to grassroots music venues, small cinemas, and pubs. Yes, we have provided a wide variety of short-term reliefs, but we have not yet provided the permanent fix that is so urgently needed.

It is appropriate to briefly describe business rates. They are a tax charged to most non-domestic properties, although there are some exceptions, such as small businesses with a rateable value of less than £12,000. They are calculated by multiplying the rateable value of the property by the uniform business rate multiplier. The rateable value is an assessment of the annual rent that the property would achieve if it were available to let on the open market at a specific, fixed valuation date. The UBR multiplier for 2022-23 is 51.2p in the pound, or 49.9p for small businesses.

Before I came to this place I was a chartered surveyor. Although I did not specialise in business rates, I did from time to time carry out business rates appeals. Invariably, that happened in situations with a lack of rental evidence on which to base an assessment of a property’s rateable value. As a result, it was difficult to agree a value, and there was the risk of a rateable value being imposed, which was abstract from reality and took no account of the ability of the business to pay and thus continue to exist and operate profitably. The Valuation Office Agency—the VOA—needs to be more transparent, open and collegiate in its dealings with businesses. I shall touch on that later.

As I have mentioned, the Chancellor made some significant announcements in his autumn statement, which included confirmation of a revaluation that will come into effect from April; the freezing of the uniform business rate multiplier; the reform of the transitional relief scheme; a supporting small business scheme; and a 75% retail, hospitality and leisure relief worth up to £110,000 per business. The revaluation is generally to be welcomed, although there are some notable exceptions, as it will on the whole bring down rates in economically depressed areas while raising rates in areas where rental values have risen.

The announcement that the downwards phasing of the transitional relief scheme for England is to abolished is good news, with upwards phasing being funded by the Treasury. The problem with transitional relief was that meaningful and full reductions in business rates, which businesses particularly in the retail sector desperately needed, took far too long to filter through. The measures will provide much needed support to help businesses get through the next few months, and they provide the foundation stone on which to now carry out the promised fundamental review.

Despite those measures, which in many respects can be likened to the application of yet more sticking plasters and, indeed, bandages, fundamental flaws remain to be addressed. Although the Government froze the UBR at 51p in the last two Budgets, it remains unsustainably high. In no other country in Europe do businesses pay half the rental value of premises in property taxes. Set at such a high level, business rates deter investment in retail, leisure and hospitality. It should be noted that the UBR was just 34p in the pound when it was first introduced in 1990.

The extension of business rates relief for retail premises from 50% to 75% in 2023-24 is welcome, even though it will help only smaller retailers because it applies to the first £110,000 of business rates paid. The Office for Budget Responsibility envisages that that relief will be removed from 1 April 2024, which would leave retailers with a massive tax hike at that point—in effect, a cliff edge. A tapering scheme will therefore need to be applied to overcome that particular problem.

In the recently published valuation list, which comes into effect next April, the valuation of retail premises fell by only 10% across the country in the six years from the last valuation date of April 2015. Without the Chancellor’s measures on downwards phasing to freeze the UBR, business rates would have had a massive levelling down impact on all retail, and on depressed regions in particular. That underlines the need for fundamental reform.

I shall move on to briefly highlight some of the inequities of the current system that need to be addressed. Business rates are a tax paid by businesses before a sale or a transaction has even been made. It is in effect a tax on existence rather than a tax based on success or failure. It therefore follows that it needs to be kept low so that it can be paid by all businesses. A high UBR discourages not only occupation, but investment in new accommodation and the physical expansion of existing premises. Ratepayers who have invested in improving their premises are penalised, as they then face higher bills. The system adversely affects physical retailers whose properties on high streets have significantly higher rateable values than the warehouses that serve online retailers. Similar challenges were faced by the hospitality sector.

While in theory, with the current UBR, business rates should represent 51% of the rental value of a property and hence one third of the cost of occupancy, retail has been struggling, and some landlords have agreed much lower rents to enable their tenants to stay in business. Rents are increasingly being linked to turnover, and are thus disconnected from the rental values that are used by the VOA to determine business rates bills. Therefore, many retail outlets will be paying business rates bills in excess of their actual rent, even after the revaluation takes effect. In the new list, rateable values for retail have gone down by 10% on average. That is surprisingly little, given that many shops were closed and paying no rent at all at the valuation date of 1 April 2021, when we were in the midst of a covid lockdown.

The valuation process that allocates properties their rateable value is not transparent, with the VOA not sharing the evidence that it uses to substantiate the basis of valuations. The only way for occupiers to assess that evidence is by challenging the valuation through the “check, challenge, appeal” process, which is lengthy and costly. There is therefore much concern that many challenges to the valuation process will be submitted over the coming months. The worry is that the VOA uses flimsy evidence when conducting property valuations. Those businesses that engage with the VOA through the appeals process, or by providing evidence leading up to the valuation, have more accurate valuations, while those that have not seen any reductions have not engaged with the VOA.

The VOA has outlawed 400,000 applications made by businesses in mitigation of rates bills on the basis of covid-19. Its view is that covid did not constitute what is known as a “material change in circumstances”, which can lead to a reassessment of a rateable value. That decision has been justified by the VOA on the basis of the allocation of the £1.5 billion covid relief fund, the distribution of which was devolved to local government. While some local authorities have been quick to distribute that relief, others have been slow. The lack of a uniform distribution mechanism has meant that receiving the relief payments is dependent on where the occupant is based, and a postcode lottery has, in effect, been created.

In the autumn statement, the Chancellor froze the UBR at 51p for one year only—that is, for 2023-24. As mentioned previously, the OBR’s figures indicate that the UBR will be index-linked thereafter. That means that as matters stand at present, business rates for retail premises will rise from April 2024. The Government have extended their 75% rate discount for shops paying up to £110,000 in rates until 2024. Likewise, unless the Government extend the relief, occupiers will again face a cliff edge when the scheme expires.

The Government will soon be bringing forward a non-domestic rating Bill. It is important that the contents of that Bill are fully debated, and that the opportunity is taken to ensure that it is a vehicle for delivering the fundamental reform of business rates that was promised in 2019. The Bill will include provisions such as the duty to notify of any change to a property; changes to the frequency of revaluation; and the removal of the need for transitional relief to be fiscally neutral. Alongside the duty to notify, there should also come a corresponding duty on the part of the VOA to share with occupiers the evidence it uses to assess rateable values.

Due to the complexity of the business rates system and the burden on ratepayers, occupiers quite understandably often seek advice from rating experts on how best to approach the whole process. Unlike with other professions, rating advisers do not need a licence to practice, resulting in some operators giving bad advice and cheating people out of their money. We need to find a way to outlaw such conduct.

Currently, property owners do not have to pay business rates on empty buildings for three months. After that period ends, most businesses have to pay business rates in full, although there are some exceptions. The outcome of the 2020-21 review was that the Government committed to an empty property relief consultation in 2022, but that has yet to take place. It is important that the relief is extended—it is probably best to extend it to 12 months—because rates will then be paid exclusively by revenue-generating businesses.

It is appropriate to highlight the particular challenges faced by the hospitality sector, which is a vital component part of many local economies all around the UK, including in the Waveney constituency that I represent. With a fair business rates system, the sector can play a key role in levelling up.

Looking at the revaluation list in the Waveney area, businesses that have invested and that are vital engines of local economic growth are being heavily penalised for their ambition and success. By way of example, the rateable value for the Kessingland Beach holiday park is due to rise from £291,450 to £388,500; for the Harbour Inn in Lowestoft, it will rise from £23,500 to £45,000; and for the Commodore in Oulton Broad, it will rise from £67,500 to £79,000.

The current system sees the hospitality sector overpay nationally by £2.4 billion a year relative to its turnover; in other words, it overpays by 300%. In the short term, the differential rates between large and small businesses should be removed and the eligibility rules for reliefs based on rateable value should be abolished. In the longer term, a significantly reduced UBR multiplier should be introduced.

To address the variety of problems that I have outlined, root-and-branch reform is urgently required. Business rates would be fairer and better if the system was simplified, the tax base broadened by removing the myriad complicated reliefs, annual valuations proposed, a one-year antecedent valuation date set, and fast appeals and greater evidence-sharing between occupiers and the VOA introduced.

Such reform could be achieved by making the following changes. First, the UBR could be reduced by 30%. By way of example, reducing the UBR from 51p to 34p, which was the rate in 1990, would reduce unsustainably high levels of business rates on retail and hospitality premises, and level the playing field for so many businesses. A lower UBR would also reduce the barriers to entry, expansion and innovation, thereby encouraging growth and broadening the tax base. In effect, this would plug the gaps in revenue that the Treasury might fear would result from a lower UBR.

Secondly, the Government have correctly moved from five-yearly to three-yearly valuations. That represents a step in the right direction, but yearly valuations would be far more equitable. By implementing yearly valuations, business rates would accurately reflect the dynamic movements of the market and allow occupiers to benefit immediately from changes to rateable values. The increased incidence of events such as the covid pandemic and the war in Ukraine further emphasise the need for a system that is able quickly to react to rapidly changing economic conditions.

Thirdly, we need to look at the abolition of the system of complicated reliefs. Instead of the fundamental review that was promised, the Government have continued to apply sticking plasters to the system to ensure its continued functioning. That has culminated in a system of complicated reliefs that can be difficult to navigate. The business rates system comprises 12 reliefs. Those would be rendered unnecessary with the lowering of the UBR, which would mean a business benefiting from paying lower rates immediately instead of negotiating and navigating the VOA system of reliefs.

Fourthly, many of the problems I have detailed could be fixed by making the VOA more efficient. Its systems, which are predominantly paper based, are not fit for the 21st century. Digitisation would enable the VOA to make its collection systems more efficient and it could take a big step towards systems efficiencies such as annual valuations. The Government recently published a consultation to that effect, entitled the digitalising business consultation. However, unfortunately, it largely missed a point because instead of consulting on the measures that would reduce the administrative burdens on businesses and ratepayers, the Government are trying to increase those burdens by requiring more information so as more effectively to target reliefs.

I sense that I have spoken for far too long, and you will be pleased to hear, Mr Mundell, that I am nearing my conclusion. High business rates hold back economic growth, are a barrier to levelling up and are an added burden that many businesses simply cannot afford at present. To be fair, the Government have listened, and they are aware of the problem. The response has been the introduction of short-term reliefs, which are welcome, but they complicate the system further in the longer term.

We need to stop searching for that elusive holy grail and stop kicking the can down the road. Instead, we need to introduce pragmatic measures that can be delivered quickly, and we need to honour the commitment to a fundamental review. I therefore urge the Treasury to introduce those initiatives—in the spring Budget, I would suggest—and in the first instance I look forward to hearing the response from my hon. Friend the Minister.

09:52

[Kevin Foster (Torbay) (Con)]

It is a genuine pleasure to serve under your chairmanship, Mr Mundell. At the outset, I must congratulate my hon. Friend the Member for Waveney (Peter Aldous) on securing the debate and giving us all a chance to reflect on the impact of business rates and levelling up.

Like my hon. Friend I represent a coastal constituency, although with a shoreline that faces east rather than west, and I do not want the levelling-up agenda to be based on a crude caricature of north versus south—often, the communities facing the greatest challenges lie on the southern coast. My hon. Friend did not speak for a moment too long; I found his points very interesting, and I was in great agreement with many of them with respect to how we need to change this form of taxation.

Communities such as Torbay can see wealth alongside areas with challenges, and we need to see levelling up in not only the national context, but the local, with the clear aim of turning back the tide on poverty, which is affecting some of the communities that I am proud to represent.

For Torbay, levelling up means looking to attract investment, which generates long-term jobs and ensures a genuinely vibrant local economy. That is where business rates can have such an impact. They effectively penalise businesses for investing in bricks and mortar, putting physical retail—not just, nowadays, high street retail—at a disadvantage to online outlets and potentially putting off development more widely across sectors such as tourism and hospitality, where a business rates liability will pretty much inevitably be created as part of a new investment.

Business rates might have been an irritant in the past, but they can often be the make-or-break factor now, especially in light of the other pressures that businesses face. Business rates are the bill that is not flexible. That bill is enforced by the magistrates, and it is often the final blow, as it takes little or no account of the actual income that a business receives, as my hon. Friend mentioned. It is literally a tax on existence. Businesses must pay the tax simply to be in their premises, before they open the door to do any trade or business.

Like my hon. Friend the Member for Waveney, I found the figures around rental revaluation extraordinary. It does not strike me that rental values for shops have fallen by only 10%, as on most high streets agents are offering businesses “Will you pay the business rates?” style deals on properties for certain periods of time. The figures do not reflect where rentals would have been five, six or seven years ago, or even a couple of years ago, before the impact of the pandemic.

I will give a quick example of the impact of the cost of business rates, when combined with other costs. A company that runs four hotels in my constituency has, unsurprisingly, seen utility costs increase dramatically, meaning that the business needs an additional net income of £8 per room—a 12% increase—for all 125,000 room nights, just to pay the increased costs. That is simply not achievable in the current economic circumstances. The company pays £6.5 million in payroll to 470 employees in Torbay and spends £7 million a year through the supply chain, mostly in the west country. The moves we are seeing to increase wages are welcome, but they will mean the company will have a 9% payroll increase in April 2023. The retail, hospitality and leisure business rates relief scheme, which has been confirmed to be 75% for 2023-24, is welcome and it will offset around £300,000 of the additional costs for business, but it will not reach the wider amounts needed, as those bills still need to be paid.

Similarly, another example is an innovative holiday park, with caravans that are the equivalent of staying in a hotel suite; the era of putting 50p in a meter is long gone—think caravans with widescreen TV and central heating. That business will potentially see its bill double, courtesy of its investment.

While we often focus on the impact of business rates on our high streets and town centres, the impact is much wider, especially in situations where it is not an option for staff to work from home or from remote locations, such as in the manufacturing or hospitality sectors. A holiday by Zoom or a pub night on Microsoft Teams will not be the same experience; a physical premises is needed to deliver those experiences.

What can be done? We need to look at providing further relief in the current system, particularly for small and medium-sized businesses. We need to realise that the days of retail and hospitality being a handy way to raise revenue for local services are now over. The high street corner is no longer the prime place to do business. There are department stores standing empty across many of our town centres, such as the former Debenhams on Torquay harbourside. We need not walk far from this Chamber to see what was once a large department store lying empty in what was a prime shopping area of London—a sight unimaginable back in 1990, when the uniform business rates were introduced.

It is increasingly the presence of business rates liability that can directly and adversely affect the chances of levelling up a community by discouraging investment in commercial properties. That was one reason why I supported the previous investment zone suggestion that allowed business rate reductions in key areas that needed regeneration.

Ultimately, a derelict and boarded-up building creates costs, not revenue, for the public purse. I urge the Government to look at what can be done further about business rates to ensure they do not become a barrier to the regeneration of our town centres, not least in the context of large national charities receiving a mandatory 80% relief, often increased to 100% relief by billing authorities. At the very least, parity for smaller businesses trading in retail, leisure and hospitality within our key areas for levelling up would be a welcome incentive, before finally getting on with what needs to be delivered: a major review of this form of taxation.

It is oft talked about, but there needs to be a better option for the future in a system that is fundamentally rooted in the pre-digital era of economic activity, when physical premises were an integral part of doing business. I appreciate that that is easily said and harder done, not least when we consider the £25 billion of revenue that has been referenced. However, we should not shy away from doing it simply because it would be hard. Taxes have changed in the past to reflect economic, scientific and technological changes. The same is needed now.

I cannot cover in a short speech every aspect of the links between business rates and levelling-up policy, alongside their impact. However, I hope the Minister in her response will reflect on how we need to consider the real disincentives of the tax for businesses such as hospitality, which must innately operate from a physical space, and the deterrent to operating retail from the high street, town centre or even the out-of-town shopping centre, which is facing huge competition. If we are to truly level up many coastal communities, those issues must be addressed and a revaluation on its own will simply not do that. If they are not, there is a danger that our taxation system, designed for an era when people went to a public payphone and had to go to a physical premises to buy something, will hit our town centres and not deliver the levelling up and regeneration that so much of Government spending is trying to achieve.

10:01

[Jim Shannon (Strangford) (DUP)]

It is a pleasure to speak in the debate, Mr Mundell; I thank the hon. Member for Waveney (Peter Aldous) for setting the scene so very well. He and I, and others in the debate today, often join forces to support our communities. His and my communities are similar in their culture and geographical stance, and we share an interest in fishing issues. It is always a pleasure to come along and support the hon. Gentleman. It is also a real pleasure to follow the hon. Member for Torbay (Kevin Foster), good friend that he is. He is back on the Back Benches now, but when we were on the Back Benches before, I used to follow him and he me. To be honest, normally, I follow everybody else—but it was a real pleasure to hear his contribution. I am also pleased to see the Financial Secretary to the Treasury in her place; I know she always generously tries to respond to our requests and I look forward to her contribution.

I think we are all on the same page on this one. I very much support the two hon. Gentlemen who have just spoken and what they are trying to achieve. I hope to be able to achieve that as well. I am pleased to see the shadow Minister, the hon. Member for Ealing North (James Murray), in his place. We are a bit sparse in numbers on this side of the Chamber, but I know that the hon. Gentleman’s contribution will make up for that.

Like many others, I am and was excited about the Government’s levelling-up agenda. I looked at the money for Northern Ireland and imagined how many improvements could be made with that funding. Like the hon. Members who have spoken and who will speak afterwards, I have been concerned that the levelling-up programme seems to gloss over the needs of coastal communities. The hon. Members for Waveney and for Torbay outlined their requests on behalf of their communities. I have not read the speech of the hon. Member for St Ives (Derek Thomas), who will follow, but he will probably endorse what we are saying as well. The hon. Member for Waveney gave his presentation of the subject at the start of the debate. It has been incredible to hear all of them.

As a quick aside, I should say that as I travelled up the beautiful peninsular roads in my Strangford constituency to the airport on Monday, in cool, crisp air, my thoughts were not only on the condition of the roads and their iciness, but on the knowledge that the road verges were getting smaller and smaller each year, giving less space for slippage and increasing the danger of those winding coastal roads. That is part of the reason why I have advocated for levelling-up funds to address coastal erosion concerns. We can have all the wonderful attractions we like, but if villages and roads slide into Strangford Lough, those attractions will mean nothing for those places.

Moving on, I want to highlight the concerns of small businesses. I always give a Northern Ireland perspective in these debates. I believe that it adds to the value of this great United Kingdom of Great Britain and Northern Ireland that we can all come together from four regions to debate these issues and thereby engender support for all businesses in the regions, just as I support my colleagues here in the mainland.

In March 2022, most of the businesses in Northern Ireland—some 89%, or 70,510—were microbusinesses with fewer than 10 employees. Just over 2%, or 1,640 businesses, had 50 or more employees. Almost half of businesses in Northern Ireland—45% or 35,415 businesses—had a turnover of less than £100,000, while 10%, or 8,220, had a turnover in excess of £1 million. When the Government talk about percentages, I presume they are thinking in terms of thousands of pounds, yet the cost for many of these businesses is hundreds of pounds, which could cover the cost of, for example, pens, biros and pencils for their office. Yet, for a small business, these perpetual small increases can be the death knell. When the debate came forward, I was pleased to support it and add a Northern Ireland perspective.

In Northern Ireland, our small businesses pay 30% more for the delivery of products. That is, in part, to do with the Northern Ireland Protocol Bill, but also the movement of goods. They seek to absorb some of the cost, and this finds their profit margin down to 15% to cover all overheads. With respect, the pressure on businesses in Northern Ireland is more acute than it is for those on the mainland. When rates are put up by a few per cent, it can mean business owners working for less than the minimum wage. There is probably more pressure today than there has been for a long time, so again this debate is relevant to my constituents and businesses in Strangford.

Another struggling demographic is pubs. I support what both the hon. Members for Waveney and for Torbay said and will give my own perspective. Pubs pay more in business rates per pound of turnover than any other business. Both hon. Members referred to the hospitality sector, and that is a sector we are concerned about. I know we always come asking for things, but it is the nature of life that we seek to illustrate in these debates where our constituents are coming from. What help can the hospitality trade be given? I know the Government have helped in many cases, so this is not a criticism—I am not in the job of criticising; I am in the job of trying to find solutions, as others are.

The business rates bill for the sector accounts for 2.5% of total business rates paid, despite only representing 0.5% of total rateable turnover—an overpayment of £570 million. When the hon. Member for Waveney introduced the debate, he clearly suggested that the rates for the hospitality sector, including pubs and restaurants, need to be substantially reviewed, because the overpayment does not reflect a fairness in the system. It is time to look at that.

The draft ratings list for 2023 to 2026 shows pubs’ rateable values falling on average by 17%, which will start to address the overpayment, but there is still a long way to go, and we should look to the immediate concern. The extension of, and increase in, the hospitality business rates relief for 2022-23 was therefore extremely welcome. I always think we should give credit where credit is due. The Government have made some substantial moves, and it is important that we recognise that. The freezing of the multiplier and the abolition of the downward transition on relief were also welcome.

However, the decision not to bring forward—this is one of my requests for the Minister—the online sales tax to offset the cost of pub rates and provide for a fundamentally fairer business tax regime for the digital age was disappointing. I ask the Minister to see whether that request could be looked at. It is important because it is one of the solutions. In these debates, the hon. Member for Waveney always sets out how we can do things better, and that is incredibly helpful. The current business rates system remains unbalanced. I join the British Beer and Pub Association in urging the Government to bring forward meaningful reforms that level the playing field.

I will use a pun, which I think the hon. Members for Waveney and for Torbay, who spoke before, and the hon. Member for St Ives, who will follow, will perhaps appreciate, as they all come from coastal constituencies. Levelling up only works if the rising tide raises all ships and does not leave the essential but smaller craft marooned behind the yachts that are already away. It is about bringing the other ones on board—the smaller businesses, who are under incredible pressure. I ask again for greater consideration on those issues. I know the Minister will do all she can to try to address that.

10:10

[Derek Thomas (St Ives) (Con)]

It is a privilege to speak under your chairmanship, Mr Mundell. I thank my hon. Friend the Member for Waveney (Peter Aldous), for bringing this subject—a pet subject of mine—to the House once more. I am glad that the debate is called “Business Rates and Levelling Up”, because I want to pick up on both of those, and include the VAT threshold within the levelling-up issue, because it is absolutely relevant to my constituency.

Much of what has been said today does not come as a surprise, but every opportunity to argue for a reform of property-based taxes is one that we should seize. As I said, I will touch on business rates and levelling up in relation to the VAT threshold. I do not think I am alone in the view that business rates are arbitrary, taxing the existence of a business within a building, irrespective of its economic activity. It is unfair and discriminates against large independent businesses, especially in town centres, and favours—in my view—out-of-town and online businesses.

I believe that business rates should be scrapped altogether and replaced, although I know that I differ from my hon. Friend the Member for Waveney on that. We should have the courage to replace business rates with a system that taxes in-town, out-of-town and online equally and fairly.

I have a great news story from my constituency. In Penzance, we have the oldest working dry dock. It is a fantastic business, and Members are welcome to come and see it. It is an amazing bit of infrastructure—donkey’s years old, and quite leaky, which does not really work for a dry dock. However, it would not be there—there is still a real risk of closure, partly because of businesses rates—if not for a local individual, a young man, who decided that it needed to be saved and wanted to have a go at it.

The dock was threatened with closure, but he has secured that business and all the jobs and skills there—and increased them—and is spending a huge amount of money on the infrastructure, trying to plug the holes and level the floor of the massive engineering workhouse. It is a fantastic piece of marine engineering, which is vital, and strategically important for the British coastline, particularly Cornwall.

That young man has invested significantly in that old facility, although much more is needed. New jobs and apprenticeships have been created and significant services have been secured and enhanced for marine engineering, and shipping more generally. However, it operates in a highly competitive market and he must find £4,000 a month just for business rates. That is undermining, as we speak, its ability to be competitive, as he needs to pour money into bringing the facility up to where it should be.

It is actually more tax-efficient—if that is the right phrase to use—to close that strategically important dry-dock facility in favour of housing or hospitality. I have done a lot of work with Cornwall Council, which says that there is nothing that it can do, but we are working to find a way to give that dry dock a level playing field with others in the area, which benefit from an enterprise zone arrangement.

I will move on to levelling up, particularly to the obstacle of the VAT threshold. In a rural coastal area where so much of the economic activity, and jobs supporting it, are compressed into the tourist season—many MPs share that problem—effort has been made for years to extend that activity. In west Cornwall, we have worked hard to extend the tourist season into the shoulder months—much earlier and later in the year. I am sure that is true in other coastal areas. That would increase economic gain, jobs wages and skills; it would provide job security, if nothing else.

However, we have faced challenges as we try to do that. There is an acute issue on the Isles of Scilly where, as we try to increase the shoulder months, we come up against the understandable need that small hotels, guest houses and restaurants have for curtailing their business. As they get closer to the VAT threshold, which I think is about £85,000, they will either close or slow down their business to avoid that threshold. The simple reason is that the minute they go over the £85,000 threshold, even by £1, they are clobbered for £9,000 of VAT. They would have to earn another £45,000 in order just to stand still. The problem with a small hotel is that it just does not have the beds, particularly in the shoulder months or the winter, to grow business to that extent.

Unfortunately, the inevitable and sensible decision for many businesses in Penzance and in my coastal community on St Mary’s on the Isles of Scilly is to close. That immediately puts other businesses in the area at risk, contributes to job insecurity and the challenges we face around that every year, hollows out communities, and threatens transport links. We tried to increase the transport running to and from Scilly in the shoulder months, but it was just not viable because people were booking the ferry, but were then unable to find accommodation or places to eat. It is a real challenge, which I have raised many times since I was elected. The last answer I received was that it was going to be looked at in 2024, but I think that might have been pushed further into the future.

Those businesses cannot grow and they would need to earn another £45,000 just to stand still—that is not an incentive for someone to work in the winter, supporting our local economy but with no gain for their business. As a result, we have a real problem in coastal areas. It is harming our ability to level up and to provide good, skilled jobs. We have seen during and following covid that jobs in hospitality and tourism are beginning to be reasonably well paid and more skilled, but they are not secure, partly because of this problem. There is thus a direct impact on job security, other businesses, transport and so on. I am not sure if this is the right place to raise it, but the simple fix is that when a business reaches the £85,000 threshold, VAT should be applied to all money earned above that. It is so simple and obvious that I am not sure why the Government do not do it.

In conclusion, I differ from my hon. Friend the Member for Waveney; tweaking business rates has actually increased unfairness and depressed growth and aspiration —that is the experience in my constituency. Business rates should be scrapped in favour of a tax that reflects the economic activity, not the building the business occupies. To support levelling up, serious consideration must be given to the chilling impact of an arbitrary VAT threshold.

10:18

[James Murray (Ealing North) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Mundell. I begin by congratulating the hon. Member for Waveney (Peter Aldous) on securing this important debate on business rates. I am pleased to respond on behalf of the Opposition.

We know that there are around 5.6 million small businesses in the UK, creating millions of jobs and opportunities. They provide essential services to local people, and make a significant contribution to the Exchequer. Businesses on high streets across our country are not just places to buy things we need. They are also an important part of where we live, work and share our daily lives.

While business rates affect businesses of all sizes, smaller businesses often struggle the most to meet those costs. They face the burden of an outdated system of business rates, while struggling with rising energy costs, rents or mortgages, and inflation, as well as the ongoing impacts of the pandemic and the September mini-Budget. Data released by the Office for National Statistics shows that the number of business closures in the UK in the first quarter of 2022 was a shocking 137,210which is 23% higher than the equivalent figure in the first quarter of 2021.

As the shopkeepers campaign has highlighted, the existing business rates system in England has become disconnected from the realities of modern retail and retail real estate. As the campaign explains, business rates in England were 87% higher in March 2020 than they were in 2001, whereas retail rents rose by only 17% over the same period. As it also points out, business rates have not responded effectively to evolving consumer and economic trends, not least the rapid growth of online retailing, and equitable business rates liabilities are the result of infrequent and delayed revaluations under a system that acts as a barrier to investment. Such views are echoed by the 2018 Confederation of British Industry report, “A Tax System that Enables Businesses to Invest and Grow”, which states:

“In an increasingly digitalised word, it has never been a more crucial time for the Government to act and set out a path for reform to the broken business rates system.”

I am sure the Minister will recall the 2019 Conservative manifesto, on which the party stood for election. Specifically, page 32 promised:

“We will cut the burden of tax on business by reducing business rates. This will be done via a fundamental review of the system.”

We recognise that any help for businesses that are struggling is welcome, and we recognise that the UBR has been frozen, relief extended into 2023-24, and downward phasing abolished. However, it seems that the promise of fundamental reform has now been abandoned. It seems that the Government have abandoned their promise fundamentally to address the imbalance that affects bricks-and-mortar businesses, which find themselves at a significant disadvantage compared with their online counterparts, whose warehouses typically attract considerably lower business rates.

My colleagues and I believe that the current system of business rates should be replaced to meet the needs of a modern economy. Last year, my right hon. Friend the Member for Leeds West (Rachel Reeves) announced that a future Labour Government would replace the current system of rates with a new system of business taxation that is fit for the 21st century. We will set out our plans before the next general election, and such a system will involve more frequent revaluations—a move that many people have been urging for years. It will be a fairer system that asks online giants to pay a fairer share, so that small, local and high-street businesses in all parts of the country can thrive. Ahead of fundamental reform, we also believe that the same principle of rebalancing the burden of tax in the system should apply, which is why we have set out our plans for an increase in the threshold for small business rates relief, funded by an increase in the rate of the digital services tax.

We know that partnership between the Government and businesses is critical to economic growth, but it has been lacking in our economy for so long. We also know that small businesses have been held back, particularly by an outdated system of business rates, for many years. To increase growth in all parts of the UK, the Government should support small businesses to invest, grow and create jobs.

As the shadow Chancellor has set out, Labour will carry out the biggest overhaul of business taxation in a generation so that our businesses can thrive. Our replacement system will shift the burden of business taxation so that online firms take a fairer share, while freeing those that rely on bricks-and-mortar premises. Our new system will incentivise investment and include more frequent revaluations and instant reductions in bills where property values fall. It will reward businesses that move into empty premises and encourage, rather than penalise, green improvements to businesses. It will also make sure that no public services or local authorities will lose out from the changes.

Labour’s approach will be based on working together, with businesses, workers and public bodies all pulling together to rebuild Britain and to seize the opportunities of the future. A Labour Government will help to breathe new life into our high streets by calling time on the outdated model of business rates, so that British businesses in all parts of the country can play their part in creating economic growth and the jobs of the future.

10:23

[The Financial Secretary to the Treasury (Victoria Atkins)]

It is a pleasure to serve under your chairmanship, Mr Mundell, and I congratulate my hon. Friend the Member for Waveney (Peter Aldous) on securing this important debate. I am delighted that on our side of the House we have so much of the English coastline represented—I include myself in that, proud as I am to represent the Lincolnshire coastline.

I am also delighted to be joined by the hon. Member for Strangford (Jim Shannon). I had many a happy time sailing in the famous Strangford lough in my childhood, and I know how important tourism and hospitality is to his constituency. I thank him for sharing his Northern Irish perspective, as he always does.

I hope colleagues are aware that the Government announced a significant support package for business rates in the autumn statement, and I welcome the opportunity to set that out. I also welcome the opportunity to discuss the substantial reforms to which we have already committed, which will make the business rates system fairer and more responsive to changes in the market. We have heard the concerns expressed about the status quo not just by hon. Members today, but by businesses in previous years. I will address some of those concerns and emphasise our keenness to make changes where appropriate.

Forgive me if first I go back to basics. The importance of business rates to public finances is perhaps lost in the understandable concerns raised about the impact on constituency businesses. Taxes on commercial property remain an important part of a fair and balanced business taxation system. Most advanced economies, including most OECD members, have a business property tax. Business rates raise over £20 billion a year in England alone. That money goes to fund vital public services—a priority that the Chancellor emphasised again and again in the autumn statement. Put simply, we do not believe that there is an alternative with widespread support that would raise sufficient revenue to replace business rates. For those reasons, we do not consider there is merit in a radical overhaul or abolition of business rates, but we have delivered meaningful change to improve the system and have continued to conduct several reviews on the issue. Those reviews reaffirmed the importance of business rates and concluded that they have several key advantages over other taxes. They are relatively easy to collect and hard to avoid, with a collection rate of around 98%, making them a vital and stable source of funding for local services.

My hon. Friend the Member for Waveney suggested that the current tax rate discourages investment in new spaces and expansion of existing spaces, but there is little evidence of structural issues in property investment in the UK. As he would expect, we keep a close eye on that. We have the highest share of investment going to non-residential buildings of any member of the G7. We recognise the valuable role that businesses play in our economy and we have taken action to support them through the business rates system.

[Kevin Foster]

I find the Minister’s response interesting. She talks about the investment in commercial property—for example, we are seeing £140 million of investment in Torbay hotels. The issue is not so much the overall level of investment in commercial property, but the specific locations. We might have 34 million seafront hotels in Paignton, but in the town centre, which was once the main focus for the collection of business rates, we are struggling to get anywhere. Does she think there might be a link?

[Victoria Atkins]

Goodness me, I would not pretend to have an intimate knowledge of the economics of Torbay. My hon. Friend knows his constituency extremely well, but the realistic fact is that businesses in his high street have to pay taxes of some sort. That is why we have tried to mould the business rate support package to help the businesses that need it the most, which we recognise are those in the retail, hospitality and leisure industry. I will come on to that particular support, which is a very generous package that I hope will be of great benefit to businesses in his constituency.

We have a duty to ensure that the business rates system is fair and responsive, while raising sufficient revenue to support the public services that I have already talked about. Since 2017, when the Government doubled the 100% small business rate relief rateable value threshold from £6,000 to £12,000, a third of properties in England have paid no business rates whatever. In my own constituency, I know of many properties in my market towns that pay no business rates precisely because of that protection and they are, I hope, thriving as best they can as a result.

The Government provided £16 billion in business rates relief for the retail, hospitality and leisure sectors during the pandemic because it was such a difficult time for them when the economy was essentially closed down. That was an unprecedented level of support for the high street, on which so many communities depend. From my own constituency, I know how vital that support was in keeping businesses’ heads above water during the lockdowns. The Government also provided a £1.5 billion covid additional relief fund for businesses that were affected by the pandemic but which were not eligible for other reliefs. Local authorities, due to their knowledge of their local areas, were responsible for designing and establishing those schemes. Progress has been in line with our expectations, and final distribution data will be published on gov.uk shortly.

As the Chancellor stated in the autumn statement last month, it is an important principle that revaluations should reflect market values. Hon. Members have emphasised that point during the debate. The 2023 revaluation will therefore go ahead. From April 2023, all rateable values will be updated for all non-domestic properties, with evidence from April 2021. This will mean initial bills will reflect changes in market conditions since 2015, and will ensure a fairer distribution of the tax burden between online and physical retail.

The hon. Member for Strangford asked me why the Government have not introduced an online sales tax. He will know that we launched a consultation on the issue earlier this year. We received many responses, which will shortly be published, but it is fair to say that there was not unanimity. Indeed, there was not even agreement—I would not put it as highly as that—as to what such a tax should look like, because many of even the smallest businesses on the high streets of our constituencies now have some form of online presence. It may not be the main part of their business—that may be the shop—but, understandably and laudably in the 21st century, they are trying to diversify by having an online business.

Nobody could quite see how we could differentiate between the enormous multinationals that we are all keen to ensure pay taxes and those microbusinesses that my hon. Friend the Member for Waveney described so well. That is why in the autumn statement the Chancellor decided against an online sales tax, with the important caveat that the changes we are making to business rates, including with the revaluations, will mean that the distribution warehouses, which supply the multinationals that we are all keen to ensure pay their proper taxes, will see significant rises in their bills while we also protect the shops and microbusinesses to which he referred.

[Jim Shannon]

That is a very helpful response, as always; I expected nothing less. I will take the Minister’s point of view out of Hansard and give it to some microbusinesses in my constituency that have asked me these questions. I understand there is a wish for this revaluation to happen, and I understand the difficulties and complexities the Government face to get it over the line. If I could come back to the Minister directly with some thoughts, maybe we could see if we could review it in a positive way.

[Victoria Atkins]

Of course. I am always delighted to hear from the hon. Gentleman. He will appreciate that there are many other factors; for example, click and collect was a stumbling block for many in the consultation. I look forward to his future correspondence.

The support package that we have introduced means that the revaluation will go some way to addressing the imbalance between online and offline retailers. On average, large distribution warehouses will see an increase in bills of about 27%, and bricks and mortar retailers will see decreases of about 20%. We recognise that business rates payers may feel uncertain about the upcoming revaluation, given other pressures the country is facing that are driven by global challenges.

Rising prices around the world, made worse by Russia’s illegal invasion of Ukraine, have hit businesses hard. In the autumn statement we announced the steps that we will take next year to provide support through these difficult times. We will deliver a business rates support package worth £13.6 billion over the next five years. That will protect businesses from facing large bill increases because of high inflation and rateable value increases following the revaluation.

My hon. Friend the Member for Waveney urged the Treasury to cut the UBR to the 1990 level of 35p, showing the trade-offs that the Government must make. Doing so would cost £9 billion a year, which would be a significant potential loss to the public revenue. We have thus taken the steps we have through the support package to protect ratepayers from high inflation, and we are instead freezing the tax rate for three consecutive years at a cost of £14.5 billion.

My hon. Friend the Member for Torbay (Kevin Foster) described the vibrant hospitality sector in his constituency. We are extending and increasing the retail, hospitality and leisure relief scheme from 50% to 75%, up to a cash cap of £110,000 per business. Pubs and the holiday parks he referenced are included.

[Peter Aldous]

I am conscious that I will have the opportunity to respond at the end of the debate, but I want to pick up now on one specific point that the Minister has mentioned. She said that the Treasury had carried out an assessment and if we were to go back to the UBR of just over 30p from when this system was introduced in 1990, that would cost an extra £9 billion. Did that assessment take into account a situation in which we had annual revaluations as well? If we had annual revaluations, that sort of margin would be much lower and we would fairly redistribute the burden of business rates across the UK.

[Victoria Atkins]

I will come back to that point, and particularly the detail on annual revaluations, because I think there is some sympathy with my hon. Friend’s point of view.

The retail, hospitality and leisure relief scheme is the largest business rates one-year relief we have provided in 30 years, so I encourage colleagues to ensure that their local businesses know that the Conservative Government are delivering for those businesses. It will support about 230,000 properties—not just on high streets, but beyond high streets, as my hon. Friend the Member for Torbay emphasised. Therefore, although I understand the point made by my hon. Friend the Member for Waveney regarding the temporary nature of these interventions, permanent changes have been announced and will provide support for affected businesses.

We will deliver on a key ask by trade bodies such as the CBI, the Federation of Small Businesses and the British Retail Consortium by permanently removing downward caps from transitional relief, which previously restricted falls in bills. Removing those caps permanently means ratepayers seeing decreases in their rateable value will experience a full drop in their bills next year.

Taken together, the revaluation and the support package have updated bills to reflect market conditions. Those facing bill increases will see them phased in through transitional relief, and the small businesses that make up our high streets will be protected through targeted support. The multiplier freeze will protect all ratepayers against double-digit inflation.

Colleagues were keen to emphasise the important role that pubs play in our communities. As a proud Member of Parliament for many excellent pubs in my constituency, I understand their concerns. It might help colleagues if I lay out the forms of help that pubs will receive through the support package. As a result of the package of support, pubs’ bills have fallen by about 30%. All pubs will benefit from the multiplier freeze, and pubs with falling rateable values will benefit from the removal of the downward cap that I just described. They will also be eligible for the 75% retail, hospitality and leisure discount. Of course, small pubs that have a rateable value of below £12,000 pay no rates at all.

Would my hon. Friend the Member for St Ives (Derek Thomas) be kind enough to write to me about his dry dock example? That business will receive some form of help through the overall package.

Let me turn to business rates reforms. We understand and listen to the concerns of those running businesses, and keep the operation of all tax policy under review. In the 2021 autumn Budget, we announced the outcome of the business rates review, and will shortly bring forward legislation to deliver those reforms. A core element of that package is more frequent revaluations, moving to revaluations every three years instead of every five; my hon. Friend the Member for Waveney is smiling at me. That represents significant reform, and will ensure that the system is more responsive to changing market conditions.

To enable those reforms, we are also introducing some administrative measures, including a new information duty on ratepayers to ensure the VOA has sufficient data to accurately update rateable values every three years, and to help reduce the number of appeals and the time taken to resolve them. The changes will also unlock opportunities for further improvements to the system in future, such as even more frequent revaluations. We understand the merits of annual revaluations, but we need the change to three years to settle in a little bit, because even moving to three years represents significant operational complexity, but we very much understand the wish for annual revaluations.

My hon. Friend the Member for Waveney mentioned the wish for increased transparency by the VOA, which I understand. I sympathise with the issues that ratepayers are facing through the “check, challenge, appeal” process. The Government are keen to address those issues by delivering on the commitments made in the business rates review. Accordingly, there is already a plan in place that is providing ratepayers with better access to improved information about how valuations are carried out. I urge my hon. Friend to pass to me any information he or others may have about the unscrupulous agents he described; I am most concerned about that, and will be very interested in that information, because I am looking at the role of agents across all aspects of tax policy. A lot of agents provide a very good service to their customers, but we must weed out those who are unscrupulous or even worse.

In the longer term, we expect ratepayers to be able to access fuller analysis of the evidence used to set the rateable value of a property, which I hope will in turn restore confidence in that system. We keep all business rates reliefs under review, as the system of reliefs plays a vital role in ensuring the overall sustainability and fairness of tax. The Government ensure that reliefs are as easy as possible for ratepayers to navigate, with several being automatically applied by local authorities, such as transitional relief, supporting small business relief, and empty property relief. Comprehensive guidance on reliefs is available on gov.uk.

Through the review—which I encourage the hon. Member for Ealing North (James Murray) to read; perhaps he has not realised that we have done it—we have committed to several measures to modernise and digitalise the business rates system, including further investment in the Valuation Office Agency to enable it to upgrade its IT infrastructure and digital capabilities. The review recommitted to the digitalising business rates reform programme, which will match business rates data with central HMRC tax data to provide a better oversight of the rates system, more precise targeting of reliefs, and more effective compliance.

At the very beginning of the autumn statement, the Chancellor told the House that he had three key priorities:

“stability, growth and public services.”—[Official Report, 17 November 2022; Vol. 722, c. 844.]

We understand that the issue of business rates cuts across all three of those priorities because of the impact it has on our high streets and the money it raises for our vital public services.

As ever, this is about balance. We acted at the autumn statement to support business and we will deliver on the reforms announced at the 2021 business rates review through upcoming legislation. We will continue to listen to the arguments, but we will also continue to make the decisions we think are in the interests of the country as a whole. I thank hon. Members for their contributions and look forward to engaging with them all to ensure that this continues to be a system that serves us all.

10:49

[Peter Aldous]

This debate has been short on quantity of colleagues but long on quality; once we get through a lot of the rhetoric, perhaps there is not much between us all. There is, though, a need for urgency to move forward and carry out that fundamental reform, and the Chancellor set the foundation stone for that last month.

The hon. Member for Ealing North (James Murray) is the odd one out here because, luckily for him, global warming and climate change mean that he is the only one of us who does not—yet—represent a coastal community. When it comes to levelling up, the dramatic impact of high business rates on coastal communities is quite noticeable. Our town centres—whether in Lowestoft, Torbay, St Ives or Strangford—are an important component part of attracting people and visitors, whether for a week’s holiday or just a day out. If they are hollowed out, there ain’t much to see.

In Lowestoft, there are exciting plans for regenerating the town centre. We are just about beginning to see that happening, but there is a danger that that reincarnation could be strangled at birth by high business rates. That is why we need the reform. Hotels, caravan parks, pubs and restaurants are vital to coastal economies. There is evidence that people who come in and invest in those businesses are being penalised for their investment under the current system. This debate has shown that we need to focus on the impact of high business rates on levelling up, particularly in coastal communities.

My hon. Friend the Member for St Ives (Derek Thomas) disagreed about the need to replace business rates. He outlined the need for a digital tax and to look at the VAT thresholds. I largely agree with my hon. Friend the Minister; it would probably be impossible to get rid of business rates. Reading between the lines of what the Opposition say—although it is probably not for me to do that—I sense that if they form the next Government, they will reach the same conclusion. We can probably get the sort of reforms that I want now in place much quicker, without having to wait until 2024 or beyond.

I would say to my hon. Friend the Member for St Ives that we should trial digital taxes and looking at the thresholds, but I do not think that is the holy grail to the full replacement of business rates. We need the fundamental reform that I have outlined, with a lower UBR multiplier coupled with annual valuations, which would produce the more dynamic and fairer system that we require.

The reliefs that we have talked about are welcome, but they make the system incredibly complicated. If a form of business taxation is simplified, the businesses and entrepreneurs that are investing can see a way towards making long-term investments, rather than saying, “Hang on! That particular relief is only around for a couple of years for certain. Do I need to be going ahead with this?” Providing that certainty is very important.

An ex-surveying colleague has texted me, using words to the effect of, “Don’t you realise the valuation coming up in April will be a bloodbath?” Those were his particular words. I suspect many people and businesses will get pleasant surprises; it might be a case of Christmas coming early for them. Others will fall off their chairs in shock and think, “What on earth are we going to do to address this?” The Government need to reach out and support those parties, and do all they can to assist them.

We touched on unscrupulous so-called surveyors. There are some very good and highly professional people out there who are involved in business rates, but, as I have said, this issue is an incredibly complicated part of the property surveying world, so there is a small number of national and regional experts. That leaves a vacuum for the unscrupulous to fill, and fliers tend to appear from businesses from all over the place—not local ones—saying, “Come on. I can help you with this. Hand over a thousand quid and I will sort it.” When I was in practice, one very often got called in when a business had responded to such circulars and the person had taken the money up front and disappeared. We need to work together closely to sort that out.

In conclusion, I sense that we could be at the beginning of a journey to reforming business rates sensibly. On 17 November the Chancellor took a major step, but it is a journey that we can complete in a much shorter timescale than has been envisaged. I hope that my hon. Friend the Minister will set out the stepping stones on that journey sooner rather than later, both in the upcoming Bill and the spring Budget.

Question put and agreed to.

Resolved,

That this House has considered business rates and levelling up.

10:53

Sitting suspended.