Non-Domestic Rating Bill

(Limited Text - Ministerial Extracts only)

2nd reading
Monday 19th June 2023 Lords Chamber

Moved by

[Baroness Scott of Bybrook]

That the Bill be now read a second time.

[The Parliamentary Under-Secretary of State, Department for Levelling Up, Housing & Communities (Baroness Scott of Bybrook) (Con)]

My Lords, this Bill delivers important changes to the business rates system. Business rates are a key component of the way in which local services are funded and are set to raise almost £25 billion this year. However, in recent years, concerns have been raised about the fairness of the tax and its impact on a competitive business environment.

Taking on board these concerns, the Government committed to reviewing the business rates system. We completed this process in October 2021, following extensive engagement with businesses, councils and others. The conclusions were clear: like any tax, the business rates system has flaws but it also has significant advantages that are important to protect. These include the tax’s relative stability, how easy it is to collect, how hard it is to avoid and its clear links to the locations where its revenue is spent. The majority of respondents to our review supported the continuation of business rates and did not support the disruption of a major overhaul. Overwhelmingly, they favoured measures to modernise the tax—especially moving to more frequent revaluations, which I will turn to shortly.

At the conclusion of the review in 2021, the Government announced a £7 billion package of support for businesses over five years, alongside a package of reforms. Since then, the Valuation Office Agency has delivered a revaluation, completing valuations for around 2 million properties in England, which reflects changes in the property market since 2015. Revaluations are crucial to ensuring a fairer distribution of rates bills. This revaluation, for example, rebalanced the burden between online and physical retail: on average, bricks and mortar retailers saw decreases of around 20%.

We made sure that the revaluation was manageable for businesses by introducing a £13.6 billion package of business support, which included freezing the business rates multiplier at a cost of £9.3 billion over the next five years. The Government have therefore provided considerable support into the business rates system while balancing the needs of local communities, which rely on funding for local services. However, we remain focused on the need for longer-term reform.

Throughout our review, businesses expressed their desire to keep business rates as accurate and responsive as possible. The Bill therefore delivers a more frequent revaluation cycle for business rates, moving from five-yearly to three-yearly. Following the revaluation that took effect this April, the next will occur in April 2026 and every three years thereafter. This is a positive step for business as it will ensure that the tax is fairly distributed more frequently. It is a major reform of the system, responding to the calls of many stakeholders, and is deliverable in the short term.

However, I recognise that there have been calls for greater ambition. Let me be clear: we are prepared to explore how we can go further in future. In particular, we wish to reduce the gap between the date against which rateable values are assessed and when they come into force, which has been set at two years for the 2026 revaluation. We will also carefully consider the case for an annual revaluations cycle in the longer term. However, we must take these steps sequentially. To deliver a revaluation, the VOA must carry out 2 million valuations in the time available—a major endeavour. Moving to more frequent revaluations means that other changes are necessary to enable the Valuation Office Agency to compile more accurate valuations at greater speed.

We have heard repeatedly from businesses that getting these valuations right is vital to sustaining public confidence in the tax. We also heard concerns that moving to an annual cycle would increase the volatility of bills and potentially damage the accuracy of valuations. It is therefore right that we monitor the implementation of the first three-yearly revaluation cycle and the supporting reforms before taking further action.

Delivering three-yearly revaluations on a sustainable basis will rely on the VOA having access to more timely and complete information. The Bill therefore introduces new obligations on ratepayers to provide the VOA with relevant information. This will bring business rates in line with other taxes, where self-declaration is absolutely the norm.

As part of our wider modernisation of the business rates system, the Bill also introduces a new requirement on ratepayers to provide a taxpayer reference number to His Majesty’s Revenue & Customs. This small extra step will connect the business rates information held locally by councils with HMRC tax data, delivering benefits such as better targeting of and improved compliance with rates relief schemes. Ratepayers will also be able to provide relevant information to the VOA, and their taxpayer reference number to HMRC, through a single straightforward online service on GOV.UK.

It is entirely right that we consider the potential burden on businesses of new administrative requirements. The Government have taken steps to minimise these burdens, have published estimates of the expected costs and will provide guidance for ratepayers.

I want to address some specific concerns about the VOA duty to notify that have been raised with me. First, on what information the Government are asking ratepayers to provide, the duty is not limited to information that the Valuation Office Agency needs to do its job and no more; it is also explicit on the face of the Bill that ratepayers will be expected to provide to the Valuation Office Agency only information that is within their “possession or control” and which they could reasonably be expected to know would assist the valuation office. The VOA will continue to make use of supplementary sources of evidence in order to minimise the burden on ratepayers.

Secondly, let me provide some reassurance about whether this will be complex for ratepayers. To comply with the duty, in practice a ratepayer will only have to visit GOV.UK, use the online service and answer all the questions asked of them. They will receive multiple reminders to support them in providing the right information.

Thirdly, to ensure that the VOA has the most complete set of information to deliver more frequent revaluations, it will be necessary for ratepayers to confirm each year that the information that the VOA holds on their property is correct. For ratepayers whose information is up to date, this step should take only a few minutes. For those who have not remembered to keep their information up to date, this stage will serve as a further reminder to rectify that.

Finally, we will continue to design the new processes in partnership with businesses and interested parties, and we will not activate the duty until we are satisfied that ratepayers can reasonably and efficiently comply. I thank those noble Lords who came to the drop-in sessions. That gave me the ability to answer those questions up front, although I am of course happy to pick up anything further in winding up.

As we move to more frequent revaluations, the Government have considered how to improve the support that we provide to businesses adapting to changing bills. At last year’s Autumn Statement, the Chancellor announced that he would permanently remove the requirement for revenue neutrality from transitional relief. That change is given effect by this Bill. This means that for the 2023 revaluation, there are no downward caps, which previously restricted falls in bills. Businesses have therefore seen the full benefit of falling bills immediately. As a result, the 300,000 properties with falls in rateable value at the revaluation have seen the full benefit of that reduction in their new business rates bill from April 2023. Going forward, we will use that freedom to permanently fund all future transitional relief schemes without recourse to downward caps. I am happy to give that commitment in the House.

It is also important that we protect the integrity of revaluations. Between revaluations, rateable values should change only for a material change in circumstances, or MCC. MCC challenges are designed for cases such as roadworks outside a shop causing access difficulties. This Bill will preserve that principle by providing that changes in legislation, advice or guidance by a public body are not a material change in circumstances. We consider that such matters are related to the general conditions of the market and so belong in the revaluation process.

Interestingly, the noble Earl, Lord Lytton, identified the scenario of a vaping ban as an example of how this measure could have unwarranted consequences. In fact, his example underlines why we need to clarify the law concerning MCCs. Without this clarity, over recent years the Valuation Office Agency has been forced to consider whether legislation changes such as smoking bans or the introduction of the congestion charge should affect rateable values. The result was uncertainty for the ratepayer and for local government.

In the future, we will have clarity in Clause 14, ensuring that changes in legislation such as that, which clearly concern the general economic conditions and level of rents, are reflected for all at the next revaluation. These revaluations will of course be happening more frequently under this Bill, and any physical consequences of new legislation on a property will continue to be reflected as and when they arise.

This Bill also introduces an important new relief to support businesses investing in their properties, responding to another key stakeholder ask during the review. Currently, our business rates are a tax on the value of the property, so businesses may see an immediate increase in their rates bill for any improvements that they make to their property. From 1 April 2024, this Bill will mean that no business will face higher business rates bills for 12 months as a result of qualifying improvements to a property that they occupy. The Bill prescribes powers for Ministers to set conditions for the availability of the relief, and the Government’s policy on this has been set out in our earlier technical consultation. My department has published draft regulations for consultation so that noble Lords may review how the Government intend to exercise these powers.

Finally, the Bill makes changes to the calculation of business rates multipliers—or tax rates. In recent years, government policy has been to uprate the lower multiplier each year by the consumer price index rather than the higher retail price index. The Bill ensures that the CPI is the default uprating for both multipliers, reducing the potential inflationary burden on businesses. The Bill also provides a power to uprate at a level lower than CPI, and to directly set which properties are subject to which multiplier, allowing the Treasury greater flexibility in the support it can provide.

In conclusion, this Bill modernises the business rates system by bringing valuations more in line with the property market, improving the data underpinning the system, removing barriers to investment and improving fairness. I look forward to hearing the contributions of noble Lords on this important subject. Many of your Lordships have called for reform of this tax for some time, and I am confident that this Bill delivers it. I beg to move.

--- Later in debate ---

[Baroness Scott of Bybrook (Con)]

My Lords, it is a pleasure to close the debate, and it has been a pleasure to listen to such thoughtful contributions. The noble Baroness opposite is absolutely right: I have got a lot of questions. I am bound not to remember all of them, but I will write a letter afterwards to make sure that everything is set. I will also offer more meetings, if noble Lords would like them, before Committee.

It is right that we strive towards the best possible business rates system: one that balances the needs of the taxpayer with the importance of sustainable services in local communities. It has to be a balance. A lot has been said about business rates being too high, but, as we know, if business rates go down, so does the money that local authorities get. We need to get the balance right.

The Government’s review of business rates considered how to improve the tax from a range of angles, and this Bill makes a series of significant improvements which will have considerable benefits for those who pay the tax and those who rely on it. As I said, I am very grateful for the contributions that have been made. I will try to answer as many of the questions as I possibly can, with my many bits of paper.

The noble Lord, Lord Shipley, the noble and learned Lord, Lord Etherton, and many others have suggested that we adopt a short evaluation cycle of one or two years. As I set out in my opening speech, we are happy to consider this carefully in future, once the reforms in the Bill have been implemented. However, it is vital that we approach these changes sequentially to ensure that we can deliver more frequent revaluations and avoid destabilising the tax. If we go too fast, that is what might happen.

The noble Lord, Lord Shipley, asked whether we could increase the threshold in the small business rate relief scheme or otherwise reduce the multiplier. The Government’s generous small business rate relief scheme already sees over a third of properties pay no business rates at all, and that is worth £2.1 billion per year. Further increases in the threshold for the SBRR would be a broad-based and indiscriminate way to provide support, and would therefore be a poorly targeted type of relief. However, the noble Lord welcomed the considerable support we are providing to businesses under the existing schemes, and obviously we will keep them under review.

The noble Lord, Lord Shipley, the noble Earl, Lord Lytton, and the noble Baronesses, Lady Pinnock and Lady Thornhill, and others asked about the transparency and performance of the VOA. If there are any changes, it is important that it can take those changes, work with them and deliver. I assure noble Lords that the VOA will continue to publish targets for its timeliness under the new system and measure performance against them. Current targets cover timeliness on maintenance reports and the check stage of the appeals process. While the new targets will be informed by the development of the new system, the Government are very clear that these must be both ambitious and deliverable. The VOA must deliver on those targets.

The noble Lord, Lord Shipley, referred to the role of land values in the tax such as it is. The Government consider that the arguments in favour of a land value tax are not supported by the evidence. A land value tax would also inevitably increase the tax burden for properties on large pieces of land, such as golf courses or farms, whereas densely developed land, such as that of the Shard, would see lower bills. I understand that he indicated his support for the tax based on rates, which is how business rates work, and I welcome that observation from him.

The noble Earl, Lord Lytton, the noble and learned Lord, Lord Etherton, the noble Baroness, Lady Thornhill, and others asked how we have framed improvement relief and whether it will in fact provide the incentive for property investment—this is very important. The relief is designed to help occupiers make improvements to their existing premises, rather than subsidising general commercial property development. The Government consider that a 12-month relief will allow time for the benefits of the property investments to flow through into businesses. We will keep this under review; in particular, we will review this scheme in 2028.

The noble Earl, Lord Lytton, asked whether we had assessed the impacts of the new duties. We have carefully considered the impact of the duties on businesses and published two impact notes to outline the estimated costs of complying with the new duty. The VOA estimates the cost of the new information duty to be £35 per ratepayer each year. The current system costs ratepayers £15, so this is an increase of £20 each year. The HMRC duty for tax reference number is estimated to be about £2 for most businesses, and no more than £6 in those cases where finding a suitable tax reference number takes a bit longer.

The noble Earl, Lord Lytton, asked whether guidance will be available to help ratepayers comply with these duties. As I said, the Government will not formally activate the VOA duty until we are absolutely satisfied that ratepayers can reasonably and efficiently comply with it through the online service. Guidance and support will be offered to those engaged in the soft launch of the system. As is the purpose of the soft launch, the guidance will be developed as we learn from engagement with users.

The noble and learned Lord, Lord Etherton, raised concerns about those eligible for the 100% relief and whether they should be subject to these duties. Information collected by the VOA on a specific property is often used in the valuation of other comparable properties, many of which may not receive 100% relief. For instance, a small independently owned shop which pays no rates would have to pay business rates if it were occupied by a large chain, such as Co-op. It is important that we have all that information collected for all properties. However, as I said, we will not formally active the duty until we are absolutely satisfied that all ratepayers, including those getting 100% relief, can reasonably and efficiently comply with it.

The noble and learned Lord, Lord Etherton, the noble Baroness, Lady Thornhill, and others set out why the level of business rates is considered too high. As I said, business rates are an essential form of funding for local government, providing vital public services and supporting the Government’s levelling-up agenda. The Government have taken action to hold the tax rate steady over the last three years, protecting businesses from inflationary pressures at a cost of around £3 billion each year from 2023-24. Given the difficult fiscal position, it would not be responsible to cut the rate further, with a 1p cut costing approximately £600 million per year.

The noble Baroness, Lady Thornhill, asked whether the VOA would be able to cope with the reforms. The VOA has plans in place to enable the delivery of the reforms in the Bill; the Government have invested to make that change a reality, with £0.5 billion for the VOA as part of the spending review; this includes funding for important changes to upgrade IT infrastructure and digital capabilities.

The noble Lord, Lord Thurlow, spoke about the transparency of the VOA’s work. The Government committed in the 2020 business rates review to reforming the VOA’s processes to make them more transparent. The duty contained in the Bill is essential for the VOA to implement its offer of improving transparency, and we remain committed to that aim.

The noble Lord also raised important points about the danger of rogue agents, as did other noble Lords. I can assure him that we will be consulting on agent behaviour as part of the avoidance and evasion consultation. As he notes, the majority of agents are legitimate organisations that are typically registered with one of the main professional bodies that he mentioned and provide a valuable service to their clients. Nevertheless, some agents seek to take advantage of their clients or actively to promote rate mitigation strategies. The consultation will, therefore, seek to understand the nature and scale of these issues and identify potential actions that the Government can take to help address these practices. While I am on this subject, I wish the noble Lord a very good day tomorrow. I hope that he will feel much better after it.

I move on to important points raised by the noble Baroness, Lady Pinnock, and all other noble Lords. All brought up the issue that the Government have not addressed the imbalanced treatment of the high street and online businesses. We recognise the concerns that people have raised and we have taken significant steps to tackle this. The Government looked at the case for taxing businesses differently, through our review of business rates and through a separate consultation on an online sales tax. Our review made it clear that people were not supportive of penalising specific sectors or properties through business rates. The Government reviewed the feedback that they received from stakeholders over the online sales tax consultation period and announced at the Autumn Statement of 2022 their decision not to proceed with such a tax.

In summary, the evidence received suggested that an online sales tax would have been extremely complex to design and implement and would create undue administrative burdens for businesses. This includes challenges of defining the boundaries between what is online and what is instore retail, including the knotty issue of click and collect, which came up. Rather than penalising innovative online businesses, we have chosen to focus on supporting those high street businesses most in need, with an improved relief for retail, hospitality and leisure businesses, worth £2.1 billion this year, offering 75% off bills up to a cash cap. That is the way we have decided to do it.

The noble Baroness, Lady Pinnock, also brought up the issue of business rate consultation on avoidance. At the Spring Budget, the Chancellor announced that the Government would consult on business rate avoidance and evasion, and that the consultation will look at the three or six-month period of relief available for empty properties. Our concern is to ensure that landlords are not avoiding paying rates, which I hope gives some reassurance. The noble Baroness also asked about the Government reforming empty property rates. As I said, we will consult on business rates avoidance and evasion and look at that issue further. Our concern is to ensure at all times that landlords are not avoiding paying rates—that is the important part.

The noble Baronesses, Lady Pinnock and Lady Hayman of Ullock, brought up the issue of the cost to local authorities, as did the noble Baroness, Lady Thornhill. I am not sure about this, but I am pretty sure that local authorities will get new burdens, if there are new burdens—but I shall check exactly how that is going to happen and write it in my following letter.

That is as much as I have, but I shall look at Hansard tomorrow. I shall answer all the questions and put the answers that I have already given in writing as well. As I said, we can meet again if any noble Lords would like to before Committee. The changes that the Government are making to the business rates system will help businesses grow and prosper, and I thank noble Lords for their basic welcome of the Bill. The Bill reforms rates so that they more accurately reflect the property market—and we are also addressing the perception that tax is a barrier to investment. The changes in this Bill will lead to fairer and more accurate bills and a more adaptive system, capable of keeping up with the changing modern economy.

Bill read a second time.

Moved by

[Baroness Scott of Bybrook]

That the bill be committed to a Grand Committee, and that it be an instruction to the Grand Committee that they consider the bill in the following order: Clauses 1 to 17, Schedule, Clauses 18 to 20, Title.

Motion agreed.