Local Government Finance Bill

Baroness Hanham Excerpts

Tuesday 3rd July 2012 Grand Committee

[Lord McKenzie of Luton]

My Lords, I shall speak also to Amendments 2, 3 and 4. At the start of our deliberations, it might be helpful if I set out our approach to these Committee proceedings. This is a framework Bill. A tremendous amount is being left to regulation-making powers in the Bill—at least a couple of dozen powers on my count—which comprises just 19 clauses. We accept that the framework has been filled in in part by recent statements of intent and that there is a plethora of technical and other papers, but that is not the same as having a complete set of draft regulations. We will therefore use the opportunity of this Committee to probe the detail of what is intended and get as much as we can on the record. We will also seek to insure, where appropriate, that those regulation-making powers give the maximum opportunity for parliamentary scrutiny, hence these amendments.

Clause 1 introduces new Schedule 7B, which contains the nuts and bolts of the business rate retention scheme. It provides, among other things, for certain of the new regulations to be by way of the affirmative procedure and the rest by the negative process. This group of amendments adds to those that should fall into the affirmative category.

Amendment 4 concerns paragraphs 37 and 38 of the schedule. The Delegated Powers and Regulatory Reform Committee recommended that regulations made by virtue of paragraph 39 should be subject to the affirmative procedure because they impose a liability on a billing authority. This is what the amendment seeks to achieve. Paragraph 39 refers to regulations under paragraphs 37 and 38, and it is presumably those that should be subject to the affirmative procedure. Although we will want to discuss the detailed provisions later in our deliberations, we assume that the Government accept the Delegated Powers Committee’s recommendations on this matter, even if not our precise wording.

Amendment 1 deals with paragraph 6. This requires, following a local government finance report, payments of the central share of non-domestic rates to the Secretary of State. However, the regulation-making power includes the power to define what non-domestic rate income is and what adjustments can be made to amounts payable. We will discuss some of the detail of this later, but the power to define what income is for the purposes of the local/central split, including judgments about authorities acting diligently, is, we suggest, significant and should be subject to the affirmative procedure, at the very least on its first use.

Amendment 2 seeks to bring the provisions concerning payment on account under the safety net arrangements within the affirmative procedure. Again, we argue that this is much more than a mechanistic provision concerning calculation. It is potentially very significant for some authorities. It covers the circumstances in which safety net payments might come about. We welcome the fact that other regulations relating to the levy and safety net are to be subject to the affirmative procedure and consider that the same should apply to paragraph 26. So far as we can tell, the issues around payment on account are not covered in the statement of intent or in the government response to the resource review consultation. The consequences of catastrophic reductions in year of a business rate base, likely to be accompanied also by an upsurge in eligibility for council tax support, need serious consideration and should be subject to the affirmative procedure.

Finally, Amendment 3 focuses on paragraph 30, which deals with transitional protection payments. These are existing arrangements designed to dampen the effect of changes to business rate liabilities arising from revaluation. This could have a significant implication for the business rate retention scheme, and it is proposed to take the effect of this outside of the scheme. This requires regulations concerning calculations of a billing authority’s deemed rate in income and actual rate in income, including judgments about whether an authority has acted diligently. This is, again, a very significant provision, which should be subject to the affirmative procedure. We are in uncharted waters over lots of these areas, on a range of key issues, and we should do all we can to strengthen the parliamentary scrutiny. I beg to move.

[The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham)]

My Lords, as the noble Lord, Lord McKenzie, said, this is framework legislation—as indeed is Local Government Finance Act 1988, which precedes it. It is therefore to be expected that there will be a number of detailed matters which will be dealt with in regulations. The appropriate level of parliamentary scrutiny for each set of regulations will differ depending on the precise subject matter at hand, and we have carefully considered the appropriate level of scrutiny for each of them.

This is why provision is already made for a number of regulation-making powers in the Bill to be subject to the affirmative procedure, as the noble Lord acknowledged. Regulations under paragraphs 8, 20 and 23, for example, which all deal with the calculation of various payments under the scheme, will be under affirmative order. The Government have made these regulations in particular subject to the affirmative procedure in recognition of the need for the highest level of parliamentary scrutiny over such types of finance provisions, given their significance and impact within the rates retention scheme.

Similarly, the tariff and top-up payments that will flow to and from local authorities will be determined by the local government finance report for a year, which must be approved by resolution of the House of Commons. That again affords the appropriate level of parliamentary scrutiny over key payments within the scheme.

All other regulation-making powers in connection with the non-domestic rating in the Bill are subject to the negative resolution procedure, as the noble Lord said. This is in line with the approach that is currently taken in the existing Schedule 8 to the Local Government Finance Act 1988, and also reflects the more technical or administrative nature of those powers. These include the regulations specified by the noble Lord in his Amendments 1 and 4.

The Delegated Powers and Regulatory Reform Committee, as the noble Lord has acknowledged, has carefully considered the Bill in advance of our debate today. The fourth report of the Committee, published on 21 June, considered that not only is the balance in new Schedule 7B between provision in the Bill and provision in delegated legislation “about right”, but also that the level of parliamentary control over regulations set out in the Bill is, subject to one exception which I will come on to in a moment,

“appropriate according to the relative significance of the various powers conferred”.

Noble Lords will not therefore be surprised when I say that I agree with the conclusions of the Delegated Powers and Regulatory Reform Committee on this point and therefore cannot accept their amendments.

We have carefully considered what the appropriate level of parliamentary scrutiny should be for each regulation-making power in the Bill, and our approach is supported by the findings of the Delegated Powers and Regulatory Reform Committee, whose responsibility it is to consider such issues. However, I hope that the noble Lord’s disappointment in my response will be tempered by my confirmation that we will bring forward an amendment at Report to make those regulations made by virtue of paragraph 39 subject to the affirmative procedure. I think that that is what the noble Lord was looking for. This is the exception to which I referred earlier, and in line with the recommendations. With those explanations, I hope that the noble Lord may feel able to withdraw the amendment.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for her reply. Of course, I will withdraw the amendment given where we are. I am pleased that the Minister has confirmed that government amendments will be tabled to deal with the recommendations from the Select Committee. But I shall dwell for a little on two provisions to try to explain further why we believe that their significance is such that they should be subject to wider parliamentary scrutiny.

On payments on account of the safety net, the provision was put in the Bill, as the Minister knows, to give local authorities that are suffering in year from a significant downturn in their business rates an opportunity to get support during the year rather than wait until after the year, which is the general structure of the scheme. In the circumstances in which those opportunities present themselves, it is of crucial importance to local authorities to know what the rules of that provision are. I would have thought that it was also important for our scrutiny of something of that magnitude, which is not simply an issue of narrow accounting but an issue of real substance as to how a key part of the business rate retention scheme will work. I shall not dwell further on the paragraph 6 issue, other than to say that this is not just about accounting for the debits and credits; it is about a definition of income for the purposes of these provisions. I am sure that I will not manage to change the Minister’s view on the matter this afternoon, but we would like to reflect on it because these are significant provisions that deserve wider parliamentary scrutiny. I beg leave to withdraw the amendment.

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[The Earl of Lytton]

My Lords, the noble Lord, Lord Beecham, made a perfectly correct reference to some comments that I put to him. Indeed, I have made comments in the context of this Bill before. Before I go any further, I ought to declare various interests: as a practising chartered surveyor, a member of the Rating Surveyors’ Association and a member of the Institute of Revenues, Rating and Valuation, which explains my interest in the valuation aspects of business rates.

There is a growing issue that creates a greater than usual level of uncertainty with regard to the yield of business rates. I referred previously to the number of outstanding non-domestic rating appeals. I believe that the current total is around 144,000 or 146,000. Even if you get rid of the repetitious ones, the true total probably sits at around slightly more than that—so, 80,000 or 90,000 appeals. Some of these go back to the 2005 rating list.

Business rate payers are getting increasingly concerned that access to justice is effectively being denied to them. A typical lead-in period from the time when an appeal is lodged to the time when the Valuation Office Agency is able to make any sort of substantive comment, I am advised, is in the order of two years—and that is not to the time when it actually gets before the valuation tribunal, when the valuation officer can actually open his book and address the issue. I do not blame the Valuation Office Agency for that. I think that the Committee should be aware that this is fundamentally to do with the agency being starved of the necessary resources. It is being starved of the personnel and starved of the resources to upgrade its computer technology; its computers do not interleave with the valuation tribunal’s computers, and so on and so forth.

Businessmen are particularly concerned because the non-domestic multiplier—that is, the multiplier that is applied to the rateable value in order to provide, as it were, the gross amount of the rates payable before transitional relief and other things—contains an element for potential losses to the tax base arising from successful appeals. So businesses up and down the country are bearing the cost of this contingent risk factor which is implicit in the fact that we are dealing with a system that is lacking in the necessary resources.

My point in raising this on Second Reading was to outline that this is the nature of the animal that is about to be bestowed—or, rather, its risks are about to be bestowed—on to billing authorities. I think that this needs to be addressed. I do not know how this relates to whether the Bill should be brought into force in 2013 or subsequently—I make no comment about that. I just say that there is an in-principle issue about the maintenance and management of the tax base that, if you do not get it right, will be in the nature of passing the buck, an issue that the noble Lord, Lord Beecham, raised on Second Reading. This is a risk factor. I think that it would be entirely wrong, although— I declare another interest as president of the National Association of Local Councils—that does not make me unaware of the risks that are being imposed on the principal authorities, which are represented here by their president, my noble friend Lord Best. I think that it is right that, when we are dealing with these matters of principle, we actually address them at this stage. This is part of the tapestry—the backdrop—over which an awful lot of the other bits that we discuss will have to be viewed.

[Baroness Hanham]

My Lords, I thank everybody who has contributed. I particularly thank my noble friends Lord Tope and Lord Jenkin, who have broadly said what I will say. I do not think that local government really wants us not to proceed at this stage. This has been in the offing for some time; people are well aware of what is coming about and there have been many discussions with them. Therefore, the suggestion that local government will not be able to implement the rates retention system from 2013 is not correct. Local government will have all the information that it needs to implement the rates and retention scheme effectively, before it has to do so. We will be publishing draft regulations before Report in October. Other information in terms of consultation of the technical detail of the scheme is going to be available over the summer and there will be draft secondary legislation in the autumn before the draft local government finance report is due. Therefore, by autumn, all the information necessary for the implementation of the business rates scheme will be out, even if some of it is in draft. Other information will then be available tying in to the local government finance report, which has to be laid, as it is part of the whole system.

The noble Earl, Lord Lytton, has raised a question that I hope we may defer, because he has tabled a major amendment about it for later in the debate. Indeed, some of the points raised by the noble Lord, Lord McKenzie, are also the subject of amendments. We might have a better opportunity to discuss them later. While I understand the noble Earl’s views that this is, or should be, part and parcel of the scheme, we think that that could and should be dealt with separately. As I said, we will come to points on appeals later on, but in setting up the retentions system we will make an adjustment to reflect the cost to local government of outstanding and future appeals, so there will be some amelioration.

We have worked pretty collaboratively with local government throughout the development of these proposals. In March 2011, we published the terms of reference of the local government resource review and in doing so we clearly set out the aims and the scope of our proposed reforms, as well as the timetable for implementation. We have since consulted local government on numerous occasions. In July 2011, we published a consultation on the design of the rates retention scheme and, in August 2011, we published a further eight technical papers to provide more details on these proposals.

We have listened to what local government has said. This was evident in our response to the consultation published in December 2011 and, indeed, that consultation continues today. The Bill that we are debating is the product of this attentive engagement and consultation. It has, of course, received pretty considerable scrutiny—perhaps unlike the Localism Bill—in the other place and there has been a gap since then for people to think about it and to ask for any information that they do not have.

We will continue to work with local government as we proceed. First, there is our working group made up of local government representatives, including the LGA, which is contributing to the policy and technical debate for the information that will be coming out shortly. There is a further consultation later this month on the technical details underpinning the scheme. There is plenty going on still to shape the legislation going forward.

In terms of our approach to the implementation, we believe firmly that the existing timetable should be adhered to. Before the new rates retention scheme is introduced in April 2013, local authorities will be consulted on their baseline funding before the end of this year, and after a debate in the other place they will receive their final settlement in early 2013. That follows the normal practice that has existed for years. I can remember discussions on local government finance taking place: we always thought that it was a bit tight, but it has always been at the end of the year, sometimes in December. That will be there. This means that the timescale for agreeing baseline funding in advance of April 2013 will be the same as happens currently for the first year of a multi-year settlement. Local authorities will be able to use that information to inform their local budget setting in a timely manner, as they always have done.

I strongly believe that we should be able to implement the rates retention scheme from 1 April and that it is desirable to do so, because local government is expecting it. Moreover, the Bill contains provisions to amend the date of introduction to a subsequent financial year should this be absolutely necessary, although I do not think that noble Lords should hang on to the coat-tails of that. It seems inevitable that such a clause would be included in legislation; there often are clauses in case the absolutely extreme happens. I do not expect the extreme to happen over business rates; I expect them to be implemented by 2013 for all the reasons that I have given noble Lords about the consultation, the discussions and the information that has been presented. Broadly, unless there are major changes to the draft regulations—and I suspect that, even if there were changes, we would be able to cope with them—we will be able to proceed as I propose and get there satisfactorily by the beginning of the next financial year.

For all those reasons, I reject the amendments. I am conscious that I have not commented on the intervention of the noble Lord, Lord Smith, but perhaps I can pick up those points later.

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[Lord McKenzie of Luton]

My Lords, I thank the Minister for her response to the amendment, which I will in due course withdraw. I follow on from the wise words of my noble friend Lord Smith, who has incredible practical experience of leading a major council. I was unclear from the Minister’s reply whether we had the assurance that all draft rates will be available by the time we get to Report, or all the information needed. There is not necessarily a position on that; all the information that somebody needs is one thing, but seeing it in terms of regulations that will, we hope, in due course go through the parliamentary process is something else. The Minister said that the timeframe is consistent with the current timeframe of the local government financial settlement. Well, yes—but this is not a routine local government finance settlement. It is a significant change, so aligning it timewise is not necessarily appropriate. The noble Lords, Lord Tope and Lord Jenkin, both said that there would be disappointment if there was a deferment. That may be the view of some but I know that it is not the view of everyone.

I am not sure that we fully covered the issues raised by my noble friend Lord Beecham and the noble Lord, Lord Palmer, about reserves, particularly the issue around CIPFA advice. It would be good if the Minister covered that before we put this matter to bed.

The noble Earl, Lord Lytton, again made a very powerful point. I was struck by his contribution at Second Reading. Summarising the concerns, he said that risks are about to be bestowed on billing authorities but the maintenance of the tax base is with central government. That mismatch is a real issue. Later in our deliberations we will come to some amendments that may enable us to go into that, but I am not sure that there is not a broader issue about having the ability to test the appropriateness of the rating system to bear the weight of this new way of dealing with local government finance. However, we will have to see when we get to those amendments.

Perhaps the noble Baroness would deal with the issue of reserves and clarify whether we are talking about draft regulations or about information in another form. We have had lots of statements of intent, which have been very helpful, but they do not amount to fine detail. If we have draft regulations by Report, when is it expected that they will come into effect? What is the rough timetable?

[Baroness Hanham]

My Lords, the regulations that are going to be of significance will be in draft form. I guess that that will be most of them and any that are not will not be worrying us. I think that I can give the Committee an assurance that the draft regulations will be available for us to consider by Report. That is what I would want to happen and I take that on board.

I apologise for not having picked up my noble friend Lord Palmer’s comment about reserves. I shall have to write to him about that, although I ought to know how they are interlocking. Unfortunately, I did not hear the Secretary of State’s speech at the local government conference but I am sure that, whatever he said, he was not getting at local government in any way. However, there are a number of aspects of reserves—main reserves and specific reserves—and perhaps I may write to Members of the Committee before the next stage to give them the information that I think they are looking for. I hope that that will satisfy that aspect of their queries.

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[Lord Palmer of Childs Hill]

No, I am not a vice-president of anything. In addition to the comments that I and the noble Lord, Lord Beecham, made about reserves—specific and non-specific—one also needs to take into account the restrictions imposed on local authorities by external auditors. External auditors used to come under the Audit Commission but now they are a stand-alone operation. They require a certain level of reserves on the balance sheet, and it would be difficult if central government were to impose requirements on those reserves. External auditors say that you have to have £5 million, £10 million or £15 million in reserves to make everyone feel comfortable, but I have always said when making speeches that I think they make people feel too comfortable. However, that is what the auditors say and they will qualify your accounts if you do not do that.

[Baroness Hanham]

I return to the fact that unfortunately I did not hear, and do not know, what the Secretary of State was referring to. Of course, reserves are part of local government finance and part of control systems in local government. I should like to make some further inquiries about how that interlinks, if it does, with what we are talking about—the business rate retention scheme—so that I do not mislead the Committee. I know that the provision and use of reserves—and sometimes councils have large reserves—could potentially be used to help to ease the current financial situation. I shall not say anything more about that because I do not know what was said but I shall come back to it.

I was also asked about the police authority, and again I apologise for not picking that up. As I understand it, and I shall write if I am incorrect, the police authority will make the precept because it will be in place until November. It would be pretty unreasonable to ask a new police commissioner to come in to sort that out in the short time available. Therefore, what he or she inherits from the police authority will be what goes forward for the first year. After that, the police commissioner will set his or her own precept. I am not being prodded from behind and being told that that is incorrect but I will let noble Lords know if it is not correct.

[Lord Smith of Leigh]

I am sorry to intervene again, but that contradicts what I was told on Friday. Because of the problems of timing, the police commissioners would want to set the budget for the year from 1 April. In fact, I have just written a letter to the Home Office to ask whether we can do something about that because it makes timing very difficult.

[Baroness Hanham]

If there is a disagreement on that then I must make sure that we know the answer. I have given the answer that I think is correct.

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[Baroness Hanham]

My Lords, I am grateful to the noble Lord, Lord McKenzie, for introducing this amendment. Within it he raises some other points which we will come to later, particularly regarding the 50% retention issue, which is the subject of later amendments. However, I do not think that this provision is necessary. On a point of principle, the lack of a specific provision for making representations to the Government does not prevent anyone, or any authority, from doing so at any time. Nor do the Government need any particular legislative provision to be able to consider a representation. If an individual authority feels that it is in difficulties, it is perfectly entitled to come to the Secretary of State and say so.

Receiving and considering representations is a fundamental part of the Government’s work and the Government consider and respond to representations from members of the public and from local government every day. Representations constantly take place on local government finance, for example. I therefore do not think that we need this provision. I am not clear that the proposed new clause would bring any additional practical benefit to what will be an already transparent process, and I will explain why.

Under the rates retention scheme, the annual local government finance report will set out the tariff payments that individual authorities in the regime will be required to make to central government and the top-up payments that individual authorities will receive. There will continue to be an annual local government finance settlement and an annual local government finance report. A draft of this report will be shared with local authorities before it is laid before the other place. The report may be implemented only if it is approved by Members of the other place.

The Government intend to fix tariffs and top-ups at the start of the scheme and then link them in future years to the retail prices index. In future, the Government intend to fully reset the scheme only to reflect any reassessment of authorities’ needs, with the exception of the first reset period, at intervals of about 10 years to create the strongest possible incentive effect. I think that the noble Lord supports that view although he is concerned about individual authorities, but I think that I have addressed that point. In years where a reset does not occur—anywhere between one and 10 years—tariffs and top-ups will change only by RPI. At the very least, therefore, it will be clear to all, from the calculation of tariffs and top-ups in the annual local government finance report, whether a reset has taken place. It will be open and clear.

In practice, of course, we would expect to let local government know well in advance when the Government intend to reset the system. We have done this already by signalling the intention to reset the system for the first time following implementation in 2020. That is in seven years’ time. However, it remains the case that in any year, during the course of the debate on the annual local government finance report, Members of the other place would be perfectly entitled to ask the Secretary of State what representations he had received during the course of the year about whether it was appropriate to reset the system and why he had chosen not to act upon them.

Specific provision is not needed here for the Government to be held to account properly about resetting the system. It is an inherent part of the system through the transparent annual local government process. I therefore believe that the amendment is unnecessary and I hope that the noble Lord will withdraw it.

The noble Lord asked what would count as an exceptional circumstance. That is slightly difficult to see until you see it, although such a circumstance could arise if resources became significantly out of line with needs. The noble Lord asked me previously what the safety net will cover. It will cover situations such as a major company collapsing with the consequence that the business rate is wiped out. That goes back to the previous amendment, and I apologise for not picking it up.

I hope that the noble Lord feels able to withdraw his amendment.

[Lord Beecham]

Will the Minister look again at subsection (2) of the amendment to which she implicitly referred? The amendment would require the report in any year to refer to,

“any representations ... received from local authorities on whether it would be appropriate to re-set the system”,

and to the Secretary of State’s decision and the reason for that decision. The Minister rightly says that people could ask a question or a succession of questions about that. This amendment systematises that process so that it is clear and seen as an integral part of the annual financial report. I cannot see the difficulty in the Government accepting that it should be part of the information base to be considered alongside the whole of the rest of the local government finance settlement at the appropriate time. Would it not be more convenient for Ministers to do it that way rather than to have to reply to a succession of questions, perhaps over a different period, not necessarily tied in to the process of approving the report?

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[Lord True]

I am sure that the noble Lord, Lord Beecham, was extremely successful in secret with that one Government with whom he had a good relationship once upon a time.

I do not wish to detain the Committee. I would simply say that surely the problem with a system like this one is that you will then have emulous enthusiasm, so that if the authority of the noble Lord, Lord Beecham, makes representations and they are going to be published in a report before Parliament, someone will come to me or to my noble friend Lady Eaton and say, “Why has your authority not made representations?”. So we will have lots of local authorities asking directors of finance to put in their representations so that they can be published and ticked off in a report to Parliament. I do not think that we should bureaucratise this too much until it seems, with experience, that the Government are suddenly not prepared to hear representations on the system. Then we can look at it. However, I think that there is a risk of overbureaucratising this and that it could be a make-work rather than provide a solution. I appreciate the intent with which it is offered but I hope that my noble friend will stick to the position she set out.

[Baroness Hanham]

Yes, I will. We feel that this would be overly bureaucratic. As I laid out in my response, this can happen. If somebody has a reason or a need for a reset, or they think that they have, they can make representations. I do not think that that requires legislation. I do not intend, unless I am pushed at another stage, to accept that it is necessary at all, as such provision already exists. There is already a process by which that can happen.

[Lord McKenzie of Luton]

My Lords, I am grateful to the Minister. We have probably aired this enough, at least for this occasion. I am grateful in particular for the acknowledgement that exceptional circumstances exist when issues are out of line with need. That begs a whole range of other questions, but having that on the record is useful. We might want to explore it further at a later stage, but for now I beg leave to withdraw the amendment.

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[Lord McKenzie of Luton]

That is a very interesting question. We have an amendment coming up which is intended to probe the heads under which various categories of institution are counted as qualifying as English local government. It is a possibility but we can specifically probe that when we come to the next group of amendments.

This really is the most troubling aspect of these proposals. Unless I am missing something, it is an area where we do not have enough information. On one basis, we might be happy with a share that is not 50% but 30%, and on another basis we would not want any central share at all. Under Amendment 9, my noble friend Lord Smith probed why we have that particular formulation. I am sure that the Minister has an answer.

Amendment 17 touches on the hugely important issue of not only having information about the current year but being able to project what is likely to happen in subsequent years, particularly in an environment where councils are having to save every penny they can and take painful decisions about cutting back on services.

Amendment 12 in the name of the noble Lord, Lord Jenkin, seeks to ensure that the quantum of the central share will not grow from year to year. Given the RPI increase in rateable values, this should mean that the percentage of the central share gradually declines.

However, we need to be mindful that all these matters could be achieved by central government charging grants against the national business rate collection so that both central and local shares decline in amount— effectively top-slicing. Perhaps we can have amendments to deal with that, as we need to protect against that possibility.

Amendments 21 and 22 in the name of the noble Lord, Lord Jenkin, offer a rather novel approach, which dictates a gradually reducing percentage share of a billing authority’s central share and a gradually increasing percentage of a billing authority’s local share, so that whatever is top-sliced—if anything is—what remains is increasingly skewed to the local share. I think that that approach has some real merit. I should be very happy to engage in discussions to see how it might be developed and made watertight if it is to be included in the legislation so that the Government do not have a way round it. Subject to what the Minister says about the distribution of the central share, we would seek to support that.

Amendment 16 in the name of the noble Lord, Lord Best, seeks to preclude the determination of a local and central share after the financial year ending 31 March 2015. Whether we can support this depends on what happens to the central share. If its application provides a means of redressing possible adverse distributional consequences of the BRRS, there may be an argument for its continuance. Otherwise, it is the business rate scheme that will drive the distribution of the control total, or its equivalent. Even if the rebasing is fair at the point that tariffs and top-ups are established, the dynamic does not mean that it will continue in that way until the reset date.

I shall comment briefly on a few of the contributions to this debate. The noble Lord, Lord Greaves, made the point that whether the figure is 50% or somewhat higher, it will not necessarily change the world for some authorities, particularly smaller ones. I would echo that from Luton’s perspective. My noble friend Lady Hollis reiterated the point about cutting the link between business and local government through the nationalisation. However, we should not berate the noble Lord, Lord Jenkin, any further; I think that he has redeemed himself by his approach, and he has certainly done so with his introduction to this debate, which was very constructive.

The noble Baroness, Lady Eaton, talked about the RSG distribution and the formula grant. I think she was referring to how you set the baseline and the parameters that are going to be used, and we are going to have some debate on that. If the resetting is not going to be for seven or 10 years, getting that as right as possible is hugely important. It might be—we might get some good news from the Minister—that it could be ameliorated in part by use of the 50% central share, but I am not sure that we are going to get that news this afternoon. I am looking forward to the Minister’s reply.

[Baroness Hanham]

My Lords, so do I. I am grateful to all noble Lords who have spoken to their amendments. They asked a number of questions, in particular, the noble Lord, Lord McKenzie of Luton, at the end. Some of them I will be able to deal with, but some I will not. I think the sensible thing is for me to make sure that we give a written response to questions where there is a need for detail so that we can come back to them at the next stage or have discussions in between, if that is necessary on the full information, not all of which I have today.

I shall start with Amendment 9, which was moved very shortly by the noble Lord, Lord Smith, and seems to require about six pages in reply. I am going to have to skim through this extremely important matter which has clearly shaken the tree a bit. On the face of it, Amendment 9 makes a very simple change to the accounting arrangements for the central share but, as the noble Lord, Lord Smith, probably knows, it has a far greater effect than it may seem.

I shall say a little about how the provisions will work. Paragraph 1 of new Schedule 7B requires a “main non-domestic rating account” to be kept for a year. Most payments to and from local authorities in respect of business rates will be made into and out of this account. The exceptions are levy and safety net payments, which we will come on to later.

Paragraph 2 sets out the payments to be credited to, or debited from, the main account. This includes sums received from local authorities in respect of the central share. We have said that the central share of business rates would be used for the purpose of funding grants to local government outside the rates retention scheme. I shall return to that later. The provisions that enable this are set out in sub-paragraphs (3) to (5).

Amendment 9 seeks to make it clear that the sum that can be debited from the account in respect of the central share shall equal the payments received by the Secretary of State from authorities in respect of the central share. That sounds very simple and sensible, but in fact it does not take account of the Government’s intention to use some of the central share money to fund the transitional protection payments provided for in Part 8 of the schedule. This is because, following revaluations, the Government are obliged by current legislation to put in place a transitional relief scheme, so that business ratepayers whose bills increase significantly can see their bills phased in over a number of years. The transitional relief scheme is paid for by similarly phasing down the bills of those ratepayers who see their liability fall significantly as a result of a revaluation. Earlier, the noble Earl, Lord Lytton, was discussing the effect of appeals on precisely this area.

In the context of the rates retention scheme, this means that some authorities could see lower income as a result of the transitional scheme being put in place for ratepayers and some higher as the transitional scheme unwound. That is clearly an untenable situation. Authorities’ income is supposed to reflect their success in promoting development and not the technical vagaries of the transitional relief regulations, so we have always said that we would take transitional relief completely outside the rates retention scheme and provide for a separate series of payments to and from authorities depending on whether they see more or less income as a result of the transitional relief scheme. Part 8 gives effect to this.

The payments themselves, however, will be credited and debited to the main rating account. I hope that the Committee is following this. The scheme will be set up to balance over time but, in any year, we may pay out more to authorities than we get in. So the current wording in paragraph 2(4), which Amendment 9 seeks to change, demonstrates that if there is a deficit, it can be met from central government’s share. In other words, central government will bear that cost. So while central government could choose to debit less than it has received from authorities by way of central share income, it cannot debit more. On the strength of this explanation, I hope that the noble Lord, Lord Smith, will feel able to withdraw his amendment.

I turn now to the remaining amendments in this group. The noble Lord, Lord Jenkin, explained very clearly and plainly what he is trying to do. Amendments 12 and 21 would effectively mean that the central share could never be increased, since it could never be greater than the previous year’s central share. Amendment 16 would set the central share for the current spending review period only, and Amendments 17 and 22 would fix the central and local share—or a trajectory for them—over a number of years.

The noble Lord, Lord Jenkin, and other noble Lords asked about increasing the local share. We have always made it clear that over time we would hope to increase the local share, particularly once we have the finances back on track. It is difficult to see how legislatively we could allow that bearing, in mind that this whole question of the economy is such a difficult area at the moment.

We have also made it clear that in setting up the rates retention scheme, our aspiration is to provide for a long period between resets of up to 10 years. The corollary of that is that the central and local shares and also the tariff and top-up payments will be fixed for the duration of the reset period. By definition, the 50% rate would go on for 10 years unless there is an amendment. Between resets, therefore, we do not anticipate central and local shares changing from year to year. The 50% will last until 2020. That will give local authorities much greater long-term certainty about their financial obligations to central government and the funding that they can expect to receive from government than under the current three-year spending review process. However, the Government must retain the ability to alter the local share of business rates where it is necessary to maintain affordability and protect the interests of the taxpayer and the wider economy. However, it would be imprudent to presume that there might never be a time when we might need to increase the central share.

The percentage approach to the central and local shares of business rates was adopted in response to views expressed in last year’s consultation about the potential risk of being expected to pay a fixed sum in business rates to central government. By sharing business rates on a percentage basis, some of the reward of positive growth, but also some of the risks of negative growth, will be borne equally by central government. The Government have, and always will have, an interest in public spending, and it is unrealistic to expect the Government to take their hands off it completely and to constrain themselves, as Amendments 12, 16, 17 and 21 suggest.

I will have to write to noble Lords about some of these points because I may not have the answers, but I was asked how the 50% share was set. How did we get there? The Government have considered a range of factors involved. If the information about the setting of the 50% share is not available before the next stage, it will be available in the local government finance report in the figures for business rate totals. That may not be soon enough for noble Lords.

[Lord McKenzie of Luton]

Can I just clarify this? The detail of the clarification is to come but, in respect of 2014-15, is it the case that the local share that derives from that calculation is equal to, or about equal to, the control total that the Government are seeking to apply to local government and that there is no extra in there?

[Baroness Hanham]

It is going to be based on the base from this year. Every local authority will be equal when it starts on this system, but the tariffs and top-ups will bring that to the equality base when there is too much in one and not enough in the other. So that will be the first shuffle to get the equality base across the piece.

[Lord McKenzie of Luton]

If the Minister could just clarify this, it would be really helpful. As I understand it, the local and central shares have been calculated by reference to the lowest of the control total years. I understand why arithmetically that is so. In respect of that year, is the 50% local share that comes from that calculation equal to the control total for that year? Is it the case that there is no extra in the central share and that just enough has been left for 2014-15 to be able to apply the control total and keep it intact, or has central government taken more than that?

[Baroness Hanham]

The Government will provide revenue support grants to make up the difference between the local share of the business rates and the spending control totals for local government in 2013-14 and 2014-15, having taken into account the amounts needed. Noble Lords asked about the new homes bonus. In future years, the total amount of grant funding will be determined through spending reviews and the Government will set up the base for distribution in the annual local government finance report. I do not think that that will answer the noble Lord’s question, but I will write to him.

[Lord McKenzie of Luton]

Perhaps I should write to the Minister.

[Baroness Hanham]

And I had better write to the noble Lord, I think. That seems pretty fair.

I was asked about the specific grants. The funding will be from the central share and the finance for specific grants, and that will include the revenue support grant. I will write on the specific grants that already exist and tell the Committee what is included.

The noble Baroness, Lady Eaton, asked about the local authorities’ pool and how the money gets distributed if they go into one with others. Frankly, that will be a matter for the pool to decide; they will regulate themselves. We would expect there to be a local government lead on that so that they can receive payments and that formal arrangements would be agreed on the operation of a pool, so it will be governed by some sort of constraints.

The noble Baroness, Lady Hollis, asked who paid and who gained, but that rather depends what you mean by who pays and who gains. We have always said that no council will be worse off as a result of its business rate base at the outset of the scheme. That was what I was trying to explain about the base, the tariffs and the top-ups. I am sorry if I did not come across well, but that is what the situation is. The information that the noble Baroness sought will be available at a point of the draft local government finance report. That will be my answer to some of the questions: that the information will be ready for a bit later on, I hope before we consider this matter further. I hope that that covers the points made.

There have been a lot of discussions, some of which we will come to on further amendments. I note what the noble Lord, Lord Tope, said about local government’s disappointment regarding the split. I appreciate that that is the situation, but we ought not to ignore the fact that by making the local business rate stay with local government, even if things are then done to it, we are setting a very sensible principle: giving the business rate to local government and maintaining it with it. That principle can then be worked on in the future, regarding how much is left. However, I think we have established an important principle here. I hope the noble Lord is happy to withdraw the amendment.

[Lord Smith of Leigh]

My Lords, that was a very interesting grouping of amendments, which received a wide range of contributions. I congratulate the Minister on the scope of her responses. She gave a full and helpful answer on the first amendment that I moved, Amendment 9. I will obviously read what she said in Hansard, and if necessary come back. She was definitely trying to be helpful in understanding it. However, she did not really respond to Amendment 17. She noted at the time that she was not sure whether there would be continuity, but perhaps she would like to write to me on that one.

I thought that the debate was really interesting, because it got some way to the fundamental parts of the Bill. The contributions of the noble Lords, Lord Jenkin of Roding and Lord Greaves, seemed to be a contradiction. We all want the Bill to achieve growth in local areas for the country. However, to use a Lancashire expression, I say to the noble Lord, Lord Greaves, that 50% of nowt is nowt and 100% of nowt is nowt. Therefore, it is not really going to help in those areas where there is no growth.

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There may also be difficulty with Amendment 14. We know that for the first two years of the scheme the central share is to be used to pay revenue support grants or Section 31 grants to compensate for what was previously the formula grant so for those two years it would not meet the condition that the amendment seeks to impose. However, this is another valiant attempt to try to stop the leakage of the central share which is going to be the major challenge of this debate.

[Baroness Hanham]

I thank noble Lords for this short but none the less important amendment. I understand the concerns that prompted the amendments in this group, but I hope that I can persuade noble Lords that they are unnecessary.

Currently, the Government determine how much local government spending the country can afford and set local government grant totals.

[The Deputy Chairman of Committees (Lord Bichard)]

My Lords, there is a Division in the House. The Committee will adjourn for 10 minutes.

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[Baroness Hanham]

My Lords, as I was saying before I was rudely interrupted by the television screen, currently the Government determine how much local government spending the country can afford and they set local government grant totals—both formula grant and specific grants—accordingly. Redistributed business rates income is then used to fund formula grant and any difference is made up from revenue support grant. That is the situation at the moment. The more business rates there are in the system, the less revenue support grant is needed, and vice versa. Therefore, since 1990, business rates have been used in partial replacement of revenue support grant.

Although the mechanism is different under the rates retention scheme, the principle is exactly the same. The business rates retained through the central share will be used to finance both revenue support grant and specific grants in the same way as they are currently used to finance formula grant. Earlier the noble Lord asked me, although I was not able to answer, whether grants relevant to local government from other departments are included. They will be put into that one pot, so all the grants will be relevant. Therefore, we cannot see why the Government would need to accept Amendment 14, as it would place greater restrictions on central government than currently exist. I hope that, looked at in this way, the noble Lord will agree not to press his amendment.

Amendments 10 and 13 accept the principle that the central share should be used to finance other grants but seek to ensure that this happens only if the Government are satisfied that the overall needs of local government will be met. The overall need of local government will be, as it is now, a factor that, along with the wider economic situation, will inform the amount of specific and revenue support grant that government will provide to local authorities.

At future spending reviews, the Government will have regard to the resources available to authorities from their own resources—council tax and, in future, retained business rates—along with the overall spending needs of local government and the fiscal situation of the country, to determine how much grant should be provided.

I hope that, having reflected on the nature of the spending review and the reality that the overall needs of local government will be fully considered as part of that process, the noble Lord will agree to withdraw his amendment. The Bill contains assurances that any money paid by way of central share will be used by government only for the purposes of local government.

On Report in the other place, amendments were made to the Bill to make clearer what was meant by “local government” in this context. The list set out in paragraph 2(5) of Schedule 1, however, was not intended to be exhaustive. Rather, it was illustrative of the sorts of bodies that would be covered by the phrase “local government”. Amendment 11 would have the effect of making the list definitive—something that it was never designed to be, and therefore I cannot accept the amendment. It could otherwise be added to or detracted from and have something else substituted.

Amendment 24 would require the Secretary of State to set out in a local government finance report what payments the Secretary of State had made from the central share. I have rather more sympathy with the principle of this amendment and, although the details are probably over the top, we have discussed it and I think we have said that it will be available just before the local government finance report. However, I must say to noble Lords that the amendment is unnecessary. It will be clear from government accounts how much revenue support grant and specific grants central government have paid out in any year. It will also be clear how much has been collected by way of the central share and debited from the national accounts. It will therefore be obvious whether the Government have used the central share money in support of local government.

Nevertheless, I am prepared to think about whether, regardless, it would be helpful to set this out in the local government finance report in respect of an earlier year. Because of the timing of the outturn data, that would mean that we could not set out this information except in respect of the two previous years, which might make it a little out of date. However, we will consider that and talk to the LGA about it. I hope that, having heard those comments, the noble Lord will be happy to withdraw his amendment.

[Lord McKenzie of Luton]

The noble Baroness dealt with the question of whether the list in sub-paragraph (5) is complete, and the answer was that it is not. If it were, however, what other bodies would be on there? Would it be a vast range? Can she give us a clue as to which others might have sat on that list?

[Baroness Hanham]

I think I have said all I can say. The list is not complete and others can be substituted or interposed if necessary. Those will arise at other times but I do not know what they are. If we have information on or a sort of idea of which others we might be talking about, I will let the noble Lord know, but at the moment it is simply left that other bodies may be included.

[Lord Palmer of Childs Hill]

I beg leave to withdraw the amendment.

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[Lord Palmer of Childs Hill]

My Lords, I support my noble friend Lord Best because there is a need to take into account revalued and increasing rateable values of properties. The analogy used by the noble Lord, Lord Beecham, reminded me of development land tax where when agricultural land got development planning permission its owner had to pay substantial extra taxation. We are in danger of looking at how much individuals, companies and corporations make as a result of Crossrail or whatever. If the land has increased in value as the property has increased in value, it ought to be a factor in the calculation of what the local authority receives. The point made earlier was that local councils such as Westminster would gain by the redistribution. Projects such as Crossrail spread that gain through rural areas and the like. I do not think that the fact that some local authorities may gain because of a national or regional development is a reason not to give that local authority the benefit of having an increased rateable base. If you look at new floor space, there are many places where that will not happen. Some noble Lords showed a degree of pessimism when they spoke about how things will devalue rather than increase in value. We have to look positively at how we should encourage local authorities to do infrastructure and to encourage infrastructure, even if it is Crossrail or whatever, so that the valuations of those properties increase and local authorities can see the benefit. That would incentivise local authorities to co-operate on those matters.

[Baroness Hanham]

That was an interesting, if unexpected, debate. When it started, I was very touched by the fact that I had a little note that said, “The purpose of Amendment 15 is not entirely clear”. My reply may not be totally applicable either, but somewhere along the line we have clearly raised really important points. We are going to have to look again at the amendment, but in the mean time, I will tell the Committee what we thought it was about, and if it does not quite tie up, we will sort it out, I am sure, between now and the next stage.

I am advised that the amendment in its current form could not stand as it would insert an amendment into Schedule 8 which, as a result of this Bill, will cease to apply for any purpose in England. That is the first problem. Even without this technical deficiency, we have a bit of a problem. We fully respect the noble Lord’s views that under the rates retention scheme authorities should be able to benefit from rental growth as well as physical growth. Westminster has been touched on by several speakers, but for authorities such as Westminster or, potentially, for my ex-authority Kensington and Chelsea, the potential for physical growth is much more limited than for others as there are very constrained sites with developments all through.

The efforts of local authorities to make their areas more attractive to business are not quite as limited as some would like to pretend. Efforts that have resulted in a steady increase in rental values and hence rateable values will arguably go unrewarded under the rates retention scheme. The duty of government is to legislate for a rates retention scheme that is workable for the whole of local government, not just for some authorities. For that reason, we could not devise a scheme that allowed local authorities to keep any part of the growth in rateable values. To explain why, I need to explain to the Committee how the revaluation works, although I hesitate to do that because the noble Earl, Lord Lytton, will understand this far more than I do. Perhaps for the benefit of the Committee we should go through it.

Every five years, the Valuation Office Agency undertakes the revaluation of non-domestic properties and, as a result, the aggregate rateable value of all English non-domestic properties either—amazingly—increases or decreases. In setting the multiplier for the first year following the revaluation, the Government take account of the overall increase or decrease in order to ensure that overall the same amount of tax is raised from business after revaluation as from before. For example, if the aggregate rateable value were to double, the multiplier would have to halve. In that way, it simply redistributes the tax burden between businesses on the basis of their up-to-date property values.

In the new world of rates retention, the system is set up at the outset so that through the means of tariffs and top-ups there is an initial redistribution of resources. That protects the position of those authorities that are relatively resource poor. But if, as I explained, we collect no more money from businesses following the revaluation than we did before, it follows that there is no additional money in the rates retention system. If therefore some authorities are to be allowed to keep additional resources, by the same token, some will have to receive less. Therefore, because of the uneven distribution of the rates base, this would not just mean a cut in funding for those authorities that have seen their rateable value fall. So an authority could see a funding fall, even if its rateable value had risen, if that price was by less than the national average. That could not be fair. In fact the only way to ensure that all authorities see their rateable value rise and see some income benefit is to break the multiplier link and raise the overall burden on business, and the Government are not prepared to do that.

For those reasons, I cannot accept the amendments that seek to allow any part of an increase in rateable values to be retained by local authorities. I hope that that explanation, somewhere along the line, meets the basis of the amendment. If it does not, perhaps we could discuss it between now and the next stage. I am not sure at all that it covers any of the matters raised by the noble Earl, Lord Lytton. Having looked at Hansard, we may need to come back to that. While it was a very relevant aspect to commercial improvements, I am not sure that it necessarily fits in with the amendment, but it may do. I will happily say that if the amendment is to be pursued and if the noble Earl feels that the reply is not adequate or there is something more that needs to be done, we should discuss it between now and the next Sitting and then we might be able to get us both together to decide what we are trying to achieve.

[Baroness Hollis of Heigham]

I was intrigued by the Minister’s answer. I fully understand her point about the multiplier effect and all the rest of it, but I did not understand her bald statement that the Government were not willing to allow local authorities to retain any growth et cetera under that formula, if you were to break the link. Why can the Minister not make a distinction, which most of us would expect to operate, between an increase in the value of commercial property—the amount per square foot as affected which runs across a city, which I absolutely accept has to be recalibrated given the equalisation formula—with the additional increase that comes through the efforts of local authorities for either the growth of a particular business or new business coming in? Those are two different sets of flows of money. The Minister did not distinguish between the two. The point about encouraging local authorities in this way was precisely to put a new emphasis and new attractiveness on the second of these.

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[Baroness Hanham]

I did have to look over my shoulder for that one and I am told that it is an improvement against physical growth, but I will write a bit further to the noble Baroness.

[Lord Best]

My Lords, I am grateful to the noble Lords who supported this difficult but fundamentally important amendment. I thank the noble Lord, Lord Palmer, and the noble Earl, Lord Lytton. Perhaps I might respond briefly to the noble Lord, Lord Beecham, by saying that the objections he raises—first, that some places would get a windfall and might not deserve it and, secondly, that some places will see a fall in rental values and therefore of rateable values and income—did not strike me as undermining the case here. Major infrastructure projects require people to buy into them; to accept that Crossrail will come through town, or whatever the big issue is. It helps if there is some financial return to that area for the inconvenience that can elapse, perhaps for several years, when major infrastructure projects come through. However, this amendment is not of course specifically addressing that but addressing the upgrading of a particular part of town by the efforts of the local authority. That is the principal objective.

In relation to the noble Lord’s second point, that some areas may see a fall in values—that factories may close and nothing may happen—this amendment is intended to provide local authorities with a greater incentive to prevent that and to do something about it. If the council makes the area much better for customers to come to and for offices to recruit staff to work there, and if it does some good for the area, that is surely good for the local economy and can revive and regenerate a place. However, if councils have absolutely no incentive to spend that money in times of difficult resource allocation for them, it would seem most unlikely that local authorities would put their backs into trying to drive some business improvement and growth in those places. It strikes me that this amendment still has some heart to it. The technicalities have completely escaped me along the way and I would be very grateful if I could take up the Minister’s offer to explore whether or not her response was helpful.

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[Lord Greaves]

Perhaps I can follow with a much smaller-scale example. I ask noble Lords to imagine an old warehouse that has low-level use and is paying relatively low business rates. There is a joint proposal by the council and its owners, if it is near the centre of town, say, to work together to turn it into a modern retail facility with a much higher rateable value: the same building, on the same footprint, with no change to the shape of the building so there is no expansion. What is the difference between doing that and, for example, demolishing that building and then having a completely new retail building, which would presumably provide an extra rateable value that could come within the scheme and have 50% of it going to the local authority? There seem to be marginal cases here, either on a larger scale—such as the noble Lord, Lord Beecham, spoke about—or just individual things. I think we need an answer to that. In the case I am talking about, there is no difference in terms of the input of the local authority between the new building and the renovation of the old building.

[Baroness Hanham]

In response to the noble Lord, Lord Greaves—and again I think that we need to look into this—it seems to me that where you have a building which goes out of business, and consequently the rates from it may go away as well, if that building is converted for another use and there is a revaluation then the local authority can keep that growth, subject to the conditions that arise from growth. It contributes to the local authority’s income from the rateable value. I do not see that there is a problem with that in terms of what the local authority subsequently receives as a result of having maintained its proportion of that rateable growth. We can check that through, but I think that is correct.

[Lord Greaves]

In practice, if the property has been empty for a certain time—I am not sure of the details—they will have to pay rates on it anyway.

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[Baroness Hanham]

In either case, I understand that the local authority would get the benefit of the rate and the growth.

[The Earl of Lytton]

My Lords, I am thinking about the current process of recording hereditaments, as they are known, in the local rating lists. I call to mind that as a result of the riots last year, one or more commercial premises were totally destroyed. As I understand it, there is a vacant site awaiting redevelopment that is described as a shop and premises, and it is in the list at £1. The Prime Minister had in fact said in the wake of the riots that properties with damage would be taken out of assessment altogether. Now, there is a little wrinkle here. If a site remains in the assessment, effectively as a cleared site, but is still called a shop and premises or a department store and premises, or whatever it was, at a £1 rateable value then it is still in the list. When it comes back into the list again as a refurbished property, it will be at whatever the level is of the new premises. If it was a redevelopment process—not riot damage or anything like that—in which the local authority was a key player, the question is whether it stands to be disenfranchised because the hereditament has not been taken out of the list altogether and is not therefore really a new entry in the list. It is a revaluation of an existing one.

This might be looking for trouble where there is none, but I want to be very careful. As I made clear both in the debate on the Queen’s Speech and at Second Reading of this Bill, there are a number of little wrinkles creeping in because of the way in which Treasury policy now appears to influence the work of the Valuation Office Agency in handling the entries in the valuation list. I want to be absolutely sure that by dint of this business of not taking things out of assessment when in fact they probably should be, we are not going to find that we have disenfranchised the authority from that gain in rateable value, which is undoubtedly the work of its own hands.

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[Baroness Hanham]

My Lords, the noble Lord, Lord Brooke, gave me an opportunity to respond, which I am not going to take.

[Lord Best]

In that case, I am delighted to beg leave to withdraw the amendment.