Non-Domestic Rating (Multipliers and Private Schools) Bill

Debate between Lord Fox and Lord Khan of Burnley

Committee stage
Monday 24th February 2025 Grand Committee

[Lord Khan of Burnley (Lab)]

I will come to the noble Baroness’s points when I come back to the valuations, rest assured.

The Government have been clear that they intend to fund new lower multipliers by raising revenue within the business rates system. The lower multipliers are a necessary tax cut, but a tax cut that must be funded. By limiting it to properties with a rateable value of £500,000 and above, the Government are asking those with the most valuable 1% of properties to pay more to support the viability of high streets. Moreover, by including all sectors within this group, they are doing so equitably and will capture the majority of large distribution warehouses, including those used by online giants—a cohort that I know the noble Lord, Lord Thurlow, has previously raised in relation to imbalances in the business rates system. We are trying to make sure that we have prudent financial management of the economy and a system that is sustainable.

I come back to some particular points. First, the noble Earl, Lord Lytton, spoke in relation to the potential rise of £39 billion, as indicated by the OBR’s Budget report. The OBR forecast assumes that business rates income will vary in line with forecast CPI inflation, estimated growth in the tax base and the change to business rates relief. The main business rates forecast is gross rates yield, net reliefs, net collection costs and other reductions to contributions. The forecast is higher for future years as it assumes that retail, hospitality and leisure relief is removed. The business rates forecast considers measures only after they have been announced at fiscal events. As in normal practice, forecasts beyond 2025-26 are based on a number of assumptions, as the Government have not yet set out their policy beyond that year. This will take place at the Budget later this year: the main business rates forecast will then be updated to reflect it.

As I have highlighted today, the Bill includes constraints that I hope will reassure Members of this Committee. In addition to limiting it to the most valuable properties, the Government cannot set the higher multiplier more than 10 pence above the standard multiplier. The Government have also been clear that this is not the intended rate. It is there to provide flexibility to adapt to outcomes in 2026 following the next revaluation, while acting as a guardrail against concern about excessive increases.

As the noble Lord, Lord Thurlow, will also be aware, the Government keep all taxes under review, including rates and thresholds. As such, I can assure the Committee that the Government will, as a matter of course, actively consider whether the £500,000 threshold should be amended at the 2029 revaluation, as they approach that revaluation.

[Lord Fox (LD)]

Coming back immediately on that point, what criteria will the Government be using for that revaluation? In other words, what are they seeking to confirm or otherwise from it? Can the Minister recognise that the point made by my noble friend, which I am sure will be made otherwise, is that when you multiply two numbers together, if one side of the equation is substantially smaller, the sum becomes low? If the valuations are 100 times less out of town, versus those in town, you can mess around with the other number as much as you like, but it will still be a tiny number out of town relative to town centres. Does he recognise that valuations are crucial to this and that, while this is all well and good, until valuations are sorted out, we really are fiddling around?

[Lord Khan of Burnley (Lab)]

My Lords, on that specific point about criteria, I want to be clear that we have had a one-year ad hoc system and we are trying to build a sustainable system, which will have a three-year rating on non-domestic properties. We want to see how we will get there when we see what the situation is in the fiscal climate; that will be a big part of addressing how the Treasury will set the multipliers. The Bill is not about setting multipliers. It is up to the Treasury to set those. I will come back to the impact in a moment.

In relation to the different level of multipliers, of course it is a complex system. However, the highlight of what we are trying to do is to have a sustainable system that funds itself and, by asking less than 1% of properties to shoulder a bit more, ensures that we support the high street and properties of low valuation. We are trying to have an equitable system that is sustainable and can pay for itself. We recognise that there are different scenarios and situations but, ultimately, we want to ensure that the system is much fairer than it is now and creates more certainty.

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[Lord Fox (LD)]

I think I clarified that there were two issues. If the Minister looks in his data, he will find that the Royal Albert Hall is classed as being over £500,000, and I specifically asked about the Royal Albert Hall, so we require an answer to that. The point about grass-roots venues was not about the £500,000; it is about the loss of the relief, from 70% to 40% in the coming financial year, which will put them below the waterline, on average. That was a specific and different question that the Minister may want to answer separately.

[Lord Khan of Burnley (Lab)]

I did say that I would come back to the noble Lord on his specific question.

[Lord Fox (LD)]

I apologise.

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[Lord Khan of Burnley (Lab)]

I thank the noble Earl very much for that clarification, but if he looks at my remarks later, he will see that I said that we do not expect “many”—not any—grass-roots music venues to fall above the £500,000 threshold. As I said, although we do not hold data specifically on music venues, we know, for example, that pubs, which often play an important role in the grass-roots music scene, have an average rateable value of only £16,800.

The noble Earl, Lord Lytton, asked how the lower multipliers will affect vacant property. The Bill allows for the lower multipliers to apply to vacant RHL properties. I assure the noble Earl that we intend to apply these new multipliers to occupied properties in the same way as we do to vacant properties. That will be consistent.

The noble Lord, Lord de Clifford, and the noble Baroness, Lady Pinnock, touched on the important point of why an impact assessment has not been prepared. Let me be absolutely clear and repeat my previous points on this: policies and legislation concerning tax and the administration of tax fall outside the meaning of regulatory provisions and are therefore not required to be accompanied by an impact assessment. However, His Majesty’s Treasury committed to publishing an analysis of the new multipliers at the Budget.

A further set of amendments seeks to expand the set of properties eligible for the lower multipliers. This includes widening the lower multipliers to manufacturing properties. I repeat this for the noble Lord, Lord Fox, and the noble Baroness, Lady Scott, who raised this in particular: a further set of amendments seeks to expand the set of properties eligible for the lower multipliers. This includes widening the lower multipliers to manufacturing properties and, more generally, a power to widen the lower multipliers to other sectors.

I acknowledge the intention of the noble Earl, Lord Lytton, to provide greater flexibility within the Bill, should it be deemed appropriate, in future, to apply the lower multipliers to other types of property. However, the Government were clear at the Budget that the intention is for the permanently lower tax rates to apply to qualifying RHL properties from 2026-27, ending the uncertainty of RHL relief that has been extended year on year. This has been an ad hoc system, and year on year is not the most effective way for businesses to plan.

[Lord Fox (LD)]

I think I heard the Minister say, on a different group, that this will apply for three years. On that basis, we cannot really expect a root-and-branch change of the system until either the end or beyond the end of this Parliament. Would that be a reasonable assessment?

[Lord Khan of Burnley (Lab)]

The noble Lord makes an interesting point. This will come into force in 2026-27; we are talking about the revaluation and review being three years after that. Again, this provides more certainty, because we do not want year-on-year unpredictability in an ad hoc system. This is a sustainable process, and it will give us a chance to see what the environment and fiscal climate will be at that time. Again, it is for the Treasury to set the multipliers.

Against the current fiscal backdrop, widening the scope of properties eligible for the lower multipliers would potentially reduce the level of tax cut that could then be provided to that cohort. Similarly, widening the scope may require a higher tax rate on those properties paying the higher multiplier to enable the Government to deliver a permanent tax cut.

The amendments for manufacturing could, of course, widen the lower multipliers somewhere beyond the town-centre and high-street environment. As we have heard from stakeholders, retail, hospitality and leisure businesses tend to occupy properties in higher-value locations with higher footfall, which in turn drives up the rateable value and rates bill. The Bill will rebalance this. The same cannot generally be said for manufacturing, so the case for special treatment for it here is weaker.

The Government are supporting our manufacturing sector through other means. At the Autumn Budget, we announced £975 million for the aerospace sector over five years, over £2 billion for the automotive sector over the same period and up to £520 million for a new life sciences innovative manufacturing fund.

I turn to a point raised by the noble Lord, Lord Fox. Live music venues are currently eligible for the existing RHL relief. The definition of RHL, in terms of the new multipliers, broadly follows the current definition, which will be set later in secondary legislation.

[Lord Fox (LD)]

I am sorry; I am just trying to process that. Are you saying that, going forward, they would continue to benefit from the lower multiples as RHL-qualified businesses?

[Lord Khan of Burnley (Lab)]

In terms of over £500,000, we are going to have the same policy applied to all sectors. We are not doing carve-outs, but in terms of any relief that music venues are having below that, the definition of the new multipliers will broadly follow the current definition and will be set out in secondary legislation later this year.

I think I have answered the question asked by the noble Baroness, Lady Pinnock, but I will make a few points again about the impact on the public sector. The fiscal inheritance demands tough choices in order to fix our public services to create long-term growth and investment that will support businesses, but we have sought to mitigate the worst impacts of these choices. It would not be fair on businesses if we excluded the public sector from the higher multiplier.

In relation to the points made by noble Lord, Lord Fox, and the noble Baroness, Lady Pinnock, I repeat, in particular, that the Government will work to ensure that, as far as practically possible, local government income from business rates is unaffected by business rates tax rate changes. The Government are making good on the promise to reform the local government funding system. I talked about this on the previous group. We will pursue a comprehensive set of reforms for public services to fix the foundations of local government in partnership with the sector and with the principle of giving councils early notice.

There has been a wide-ranging debate on this group. For the reasons that I have set out, I hope the Committee will understand, as we consider these amendments and those in the three groups that follow, that we should not seek to carve out certain properties from the higher tax rate or bring other properties into eligibility for the lower multiplier. I hope that the noble Earl will withdraw his amendment.

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[Lord Khan of Burnley (Lab)]

My Lords, I thank the noble Baroness, Lady Pinnock, and the noble Lord, Lord Fox, for their Amendments 16, 34, 42 and 51. I understand the intention of these amendments is to understand further, first, what hereditaments will be included in the definition of qualifying retail, hospitality and leisure properties; and, secondly, the intended application of the new multipliers to high streets.

The definition of qualifying retail, hospitality and leisure properties will be set out via secondary legislation later this year, as I repeated earlier. However, I can confirm that the Government’s intention is for this broadly to follow the definition that is used for the current RHL relief; I note that the noble Lord and the noble Baroness are familiar with this definition, as their amendment draws on the guidance published by the Government. When introduced from 2026-27, the new multipliers that this Bill makes provision for will apply to all relevant hereditaments, regardless of their geographical location.

It is the Government’s intention to introduce two lower RHL multipliers: one for RHL properties with a rateable value of between £51,000 and £499,999; and another one for RHL properties with a rateable value of below £51,000. All qualifying retail, hospitality and leisure properties will be eligible for these new multipliers. This approach will best ensure that support is targeted towards RHL businesses based on the high street while working within the existing business rates architecture. We are moving from a stopgap, ad hoc, year-to-year relief scheme to a permanent lower multiplier that provides greater certainty for business.

It is also the Government’s intention to introduce a higher multiplier for all properties with a rateable value of £500,000 and above—a point that I have made previously. Again, this will affect all properties that meet that criterion, regardless of their geographical location. It is the Government’s view that this is the fairest approach and that trying to restrict the application of the different multipliers based on geography would create unintended consequences and would likely drive perverse incentives.

[Lord Fox (LD)]

I thank the Minister for introducing the use of the relief definitions. If I have got this wrong, I am very happy for him to tell me so, but my understanding is that the bottom level of below £49,000, I think, were not paying business rates at all. Is that correct? Will they now be classified along with everyone else and pay business rates with the appropriate reduction put on to them, in which case they will go from paying no rates to some—albeit less than the full rate, as we would have seen it?

[Lord Khan of Burnley (Lab)]

Just to clarify, the noble Lord, Lord Fox, has got it wrong because the zero, as in no business rates, is for rateable values—£12,000 in particular—and it is then tapered, so the relief decreases as it goes to £15,000.

[Lord Fox (LD)]

Do they now come into the system or do they continue to have a zero rate under the proposals of this Bill?

[Lord Khan of Burnley (Lab)]

Just to clarify for noble Lords, there will be no change to small business rate relief—that is not changing—so they will still pay tax.

It is the Government’s view that this is the fairest approach and that trying to restrict the application of the different multipliers based on geography would create unintended consequences and would likely drive perverse incentives. It is also extremely difficult to draw a line around a town centre. I note that the noble Baroness, Lady Pinnock, made a suggestion around using the understanding of the term as per the National Planning Policy Framework, but that framework does not set a definition of a town centre. It should be noted that the framework suggests those centres identified in development plans, but this does not represent a requirement that all centres are identified. We also know that many areas do not have up-to-date development plans and that, therefore, centres that are identified may not reflect current realities.

Such an approach would essentially give local planning authorities the power to determine where multipliers should apply and could restrict their application from smaller retail centres that might be essential to particular neighbourhoods. Furthermore, it could result in the higher multiplier not being able to be applied to large warehouses used by online businesses or other properties with a rateable value of £500,000 or above if they are not located in a town centre, as these would fall outside the definition of a town centre. I do not think that is the noble Lords’ intention, but it is important to clarify that point. I hope that my remarks have helped to clarify the areas of interest and provided reassurance on the Government’s policy in this space. I respectfully ask the noble Baroness, Lady Pinnock, to withdraw her amendment.

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[Lord Fox (LD)]

My Lords, I think this might be the last group today; I would say that we have done very well to get this far. I shall speak to these four amendments. The first three make an assumption that the £500,000 threshold was right in the first place. Of course, that is really addressed by the fourth amendment, so I am going to speak to it. It is right that there should be some form of uprating, but I am more intrigued about how the figure of £500,000 was alighted on in the first place.

If we were looking at something that was broadly financially neutral, I do not know how we would know, because we do not know how the flexible upper rate will be applied, so we do not know how much money that will raise. We therefore do not know whether £500,000 was the right number to make it financially neutral. Was it chosen for a business reason? Are businesses of that size particular sorts of business that we need to factor in, in a different way, or was there some other sociological plan involved in choosing £500,000? My big question for the Minister is who chose the number. Was it DHCLG or the Treasury?

[Lord Khan of Burnley (Lab)]

It is not DHCLG these days; it is MHCLG.

[Lord Fox (LD)]

Whatever it is called these days—they keep changing it, and I never normally address this particular crowd. Was it the Minister’s ministry or was it the Treasury? If it was the Treasury, I rather think we should have a Treasury Minister here to answer the question of why it was a £500,000 limit, because it seems to me that it is a very round, arbitrary number. It would have been more convincing had it been £550,000; it might have looked like some thought had gone into it. This looks like a dart-throwing exercise.

So can the Minister explain what was behind the number? Is it trying to balance the money raised? If so, how can you know when your top rate is a top rate and is not necessarily applied? If it is the nature of a business, what is it about the nature of the business? If it is from an analysis of every single £500,000 business, what criteria were used to make that analysis? In other words, where did it come from?

[Lord Khan of Burnley (Lab)]

My Lords, Amendments 21, 40 and 44 concern the rateable value threshold above which the higher multiplier may apply. This is set in the Bill at no less than £500,000, as we have heard repeatedly in contributions by noble Lords. The Bill allows the Government to set a higher threshold through regulations if they wish, but the amendments would require this threshold to be increased annually in line with CPI.

Alongside the amendments, the noble Baroness, Lady Scott of Bybrook, has given notice of her intention to oppose Clause 3 standing part of the Bill. It would therefore be appropriate at this point if I set out why Clause 3 should stand part.

The noble Baroness, Lady Scott of Bybrook, raises a reasonable question as to whether, and if so how, the £500,000 threshold should change over time and other noble Lords have also raised this point. Of course, we would expect that, over time, the value of properties and therefore their rateable values will increase as the economy grows. As these rateable values grow, the current threshold in the Bill of £500,000 will, relatively speaking, be smaller and more properties may be drawn into that category. That is the issue that the noble Baroness is probing with these amendments.

However, I do not think these amendments are the answer to that issue. First, and perhaps most importantly, rateable values will not increase annually in line with inflation or with any other measure of property value or the economy. Rateable values are set every three years at revaluations, and between those revaluations will not change other than for matters such as physical changes to the property.

The Government have set out that our intention for the 2026 rating lists is for the threshold for the higher multiplier to be set at a £500,000 rateable value. The Government consider that this will best ensure that sufficient revenue is raised to provide for a meaningful level of support for retail, hospitality and leisure properties, and will do so in an objectively equitable way.

The 2026 rating list will last for three years, and those rateable values will not increase over that period, other than if, as I have said before, the property is expanded or improved, for example. By extension, the 2029 revaluation will be the next logical moment to consider whether the £500,000 threshold remains the appropriate minimum for the new higher multiplier.

In approaching these considerations, the Government will need to examine how rateable values have changed at the revaluation but also what support is to be provided to retail, hospitality and leisure properties and, consequently, how much revenue is needed to be raised from the higher multiplier.

I hope the noble Baroness will appreciate that there are several factors the Government will need to consider and balance, beyond just the changes in rateable value. More broadly, as the noble Baroness will be aware, the Government keep all taxes under review, including rates and thresholds. As such, I can assure the Committee that in relation to the proposed amendment, the Government will, as a matter of course, actively consider whether the £500,000 threshold in the relevant regulations should be amended at the 2029 revaluation, as they approach that revaluation.

The noble Lord, Lord Fox, asked whether MHCLG or the Treasury decided. It was the Government who decided. As much as I love darts, it definitely was not a dart-throwing exercise.

I will now expand further on Clause 3 so that, I hope, noble Lords can agree that it should stand part of the Bill. We have discussed several amendments in relation to Clause 3 today, so I shall try to keep my remarks to the point and not go over previously covered ground too much.

Clause 3 is concerned with how we will determine to which hereditaments those multipliers should apply. It is split into three main parts, concerning occupied hereditaments in Clause 3(2), unoccupied hereditaments in Clause 3(3), and hereditaments on the central rating list in Clause 3(4). Properties on the central list are typically utility networks spanning many local authority areas, such as the gas, electricity and water networks. Each of these parts of Clause 3 are essentially identical, so to save the Committee from repetition, I will explain the provisions on occupied hereditaments in Clause 3(2) only.

The most important part of Clause 3(2) is the small amendment made by Clause 3(2)(a) to existing powers in the Local Government Finance Act 1988. Under those existing powers, the Treasury already has the ability to determine in regulations which multiplier applies to which property. Those powers, in respect of occupied properties, are in paragraph 10(9) and 10(10) of Schedule 4ZA to the 1988 Act. Clause 3(2)(a) amends that part of the 1988 Act to extend those powers to cover also the new additional multipliers. This means that the Treasury will be able to determine by regulations which properties pay on which multiplier.

As with Clause 1, we have included in Clause 3 safeguards as to how the Treasury may use these powers. These limit the higher multipliers to hereditaments with a rateable value of £500,000 or more and limit the lower multipliers to only qualifying retail, hospitality and leisure hereditaments.

Finally on Clause 3, the existing powers for determining the application of the multiplier allow the Treasury to do that by reference to a list of factors found in paragraph 10(10) of Schedule 4ZA to the 1988 Act. This is a non-exhaustive list that includes factors such as its rateable value, location or use. Clause 3(2)(c) expressly gives the Treasury the scope also to determine the application of the multipliers by reference to the description which the Valuation Office Agency puts in the rating list.

I hope that this further information provides the reassurance and clarity needed for the noble Baroness to withdraw her amendment and agree that Clause 3 should stand part of the Bill.