Non-Domestic Rating (Rates Retention: Miscellaneous Amendments) Regulations 2024

Baroness Scott of Bybrook Excerpts

Tuesday 27th February 2024 Grand Committee

Moved by

[Baroness Scott of Bybrook]

That the Grand Committee do consider the Non-Domestic Rating (Rates Retention: Miscellaneous Amendments) Regulations 2024.

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

My Lords, these regulations make changes to key elements of the business rates retention system by actioning policy decisions that have already been taken. The business rates retention system has been in operation for over 10 years. Through it, local authorities keep 50% of the business rates that are collected in their areas, subject to redistribution, with the other 50% being paid over to central government.

Under the system, if a local authority sees its business rates income fall significantly in a year, it can receive protection in the form of a safety net payment. The cost of making safety net payments is met within the system. This is done by levying a percentage of the business rates income of those local authorities whose business rates income has significantly increased.

Such arrangements under the system are governed according to the underlying legislative framework. Each year we make changes to this framework in response to the wider policy environment—for example, following a revaluation or adjustments to the tax. This instrument makes the necessary amendments and, while they are technical, the reasons for them are easily explainable.

Before I go into the details of the instrument, however, I will briefly address why it was withdrawn and re-laid. Unfortunately, following the initial laying of the instrument, there was a need to withdraw and re-lay it to correct a minor error made in its drafting. We did this to ensure that payments are made to councils on the right basis. After this, we were made aware of a risk of delay to the instrument’s progress through Parliament. This could have arisen if the JCSI had queried why we had left cells in a table blank, rather than explicitly setting values at zero. In anticipation of this, we re-laid the instrument with zeros in the schedule to provide greater clarity to the reader. This will ensure that we do not delay paying local authorities what they are expecting. This instrument is the resulting version and I am grateful to all parties for their consideration in making it possible.

I will now focus on the details of the instrument. Several sets of regulations set out the detailed rules which underpin the operation of the business rates retention system. This instrument makes changes to two of them. These are the Non-Domestic Rating (Rates Retention) and (Levy and Safety Net) Regulations.

The rates retention regulations provide for the core administration of the system and determine how payments are calculated and then made between local authorities, and between local authorities and central government. The levy and safety net regulations are more particular. They set out, in detail, the safety net and levy mechanisms that I have already mentioned.

I will now describe the reasons that amendments to the regulations are necessary, as well as what they entail. First, we must make changes in response to the 2023 business rates revaluation. As many noble Lords will be aware, revaluation is a key facet of the tax, allowing for changes in the market to flow through to the amounts paid by taxpayers. The reason we need to adjust for revaluations is to avoid abrupt increases or decreases in local authorities’ funding via the business rates retention system. This would otherwise result from the aggregated change in the amounts that local authorities collect from businesses.

The actions we are taking to neutralise the impact of the 2023 revaluation can be summarised as follows. First, we are adjusting top-up and tariff figures—the figures which redistribute income around the system. Secondly, we are adjusting the calculation of levy rates; to recalculate levy rates, we must also restate local authorities’ business rates baselines. These are the share of rates income we expect a local authority to have access to.

The year 2023 was somewhat busy for the business rates retention system. Not only did the revaluation take place, but also Royal Assent to the Non-Domestic Rating Act. I am sure that many noble Lords have fond memories of the debates during its passage through the House. As with most changes made to the workings of business rates as a tax, those made by the 2023 Act impact how the business rates retention system is administered.

The delinking of the small business and non-domestic rating multipliers has the biggest impact on the retention system. Currently, the non-domestic rating—standard—multiplier is equal to the small business multiplier plus a supplement figure. From April this will change as these multipliers are delinked. This means that the two multipliers can be changed independently of each other, and therefore at different rates.

The reason for the significant impact this has on the business rates retention system is because each year we have used the change in the value of the small business multiplier to adjust key figures within the system. Under a system of linked multipliers, the change in the small business multiplier represented the change in the tax rate for all properties. As multipliers will no longer be linked, we have had to identify a new way to uprate these figures. After consultation with local authorities and other stakeholders, we will do this using a new weighted average formula. This calculates uprating figures for each local authority based on the proportion of rateable value on each multiplier in that authority’s area. The instrument applies this new formula to the relevant figures in the regulations. These are top-up and tariff figures, baseline funding levels and the City of London offset.

I have already provided a quick description of what top-up and tariff figures are. For the sake of clarity, I will do the same now for baseline funding levels and the offset. Baseline funding levels are a measure of each local authority’s need. They are uprated each year to ensure that the safety net eligibility threshold, measured as a percentage of the baseline funding level, takes account of inflationary increases. The offset, meanwhile, is a small amount of business rates income outside the system that the City retains, in acknowledgement of its high daytime, but low resident, populations. Alongside delinking the multipliers, the Non-Domestic Rating Act also introduced new or amended existing reliefs for ratepayers—specifically, heat network relief and improvement relief, and doubling the rural relief from 50% to 100%.

Furthermore, we must take account of other tax measures that were not delivered through the 2023 Act —namely, the retail, hospitality and leisure relief for 2024-25, which was announced at Autumn Statement 2023, and the green plant and machinery exemption. The Government compensate local authorities for reliefs and exemptions. If they did not, they would unfairly cost local authorities as their income from business rates would fall. However, when calculating levy and safety net payments, it is essential that we recognise that local authorities have already been compensated for their losses due to the awarding of reliefs and exemptions. Otherwise, some local authorities may receive substantial increases in safety net payments despite already receiving compensation or may underpay the amount of levy on growth that they owe. This instrument makes sure that the appropriate compensation given to local authorities is included in levy and safety net calculations.

In continuation with the theme that 2023 was a year of change for the business rates retention system, the year also saw the Government transfer the power to grant certain types of relief from billing authorities to mayoral development corporations in Hartlepool and Middlesbrough, following a request from the Tees Valley mayor. Given that authorities receive a share of business rates income in their area, authorities could lose out from the relief awarded if the mayoral development corporation took up those powers. While we have already provided for billing authorities to be compensated, now we are extending the compensation to major precepting authorities.

Lastly, we are making a change to the levy and safety net calculations for the Greater London Authority. The share of income which we will use to calculate levy and safety net payments going forward for the authority is its 20% share. This is its share under the 50% rates retention system. Using its 20% share in this calculation brings it into line with other increased rates retention authorities.

To conclude, it would not be a mischaracterisation to describe these regulations as technical. Nevertheless, they pick up wider policy changes and, in doing so, make several important updates to the administration of the business rates retention system. It is very important that these changes are made to the system so that authorities retain the income from it that they are anticipating and on which they have budgeted. I commend these regulations to the Committee.

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[Baroness Taylor of Stevenage (Lab)]

My Lords, I draw attention to my interests in the register as a vice-president of the Local Government Association and as a serving councillor on Stevenage Borough Council and Hertfordshire County Council. I thank the Minister for her introduction to this statutory instrument and I am very grateful for her explanation of the relaying of it, which was informative.

I suppose that this instrument is necessarily complex and technical in content, but, if we look through it, we see that in many ways it demonstrates exactly how far business rates—or non-domestic rates, as we have to call them—have got from their objectives. They are intended to ensure that businesses make a contribution to the communities that allow them to thrive, to link them with the people and public services of their local area. They should recognise the differentiation between small, start-up and local businesses and the multinational corporates, when in fact non-domestic rates sometimes penalise them in inverse proportion to their ability to pay. They should also ensure that areas wishing to improve, increase or regenerate economic activity are able to vary the business rates to incentivise according to local circumstances.

Looking through the pages of mathematical formulae and complex calculations in this SI, I say that it would not be surprising if any average business doing so felt that we had somewhat lost the plot. The complexities of the system do not really benefit most councils, either, although we appreciate the funding that comes from them. For example, my borough raises over £61 million in non-domestic rates but, after all these calculations and the turning of the Government’s sausage machine, we get around £4 million of that—in spite of having three of the most deprived wards in the country.

So we need to refocus business rates back on to what they were intended to do. That is why they are part of Labour’s plan to support the vast majority of businesses in this country that are SMEs. They employ 16.7 million people and boost our economy by £2.4 trillion; they breathe life into our high streets; they deliver services that make our life easier: and they provide the goods we need to thrive. While SMEs welcomed the support they got during Covid, many of them now feel neglected as they struggle to survive the cost of living crisis, the recession and the complexities of this business rates system, which can seem utterly overwhelming, as the noble Baroness, Lady Pinnock, set out.

Labour’s plan for small businesses will be an important milestone in recognising their value to the economy and the essential role that they have in ensuring the economic growth that we need. We will undertake a fundamental reform of business rates, which will reshape this antiquated system and refocus it on business not bureaucrats’ objectives. We want to make sure that bricks-and-mortar businesses do not continue to pay disproportionately more than their online competitors. We want to take the burden from high streets and the businesses that sit at the heart of our communities, such as the local café that makes our morning coffee, the mortgage broker on our high street who went above and beyond to help you get your first home, the plumbers who come out of hours when you have water pouring through the ceiling. We want a new system that incentivises businesses to invest, rather than discourages them doing so. Our plan for business rates sits within a comprehensive plan for small business, which tackles all the issues that our many conversations with those businesses have told us are key to their future.

We had the chance to speak on the wasted opportunity to revise non-domestic rates during last year’s debates on the Bill, as the Minister said. We recognise that, for now, this technical paper is necessary to put in place the mechanism for the current system, so we will not be putting forward any formal objections, but I have some questions for the Minister. Can she comment any further on the Government’s plans to shift the current disproportionate burden of non-domestic rates taxation from small local businesses to online corporates or, potentially, on alternative forms of income for local government, including an e-commerce levy, with the funding retained by local government?

The retailers that we know and love on our high street, such as M&S, Boots, WHSmith and small, local businesses, seem to have a dramatic penalty in the business rates system over big online retailers such as Amazon. The current top-up and tariffs system is now outdated and, in view of the extraordinary cuts to which local government has been subjected, it often penalises areas of deprivation just because areas around them may be more economically vibrant. Can the Minister comment on what recent assessment has been carried out on the validity of the tariffs and top-up system?

What progress has been made on the Government’s promised consultation on business rates avoidance and evasion? The LGA, for example, has called for a review of exemptions, such as where businesses happen to be located on farms, and further clamp-downs on business rates avoidance, along the lines of those introduced in Wales and Scotland, to ensure that the rules on reliefs, such as empty property and charitable relief, are applied fairly.

The Minister knows that the LGA is also in favour of giving councils more flexibility on business rates reliefs, such as charitable and empty property relief, and the ability to set their own business rates multipliers or, at the very least, to set a multiplier above and below the nationally set multiplier. Have the Government given any further consideration to those proposals? Lastly, could she comment on the glacial speed of the appeals process, which distorts council finances and reserves, as councils often have to hold funds for not just months but years while they wait for the outcome of business rate appeals?

As I said, we understand that this instrument is necessary to move forward non-domestic rates for this year, but we hope that there is an understanding that sticking plasters, even complicated and technical ones such as this, are the problem and not the solution.

[Baroness Scott of Bybrook (Con)]

My Lords, I thank the noble Baronesses seated opposite for their contributions. A number of questions came up. First, the noble Baroness, Lady Pinnock, and, I think, also the noble Baroness, Lady Taylor, asked about complexity. We accept that the administration of the system has become necessarily complex over time in response to all the changes to policy and tax that have happened. This will be an ongoing thing. Whatever the system is, as changes happen, it becomes more complex. While every mechanism cannot be made accurate pound to pound, as the noble Baroness, Lady Pinnock, would like, we minimise the risks to the system from any major changes that would affect a local authority’s budget as much as possible. Of course, we are always happy to talk to local authorities if they feel that they have a problem with their business rates.