Queen’s Speech

Earl of Lytton Excerpts

Wednesday 16th May 2012 Lords Chamber

[The Earl of Lytton]

My Lords, I add my congratulations to the two maiden speakers, particularly the noble Lord, Lord Ashton of Hyde, who I thought was about to shoot my fox in turning his attention to regulation, which I want to concentrate on, too.

I welcome the Government’s commitment to reducing regulation and red tape, and am pleased to see that a number of measures have been put in place. The question that I want to concentrate on relates to business rates. These are one of the largest premises costs after rent, typically relating to about one-third or one-half of the rent itself. Very small businesses get some relief, but the extra cost of that is passed back through the system and is borne by other business rate payers. The businessman has no democratic voice, unlike the council tax payer; no services are provided for his payment and, save for extreme and demonstrable hardship, there is little relief. Empty rates, meanwhile, are levied on all but the tiniest premises and stalk the minds of those with empty and unlettable properties.

The system is under considerable stress in terms of the management of the business rates environment. First, due to inadequate resources made available to the Valuation Office Agency, whose predecessor body I was once an employee of, the initial accuracy of figures in the valuation list has suffered. Secondly, the valuation base year for the 2010 valuation list that we are currently in is in fact the antecedent year of 2008, the peak of the market. Many commercial values have fallen a great deal since then, and rates have accordingly become more onerous for that reason. In fact on 1 April this year they went up by 5.7%, an increase that, had it applied to council tax, would have been fairly instantly stamped on. Thirdly, as I have said, the risk of liability for empty rates makes owners of unlettable buildings desperate to reduce their exposure. Regrettably, the VOA has allowed itself to change its role from being the impartial government valuer, when I was part of its predecessor organisation, to a strategic player in the maintenance of a tax base. I view that with considerable regret, as do a number of other professionals in this field.

I understand that the Valuation Office Agency and the Valuation Tribunal, which deals with appeals against rating assessments, just about manage to handle the current inflow of appeals but have no resources to clear the backlog, amounting to some 146,000 or so outstanding cases, some going back to the 2005 valuation list. Typically it might take two years for an appeal lodged today to receive even an initial substantive response from the VOA. Meanwhile, the rates are payable in full. The Valuation Tribunal, which appears to operate on a computer system different from and largely incompatible with that of the VOA, has in recent times produced a plethora of practice statements and other regulations making for immense complexity, such that even some of the experts no longer understand the system.

The businessman is forced to take advice from others. Unsurprisingly, in the confusion, unscrupulous practitioners emerge promising rate reductions they cannot deliver, charging high up-front fees and making mass appeals which further swamp the system. More draconian regulation then follows naturally from the Valuation Tribunal, and the Valuation Office Agency becomes more defensive in its administration as a natural consequence. Soon nobody knows whether they are coming or going, whether an assessment is correct or up to date and so on. This is a fairly corrosive mix. Justice is denied, fairness has gone out of the window and a rather unsavoury mercantile element seems to have entered the minds of those administering the system, which dents confidence in it. We do not need confidence to be dented.

For years, the smallest of small businessmen have voted with their feet. The threshold costs of moving to a conventional rented office or other commercial accommodation are too high at the margins. The market adjustments are too slow in terms of bringing rents and rates into line with affordability. If the necessary adjustments were made, I suspect that insolvencies and write-offs would be very large indeed. So microbusinesses operate from spare bedrooms, converted garages, garden sheds and other domestic spaces. Their marketplace is the web, which is also their shop window. Good luck to them. I am one of them. I have been using one end of my home since 1988. To use a term from one professional acquaintance, this domestic environment has become the new business enterprise zone, free of rent, rates, business premises regulation, legal set-up costs, travel-to-work overheads and so on. It is not lost on such business operators that the council tax on an average band E or F dwelling is less than half the rates on an equivalent area of business space.

Nobody is charged with policing what happens here, and nobody has any real interest in investigating further what is happening on the ground. There are no checks on, for instance, whether a second home with its council tax reduction is also a holiday home run as a business. Charging authorities have no incentive to check up on this either, as they are merely collection agents for someone else’s revenue stream.

Business rates are not the only place where this sort of thing happens and where the management of all sorts of things from environmental health, health and safety, employment rights, planning rules, landlord and tenant law and so on cumulatively affect small businesses, in particular small businesses that start as microbusinesses and want to become small and medium-sized enterprises and grow on from there. I believe this is a great country in which to start a business, but I am not sure that it is quite such a good one in which to grow it on once it has got going.