Non-Domestic Rating (Multipliers and Private Schools) Bill

James Murray Excerpts

2nd reading
Monday 25th November 2024 Commons Chamber

[The Exchequer Secretary to the Treasury (James Murray)]

I beg to move, That the Bill be now read a Second time.

Last month, the Chancellor set out the Government’s first Budget. That Budget was a once-in-a-generation event to wipe the slate clean after 14 years of the Conservatives. At that Budget, we laid the foundations for our No. 1 mission of economic growth. The scale of the mess that we inherited at the general election meant that we had to take tough decisions on welfare, spending and tax. Those decisions have been difficult, but they were necessary. They have enabled us to deliver economic stability and fix the public finances. Doing that is crucial to getting public services back on their feet, and to giving businesses the confidence they need to invest and thrive.

Stability, certainty and predictability are highly prized by businesses when making decisions about where and how much to invest. In opposition, I spoke to businesses time and again about the importance of stability, so in government we have made sure to deliver for them by publishing our corporate tax road map alongside the Budget. In my meetings with businesses about what they need to succeed, the system of business rates also came up time and again. I heard businesses criticise a system that is inflexible, that disincentivises investment and that places an unfair burden on those businesses on high streets across England.

That is why, in the Budget, the Chancellor confirmed our first steps towards creating a fairer business rates system that protects the high street, supports investment and is fit for the 21st century. We are determined to support high streets, as they are places that bring people together and serve as focal points for economic activity. Their success is what people across the country want to see, and it is a priority for the Government to deliver it. That is why, in our first Bill on business rates in this Parliament, the Government have prioritised making progress to rebalance the rates burden faced by high street businesses.

The Bill before us seeks to put into law the commitments made at the Budget by enabling the introduction from 2026-27 of permanently lower tax rates for the retail, hospitality and leisure properties with rateable values below £500,000 that make up the backbone of high streets across England. We are determined to give those businesses a tax cut, and we know that that must be fully funded in a challenging fiscal context. For that reason, the Bill also enables us to generate sustainable funding for those tax cuts through an increase of multipliers on the most valuable 1% of business properties in the country.

This targeted approach captures the majority of large distribution warehouses, including those used by online giants, as well as other out-of-town businesses that draw footfall away from high streets. It will enable us to lock in new, permanently lower tax rates for core high street businesses, providing not only a tax cut but stability and certainty after the one-year retail, hospitality and leisure relief, which has been precariously extended year by year since the pandemic. Our approach provides a permanent tax cut to help high street businesses succeed, alongside the certainty that they need to invest and the means to pay for it within our tough fiscal rules.

[Dr Luke Evans (Hinckley and Bosworth) (Con)]

The Minister talks about certainty, but one of the biggest problems for small businesses is that so many things are happening at once, including the national insurance contributions increase, the Employment Rights Bill that is coming in, and now the levy that has been cut down from 70% to 40%. The cumulative effect of all those makes a massive difference for my businesses. A hairdresser that I met only this weekend talked about how much of a problem that will be. How does the measure help to engender stability for those small businesses, which have to wait until 2026?

[James Murray]

Let me remind the hon. Gentleman that, around the difficult decision that we had to take on employer national insurance contributions, we provided explicit protection for small businesses by more than doubling the employment allowance from £5,000 to £10,500, which will benefit hundreds of thousands of small businesses across the country. I suggest that he talks to businesses in his constituency about that.

We are not shying away from the fact that difficult decisions were taken in the Budget, but he might also consult the plans that were left in operation by the previous Government in July. If we had pursued those plans, and if we had not taken any action on business rates, the retail, hospitality and leisure relief would have ended entirely next April. The cliff edge looming next April would have seen it go down to zero. We have extended it, despite the tough fiscal circumstances, for another year at 40%. That is a reasonable way forward while we put in place these permanent reforms.

As I mentioned, the measures in the Bill to level the playing field for high streets are the beginning of our efforts to transform the system of business rates. Our ambition to go further is set out in the paper published alongside the Budget, “Transforming business rates”. That paper sets out the Government’s priority areas for further reform to support investment and make the system fairer. It invites businesses and industry representatives to work with us on designing the best possible system for the future.

I am grateful to all those businesses and representative bodies that I have spoken with in the last few weeks for their engagement already. We will consider what more the Government should do to incentivise investment and growth, including by looking at the efficacy of improvement relief and empty property relief, the impact of losing small business rate relief on expanding businesses, and the cliff edges within the current system.

[Andrew George (St Ives) (LD)]

If the Minister is looking for other methods by which public finances could be effectively deployed, will he look carefully at the last decade, during which small business rate relief has been used by second home owners to flip their properties to business rating and pay nothing at all? In Cornwall alone, that has resulted in over £500 million of taxpayers’ money being paid out to wealthy second home owners through covid aid and the small business rate relief. Will he look at how wealthy people have been incentivised to use that method to their advantage? Will he ensure that we have a much fairer system that puts first homes before second homes?

[James Murray]

The hon. Gentleman raises a crucial point about ensuring that the tax system is fair and that it supports the behaviour that we seek to incentivise.

That leads me neatly to my next point. As part of the discussion paper on transforming business rates, we have committed to consulting on adopting a general anti-avoidance rule for business rates in England. Although that might not necessarily address the exact problem the hon. Gentleman highlights, it speaks to the general issue of avoidance in relation to business rates.

We will also look at how the burden adjusts with the economic cycle, and we will assess the merit of a further increase in the frequency of re-evaluations. I look forward to working closely with businesses and representative organisations to deliver a business rates system that is fit for the 21st century, and that work begins today with the powers in this Bill to deliver our permanent tax cut for high streets.

As I said earlier, the tough decisions that the Chancellor set out in the Budget to deliver economic stability and fix the public finances enable us to give businesses the confidence they need to invest, and to get public services back on their feet. One public service that is crucial to breaking down barriers to opportunity is the education system, which is why the Government have prioritised ensuring that every child has access to the high-quality education that they deserve.

[Jim Shannon (Strangford) (DUP)]

Like others, I have repeatedly raised the need for exemptions for religious schools. For the Free Presbyterian Church in Northern Ireland, for example, the expression of its faith and treasured beliefs does not sit comfortably with mainstream schooling, and it is the same for many other faiths. If the Government are determined to press ahead, does the Minister agree that exemptions must be made, at the very least, for such schools? On behalf of those Churches, those faiths and those people, I have to say that the Government must think again.

[James Murray]

I thank the hon. Gentleman for a rare intervention, but this Bill is about business rates in England. Some of his wider points may relate to the removal of the VAT exemption for private school fees in other countries and nations of the UK. Those provisions will be debated as part of the Finance Bill on Wednesday and, if he repeats his comments, I might be able to address them more specifically.

Today, we are addressing the business rates system that applies in England. This is important because every parent aspires to get the best education for their child, and we as a Government are determined to ensure that those aspirations are met. At the Budget, the Government announced a real-terms increase in per pupil funding, with a £2.3 billion increase to the core schools budget for the financial year 2025-26, including a £1 billion uplift in high-needs funding.

This funding increase needs to be paid for so, to help make that happen, the Government are ending the tax breaks for private schools, as set out in our manifesto. This includes ending charitable rate relief eligibility for those private schools in England that are charities. This Bill will do that, and its measures operate alongside the ending of the VAT exemption for private school fees, which is being delivered through the Finance Bill that I will be moving on Wednesday. Together, these measures will raise £1.8 billion a year by 2029-30.

[Dame Caroline Dinenage (Gosport) (Con)]

The Bill makes provision for maintaining the charitable status of institutions that are wholly or mainly concerned with providing full-time education for pupils with an education, health and care plan. Will the Minister set out the definition of “wholly or mainly”? What support will be put in place for councils to afford the burden of extra pupils moving into mainstream education? Schools will be facing the double whammy of losing charitable status and VAT being imposed on school fees. Hampshire county council is already under financial strain, and it will face a crisis point by 2026-27 under these proposals.

[James Murray]

As I will explain, the test of “wholly or mainly concerned” is 50% of pupils, or more, having an EHCP specifying that their educational needs can be met only in a private school. I will provide some more detail in a moment.

Of course, the Government have prioritised funding for the state education system in this Budget. The £2.3 billion increase, including a £1 billion uplift in high-needs funding, is possible only because of the difficult decisions that we have taken on taxation, including in the Bill.

[Chris Vince (Harlow) (Lab/Co-op)]

Does the Minister agree that the Budget’s prioritisation of state schools should be welcomed? I have talked to teachers in Harlow and, under this Labour Government, they feel hope for the first time in 14 years. Is it not shocking that the Conservative party is still bemoaning the removal of tax exemptions from private schools, rather than focusing on the mainstream education attended by 96% of children?

[James Murray]

My hon. Friend is right that we, as a Government, are focused on improving state education for children across the country, because we know that every parent aspires for their child to get the best possible education. That is what our plans seek to achieve, and I would welcome it if the Opposition supported our efforts for the good of children across the country.

Members will have the chance to scrutinise the detail of this Bill in Committee, but I will now spend a few moments outlining how the Bill’s provisions are intended to operate.

[Munira Wilson (Twickenham) (LD)]

Does the Minister recognise that many independent schools, such as Lady Eleanor Holles school and Hampton school in my constituency, are involved in a huge amount of partnership work with schools in disadvantaged areas, like Feltham’s Reach academy, to help disadvantaged children to have opportunities that they would not otherwise get? Does he recognise that both the measures in this Bill and the introduction of VAT on private school fees will lessen that partnership work, which will have a detrimental impact on many state schools?

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[James Murray]

I thank the hon. Lady for her intervention, but what will have a positive impact on state schools across the country is the extra funding that we announced in the Budget. If Opposition Members want to support extra funding for schools, they have to support some of the tough decisions to raise that revenue in the first place. They cannot have it both ways. I know the new Leader of the Opposition is very keen to oppose tax rises while claiming that she supports the investment, but she cannot have it both ways. If Opposition Members want to support extra funding for schools, the NHS and other public services, they have to have some responsibility and accept the decisions that we are taking, or propose some of their own.

[Kevin Hollinrake (Thirsk and Malton) (Con)]

Will the Minister confirm the continuation of small business rates relief for the rest of this Parliament?

[James Murray]

I will come to business rates. The hon. Gentleman will have a chance to respond in full in just a moment. [Interruption.] I see that he is impatient to tell us how much he supports the Bill—or am I misreading the signs from across the Dispatch Box?

As I have said, this Bill will enable the introduction of new multipliers in the business rate system from 2026-27. The provisions in this Bill will enable the introduction of two lower tax rates, which may be applied only to qualifying retail, hospitality and leisure properties. The definition of “qualifying properties” will ultimately be set out in secondary legislation but, for the avoidance of doubt, it is our intention that the scope of these new tax rates will broadly follow that used for current retail, hospitality and leisure relief. These new rates will provide permanent tax cuts, offering certainty to businesses by ending the continued uncertainty of retail, hospitality and leisure relief, which has been rolled over annually since covid-19.

Our intention is for a lower rate that offers a tax cut for retail, hospitality and leisure properties that currently pay the standard multiplier, with a rateable value between £51,000 and £499,999. Another rate will offer a larger cut to the retail, hospitality and leisure properties currently paying the small business multiplier, which are those with a rateable value below £51,000.

We are clear, however, that any tax cut must be sustainably funded. For that reason, the Bill will also enable the introduction of higher multipliers, which can be applied only to the most valuable properties—those with a rateable value of £500,000 and above, which represents less than 1% of all properties in England. The rates for any new multipliers will be set in the 2025 autumn Budget in the light of the outcomes of the 2026 revaluation. The Government recognise, however, that it would be inappropriate to take unfettered powers that allowed the Government to change tax liabilities by unlimited amounts. For that reason, the Bill includes sensible guardrails to limit the use of those powers.

The guardrails determine that the two lower tax rates, when introduced, may not be set lower than 20p below the small business non-domestic rating multiplier, and that the higher tax rates, when introduced, may not be set higher than 10p above the non-domestic rating multiplier. Let me make it clear that those values are maximum parameters and do not represent the changes that we intend to implement. They are guardrails that offer sensible limits with proportionate flexibility. They ensure that the Government can respond to future revaluations as well as the changing economic and fiscal context. As I said, the exact rates for 2026-27 will be set out in next year’s Budget.

Alongside the provisions on multipliers, the Bill contains provisions relating to private schools that will raise around £140 million a year. There are more than 2,400 private schools in England, of which approximately half are charities and are able to benefit from business rates charitable relief. The Bill will remove the eligibility of private schools that are charities for that relief. The Bill provides a specific definition of a private school as

“a school…at which full-time education is provided for pupils of compulsory school age…where fees or other consideration are payable for that…education”

or

“an institution…which is wholly or mainly concerned with providing education suitable to the requirements of persons over compulsory school age but under 19…where the provision of full-time education…is wholly or mainly provision in respect of which fees or other consideration are payable”.

A number of right hon. and hon. Members have questioned how the Government’s plans will affect pupils with special educational needs and disabilities. My officials and I carefully considered the design of the policy, and the provisions in the Bill mean that private schools that are charities that wholly or mainly provide education for pupils with an education, health and care plan will remain eligible for charitable rate relief. To be clear, in answer to the earlier question from the hon. Member for Gosport (Dame Caroline Dinenage), “wholly or mainly” in business rates generally means 50% or more. The Government believe that will ensure that the majority of special educational needs schools will not be affected by the measure.

The measure will operate in addition to the existing business rates exemption for properties used by private schools wholly for the training or welfare of disabled people. That exemption, which we are retaining, means that those types of properties pay no business rates at all. Taken together, the existing and new provisions are intended to ensure that most private special educational needs schools will not be affected by the removal of charitable rate relief.

[Victoria Collins (Harpenden and Berkhamsted) (LD)]

Given the terrible SEND crisis across the country, does the Minister really think that it is good enough that only “most” of those schools will be exempt?

[James Murray]

I hope that the hon. Member will welcome the fact that we have committed an extra £1 billion in 2025-26 to high needs funding in the education system. The Government are committed to reforming England’s SEND provision to improve outcomes and return the system to financial sustainability. I would welcome her support for our measures in that regard.

[Dr Luke Evans]

I appreciate the Minister making this carve-out on SEND, but I would be grateful if he could give us some statistics. He said that “most” will be carved out. Have the Government done any work to determine how many schools will still fall under the provisions? If not, placing such an impact assessment in the Library would be useful for Members across the House.

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[James Murray]

Let me point the hon. Gentleman to a document that has already been published: “Removal of eligibility of private schools for business rates charitable relief”, which sets out the impact and all the figures that he requests. There are 2,444 private schools in England, 1,139 of them are charities, and we expect that under our plans 1,040 will lose the relief. The schools that are wholly or mainly concerned with provision for children with an EHCP that specifies that their educational needs can be met only in a private school will retain access to charitable rate relief. I hope that that document will give him some of the statistics that he requests.

Let me add a few more details, in case they help hon. Members in understanding the policy. I can confirm that stand-alone nurseries with their own rates bills are not within the scope of the Bill. If they are charities, they will retain their eligibility for the existing relief. In addition, the Bill references independent training providers, which provide valuable vocational training courses on behalf of the Government, ensuring that there are suitable further education opportunities for all. Because of the funding mechanism used by the Government to fund independent training providers to provide full-time education and training for 16 to 19-year-olds, the Bill provides a specific carve-out to ensure that those institutions will not be affected by the measures in the Bill. As previously announced, it is the Government’s intention that this measure will come into effect from 1 April 2025. As business rates are a devolved tax, the measures in the Bill will apply only in England.

The measures in the Bill will play their part in bringing about the change that the Government were elected to deliver. The powers to introduce new multipliers serve as first steps on the road to transforming the business rates system. We are determined to transform the business rates system to support our high streets in a sustainable way, to offer stability and promote investment, and to drive the economic growth that is our mission as a Government. Our vision of a modern business rates system is one that helps to create wealth and decent jobs in every part of the country, and that ensures that high streets serve as the heart of local communities.

We are also determined to break down barriers to opportunity and help all parents to achieve their aspirations for their children. That is why the Bill will make changes to the relief from business rates that private schools that are charities currently enjoy, raising crucial funding to help to ensure that every child has access to the high-quality education that they deserve. The Bill delivers change. Change is what the British people voted for, and I commend the Bill to the House.

[Madam Deputy Speaker (Ms Nusrat Ghani)]

I call the Opposition spokesperson.

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[Kevin Hollinrake]

I am grateful to the hon. Gentleman for his intervention. I remind him that it was not the Conservative party that voted to leave the European Union, but the people of this country. We respect democratic mandates.

I hope every Member on the Government Benches who walks through the Lobby to support the Bill tonight realises the price their constituents will pay for that decision. If the Government will not publish the likely consequences of the Bill, let me set out what I believe the consequences will be.

The Government claim to be cutting business rates relief for retail, hospitality and leisure businesses in England, but that is not the case. The business rates relief for retail, hospitality and leisure businesses that we introduced cuts 75% off bills, but that support is being reduced by the Labour Government. They are almost halving that relief to 40%, meaning that shops, restaurants, cafés, pubs, cinemas, music venues, gyms and hotels will all see their business rates rise.

[James Murray]

Was that 75% business rates relief for retail, hospitality and leisure businesses due to expire in April 2025?

[Kevin Hollinrake]

As the Minister knows, it had been renewed every year since 2021. The Conservative party supports businesses. When that 75% was passed on in England, the same moneys were provided to Scotland and Wales. What did Wales do? Only 40% relief was passed on, not 75%. That is the Welsh Government’s attitude to business. The Conservative party supports businesses, but the Labour party does not because it does not understand them.

Businesses face a stealth tax from Labour, with a £925 million rise in rates next year. That will add more than £5,000 to the business rates bill for the average pub, on top of £5,000 per year in extra costs for national insurance rises. It will also add more than £9,000 to the rates bill for the average restaurant, on top of the £12,000 national insurance increase, which means an additional £21,000 in total per annum for a typical business.

There will also be an increase of up to £2.7 billion in 2026 through higher business rates via the new multipliers, despite Labour’s manifesto promise not to increase the amount raised by the levy. These tax rises, as the CBI has said again today, will be passed on to workers through lower wages and to consumers through higher prices, making a mockery of Labour’s claim that it would not raise taxes for working people. The British Retail Consortium has warned the Government:

“The sheer scale of new costs and the speed with which they occur create a cumulative burden that will make job losses inevitable, and higher prices a certainty.”

The Bill will replace retail, hospitality and leisure relief with a lower multiplier for businesses with a rateable value below £500,000. That will be funded by the new higher rate multiplier for premises with a rateable value of more than £500,000, as the Minister set out. Setting the threshold at that higher level is a blunt instrument. I can assure the Government that it will have consequences for businesses that are not big online retailers. It will hit large supermarkets, supermarket delivery, large department stores, football and cricket clubs, conference centres and airports. Some of those on whom the new charges will be levied pay tens or hundreds of millions of pounds in rates. At the maximum level, it will mean a 20% increase to their rates bill.

It is no wonder that the outgoing chief executive of John Lewis has criticised Labour’s lack of business rates reform and warned that, alongside the national insurance increase, this is a “two-handed grab” from businesses. The Cold Chain Federation has warned that the business rates changes and the NICs increases could lead to the cost of food and medicine going up. That might be a double whammy for consumers, as the National Farmers Union has warned that the cost of food will go up because of the family farm tax. The Labour Government do not seem to have thought that through. The Labour party used to say that the business rates system created uncertainty, but now KPMG has described the Government’s plan to change the business rates system, as set out in the Bill, as “creating uncertainty for businesses”.

The Bill is silent on the matter of small business rates relief, which is a lifeline for many businesses on our high streets. When the Minister for Local Government and English Devolution winds up the debate, will he confirm that the Government intend to retain small business rates relief for the rest of this Parliament? Business is listening, and it needs to know.

Let me address the sting in the tail of the Bill: Labour’s education tax. The shadow Education Secretary, my right hon. Friend the Member for Sevenoaks (Laura Trott), feels passionately, as do all Conservative Members, that the Government are making the wrong decision. This Bill is part of the Government’s education tax, because removing the charitable rate relief from private schools that are charities goes hand in glove with the utterly wrong-headed, anti-aspirational and counterproductive policy of charging VAT on private school fees.