Business Rates and Levelling Up

Kevin Foster Excerpts

Tuesday 13th December 2022 Westminster Hall

[Kevin Foster (Torbay) (Con)]

It is a genuine pleasure to serve under your chairmanship, Mr Mundell. At the outset, I must congratulate my hon. Friend the Member for Waveney (Peter Aldous) on securing the debate and giving us all a chance to reflect on the impact of business rates and levelling up.

Like my hon. Friend I represent a coastal constituency, although with a shoreline that faces east rather than west, and I do not want the levelling-up agenda to be based on a crude caricature of north versus south—often, the communities facing the greatest challenges lie on the southern coast. My hon. Friend did not speak for a moment too long; I found his points very interesting, and I was in great agreement with many of them with respect to how we need to change this form of taxation.

Communities such as Torbay can see wealth alongside areas with challenges, and we need to see levelling up in not only the national context, but the local, with the clear aim of turning back the tide on poverty, which is affecting some of the communities that I am proud to represent.

For Torbay, levelling up means looking to attract investment, which generates long-term jobs and ensures a genuinely vibrant local economy. That is where business rates can have such an impact. They effectively penalise businesses for investing in bricks and mortar, putting physical retail—not just, nowadays, high street retail—at a disadvantage to online outlets and potentially putting off development more widely across sectors such as tourism and hospitality, where a business rates liability will pretty much inevitably be created as part of a new investment.

Business rates might have been an irritant in the past, but they can often be the make-or-break factor now, especially in light of the other pressures that businesses face. Business rates are the bill that is not flexible. That bill is enforced by the magistrates, and it is often the final blow, as it takes little or no account of the actual income that a business receives, as my hon. Friend mentioned. It is literally a tax on existence. Businesses must pay the tax simply to be in their premises, before they open the door to do any trade or business.

Like my hon. Friend the Member for Waveney, I found the figures around rental revaluation extraordinary. It does not strike me that rental values for shops have fallen by only 10%, as on most high streets agents are offering businesses “Will you pay the business rates?” style deals on properties for certain periods of time. The figures do not reflect where rentals would have been five, six or seven years ago, or even a couple of years ago, before the impact of the pandemic.

I will give a quick example of the impact of the cost of business rates, when combined with other costs. A company that runs four hotels in my constituency has, unsurprisingly, seen utility costs increase dramatically, meaning that the business needs an additional net income of £8 per room—a 12% increase—for all 125,000 room nights, just to pay the increased costs. That is simply not achievable in the current economic circumstances. The company pays £6.5 million in payroll to 470 employees in Torbay and spends £7 million a year through the supply chain, mostly in the west country. The moves we are seeing to increase wages are welcome, but they will mean the company will have a 9% payroll increase in April 2023. The retail, hospitality and leisure business rates relief scheme, which has been confirmed to be 75% for 2023-24, is welcome and it will offset around £300,000 of the additional costs for business, but it will not reach the wider amounts needed, as those bills still need to be paid.

Similarly, another example is an innovative holiday park, with caravans that are the equivalent of staying in a hotel suite; the era of putting 50p in a meter is long gone—think caravans with widescreen TV and central heating. That business will potentially see its bill double, courtesy of its investment.

While we often focus on the impact of business rates on our high streets and town centres, the impact is much wider, especially in situations where it is not an option for staff to work from home or from remote locations, such as in the manufacturing or hospitality sectors. A holiday by Zoom or a pub night on Microsoft Teams will not be the same experience; a physical premises is needed to deliver those experiences.

What can be done? We need to look at providing further relief in the current system, particularly for small and medium-sized businesses. We need to realise that the days of retail and hospitality being a handy way to raise revenue for local services are now over. The high street corner is no longer the prime place to do business. There are department stores standing empty across many of our town centres, such as the former Debenhams on Torquay harbourside. We need not walk far from this Chamber to see what was once a large department store lying empty in what was a prime shopping area of London—a sight unimaginable back in 1990, when the uniform business rates were introduced.

It is increasingly the presence of business rates liability that can directly and adversely affect the chances of levelling up a community by discouraging investment in commercial properties. That was one reason why I supported the previous investment zone suggestion that allowed business rate reductions in key areas that needed regeneration.

Ultimately, a derelict and boarded-up building creates costs, not revenue, for the public purse. I urge the Government to look at what can be done further about business rates to ensure they do not become a barrier to the regeneration of our town centres, not least in the context of large national charities receiving a mandatory 80% relief, often increased to 100% relief by billing authorities. At the very least, parity for smaller businesses trading in retail, leisure and hospitality within our key areas for levelling up would be a welcome incentive, before finally getting on with what needs to be delivered: a major review of this form of taxation.

It is oft talked about, but there needs to be a better option for the future in a system that is fundamentally rooted in the pre-digital era of economic activity, when physical premises were an integral part of doing business. I appreciate that that is easily said and harder done, not least when we consider the £25 billion of revenue that has been referenced. However, we should not shy away from doing it simply because it would be hard. Taxes have changed in the past to reflect economic, scientific and technological changes. The same is needed now.

I cannot cover in a short speech every aspect of the links between business rates and levelling-up policy, alongside their impact. However, I hope the Minister in her response will reflect on how we need to consider the real disincentives of the tax for businesses such as hospitality, which must innately operate from a physical space, and the deterrent to operating retail from the high street, town centre or even the out-of-town shopping centre, which is facing huge competition. If we are to truly level up many coastal communities, those issues must be addressed and a revaluation on its own will simply not do that. If they are not, there is a danger that our taxation system, designed for an era when people went to a public payphone and had to go to a physical premises to buy something, will hit our town centres and not deliver the levelling up and regeneration that so much of Government spending is trying to achieve.

--- Later in debate ---

[The Financial Secretary to the Treasury (Victoria Atkins)]

It is a pleasure to serve under your chairmanship, Mr Mundell, and I congratulate my hon. Friend the Member for Waveney (Peter Aldous) on securing this important debate. I am delighted that on our side of the House we have so much of the English coastline represented—I include myself in that, proud as I am to represent the Lincolnshire coastline.

I am also delighted to be joined by the hon. Member for Strangford (Jim Shannon). I had many a happy time sailing in the famous Strangford lough in my childhood, and I know how important tourism and hospitality is to his constituency. I thank him for sharing his Northern Irish perspective, as he always does.

I hope colleagues are aware that the Government announced a significant support package for business rates in the autumn statement, and I welcome the opportunity to set that out. I also welcome the opportunity to discuss the substantial reforms to which we have already committed, which will make the business rates system fairer and more responsive to changes in the market. We have heard the concerns expressed about the status quo not just by hon. Members today, but by businesses in previous years. I will address some of those concerns and emphasise our keenness to make changes where appropriate.

Forgive me if first I go back to basics. The importance of business rates to public finances is perhaps lost in the understandable concerns raised about the impact on constituency businesses. Taxes on commercial property remain an important part of a fair and balanced business taxation system. Most advanced economies, including most OECD members, have a business property tax. Business rates raise over £20 billion a year in England alone. That money goes to fund vital public services—a priority that the Chancellor emphasised again and again in the autumn statement. Put simply, we do not believe that there is an alternative with widespread support that would raise sufficient revenue to replace business rates. For those reasons, we do not consider there is merit in a radical overhaul or abolition of business rates, but we have delivered meaningful change to improve the system and have continued to conduct several reviews on the issue. Those reviews reaffirmed the importance of business rates and concluded that they have several key advantages over other taxes. They are relatively easy to collect and hard to avoid, with a collection rate of around 98%, making them a vital and stable source of funding for local services.

My hon. Friend the Member for Waveney suggested that the current tax rate discourages investment in new spaces and expansion of existing spaces, but there is little evidence of structural issues in property investment in the UK. As he would expect, we keep a close eye on that. We have the highest share of investment going to non-residential buildings of any member of the G7. We recognise the valuable role that businesses play in our economy and we have taken action to support them through the business rates system.

[Kevin Foster]

I find the Minister’s response interesting. She talks about the investment in commercial property—for example, we are seeing £140 million of investment in Torbay hotels. The issue is not so much the overall level of investment in commercial property, but the specific locations. We might have 34 million seafront hotels in Paignton, but in the town centre, which was once the main focus for the collection of business rates, we are struggling to get anywhere. Does she think there might be a link?

[Victoria Atkins]

Goodness me, I would not pretend to have an intimate knowledge of the economics of Torbay. My hon. Friend knows his constituency extremely well, but the realistic fact is that businesses in his high street have to pay taxes of some sort. That is why we have tried to mould the business rate support package to help the businesses that need it the most, which we recognise are those in the retail, hospitality and leisure industry. I will come on to that particular support, which is a very generous package that I hope will be of great benefit to businesses in his constituency.

We have a duty to ensure that the business rates system is fair and responsive, while raising sufficient revenue to support the public services that I have already talked about. Since 2017, when the Government doubled the 100% small business rate relief rateable value threshold from £6,000 to £12,000, a third of properties in England have paid no business rates whatever. In my own constituency, I know of many properties in my market towns that pay no business rates precisely because of that protection and they are, I hope, thriving as best they can as a result.

The Government provided £16 billion in business rates relief for the retail, hospitality and leisure sectors during the pandemic because it was such a difficult time for them when the economy was essentially closed down. That was an unprecedented level of support for the high street, on which so many communities depend. From my own constituency, I know how vital that support was in keeping businesses’ heads above water during the lockdowns. The Government also provided a £1.5 billion covid additional relief fund for businesses that were affected by the pandemic but which were not eligible for other reliefs. Local authorities, due to their knowledge of their local areas, were responsible for designing and establishing those schemes. Progress has been in line with our expectations, and final distribution data will be published on gov.uk shortly.

As the Chancellor stated in the autumn statement last month, it is an important principle that revaluations should reflect market values. Hon. Members have emphasised that point during the debate. The 2023 revaluation will therefore go ahead. From April 2023, all rateable values will be updated for all non-domestic properties, with evidence from April 2021. This will mean initial bills will reflect changes in market conditions since 2015, and will ensure a fairer distribution of the tax burden between online and physical retail.

The hon. Member for Strangford asked me why the Government have not introduced an online sales tax. He will know that we launched a consultation on the issue earlier this year. We received many responses, which will shortly be published, but it is fair to say that there was not unanimity. Indeed, there was not even agreement—I would not put it as highly as that—as to what such a tax should look like, because many of even the smallest businesses on the high streets of our constituencies now have some form of online presence. It may not be the main part of their business—that may be the shop—but, understandably and laudably in the 21st century, they are trying to diversify by having an online business.

Nobody could quite see how we could differentiate between the enormous multinationals that we are all keen to ensure pay taxes and those microbusinesses that my hon. Friend the Member for Waveney described so well. That is why in the autumn statement the Chancellor decided against an online sales tax, with the important caveat that the changes we are making to business rates, including with the revaluations, will mean that the distribution warehouses, which supply the multinationals that we are all keen to ensure pay their proper taxes, will see significant rises in their bills while we also protect the shops and microbusinesses to which he referred.