Lord Jenkin of Roding
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Lord Jenkin of Roding
Lord Jenkin of Roding
My Lords, before I move this amendment I should declare my interest as a joint president of London Councils and, like a large number of other noble Lords in all parts of the House, as a vice-president of the Local Government Association. There were lengthy debates in Grand Committee about the question of 50% of the amount of business rates being retained by local authorities. I therefore really make no apology for coming back to this issue. There have been references already, in the debates on earlier amendments, to the Government having made it clear that there will be no reset until 2020 and that therefore the main structure of the system will remain as it is.
First, I can deal very briefly with Amendment 10 because I want to direct most of my speech to the two other amendments in my name in this group, Amendments 13 and 14. When a similar amendment to Amendment 10 was tabled in Grand Committee, my noble friend explained that it was the Government’s intention to retain, as I have just said, the first reset date as 2020. That means seven years without a change. It is worth reading what she said on that occasion:
“That will give local authorities much greater long-term certainty about their financial obligations to central government and the funding that they can expect to receive from government than under the current three-year spending … process”.—[Official Report, 3/7/12; col. GC 327.]
At first sight, that sounds like an attractive proposition, but the fact of the matter, as has already been indicated, is that there are considerable other uncertainties surrounding this.
If I may say so, my noble friend might have somewhat exaggerated the degree of certainty that the system in the Bill, and her plans for it, will actually produce. What she said is really not accepted by a number of local authority associations. Perhaps I might just refer to one. London Councils suggests that while the system of top-ups and tariffs might remain constant within the business rates retention element of the system, although the adjustment for revaluation may alter this, uncertainty will continue to exist around the total level of funding that local authorities can expect to receive under this system. It points out that this really is not ideal. We have of course had references to the problem of setting budgets, not just for 2013-14 but thereafter.
To some extent, this overlaps the proposition in Amendments 13 and 14. These amendments go to the heart of the policy that lies behind this part of the Bill. They highlight what appears to be a contradiction between the laudable ambitions of Ministers to transform the system in the interests of economic growth, on the one hand, and on the other of what seem to be the instincts of the government machine to retain a very firm grip on the levers of control. This is an instinct that I of course recognise but in this context deplore.
The aim of this debate and the amendments that I am moving is to elicit from my noble friend a statement of the continuing willingness of Ministers in the department to do battle against the inertia of Whitehall’s controlling instincts and to hold fast to the vision of promoting growth and development. These are arguments that we developed at some length during the debates on the Localism Act, with, I have to say, some quite tangible results—Ministers recognised that if you were giving local authorities a general power of competence, it was rather silly to have pages and pages of the Bill telling them exactly how to do it. I am not asking for the impossible here but simply for recognition that one must resist the tendency for Whitehall to control town halls.
A fundamental principle behind the localisation of the business rates is that local residents of councils that actively promote development will see the benefit of extra growth in the form of retained tax receipts. To put it simply, it is an incentive, and that is what it is intended to be. It makes very real for councils the basic economic truth that the state prospers only if the nation does. All government, not just local government, can spend only what productive businesses earn. I recognise at once that many councils already care deeply about promoting their local economies. The evidence for that is clear as they put effort into economic development through activities as diverse as the way they operate the planning system, build up the local tourism offer—that has been referred to—tackle local unemployment, find training opportunities for young people and maintain the effectiveness and attractiveness of the local high street.
The evidence also shows that communities that know that extra development brings extra funding for public services take a different attitude to what might otherwise appear to be difficult decisions—one thinks particularly of planning decisions. That is not just my own opinion or even some abstract economic theory; we have as evidence the DCLG’s own excellent analysis, overseen by Professor Henry Overman of the London School of Economics. That analysis calculates for us the precise incentive effects from retaining business rates locally. It draws on empirical economic studies and the current academic literature. It shows that on a middle-case scenario, and of course there are margins for variability on either side, the Government’s policy could generate an extra £10.1 billion of gross domestic product as the result of the incentive effect of localising just half the business rate revenue, affecting councils’ planning decisions. Half is what the Bill provides, of course, and is what is intended to remain in place until 2020.
However, the evidence shows something more than that. According to the Government’s analysis of that best academic literature, this incentive effect works in direct proportion to the share of the business rate that is retained locally. For every extra percentage share of the rate revenue localised, the gain in GDP increases too. The more of the rate revenue you localise, the more extra-economic growth you get as a result. As I say, this is the finding of the Government’s own analysis.
I come therefore to the point of the amendments. If the Government believe their own economic analysis and if they really want to see economic growth—I cannot think of any of us who would not want to see that—the economic argument is completely compelling: we should localise as much of the business rate as we possibly can.
However, that is not what my noble friends have chosen to do. Instead, the policy is to fix 50% as the central share of the rates which councils must continue to surrender to the Exchequer. One can only speculate on the reasoning behind the figure of 50%, which seems a suspiciously round number, but the effect is clear. The mechanisms required to impose the 50% central share will mean that the DCLG will need to continue to involve itself deeply and in detail in councils’ financial affairs for some years to come. Central government will be kept busy. More than that, to go back to Professor Overman’s research, if the local share is set at 50%, so is the growth incentive of the new scheme. Are we really happy to try to escape the current choppy economic waters by going at only half speed?
Amendments 13 and 14 challenge the way in which the central share arrangement in effect contradicts the commitment to growth that lies behind the scheme in this Bill. They would require the size of the central share to reduce progressively over time—I suggest a minimum of 5% a year—and the local share to increase accordingly. They take the Government’s policy intention at face value and in the light of their own published economic evidence, and impose a framework that would allow them, over time, to increase the growth incentive built into the new system and as a consequence to increase the economic output of the nation. That seems to me to be a thoroughly desirable objective.
My noble friend has said on other occasions that 50% would not stay for all time; it is the Government’s hope, as they put it, that as the economic situation improves they will be able to increase it. But if increasing it earlier actually helps to put the Government’s economic policy firmly on to a growth trajectory, we really ought to consider that. When local authorities are looking for an opportunity to get a bigger than 50% share, that share should grow over a period of years. They are asking for something that is not only in their own interests but in the interests of the nation at large. I beg to move.
Baroness Thornton
My Lords, I shall speak to Amendment 37A, tabled in my name. I need to declare some interests. I am the honorary secretary of the All-Party Group on Social Enterprise, which I founded in 2001. I am a patron of Social Enterprise UK, and the ambassador for Spota, the trade body for a sports and leisure trust and an associate of Social Business International. The last two are modestly remunerated and are listed in the register of interests. I am a founding chair of Social Enterprise UK, a former trustee of Jamie Oliver’s Fifteen Foundation, Social Enterprise London and Training for Life, and I am a lifelong member of the Co-operative movement. Noble Lords will understand that with that background I know quite a lot about charities and social enterprises, but I have to say that local government finance does not rank highly among my areas of expertise. That is why I am so pleased that my noble friend Lord Smith and the noble Lord, Lord Shipley, have agreed to support this modest amendment because they certainly understand much more about the detail of business rate relief.
What we are considering today is not a partisan issue. It is in no one’s interests for the development of trusts to provide sports facilities, theatres, museums and libraries at the local level to be discouraged in any way, so it is disappointing that the issue has not been resolved since the Committee stage. When we last discussed this in Grand Committee on 5 July, it was clear that the Minister anticipated that it would be. She said:
“I understand the question of sports and leisure clubs is still under discussion, and perhaps we may be able to deal with that at a later stage”.—[Official Report, 5/712; col. GC 407.]
Lord Jenkin of Roding
My Lords, I am extremely grateful to all those who took part in this debate and, in particular, to a number of my noble friends, as well as the noble Lord, Lord Smith of Leigh, who were able to support my amendment concerning the escalator. However, there is an interesting parallel between the two Front Benches: they accept the matter in principle but do not want to be pinned down to a timetable. I understand that. I understand that the timetable that we built into Amendment 14 would, if it became part of the Bill, require further legislation if it were going to be departed from, so I do not think that we can possibly advance on that.
However, the main purpose of moving the amendment has been accepted. My noble friend has reiterated her support for the principle of the progressive increase in the local share of the business rate to be retained by local authorities, but, as she said, she would prefer that to be a movable feast rather than a fixed escalator. I understand that.
With regard to the amendment very ably spoken to by the noble Baroness, Lady Thornton—she was kind enough to ply me with a number of quite long papers in support of it—if this matter is currently being discussed between the noble Baroness and her supporters on the one hand and the Government on the other, it seems to me that that is the right way to proceed. I support the Local Government Association when it raises the question of affecting competition between in-house and out-of-house services. The LGA says—and I agree—that this must be on the basis of cost and not on the basis of some sort of tax break. I am not sure how far the noble Baroness was arguing that case but if one is going to do it in-house, rather than contract it out or use the services of a private contractor, it has to be on the basis of fair competition. I understand that.
Returning to the question of a steady increase in the local share, I think, if I may say so, that my amendment has achieved its purpose. There has been a very clear statement from the Government that they are in favour of this. We shall hold them to that over the years ahead because there is no doubt that local authorities would love to see that. They do not want to be pinned to feeling that the local share has to be 50% and no more over a period. Having said that, I beg leave to withdraw the amendment.
Lord Smith of Leigh
My Lords, the local government finance report will be a really important document when it comes out. My two amendments in this group apply to that. In Amendment 18 we come back to this magic date of 30 November, but some date needs to be suggested. It is fundamentally important to local authorities that we should understand what is in this document within a reasonable time so that we can make budgets for future years. I recognise that it is a challenge for the department and the Secretary of State to agree to a particular date. Nevertheless, this is something that the department should aim for. We want reassurances that, due to the nature of this report, we will not be deferred even further down the line, and that we will be able to make a judgment on what each local authority’s needs will be and what the budget will be for the following year.
I do not intend to go through the detail of Amendment 73, but with this probing amendment I am trying to tease out from the Minister a good indication of what is contained within the finance report. I presume that most of these things would be in there, but I would be very grateful if she could confirm that.
Lord Jenkin of Roding
My Lords, I have three amendments in this group and I can put them swiftly to the House. Amendments 57 and 58 deal with what is to happen if there is a surplus, or what the Bill calls “the remaining balance”, left over after the tariffs and levies have been made. The Bill, as it stands, says:
“The Secretary of State may by regulations make provision about the basis (‘the basis of distribution’) on which an amount … is to be distributed”.
It seems to me that it should be a matter not for the Secretary of State but for the local authority. Therefore, Amendment 57 sets out a slightly longer procedure which involves a consultation with the local authority about what is to happen to that remaining balance—whether it should be retained or distributed—and the basis on which it should be distributed.
Secondly, it requires that to be dealt with through the local government finance report. That is what gives Parliament a say on this. Essentially, this seeks to provide, first, an opportunity for local authorities to express their views through consultation and then for Parliament to have the final say. It is not the end of the world, but I think that this is going in the direction in which we would want to move. If you are to have these elaborate procedures, it seems to me that parliamentary control is important.
Amendment 78 proposes a new clause, which again requires consultation. The clause states:
“The Secretary of State may not make any changes to national business rate policy which impact on local business rate yields without first consulting with all interested parties”.
For the life of me, I cannot foresee circumstances in which a Government would want to do this without consulting. It seems that this is a perfectly sensible procedure to put in. If you are going to change the basis on which business rates are collected, it should be a matter for consultation.
We had a brief discussion when debating the previous amendment in which the noble Lord, Lord McKenzie, referred to the nationalisation of the business rates. I was responsible for that policy. When they were going to denationalise and decentralise, the main point was that businesses were charged rates by local authorities and had no vote. Therefore, business rates have been set nationally ever since. However, if the national rate is to be changed, there should be a process of consultation. I hope that the Government will be able to accept that.
Lord McKenzie of Luton
My Lords, we tabled Amendments 79 and 81 in this group. Amendment 79 revisits a debate we had in Committee concerning resetting—indeed, it revisits a debate we had earlier today. It requires arrangements whereby the Secretary of State must formally report on representations received from local government about resetting the system, and the outcome of the Secretary of State’s deliberations on such representations. As we have discovered, resetting is a contentious issue. The Government have made their position clear: not before 2020. However, the fear is that the system introduced will not remain robust over that period and that many councils will find themselves in difficulties.
As the Minister asserted in Committee, it is accepted that receiving and considering representations is a fundamental part of government work. The amendment seeks some transparency in the process. It seeks the formal detailing of representations so that the scale and scope of any concerns are clear. It also requires exposition of the Government’s position and reasoning in response to such representations. The Minister will doubtless say that such an amendment is unnecessary if there is an undertaking to deliver what we seek. Perhaps I would agree, but I will make it clear that we seek a process that spells out for Parliament the representations that have been received and the Government’s decisions thereon.
Amendment 81 is more specific and requires a reset every three years, to coincide with each spending review. This will entail an assessment of relative resources and of the needs of local authorities. The exclusion of the specific issues that need to be assessed—deprivation, unemployment, child poverty, the number of looked-after children, adult social care and so on—emphasises not only the important role that local government can play, but what is at stake under these proposals. I offer that amendment in particular for noble Lords who expressed themselves in favour of resetting but did not feel able to sign up to a formal review process. It might be more palatable to some noble Lords; I will be interested to know whether it is.
We thoroughly support Amendment 18, moved by my noble friend Lord Smith. We have added our names to Amendments 57 and 58, and support the noble Lord, Lord Jenkin, in tabling them.
Amendment 73, tabled by my noble friend Lord Smith, calls for the Secretary of State to compile each year and for each authority in England a raft of information about resources, including estimates for subsequent years. As ever, it seems an entirely reasonable proposition. We also support Amendment 78, to which we added our names. This is about changes to national business rate policy that impact on local business rate yields, and the requirement for consultation. It is absolutely essential that it takes place because the ground has shifted on this. Local authorities are at risk; they are not just collectors of the business rate now. They are at risk from the consequences of how much is collected, how the system operates, and any policy changes that central government may feel inclined to make. That is a particularly important issue.
Lord Jenkin of Roding
“(4A) Regulations under this paragraph and under paragraph 8 may, subject to such adjustments as may be specified in the regulations, define the non-domestic rating income of a special authority by reference to the amount which would be payable to it in respect of the year under sections 43 and 45 if—
(a) the authority’s non-domestic rating multiplier and small business non-domestic rating multiplier for the year were equal respectively to the non-domestic rating multiplier and small business non-domestic rating multiplier for the year, so far as relating to England, determined in accordance with Part 1 of Schedule 7, and(b) the authority acted diligently.”
Lord Jenkin of Roding
My Lords, this amendment deals with the situation of the City of London as a “special authority” for non-domestic rating purposes; that is, of course, a statutory expression. Perhaps it would help if I explained a little of the background to the City of London’s particular treatment for non-domestic rating purposes.
I should say at the outset that this is a probing amendment; I do not wish to divide the House on it. It is intended to provide an opportunity for the Minister to clarify why this Bill does not refer expressly to the City’s position and to confirm that this will be dealt with in regulations. Previously it has always been a matter of primary legislation. Now, if the Government can tell me that that will happen, it will be in regulations.
The background to the City’s particular treatment arises from the fact that the City is overwhelmingly a place for doing business and not for living in. Fewer than 7,000 individuals are currently on the constituency register of electors, and of course the number of actual households is far lower than that. So the council tax base is, in relative terms, very small. On the other hand, the City currently provides local services to more than 300,000 people who come in every day to work.
The starkness of the imbalance between the local services needed to meet the needs of the daytime population and the income generated from the residential tax base is illustrated by the effect on the City of London when the community charge, the predecessor of the council tax, was introduced. Without special provision for the City, its residents would have had to pay an annual charge of £8,700 each, equivalent to about £19,000 in today’s money. In other words, the general formula simply did not begin to work, given the City’s unusual demography.
It was for this reason that arrangements were made to treat the City as a special authority under that legislation. This had the effect of reducing the amount payable by residents to realistic levels. The cost of local services was to be met in part by businesses through a rate retention mechanism, with the City also being given the ability to levy a small local business rate. That is the system that operates today and which is, I think, a matter of general consent from the point of view both of the commercial population of London and of the residents.
I hope that it will be apparent from this short explanation that the City of London regards the retention of this arrangement as important, not least for the safeguarding of its 7,000 residents. However, there is no reference in the Bill whatever to the City as a “special authority”. The DCLG, my noble friend’s department, has indicated in its technical consultation document, published in July, that the Government do not intend to disturb the status quo. My amendment tries to reflect that. I gather that the arrangement is assumed to be dealt with later by regulations, but it is not at all clear why the status of the City as a special authority has been omitted from the Bill. Accordingly, my amendment seeks to reinstate the existing references to “special authority” contained in the Local Government Finance Act 1988.
The question is whether the arrangement should be in the Bill or whether it is sufficient to deal with it by regulations. It has always been in the Act and the City will be disappointed if it is not going to be in this Bill today. The amendment gives the Minister an opportunity to confirm that the situation is indeed as I have described and perhaps to indicate to the House why a reference to it has not been included in the current Bill. I beg to move.
Lord Ahmad of Wimbledon
My Lords, I am grateful to the noble Lord, Lord Jenkin, for raising this amendment, and I hope that I can provide him with the reassurances that he seeks. I have knowledge at a personal level of the City and its qualities and recognise the benefits that it brings to our country.
As the noble Lord notes and so aptly describes, under the current system the City of London is allowed to keep extra resources from business rates. First, the City has the power to raise additional funds from its business rate payers through a higher non-domestic multiplier. This is known as the City of London premium. Secondly, the City is also allowed to retain £10 million of extra business rates income. This is known as the City of London offset. These extra resources are given to the City in recognition of its low council tax base.
Her Majesty’s Government agree that the City of London should be able to retain in full the City offset and any extra revenue that it can generate from the City premium. We made this clear in this summer’s technical consultation, to which the noble Lord referred. Moreover, we have placed in the House of Lords Library the draft Non-Domestic Rating (Rates Retention) Regulations 2012. The regulations will determine through Schedule 1 the income to be included in the rates retention scheme. Paragraph 1(2) of Schedule 1 states that the income of a special authority, which also means the City of London, should be calculated on the basis of the national multiplier and not the special authority’s multiplier. The same paragraph states that the calculation of income should be reduced by the value of the city offset, which is around £10 million as I previously stated.
Paragraph 1(2) of Schedule 1 to the draft regulations will therefore ensure that any additional revenue from the City premium and the City offset will be retained in full by the City of London. I hope that this clear statement of government policy, together with the draft regulations to which I have referred, gives the noble Lord the reassurance that he and the City of London require. I invite him to withdraw the amendment.
Lord Jenkin of Roding
I am very grateful for my noble friend’s very clear and specific assurances on that basis, but I am sure that he will understand that the City is a little upset that it is being dealt with through subordinate legislation whereas hitherto it has always stood on primary legislation. However, if the Government have made up their mind that that is how they are going to do it, so be it, and I have no doubt that the City authorities will come to terms with it afterwards. However much we may be trying to rebalance the economy, the City is such an important part of it that the authorities should always recognise that this arrangement must be preserved if it is going to be able to perform its role for the benefit of the very large number who come in every day and work there. I beg leave to withdraw the amendment.
Lord Jenkin of Roding
“(3) The regulations must make provision to ensure that, where—
(a) a billing authority is required to make a repayment or credit by regulations made under paragraph 2(2)(j) of Schedule 9, and(b) the requirement is the result of a relevant alteration of the authority’s local non-domestic rating list,the amount of the repayment or credit is credited against subsequent payments by the authority under this paragraph.(4) A relevant alteration for the purposes of sub-paragraph (3) is an alteration made under section 55, which was—
(a) an alteration of the rateable value of a hereditament shown in the list,(b) made on the grounds of an inaccuracy in the list arising from a change in the matter mentioned in paragraph 2(7)(e) of Schedule 6, and(c) attributable to a general change in the level of demand for, or supply of premises of a given use or occupation within the locality of the hereditament.(5) The regulations must make provision to ensure that, where—
(a) a billing authority is required to make a repayment or credit by regulations made under paragraph 2(2)(j) of Schedule 9,(b) the requirement is the result of a relevant alteration of the authority’s local non-domestic rating list, and(c) the authority has made a payment under paragraph 6(2) or 8(1) as a result of the relevant sum having been treated as forming part of the authority’s non-domestic rating income for the year,the amount of the payment by the authority referred to in paragraph (c) is repaid to the authority or credited against subsequent payments by the authority under the same paragraph.(6) A relevant alteration for the purposes of sub-paragraph (5) is an alteration made under section 55, which was—
(a) an alteration of the rateable value of a hereditament shown in the list, and(b) not made by reason of a material change of circumstances which occurred on or after the day on which the list was compiled,and the relevant sum for the purposes of sub-paragraph (5)(c) is the sum in relation to which the repayment or credit referred to in sub-paragraph (5)(a) is required to be made.”
Lord Jenkin of Roding
My Lords, the amendments in this group, of which Amendment 24 is the first, are very long. I hope that the House may bear with me while I explain what they are all about.
How to deal with errors in the valuation list and with the sometimes long-delayed impact of appeals was referred to in Committee, as was the question of how these would be dealt with in the face of the new system of local retention of business rates. I use the term “appeals” to describe all successful proposals by a ratepayer to reduce the rateable value shown for his property in the local rating list, and thus his liability to pay. In essence, the amendments are intended to protect against a large transfer of risk to local billing authorities. It is important to make the point that these are matters beyond the control of the local councils. That is the background to what the amendments are about.
As part of local retention, the effects of valuation appeals in a billing authority’s area would, unless there was some express provision to the contrary, directly affect the finances of the authority. Appeals are a particular concern because of their prospective and retrospective effects. They tend to take a long period to conclude and can therefore relate to circumstances which may have arisen some years previously. Therefore, the reduction in rateable value is often then backdated by several years. As a result, the authority is faced not only with a reduction in future income but with the immediate need to make backdated refunds, and consequent effects on cash flow.
It is, of course, inherent in the notion of local retention that local rating authorities will be exposed to some volatility and risk to which they would not be exposed in a system of wholly centralised distribution as we have had hitherto. But there are certain sources of risk to which it would not be fair to expose individual billing authorities, even as part of a system of local retention.
The appeals with which I am concerned are of two types. The first are appeals where the value shown in the rating list was, for whatever reason, inaccurate when the list was made. I shall refer to this category as “initial inaccuracy” appeals. The second type is where the value has become inaccurate as a result of a general movement in the local property market since the list was made. These are sometimes called “market movement” appeals.
The initial inaccuracy type of appeal is fairly straightforward and can be dealt with quite shortly. Such appeals arise in a wide variety of circumstances. The central point for the present purpose is that the compilation of local rating lists is in no way the responsibility of local billing authorities. It is conducted entirely by the Valuation Office Agency, which is, of course, an agency of central government. Therefore, local billing authorities have no control over the accuracy or otherwise of the lists. This being the case, it would seem plainly unfair if a local billing authority were to find itself out of pocket by reason of some inaccuracy for which it was not responsible. That is the basic point of principle embodied in these amendments. I make clear that the amendments in relation to initial inaccuracy, and appeals of that kind, would not enable billing authorities to gain any benefit from any inaccuracy in the rating lists. They would not have any windfall from being able to retain the local share of overpaid rates. The amendments simply seek to ensure that billing authorities are not left in a worse position than they would have been if the list had been accurate to start with.
Three elements are needed to protect them in this way. First, where the billing authorities pass on half the revenue that is collected to central government—the central share—and some of that revenue later has to be refunded to the ratepayer after a successful appeal, of course, in those circumstances, the Government must refund the billing authority for the share that was passed to it. Otherwise, the billing authority would be out of pocket and the Government would be left with a completely undeserved windfall.
The second element is where the billing authority has to make backdated refunds, which means the system in past years has relied on an overgenerous assessment of the authority’s financial situation. In other words, the authority’s top-up will have been too low, or its tariff too high, because the calculation of the authority’s baseline—the revenue expectation, which is taken as the starting point for the authority under the new system and which determines the level of its top-up or tariff—was influenced by an inaccurate rating list. Where the appeal succeeds, a backdated correction of the position between the ratepayer and the billing authority will always follow. Of course, it is only fair that this must be accompanied by a backdated correction in the position between the billing authority and the Government. Otherwise, the authority would be disadvantaged through an inflated calculation of its expected revenue.
Thirdly, for much the same reason, the authority’s top-up or tariff for subsequent years should be adjusted to take account of that reduced ability to raise revenue in the future. An authority’s baseline is calculated by reference to the local rating list. Where an inaccuracy is revealed, it is right that the authority’s baseline be adjusted to take this into account. Otherwise, their entitlement will continue to be calculated on an erroneous basis.
I hope that the House will agree that really that is absolutely straightforward. It may be the intention of the Government to deal with these points through regulations. Of course, I have to raise this as an amendment on the Bill, simply as a matter of procedure, but I am looking for some assurances on that.
The second type of appeal, on market movements, raises rather more complicated issues. I will briefly explain how this can give rise to appeals. It is not the basic intention behind the rating system, where alterations are meant to deal with immediate, physical changes to properties and their surroundings. The broader economic developments in the locality are meant to be taken into account only every five years, in the revaluation. However, the line between the two is blurred by reason of the general movements of the market, as a reflection of the principles of supply and demand, which is obviously manifest in the rate of occupancy of certain types of property in a given area. The interpretation of the valuation tribunal has been that pronounced changes in levels of occupancy amount to the sort of significant change that gives rise to appeals, even though the effect is, in truth, just that of a market fluctuation.
This is likely, by its very nature, to affect a large number of similar properties at any one time. Liabilities for the authorities affected can be large and immediate. The threat is particularly severe in those areas that contain high concentrations of homogenous commercial property. The City, again, is an obvious example, but I understand that there has been a striking instance in Leeds, which has a thriving commercial district at its centre. It is a risk to which all billing authorities are exposed, to one extent or another.
It is not immediately obvious, as with initial inaccuracy, why market movements should be excluded from the scope of the risk borne by the local billing authorities. I understand that, but it could be perfectly properly argued that local property markets are a reflection of the local business environment, for which billing authorities are at least in part responsible and which they ought to have an incentive to improve. However, this is not the path the Bill takes. The system has been designed so that market movements will not form part of the incentive for local billing authorities. The scope of the incentive—and of course, conversely, the risk—has been confined to the direct consequences of changes resulting from the addition or removal of properties from the list.
This is evident from the Government’s approach to revaluations, which are the primary way in which general movements of rental values affect a billing authority’s revenue. The Government have stated that they intend to neutralise these effects in the local retention scheme by adjusting the top-up or the tariff of the authority. The rationale for that appears in the response of the Government to the consultation of the local government resource review. The reason given in paragraph 4.6 of the government response, published by my noble friend’s department last December, is that to allow the effects of revaluation to fall within the scope of the retention scheme,
“could lead to local authorities experiencing turbulence in their budgets as a result of revaluation changes which are, for the most part, out of their control. Allowing the impact of revaluations to feed through into the business rates retention scheme could result in significant changes to the income that authorities retain from business rates through no fault of their own”.
I accept that. It is obviously right. However, exactly the same principle requires that appeals founded on market movements should also be excluded from the risks faced by local billing authorities. It does not matter, for present purposes, whether the premise that such factors are largely out of the control of local authorities is right or wrong. What matters is that the principle adopted by the Government from the passage that I have just quoted, in such clear terms, should be applied consistently and fairly. If it is wrong that billing authorities should face adverse effects from local market movements through the mechanism of revaluation, it appears equally unfair that they should do so simply because it has been discovered through the mechanism of appeals.
As a further point, which should make that inconsistency particularly invidious, market movement appeals are made only, by definition, by the ratepayer. There is no mechanism to do it the other way around. It is a particularly risky downside for billing authorities—a large transfer of risk to local authorities with no commensurate prospect of reward.
In relation to this type of appeal, the amendments again have two strands. The first deals with the retrospective effect of appeals and requires the Government, in effect, to indemnify billing authorities against any refunds they are required to make as a result of backdated market movement appeals. The second addresses the prospective effect of appeals and requires that a billing authority’s top-up or tariff be adjusted in future to counteract the loss of revenue resulting from a market movement appeal.
In fairness to the Government, they have made some movement in response to the concerns about appeals. Initially, they seemed to take the position that the effects of appeals would simply form part and parcel of the increased volatility that would naturally face billing authorities in a system of local retention. In Grand Committee, and in the Government’s technical consultation, this position has now been modified, which is very welcome. The historical incidence of appeals will be taken into account when determining the revenue expectations of local government in England as a whole. However, in my view and that of those who are advising me, that does not go far enough to meet the concerns. The losses incurred by an individual authority will arise to a large extent from one-off circumstances that will be difficult to predict with accuracy. The effect is that billing authorities will be left facing the consequences of factors entirely outside their control. The amendments would put in place a system ex post facto to the actual losses suffered by individual authorities. That would seem to be the fairest way to proceed; that is what ought to be done.
Baroness Hanham
I apologise to the noble Lord but I think that when he asked the question he anticipated that that is actually quite detailed. It is not a figure that I have just got in my head, so perhaps I may write to him to give it.
Lord Jenkin of Roding
My Lords, my noble friend has made it very clear that these matters are going to be dealt with in regulations. There will therefore be the opportunity to consider those regulations in draft and if necessary, to negotiate. As I understand it, the City authorities have been negotiating with my noble friend’s department for some time on this. This is not a new thing, but there still has to be an opportunity to try to reach a sensible agreement. I understand the point that my noble friend has made about not loading the whole thing on to government, but that agreement has to be fair to both parties. Having heard that, however, I do not think that I should talk any longer and I beg leave to withdraw the amendment.