Localism Bill

Lord Shutt of Greetland Excerpts

Tuesday 28th June 2011 Lords Chamber

[Lord Beecham]

My Lords, the noble Lord, Lord Shipley, is quite right to refer to the support for the principle from the core cities and also, in general, from the Local Government Association. I endorse that. To help me understand the implications of this measure, can the Minister refer back to the point that she raised about this being more acceptable to business ratepayers because they will benefit from the projects that are being financed through this mechanism as opposed to something like Crossrail where they may not have done? This does not necessarily constitute an objection to the proposal, but I wonder whether that is right. The rates are borne by the occupier of business premises. The value effectively goes to the owner and they are not necessarily the same. We have had over many years in local government finance the position where property owners contribute little to the regeneration of cities and the like. The financial burden falls on the tenants through the rents and they also pay the rates. I wonder whether she is not being a little optimistic in assuming that the occupiers of premises that may benefit from these developments will be as enthusiastic as she might suppose, although, as I say, that does not vitiate the validity of the proposal as a means of financing investment.

[Lord Shutt of Greetland]

My Lords, I hope I can be helpful on this but, while thanking all noble Lords who have spoken, I revert to the point that my noble friend Lady Kramer made in her initial remarks about this being a probing amendment.

The Government have committed to introduce tax increment financing but we should not pre-empt the outcome of the local government resource review that will conclude in July. The review is looking at both local retention of rates and tax increment financing as we need to make sure that tax increment financing proposals are consistent with our wider proposals on business rates retention. The amendment appears to increase the rates liability of businesses, whereas tax increment financing, as generally understood, does not increase the business rates that would otherwise be levied but uses those rates to repay the borrowing that helped to deliver a piece of infrastructure. The business rate supplement and proposals for tax increment financing are two separate models that are structured differently. Rather than integrate them, there is no reason why they could not be used alongside each other to facilitate the funding of infrastructure to support economic growth.

The amendment seems to create two types of business rate supplement. The first type is a traditional business rate supplement of up to a 2p levy on business rates payers within an authority area that occupy property rated above £50,000 for an economic development project. The second type is a business rate supplement for where tax increment financing has delivered some infrastructure project of up to a 2p levy within an authority area but is restricted to the increases in rateable value of properties rated above £50,000 as a result of some infrastructure that has been implemented by tax increment financing.

The amendment appears to be defective in a number of ways. There is no definition of tax increment financing. The amendment would also create some practical concerns. The tuppence maximum will apply to the area, so in London the proposal could not apply as the tuppence limit reached by the Crossrail business rate supplement has been dealt with. Applying the increase to the rateable value to adjust the impact of the tax increment financing project would require a second ratings list to be set up for all properties with rateable values both prior to and after the tax increment financing project delivery. A consequent increase in administrative costs is highly subject to challenges over the extent of any rateable value increase as a result of the tax increment financing project or other factors—refurbishment of a property, for example.

The tax increment financing scheme does not increase the business rates that would otherwise be levied but uses those rates generated by the infrastructure to repay borrowing. Under existing arrangements, 100 per cent of business rate revenues collected by local authorities are pooled for redistribution to local authorities in England. By considering options to enable councils to retain their locally raised business rates, the current local government resource review provides an opportunity for significant changes in the way in which councils are funded. Such an approach could help to set free many local councils from dependency on central government funding and provide incentives for them to promote economic growth. The review is considering how we could manage the distributional impacts of any new arrangements. More deprived councils will continue to receive support.

Last September, the Deputy Prime Minister announced that the Government were committed to take legislation to allow for tax increment financing. Then, the local growth White Paper, issued in November, set out the Government’s intention to carry out a resource review. The terms of reference for the resource review were published in a Written Ministerial Statement by the Secretary of State on 17 March 2011. The resource review will look at local retention and tax increment financing in the round and will conclude in July. The aim is then to move as quickly as possible towards implementation, taking into account the need for primary legislation.

I appreciate the spirit of Amendment 118ZA, which aims to ensure that any business rate supplement where the levy raises less than one-third of the overall project cannot be imposed between Royal Assent and the commencement order without a ballot. However, we do not think that bringing forward commencement of that part is necessary as we are not aware of any proposals for any new business rate supplement planned to be imposed—that would fund less than one-third of the overall project—as we have not seen an initial prospectus or consultation. The business rate supplement for Crossrail has already been imposed and would not be affected by the amendment. I should like to offer reassurance that the Government will bring into force the proposed change that will ensure a ballot for all future business rate supplements regardless of whether it funds more or less than one-third of overall costs.

Clause 38 will come into force following a commencement order to be made by the Secretary of State. We will look to make that commencement order for a date no earlier than two months after Royal Assent in line with convention that legislation is brought into force earlier only where necessary and in exceptional circumstances. I trust that that is a fair response to the noble Baroness and that she will feel able to withdraw her amendment.

[Baroness Kramer]

I thank the Minister. I am not sure that we are a whole lot clearer on the commencement date but perhaps the Government at the earliest possible opportunity will make that date clear to allow local authorities to handle their affairs in the most effective manner. I accept that I am not likely to get a clearer answer than that.

There are no absolute rules on tax increment financing. There is no absolute requirement that TIF applies only to the standard business rate. There is no rationale that says that it should not apply to a special business rate, which is what we might call the business rate supplement. If this begins to be a widely used measure, many communities and many business communities might rather see a special rate for a project that they consider to be particularly beneficial rather than forgo the project. I would be sad if the Government were ruling out flexibility around TIF from the beginning and going only with the very plain vanilla simplest form of TIF as they look at the various options in front of them.

The noble Lord, Lord Beecham, raised the point that very often the person or the business paying the business rate is not necessarily the one that benefits from the increase in value. I take his point. However, as the Minister pointed out, with the standard vanilla TIF, this would not be an issue because one is looking just at the standard business rate and it would be only where there was a special levy in order to create the project. It will depend on whether that increase in value results in increased benefits to the occupier. For example, a shop that suddenly finds there is much more traffic coming through the door may be very pleased to support the higher rate payment because, in effect, their business has benefited. I would say that that is not an absolute.

I would hope that local authorities are given the maximum amount of flexibility to be able to design projects around the needs of their community—and the benefits that will come to their community—to negotiate much of this with local business. I hope very much that as the Government deal with this issue, they will not try to be prescriptive but will allow that kind of financial flexibility which local authorities, I suspect, are best positioned to understand in detail.

I very much confirm that this was a probing amendment. I was rather flattered by the Minister’s attempt to deal with some of it on a line-by-line basis. It was not written with that in mind. I very gladly beg leave to withdraw the amendment.