Non-Domestic Rating (Multipliers and Private Schools) Bill (First sitting)

Patrick Spencer Excerpts

Committee stage
Wednesday 11th December 2024 Public Bill Committees

[Vikki Slade]

Q Can I ask you about certainty? The Bill providers the power to introduce multipliers for a given year. With so many stores, you must plan a long time ahead. Do you think that, if we allow changes to be made so frequently, that will be a problem for you?

Paul Gerrard: Your underlying point that businesses like certainty is well made, because we do; we try to plan ahead. If I think back 18 months to the energy crisis, that was unforeseen and caused a real problem. You are absolutely right that certainty is important. Also, though, there is flexibility depending on the economic circumstances at the time—the pandemic allowed a different flexibility—so I think there is a balance there.

What is important is that, in deciding that, there is real transparency and openness. I spent 20 years in government, much of it in the Treasury and Her Majesty’s Revenue and Customs, as it was then. I would say of my time there that perhaps we were not always that open and transparent with business. The more openness there is, and the more that officials can advise Ministers based on what is happening in the business community, the better. I am relatively comfortable about the structure; I think it is the ways of working that are important.

[Patrick Spencer (Central Suffolk and North Ipswich) (Con)]

Q Thank you, Mr Gerrard, for coming to give evidence. I want to put on the record my support for the premise of supporting community shops and stores and providing somewhere for people to go to do their shopping, but you mentioned that the provisions in the Bill will make distribution more expensive. Should we not be more concerned that home delivery, which we know is very important to vulnerable customers, will be more expensive as a result of the Bill?

Paul Gerrard: I think I am right in saying that the Co-op has the biggest quick-commerce business in the country. People order through aggregators and their orders are delivered from our stores; that is something that we have within our business model. Clearly, there will be costs going on to some of the depots and distribution centres and, to keep this revenue neutral, that will bring extra costs. I think that is the price of revenue neutrality. In the round, the impact on small stores and local shops will outweigh the potential risk around home delivery. As I said, we have a home delivery business; I think our quick-commerce business is the biggest in the country for small, quick deliveries. You are right to flag the risk, but in balance we would say that it is a positive thing that we are supporting brick and mortar shops as much as we can.

[Mr Mark Sewards (Leeds South West and Morley) (Lab)]

Q Thank you, Mr Gerrard, for your answers so far; they have been really insightful. We have Co-op shops in my constituency; the Co-op in New Farnley is virtually the only shop in that community. It was an absolute lifeline throughout the pandemic, and it is still a lifeline today, given that there are not other shops. We have had some questions about consistency. Obviously, the aim of the Bill is to provide consistency for businesses—especially those in retail, hospitality and leisure—by providing lower multipliers. You have said how beneficial it will be for about 92% of your properties. Can you talk more broadly about the potential benefits for other retailers?

Paul Gerrard: Certainly. I will make a couple of points. The last time I looked, about 95% of retail was microbusinesses with fewer than 10 employees. From the data I have seen, 98% of retail stores have a rateable value below £500,000. So this helps 92% of the Co-op but, from what I have seen, it helps 98% of the broader retail sector.

In my experience and the Co-op’s experience, high streets and precincts are not made by one business, but you often get one business beginning to drive vibrancy in that place. If one business can make it work, you attract custom and those customers might want to buy other things, so you will get a ripple effect from that. I think this will help communities, because it will make it much more viable for those small stores—either independent traders, or small stores of national businesses like the Co-op—to be in communities. I think the ripple effect will be significant. As I said before, there is a commercial thing there, but, as you alluded to, there is a hugely important social and community perspective as well.

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[Vikki Slade]

Q Thank you very much for coming in to give evidence. On the timing, we know that retail, hospitality and leisure relief will reduce to 40% in April, but these measures will not come in until the April after that. Do you have any concerns about the impact on convenience stores during that year, before we know what will be happening the following year?

Edward Woodall: If you talk to convenience retailers now about business rates, what is in the front of their minds is the reduction in retail, hospitality and leisure relief, which has gone down from 75% to 40% from April next year. That is a big hit, among a cumulative burden of other measures that were announced in the Budget. That is concerning for them. They talk to us a lot about that, as part of the overall Budget package being challenging—and it was a big challenge, with £660 million costs for the sector.

That said, we knew that the retail, hospitality and leisure relief was introduced as a temporary measure during the covid pandemic, so we welcome the fact that it has not disappeared completely but has been tapered. We also welcome the principle that is set out in the Bill that we are giving a bit more permanency to support for retail, hospitality and leisure businesses on the high street in the future. There has been a cycle of changes in the policy over time, so hopefully this will give us a bit more of a stable footing to understand that. That does not just help us; it helps the other businesses from the retail industry that are thinking about investing in those locations too, but also those from hospitality and leisure.

[Patrick Spencer]

Q Thank you very much, Mr Woodall. I was struck by what you said about rural convenience stores and the importance of supporting them, and I could not agree with you more. I represent a rural constituency and in the next-door village there is a shop that has been there for years. I am terrified every year that it will go under, yet it is very resilient. Do you think this Bill should make provision for convenience stores that stand alone within rural areas and villages, where they are the only shop left that sells milk, eggs and newspapers? Do you think it is not just about small and microbusinesses, but those that are the only ones left? Do you think there should be a provision in the Bill for them?

Edward Woodall: I certainly think there should be provision of support for rural businesses, particularly those that are the last ones serving a community. They deliver essential services to those communities, and there is a cost to that community if they have to travel elsewhere. Whether it is possible to do that through the legislation is an interesting question. This was picked up in some of the previous evidence that you heard this morning, but there are measures within local authorities’ existing powers to issue discretionary relief to support those locations. That was previously called rural rate relief but it has been taken over by small business rate relief.

The challenge is whether local authorities have the funding to administer that relief. I think it is quite challenging to do that in the Bill, because you get into a space where you start adding more complexity by identifying regions or locations in national legislation. Actually, what we often see is that there are more differences within a region than there are between regions. I agree with the principle of what you are saying, but perhaps the existing powers of local authorities to do that are better, but they probably need support and trust from the Government to allow them to administer it well.

[Adam Thompson]

Q Thank you again for coming in this morning, Mr Woodall—we really appreciate your time. I am very pleased to hear your overall assessment that, for the convenience stores that you represent, the Bill will be positive and benefit the vast majority of them. On the savings made and the tangible effect of this Bill, what will they mean for a shopkeeper in my constituency of Erewash for security implementation, staffing and operations?

Edward Woodall: I tried to give some examples earlier of how businesses might invest. I suppose the first question is: where are the multipliers set? I would encourage the Government to use the flexibility to enable the best possible investment. As the example identified, if you have the multiplier set at a lower rate, the business is starting to save thousands of pounds. That is an opportunity for them to think, “Right, I can update the CCTV system. I might be able to add some new security measures in store.” The Bill can facilitate that investment. I should also say that, with the overall pressures on retailers at the moment, the cumulative burden is very big. They also might have to use that money just to keep operating and managing the costs that go up as well. This Bill can facilitate investment, but the Government have to think about the overall investment environment for retailers, not just through the rates bill by itself.

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[Jim McMahon]

Q Is part of the tension not that the question described a broken market, but that response describes a functioning market? Is the real issue that many institutional investors would sooner have an empty property with a notional rent attached to it, even if the rent is never achieved, than accept a tenant for a lower rent that would have an impact on their overall balance sheet? Is there not a tension there?

Stuart Adam: Yes, I think that is right. There is an interesting question as to why so many properties are left empty for so long, when it would seem to be in the landlord’s interest to have anyone in there paying them something, rather than no one in there paying them anything. There are certainly aspects in which the market does not function well, but on the whole it still looks to me like a market where, basically, prices are determined by supply and demand, and such evidence as we have seems to support that.

[Patrick Spencer]

Q On this remarkable relationship between taxes and rent, are you saying that there is a uniform relationship across geographies, locations and shop types? There is a big difference between Oxford Street and a town high street; are you saying that the behaviour of rents and taxes does not vary across those situations?

Stuart Adam: Broadly speaking, yes. The rule of thumb that, in the long run, rent will change with rates almost pound for pound will apply across different types of property and location. There is a difference where the tax on the premises is not fixed, for example where it depends on what the premises is used for: I do not think it is the case that reliefs for particular sectors get reflected pound for pound, because the use of the property may vary.

[Patrick Spencer]

Q Have you done any analysis of the variation of impact between renters and freehold owners of shops? On my high street, the shops that own the freehold are the ones that have been there for 15 years, so they have not weathered the same problems that other shops have. Surely at the margin there is an impact on shops that own the property.

Stuart Adam: There are a couple of slightly different things there. The first is that you may have a chain of ownership: possibly a very short-term sub-let, a let, a long-term leaseholder and then the ultimate freeholder. How far and how quickly it gets passed up that chain will partly depend on how long term the contracts are, how easy it is to renegotiate and so on.

The second thing, when talking about what happens as rents adjust, is that a minority of businesses, but a sizeable minority, own their own premises. In the long run, they may not be affected in their capacity as tenants, but they are still affected in their capacity as landlords to themselves, as it were. One way to think about it is that it is almost lump sum redistribution across owners of different properties. If you own the property and your business rates bill goes down—there is no rent. You can imagine charging rent to yourself, but the reality is that you just have a lower bill to pay.

That is a one-off gain in the sense that you could sell that property and get more for it in the same way, so you are just better off if your business rates bill has gone down. Someone else looking to buy it would face a lower business rates bill, but they would have to pay more to buy the property in the first place. So yes, businesses that own their own premises would benefit from a business rate cut—or lose from a business rate increase if we are talking about those above £500,000— in their capacity as owners, essentially, rather than their capacity as the business occupying and using the property.

[Ms Billington]

Q We have a 24% vacancy rate on Ramsgate High Street for many of the reasons that Jayne gave in relation to Cornwall. Do you think that the certainty that this legislation brings will have an impact on establishing long-term help for reviving the high street, particularly when it comes to rents and increasing occupancy? The long-term drivers that have been undermining the high streets are new shopping behaviours—not only post-pandemic behaviours but online shopping. If you do not think that this legislation will help, what will?

Stuart Adam: First of all, I do not want to say that it will do nothing to help. It will certainly do something in the short run, and I am also giving the quite extreme case—the very purest—in the long run. Even in the long run, it will not be quite as simple as I am painting it. There will be some help, but as I say, it is more second order than first order. I also agree, as I emphasised earlier, that the certainty will definitely help.

I also think that we can look at other parts of the business rate system. The treatment of empty properties—empty property relief—is one, which is much more important and more directly targeted at actually getting properties back into use. I know that the Government are concerned, as the discussion paper mentions, about exploitation of empty property relief by people cycling in and out artificially and things like that. I also think that a lot of the struggles of the high street are not caused by business rates. Things such as online competition make a huge difference, and are not driven by business rates.

Non-Domestic Rating (Multipliers and Private Schools) Bill (Second sitting)

Patrick Spencer Excerpts

Committee stage
Wednesday 11th December 2024 Public Bill Committees

[Patrick Spencer (Central Suffolk and North Ipswich) (Con)]

Q The premise of this policy change, as I understand it, is to rebalance fairness back towards local, community-based properties and businesses, which I am in favour of. But can you speak to the impact that the Bill will have on your institutional investors that invest in large warehouse space? What is the importance of that for the UK economy, in terms of supporting our distribution networks and the many businesses that provide goods to our doorstep? What impact will the change of policy have on those businesses?

Rachel Kelly: Our whole economy is interconnected. Those large logistics and distribution warehouses that you talk about will be servicing parts of our retail sector as well. I am sure there will be loads of impacts of this measure that are impossible to predict at this point, but ultimately, increasing the tax rate further makes investment in property harder, and it will make the occupation of property more expensive. Other than that, it is good that the whole economy is shouldering the burden of the higher tax rate, and we would not want that to be intensified further so that individual sectors are solely bearing that burden; I do not think that would be right or sustainable. Ultimately, the higher tax rate will make the tax system less competitive and the occupation of property more expensive.

[Deirdre Costigan]

Q You said at the outset, Rachel, that you wanted the tax system to be more responsive. Would you not agree that rebalancing the tax system in this way is being responsive to those empty shops on the high street, and to the feeling among small businesses and hospitality that it is the online distributors that are not playing on a level playing field and are getting away with being able to undercut them because the tax system currently does not work? The legislation will give us the responsiveness we need to level that up.

Rachel Kelly: Yes and no. Ultimately, if you take a step back, business rates are a tax on the occupation of property, and they are levied on the basis of the value of that property. If you occupy a more valuable property, you will pay more tax. The business rate system is working as the policy intended in that respect.

In terms of making it fairer, the best thing you can do is value property more frequently. Retail rents have been falling for the last 10 or 15 years. In the decade from 2010 to 2020, rents came down 30%, but business rates did not for that sector. Rents are negotiable—rents do respond—but it is business rates that do not. If valuations had kept up with rents, retail would have been paying much less, much earlier, and other sectors that had been growing would have been paying more much more quickly. To my mind, the best way to introduce fairness into the system is to value properties more frequently.

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[Adam Thompson (Erewash) (Lab)]

Q Thank you, Professor Green, for joining us this afternoon. You have noted a couple of times already that your assessment is that the impact of this measure will probably be negligible. I was wondering how you might compare that with the cash-terms doubling of private school fees over the last 20 years, from the perspective of families.

Professor Green: Well, I think that is part of the indirect evidence of the fact that there will not be a great deal of impact, because, broadly speaking, the same proportion of the population is attending private schools as 10, 20 or 30 years ago, so it is one of those constants. That is slightly down, but, to be honest, it depends on the fortunes of the top echelons of our income and wealth spectrum—how much they can afford and choose to send their children to private schools. That is the nature of the market.

[Patrick Spencer]

Q Sorry, Professor Green, can we just go back? You said that you would expect 10,000 to 20,000 students to transition out of independent schools and into the state system—

Professor Green: Somewhere between 10,000 and 30,000, and that would be over a five-year period.

[Patrick Spencer]

Okay, so we will go midway, which, at 20,000, would be a 3.5% reduction in the total independent school population.

Professor Green: Yes, I think that is right.

[Patrick Spencer]

Is that as a consequence of everything that is going on in this context, or just the business rate changes? Do the parameters of that analysis include VAT?

Professor Green: That is the VAT estimate, so I am saying that, if that is the VAT estimate, the business rate relief change is one tenth of that.

[Patrick Spencer]

I just want to clarify that that analysis was based on the total changes that the sector is undergoing, not just specifically the context of the Bill.

Professor Green: Correct.

[The Chair]

Is that the end of all of our questions for this witness? Thank you, Professor Green.

Examination of Witness

Jim McMahon OBE MP gave evidence.

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[Patrick Spencer]

Q Forgive me, Minister, but is this not a bit of a missed opportunity? The Committee has heard a lot of evidence today that, yes, the measures introduced in the Bill, specifically the ones around supporting local shops and our high streets, are probably very fair and reasonable, and that it is about time, but at the end of the day, business rates are not a progressive way to tax individuals and businesses. Taxing capital always allows for businesses that may seem asset-rich or that have asset liabilities to be taxed unfairly.

Why did the Government not go further in looking at alternatives, whether it be a sales tax or a land value tax? I am not a fan of land value taxes—they are another form of capital tax—but why did the Government not look at being more ambitious, instead of retaining a system that may be better in the future but still not ideal?

Jim McMahon: Which taxes are fair is always in the eye of the beholder. People have very different views about the fairness of different taxes in the system. In terms of property tax, I am here as the local tax Minister covering business rates and council tax. They are established taxes and they are understood. There are definitely views about whether they are up to date and fit for purpose, and whether they should be reformed, but however clunky the system is, very few people have an alternative that holds water, is fair, and produces the same level of income to support local public services.

There is always that balance to be struck. With business rates, you are getting a balance between the inherent value of a property, the rent that it can achieve, and the link to capital. We have heard that there are contradictions in some places where the economy is more suppressed, but it is not entirely intended to do that anyway; it is about reflecting the activity that takes place within a property as much as the bricks and mortar. On that basis, it is probably as good as you are going to get.

The question for the Government is how we build in a safety net for those uses that we want to maintain because they are positive for the local community and the economy, but that may be marginal commercially, which is exactly what the Bill is intended to do. But in a self-financing system, as the business rate system is, how do you then draw from other parts of the system in the fairest possible way? I think we have achieved that.

Why? Because a £500,000 rateable value is 1% of the business rate system, and it targets the warehouses and distribution centres for companies that are by and large doing well. Most retail, hospitality and leisure businesses on the high street, such as restaurants, fashion retailers and pubs, are saying, “We are only just keeping our head above water.” In a system that anybody would say is quite clunky, I think this Bill is as good as you will get for rebalancing it fairly, while being targeted enough to get the outcome that you want, which is thriving high streets and local communities who can begin to be proud of the places where they live because they are seeing activity, not windows boarded up and roller shutters pulled down.

[Jayne Kirkham]

Q This is just a point of clarification for me. It is probably really simple. On the larger rate, over £500,000, and the lower multiplier, one witness said that it could still apply to hospitality, retail and so on, so it could still be applied to big hotels and grassroots music venues even if they are over the level. Is that right?

Jim McMahon: At the moment, any property over £500,000 would be subject to the higher value. We are not looking at the moment at sectoral exemptions, but clearly we will take into account the evidence sessions and the discussions that will happen tomorrow. However, it would be fair to say that if you are a retailer with such a square footage that the value is over £500,000, you are likely to be a very big department store, a big out-of-town shed or a supermarket. The assumption in the system is that if you can afford to occupy and run a space of that size, there is room to pay additional business rates on that basis. In the end, it is about giving it to that ultimate use, which is the smaller retail, hospitality and leisure uses that are the backbone of many communities.