Business Rates

Ruth George Excerpts

Wednesday 13th June 2018 Westminster Hall

[Rachael Maskell (York Central) (Lab/Co-op)]

I beg to move,

That this House has considered a review of the business rates system.

Thank you, Mr Gray, for being in the Chair for this important and timely debate.

Almost every day, we learn of a chain of retail stores or local businesses closing its doors, resulting in job losses, people’s lives being thrown into turmoil and empty premises along our high streets. The Centre for Retail Research has said that 10,000 stores will close this year alone, amounting to 384,000 jobs that are forecast to be lost over the next four years—unless, of course, the Government take urgent action now.

Businesses face many challenges at this time, not least the cost of property rental, and that leads into the issue of business rates. I would like those issues be addressed in today’s debate and I look forward to hearing the Minister’s response, because it is time for action to rescue businesses from the current crisis.

Front Street in Acomb once bustled with an array of independent stores serving the west of York. Those premises are now being exploited by foreign investors who are charging extortionate rents, which in turn is driving up the rentable property value, and thus business rates. Today, empty units line the street. York’s city centre is following suit, as are towns and cities up and down the country. This cannot continue to drag on.

The ever-inflation-busting rental levels have over-inflated the local property market. That is exacerbated by the empty property tax loopholes, resulting in units being left dormant, further blighting our beleaguered high streets and letting the owners of those properties off the hook.

The Valuation Office Agency has made its calculations based on this overheated market and set excruciatingly high business rates, as determined by the Government. When I hold business meetings across York, everyone feels that they have been failed by the business rates system, and as the situation gets worse, they want to know why the Government are forever providing sticking plasters when major surgery is required.

In York, where the retail sector accounts for 13% of employment, the toll is being felt. However, it is not only the retail sector that is affected. The hospitality sector employs 2.9 million people across the UK and although it pays 10% of all business rates, the sector’s share of turnover is just 3%—as the sector puts it, it has made an overpayment of £1.8 billion.

Other businesses are also being impacted. In the last couple of years, I have witnessed major employers—employers employing hundreds of people—leaving the city of York, citing excessive business rates as the root of their decision, and moving to areas with lower business rates. The 2015 valuation took a particular toll on businesses in York. We have had increases as high as 600% for pubs and retail outlets, including a bicycle shop in the city. Our city centre is changing dramatically, with the loss of national chains. High rental rates and business rates are to blame.

[Ruth George (High Peak) (Lab)]

My hon. Friend is making an excellent speech setting out the key concerns for retailers and other businesses. Does she agree that the average £3,600 increase in rates for small shops over the next five years is contributing to the demise of high streets up and down the country?

[Rachael Maskell]

My hon. Friend makes an excellent point, because it is the small retailers that are really struggling to survive, and it is an issue of survival in the current age. Of course, business rates are at the heart of the decision by businesses as to whether to remain open or close.

Other organisations have been brought to my attention that are even worse affected than those with the 600% increases I have cited. For instance, there are organisations that have had rooftop solar panels installed and then seen their business rates rise by as much as 800%, and all for doing the right thing. The Valuation Office Agency is discussing similar measures for battery storage, all at a time when green energy and microgeneration should be promoted; instead, people are being deterred from doing their bit for the environment.

Let us remind ourselves that business rates are set by multiplying the valuation rate—that valuation rate is based on the market rental value, as if the property was being placed on the open market—by a multiplier set by Government. In England, that is 49.3p, or 48p for small businesses. It cannot be raised by more than the rate of the retail prices index, or the consumer prices index from this year.

There are certain relief schemes in place, three tiers of arrangements to reduce the burden on small businesses, and an array of different arrangements for charities, rural businesses and community sports clubs. Last April, temporary relief was also introduced, with an additional relief fund of £300 million, which was to be shared between local authorities around the country over four years. Pubs with a rateable value above £100,000 were given relief at a flat rate of £1,000, which is subject to current state aid rules. I would like the Minister to examine that specific issue. There are also relief schemes for fibre infrastructure, local newspapers and empty properties.

York received £788,000, but the local council’s governance of the money provided by that fund has been extremely poor. It started with an application process in May to provide grants to businesses that were struggling and that could guarantee—that is, guarantee—they would be sustainable. However, because businesses were unable to give such an assurance, they were unable to apply. In December, the council therefore changed its mind. All businesses with premises that have a rateable value under £200,000 and that had experienced a business rates increase of over 12.5%—except for national chains and local government premises—automatically received a discount, meaning that the council did not even consider hardship issues; the discount was an automatic entitlement. The Government should have provided far better guidance for councils that were handing out taxpayers’ money; the councils really did not have the understanding of what was required of them to support businesses.

This year, York will receive £383,000; next year, it will receive £158,000 and the following year just £23,000. That tapering leaves businesses in an incredibly vulnerable position, without any long-term solutions being provided by the Government. Businesses are crying out for such solutions.

York is not unique, but it does provide the Government with an excellent case study as to why the business rates system is failing. I will provide some examples of the systematic problems that my city is facing.

Retailers in high-value rental areas pay the highest rates, whereas companies selling goods on the internet from warehouses in low-value rental areas pay the lowest. For example, Amazon is the largest retail business in the UK, with a warehouse of 65,000 square feet outside York. In York, Amazon pays £1.4 million in rates. Marks & Spencer in York city centre is seven times smaller in size, but it still pays £500,000 in business rates, or about a third of the amount that Amazon pays.

The smallest stores pay the most. For example, in York city centre small shops pay up to £950 per square metre, whereas larger companies benefit from a special larger store rate of £110 per square metre. If all companies in York paid the same as small businesses in York, Marks & Spencer would have a rateable value of £9 million and Amazon would have a rateable value of £61 million. Across the sector, the perception has grown that the Valuation Office Agency gives large companies favourable treatment to avoid lengthy and costly disputes, and clearly small businesses are suffering.

[Rachael Maskell]

The point my hon. Friend raises is the point of this debate. The reality is that we are talking often about independent business in which families have invested, maybe for generations, building it up and building a reputation, only to find that the competition from online sales and out-of-town stores is challenging. In addition, such businesses then have the weight and burden of business rates to pay on top of high rental values for their properties. The sums simply do not add up, and it is driving them out of town.

That situation is why we are seeing so many closure notices on shops. Some shops have been part of communities for decades and are sadly no longer there. That is certainly true of York. Our communities are losing their identity as a result and that is changing what happens in our town and city centres. I could relate so many stories from York of how independent shops have disappeared to be replaced by vertical drinking establishments and other such premises. That changes the whole context of our city. It is vital that we get on top of the business rates issue.

We have to recognise that businesses are penalised when they try to do the right thing, as equipment adds to the rateable value of business premises. Companies are penalised for making improvements to their businesses. Labour’s manifesto promised to exclude all new investment in plant and machinery from future business rates to encourage investment. We want to see employers investing in the future of their business, but they are deterred. If that investment would put up their rateable value, why take those steps when they are already struggling?

[Ruth George]

Businesses often have to invest in CCTV because of rising crime rates. In doing so, they can help the police by providing footage to help catch offenders, but they are then penalised for doing the right thing and helping tackle crime when their business rates increase due to that investment. Does my hon. Friend agree that that is an anomaly that must be looked at?

[Rachael Maskell]

My hon. Friend makes an excellent point. When people try to improve their community, and not just the business itself, that increases the rateable value. Business rates are built on that premise. In York, a company installed air conditioning. That might seem an obvious thing for a business to do, but doing so increased the rateable value by £275. That business now sees air conditioning as a negative, rather than a positive for itself, its staff and the public.

We have to be honest: business rates are an extremely antiquated system that is not fit for purpose in our globalised digital age. The UK now has the highest level of online shopping in the world, and it is essential that the duty that is paid catches up with that reality. We know that online shopping is increasing because when we go to our high streets, the stores that shoppers want to engage with are no longer there. There are also the wider trends we see across the world.

We need to ensure that we invest back into our city centres to revitalise them and ensure that they keep their identity. That is especially important for a city such as York, which has such a great heritage and attracts 7 million people a year. We want to ensure that people continue to come to our city not only for all the wonderful attractions, but to utilise the vibrant shopping area it once was.

Last April, following the revaluation, the average small shop was hit with an extra £3,663 in rates over the next five years, while many large online retailers saw their rates fall. Large supermarket chains saw a 5.9% reduction in their rateable value. There is huge inequality within the retail sector. Pubs are also being put at risk. They pay 2.8% of the total rates bill, yet contribute only 0.5% of the rate-paying business turnover—an overpayment relative to turnover of £500 million. That figure will increase by 17% by 2021-22.

It has been cited that the transitional relief scheme has been of detriment to some businesses. For instance, House of Fraser saw a 10% rise in business rates last year. As has just been announced, it is looking to close 31 stores, of which 28 have been negatively impacted by the relief scheme. It is clear that huge inequality has grown with the advent of large out-of-town retail centres and the online industry. The business rates system simply does not work in the modern age.

Reform has been called for, not least by the Business, Innovation and Skills Committee, as was, which in 2014 recommended changes to the business rates system. The Committee called that system

“a significant barrier to innovation.”

It recommended a Government review of the system to examine the questions

“whether retail taxes should be based on sales, rather than property; whether the retail sector should have its own form of taxation, calculated in a different way from other businesses; and how frequently the revaluation of Business Rates should take place.”

Since those recommendations were made, York Retail Forum has not been idle. It has carried out a thorough piece of work to look into the alternatives, and it has concluded that the best way forward for its businesses is to have a turnover tax. The Centre for Retail Research has come to the same conclusion. Clearly, if that formula were to be adopted, there would need to be tapering to address businesses with a high turnover but low profits, such as small convenience stores.

Local entrepreneur Phil Pinder, who chairs York Retail Forum, has looked at the figures. When just a 1% levy is placed on all online and high street businesses, the resultant revenue exceeds the current total raised by business rates. Governments gain, small businesses gain, local economies gain, high streets are revitalised, and tax-dodging multinationals such as Amazon have to pay up. While the benefits for Government would be the same, introducing a turnover tax would be like handing thousands of pounds to small businesses and would help them to invest in developing their businesses and employing more staff.

Equally, a profit-based levy would provide for a fair system: the more profit, the more a business would pay proportionately. That is favoured by many businesses, as they believe that nothing could be more equitable, and certain exemptions would not be required. With either model, there could be some tapering, so that those with the greatest returns paid more and those with the least paid less. Social interventions could be made—for instance, some relief for those who invest in microgeneration of energy. There is scope to use the system to drive forward our future economies. Either way, we need to find a new way to bring in revenue from businesses to replace the business rates system—perhaps through another non-domiciliary, property-dependent levy. Whichever system is used, it would clearly be a lot easier to operate, to collect revenue and to reinvest in communities and business growth.

One other point that I must raise in today’s debate is that the Valuation Office Agency is not fit for purpose. It has lost staff; its IT systems are creaking; its programme capability is questionable, having failed businesses; its “check, challenge, appeal” system is not thorough in responding to the grievances of businesses; and its time delays are causing more difficulty for businesses that are already struggling.

That brings me to my key point: the Government have prevaricated for far too long over business rates, and we have on our hands a serious crisis on our high streets. Last year, in the light of the business rates crisis, many of us in Parliament gathered momentum to call for change. On 8 March 2017, a business rates review was announced by the Chancellor. Since then, I have continually asked questions about when that review will begin, and have been passed from pillar to post—from the Ministry of Housing, Communities and Local Government to the Department for Business, Energy and Industrial Strategy, and from there to the Treasury. That resulted in my having to raise a point of order with the Speaker to identify who was responsible for what, and even then, discussion ensued on the Government Benches.

Businesses are saying that they cannot wait any longer, and the daily announcements of closures testify that that is the case. The Government have to get on and start their major review of a new business levy. In introducing today’s debate, I am calling time on this broken system on behalf of businesses in my city and up and down the country, and asking the Minister to carry out the following with immediate effect.

First, I ask the Minister to open a complete review of a new business levy system to report in the autumn, with recommendations being made in time to be implemented in this year’s Budget. Secondly, I ask him to open the consultation to all businesses across the economy and to commence the review before the summer. Thirdly, I ask him to identify some case studies to gain an in-depth understanding of why the current system is failing. I suggest York would be a good case study for the Minister to look at, and I am sure other colleagues would be helpful in advising why their communities would provide good examples too.

Fourthly, I ask the Minister to look at the offshore rental market and its impact on our high streets and businesses, and at the extortionate rents that people have to pay. There is often no connection between the local community and the offshore business entrepreneurs who seek to reap as much revenue as they possibly can, at the expense of the high street. We need reparation there, too, because that feeds into the business rates crisis that we see today.

There is an existential crisis on our high streets as they are drained of the vital enterprises that give life and character to our communities. There is no scope for further delay. I urge the Government to bring a laser focus to this issue, and I call on the Minister to act. I trust that he will be willing to meet me and other hon. Members to help move the issue forward for the sake of our communities. There needs to be a radical reform of the system. The Chancellor said it was his desire to move away from a bricks and mortar-based system. The review was promised in the Conservative manifesto, as well as in ours, so progress should not be delayed. Time is running out.

I trust that the Minister will respond clearly to the matters I have raised and tell us what actions he will take to secure a new business levy system that is in place in time for an announcement in the autumn Budget.

--- Later in debate ---

[Mr Betts]

That was a very helpful intervention. It shows that some very interesting things are going on at a local level. Very often, ideas begin in local government, are tried and tested at a local level, and then are moved on to the whole country. It is very important that we do not simply say that now we want to move away from the whole system, and leave those valuable lessons unlearned and unapplied.

The other point is that there is the capability for even more local control of business rates. In the days when we had domestic and non-domestic rates, councillors set the rates. They were nationalised when the poll tax came in and the control for setting the rate in the pound was moved to national level. That is an argument that we have had on the Select Committee. I would like to move towards more local control eventually and the system is at least capable of doing that. Business rates are also easy to collect and difficult to avoid, and we should see that as quite a strong benefit of the system.

The right hon. Member for East Devon (Sir Hugo Swire) raised some very pertinent concerns about the impact on high streets, which we see whether it is a village, a small town or a major city. We see derelict shops and the change that is happening. The Select Committee is therefore taking evidence in an inquiry on what high streets are going to look like in 2030. We are trying to look ahead to see what change is happening and whether people are planning for it.

A good point was made about the planning system. We ran an inquiry a few years ago on the high street, and it was stark then that very few councils seemed to be adapting their local plans in recognition of the change in shopping habits. Everyone can see it happening, but nobody seemed to be recognising it when they were looking at what town and city centres would be used for in the future. That will be an issue to address.

I know business rates are an issue for some small retailers, and I will come on to a couple of points we ought to address, but I suspect that that is sometimes an excuse when the real issue is the change in shopping habits. People are just changing what they do. Whatever shopping centre it is, people are simply choosing not to go there, or, as has already quite rightly been said, they go to have a look and then buy online. About 30% of retail shopping is now done online. There cannot be that degree of change without an impact on the retail floor space needed. All the signs are that that is going to continue, and I am sure it is one of the issues we will address in our inquiry.

We are also going to look at some of the things being done by retailers and the property owners, such as the company voluntary agreements that are coming out now as retailers try to negotiate their leases effectively, with a bit of pressure. The retailers did sign up to those leases and there are reasons why they did, sometimes on a long-term basis. We are going to have a look at the issues there as well.

We will also look at revaluations, but we have to remember that revaluation is a zero-sum game: it simply changes who pays what and does not actually raise more money. I am not saying that some centres and high streets are not disadvantaged, but somebody somewhere is probably gaining in the system, which is something that we have to think about.

Two points that we have to look at were powerfully raised by my hon. Friend the Member for York Central. In terms of retailing, the change in shopping habits is to businesses that by and large pay very little in business rates. That is absolutely fundamental if we are going to review the system. How do we get from a system that is a bit archaic and a bit stuck in a particular rut, to a situation where we can charge more for those big online retailers, and indeed the out-of-town shopping centres that were mentioned? Why do they pay relatively so little in rates, compared with the often smaller shops on the high street?

[Ruth George]

My hon. Friend is making some excellent points. Does he agree that we need to make sure that we incentivise British businesses that trade in this country and make sure that they cannot be undercut, whether on the high street or online, by companies that are directly importing and often avoiding customs and other charges by doing so?

[Mr Betts]

It is important that we look at those issues in wider taxation. I am not sure we can quite go there this morning, but we certainly need to look at whether we can tax some of those major companies—we know the international conglomerates of online shopping without necessarily having to name them—on the turnover that they have in this country rather than on the profits that they declare, as they move those profits into the lowest- tax countries. Of course that is what happens.

There is a wider tax issue about how we deal with some of those online companies, but in terms of business rates, the unfairness between them and retailers on the high street is very stark, as with out-of-town shopping centres. It always seems unfair. I have a major out-of-town shopping centre in my constituency, Meadow Hall, which provides a great service to people, is incredibly well used and provides a lot of jobs, but nevertheless the rates paid there are not comparable with those paid by many shops in the high street.

We also have to bear it in mind that business rates are not just about retail. Commercial, manufacturing and other businesses pay rates and there are some disparities. One point we picked up was that where manufacturing industry innovates and improves, it gets an increase in business rates on that improvement. There is something odd about taxing improvement in that way. We should also look at that. There are some other strange things, such as hospital trusts trying to claim exemption from business rates, or lower rates, under charitable status. I mean, come on—that is about moving money from one bit of government to another! The hospitals are saying they are not going to pay, but then local authorities do not get the money. The Government have to sort out those issues. There are some nonsenses around.

If there is a review and there are changes, we have to be very clear that, if the Government legislate for those changes nationally, there is a mechanism to compensate local government for any money that it loses collectively. After 2020, that is going to be quite a challenge. My understanding is that when the 75% retention of business rates comes in in 2020, local authorities will receive only council tax and business rates, which will then be redistributed in some form. There will not be a central Government grant, so if central Government are going to compensate local authorities for any change to the business rate system that reduces the amount of money in total going into local authorities, how will they be compensated? That is a challenge we all need to think about.

--- Later in debate ---

[Ruth George (High Peak) (Lab)]

It is a great pleasure to speak in this debate. I thank my hon. Friend the Member for York Central (Rachael Maskell) for securing it and allowing the very thoughtful discussion from all parts of the House to take place.

I am chair of the all-party small shops group, and I worked for the Union of Shop, Distributive and Allied Workers for longer than I care to remember before coming to this place, so retail holds a very special place in my heart, especially the small businesses that generate the employment that we need, but businesses and employment are under pressure.

We have heard from colleagues from across the House about how the 2015 valuation hit small businesses particularly hard. One convenience retailer in three saw an increase in its rateable value, as I mentioned earlier, and small shops have seen an average increase of £3,600 over five years—an average of more than £700 a year. That really hits their profit margins, which in most cases are already under threat due to changing shopping habits.

We have all heard about the need to support high streets up and down the country, from the city of York to high streets in rural areas such as in Devon, Cornwall and my own area of High Peak. I echo the sentiments of the hon. Member for St Ives (Derek Thomas) about businesses as holiday lets, which is an issue in the Peak district and elsewhere in the country.

Retail is not the only issue. In my area, pubs in particular have seen a huge increase in their business rates due to the change in how they are valued and the turnover basis. For example, the Anglers Rest, a community pub in the small Peak district village of Bamford, was on the verge of closing down but the community came in, took it over and brought that beautiful building back to life. It is one of the only services in the village, but it provides a post office and a village shop, as well as a pub and a café. It keeps that community thriving.

The Anglers Rest is run on a not-for-profit basis and its annual surplus income last year was about £3,000, which was needed for capital expenditure on replacements and doing up the pub. The business rates, however, increased from £11,500 before the revaluation—in effect, the pub had nothing to pay, because it had both rural rate relief from being in the very rural Peak district and small business rate relief—to £21,750, which is a bill for a further £10,000. It does not take someone of the financial stature of the Minister to realise that a surplus income of only £3,000 and a rates bill of more than £10,000 puts that community venture at risk. That is detrimental to the entire community, to which that venture is so important.

Another concern expressed by pubs in my constituency about the turnover basis of the rates is that the valuation goes online, listed among other pubs in their area, and that is seen as a shopping list by criminals looking for cash-heavy businesses. As businesses with high turnovers are being targeted, local pubs are concerned that that could be due to the release of information so readily available online. Criminals are not that stupid; they are quite capable of researching which places take significant amounts of cash.

Will the Minister have a look at that issue, which concerns pubs in my area? We have seen an increase in crime—in till snatches—which is worrying for small businesses and their staff in particular.

That is also why, earlier, I mentioned investment in CCTV. Many businesses feel that they have to make that investment now, either because crime is so high that they need a deterrent or because insurance companies often insist on installation of CCTV and other security measures to make premises viable to insure. Businesses, however, are hit with not just the insurance costs of being a victim of crime, but additional business rates.

I hope to see a system, however it is calculated, that does not penalise businesses for investment. A deterrent could be provided with time-limited exemptions for new developments, and we would see greater investment. The convenience store sector invested £856 million in premises over the past year, and any increase in that investment would benefit not only high streets, but the Exchequer.

Communities would all see the benefit too. The Scottish Government’s growth accelerator scheme, for example, delays increases in business rate bills for 12 months, allowing businesses to recoup their investment at least in the initial year.

I am not sure that turnover-based methodologies will be helpful in the retail sector, in particular for convenience stores and the like, which might have a high turnover but a very low profit margin. Petrol forecourt sites are rated on a turnover basis, which causes discrepancies when retailers invest in a convenience store on the same site. They find that it is rated under the same system, causing huge rating bills, which prevents the forecourt retailers from expanding their businesses to offer services to the whole community, often in areas where there is little retail opportunity.

Another issue is to do with cash machines, as has been said. Access to cash is key, in particular on high streets and in rural areas. Retailers are billed an average of £4,000 for hosting an ATM, which is in addition to the rates payable on their shop. I hope that the Minister will look at free-to-use cash machines because they are extremely important for retailers and do not often lead to an increase in turnover commensurate with their business rates increase. The increased risk of crime that unfortunately arises from hosting ATMs means that businesses in my constituency are reluctant to take one on in areas that are in desperate need of them.

I ask the Minister—I am sure that this is a subject close to his heart—to look at the impact on employment of the turnover basis of rating. Pubs that want to open for a few additional hours to increase their turnover, taking on extra staff and growing their business, are disincentivised by the fact that turnover is the basis of their business rates, as they get no relief for the staff. They simply get taxed additionally on the turnover, whereas business taxation is based on profit.

Finally, the “check, challenge, appeal” scheme is an absolute disaster for businesses that wish to challenge their rateable value. Only one case has got to the appeal stage. By February, we had seen a 90% decline in appeal cases lodged. The check stage requires ratepayers to input details about their properties, which needs significant research on details such as the construction date of the building—quite a challenge for some of the properties in my area. The challenge stage requires ratepayers to provide an alternative valuation and to supply all the evidence needed within four months, which is often quite a hurdle. The appeal stage now requires businesses to pay a refundable £300 fee, or £150 for small businesses, which is another disincentive for businesses to go ahead.

There are plenty of issues for the Minister to look at and, I hope, respond to. I welcome the debate and the chance to speak.