I am grateful for the opportunity to take half an hour of the House's time to follow a debate about preserving the rain forests with one about preserving small businesses in Dorset. I am grateful to see my colleague, if I may call her that, the hon. Member for Christchurch (Mrs. Maddock) in her place. I have been in touch with all my colleagues in Dorset, who have given me their comments, and I think that we are of one mind in terms of what I shall say. They send their apologies because they are in Committees at the moment.
I have been trying to get this debate from late spring. We have gone through the whole gamut of writing to Ministers, talking to people in the Valuation Office and trying to put some pressure on Ministers and on the valuation people for a debate on rates revaluation. The Chancellor must have realised that I would be lucky in the ballot for an Adjournment debate because he moved swiftly in the Budget to try to defuse the problem by announcing a complete freeze on business rates for smaller businesses. We in Dorset are universally delighted. I note that my hon. Friend the Member for West Dorset (Sir J. Spicer) and the hon. Member for Christchurch are nodding in agreement. We are delighted that small businesses have got their message through to the Chancellor and that there has been a freeze in business rates.
That opens up the debate about what will happen in future. The Government have clearly been listening. The effect of business rates on small businesses is marked and in our next term in government, we shall have to address it seriously. Much of what I shall say will be directed towards what we should do in our next term in office when we shall again make reforms to ensure that Britain remains the enterprise centre of Europe, if not of the world.
First, I shall give the reasons why we in Dorset were particularly concerned about the rating revaluation that was carried out on the basis of valuations in April 1993 and came into being in April 1995. We were first told of the valuations in about January 1995 and that gave rise to a great deal of concern. Businesses in Dorset suddenly found that they faced increases which, in the context of the national picture, seemed extraordinarily perverse and strange. The flow of trade in some businesses in specific parts of towns—especially in Wareham and Swanage in my constituency, although there are pockets throughout Dorset; certainly in Portland but not to the same extent—had gone in the opposite direction from that of businesses in other parts of the towns. However, those businesses had large rate increases while the rates for some other businesses had been reduced.
After the announcement in January 1995, one would have thought that the fuss would die down. I spoke to the valuation officer in Bournemouth this morning and asked how the appeals were going. I was told that they were proceeding quite well and that there was virtually nothing outstanding for more than 18 months. I thought that there would not be many appeals left and I asked, "What is the position in Purbeck?" It has one of the smallest local authorities in the country and it has 374 outstanding appeals on business rates. Many of my constituents would not believe that there were 374 businesses in Purbeck, let alone appeals. This is plainly a serious matter.
I asked the Valuation Office about the list that came in during 1990, thinking that we would have finished with that. However, several hundred appeals from throughout Dorset are still outstanding from that list. That seems to go on for years and causes great uncertainty in businesses. In my later remarks about why the whole system should be changed, I shall try to address that.
Why do appeals take so long? The system relies on rental values, is contentious and requires a review every five years. It is unacceptable to spend five years after that review, which is the norm, sorting out the appeals and the problems. A business whose rates are suddenly doubled suffers blight despite the fact that transitional reliefs are coming through and the Government have listened and have frozen business rates. A proprietor who is thinking of selling his premises or his business, has to say to the new owners, "Eventually you will have to pay twice the current rates."
Is there not another factor in any system that is based on rental values? Many empty shops are owned not by individuals but by property companies. Those companies have the premises on their books at a book value that is kept artificially high because they keep their rental asking price high. To what extent is that taken into account on valuation? No discount seems to be allowed for the fact that it is an artificial price world rather than the real world.
My hon. Friend makes his point clearly and I do not need to repeat it. However, I shall give an example.
The businesses in a whole street in Wareham had had little change of ownership, although there were many empty properties. A new business man came along who thought that he could make an enormous success of a business and wanted the premises, but he had not been well advised about the rent for the premises. As a result, all the businesses in the street have been completely skewed because one person was badly advised about rent.
A landlord is entitled to charge whatever a tenant is willing to pay. However, if a person pays twice the going rate for premises and that is the only rental information that is available to the Valuation Office because nobody else has taken up new leases—people are all trickling out of business—that new lease will be used as the criterion for bumping up everybody's rateable value.
Of course, the converse could occur. Somebody could obtain a knockdown rate, but when that happens the rating valuation officers say, "Hang on a minute. These are special circumstances, because somebody was desperate to let his property." As a result, they discount the information. There are many problems, and I shall show why the system is unsatisfactory.
First, I shall deal with the appeals procedure. Not only does it take a long time to get to appeal and for people to talk to valuation officers, but often the valuation officers decide to wait a year or so until the case has almost reached the tribunal and then make time to talk to the business person about whether the rate is right. They may negotiate before the tribunal sits.
If the case reaches a tribunal, there will usually be a strange situation in which a group of lay people, whom I do not criticise, honestly compare the evidence of an acknowledged independent valuer—who is not doing anything dishonest, but giving his or her honest opinion of the value—with the evidence of a valuer, who is perhaps a member of an institute of chartered surveyors, acting on behalf of, and trying to achieve a reduction for, his client, the ratepayer. The tribunal will therefore have two sets of evidence and information.
Tribunal members might say, "The independent valuer is giving us independent advice, as is the appellant's valuer, who may he trying to point out the best possible case to reduce rates." They tend to say to themselves. "We had better, as an independent tribunal, take the independent valuer's advice." If the independent valuer has it wrong in many cases, he will win even more appeals, whereas logic would dictate that he should lose them. It is difficult for the tribunal system to obtain independent advice. Perhaps tribunals should take independent advice from a completely disinterested valuer to evaluate the situation.
The current tribunal system is not working. I have received some very irate letters from valuers saying, "When people come to see me and ask whether I will represent them in a tribunal, I tell them in all honesty that they may be wasting their money, because I will give my honest, independent advice. As the appeal tribunal will accept the evidence presented by the independent valuer, we may well be wasting our money—sending good money after bad."
The basis of the universal business rate is a big problem, and I shall give a few examples of why it does not work. We should remember that, in the system, we are trying to measure local businesses' ability to pay, or to gain an idea of what services they are receiving from local authorities. A fairly popular conception among other ratepayers is that businesses should pay something towards maintaining the local community, but how do we measure those factors? We do so by considering the rental value, which has remarkably little relevance—it is of such little relevance that it is almost perverse—in determining what benefits a business gives to the community or receives from it.
We have many hotel premises in Dorset. When someone stays in a hotel, the amount that they pay is very closely related to the cost of providing those premises. The business's rating is based on the property and rental values, which almost means that it is being rated on its total turnover. However, in products bought from a manufacturer, for example, only a tiny proportion of the price will be related to the rent paid. Therefore, we are rating not according to the business's overall value and activities but according to the accommodation element of its costs. That feature is perverse, and it often affects businesses in small retail premises.
Small Dorset villages with only one village shop very much welcome the Government's—albeit indirect—efforts to address the issue. The Government are trying to overcome the system's inherent problems with business rating valuation by bypassing it.
The hon. Gentleman has touched on the issue of the viability of villages. However, the viability of our town centres is also an important issue, many aspects of which we have discussed. Does he agree that sorting out, first, the appeals system and, secondly, the method by which we raise rates is vital if we are to tackle the problem of viable town centres—something that all hon. Members would like to do?
It is always a delight for me to be able to agree with the hon. Lady. We have done something special for villages that will help to ensure their viability, but that will not deal with the problem of the viability of small town centres, where very few people go.
So often, market towns are attractive places for people to live and retire. Property values, and therefore rental values—even the rental value of a shop—will be higher. It is then less a question of, "Shall I move into a different business?" than, "Shall I close the business and convert those business premises to living premises?" The valuation will be based on a value of the business's premises and not necessarily on its viability.
If one has a fairly valuable property in the middle of small, sleepy market town to which few people are moving, in which there is a shop that may require a large stock and a large area in which customers can browse, the owner-manager—who perhaps cannot pay himself a salary—will pay an enormous rate, based on the floor area. If I were making microcomputers and employed 50 people in out-of-town premises, perhaps on an industrial estate, the rent, and therefore the rates, that I would have to pay for those premises per staff member would be relatively small. Conversely, the one-person shop owner with large premises but few customers and little turnover would pay extremely high rates. We must deal with that problem.
There is also a marked difference between types of manufacturer. For example, a manufacturer of polystyrene packaging, which is very bulky, will use much more floor space than another manufacturer. We require a system that recognises such differences.
Inevitably, people will say, "We have local rates on local property for local businesses so that local people know that they are contributing towards the overall rates burden." That is not true of the UBR. Whatever the local authority collects from its businesses will be cut from its revenue support grant. It is all smoke and mirrors.
There is absolutely no relation between what local businesses contribute to the local economy and the amount that is spent—a fact that often comes as a great shock to local people and businesses. If half the businesses in my constituency went out of business and there were a massive increase in unemployment, the standard spending assessment for my area would increase because of the various factors considered in it. We would then, although we were collecting less money from businesses, receive more money in the RSG. Every pound that we do not collect from businesses will be made up in the RSG from central taxation, which is a complete nonsense.
I suggest to my hon. Friend the Minister that the Government should not fiddle about with the problem if they are serious about tackling it. Let us commission some real studies into how we can collect taxes from local businesses that will go to local councils to be spent by them, and let us do away with all the costs of systems for valuations, appeals and tribunals. Let us change the basis of the tax. No one is happy if business taxes go up, but I would be happier with an extra 1 per cent.—I think that that might be sufficient—on corporation tax specifically for local taxes, or with some other mechanism, even one based on turnover. That would be more accurate than trying to link the rate to the rental value business premises.
I hope that my hon. Friend will comment on the appeals procedure and why it takes so long. I hope that he will give us more information on this year's welcome freeze and some idea of the future of the unified business rate for small—indeed, all—businesses.
I congratulate my hon. Friend the Member for South Dorset (Mr. Bruce) on raising the issue of business rates. He and others have made strong representations on what they regard as their constituents' difficulties with the business rate. Many ratepayers in Dorset are unhappy with the new rateable values that they have been given as a result of the most recent valuation, which came in on 1 April. They are also unhappy about the speed of the appeals procedure. We recognise that considerable pressure is being applied on that point. I commend hon. Members from Dorset for pushing those issues.
There have been considerable increases. Rateable values in Dorset as a whole rose by about 8 per cent., although in Purbeck they rose by as much as 32 per cent. in some instances. That is quite a dramatic rise. The rateable values of shops as a class rose by 8 per cent. in Dorset overall, but by 24 per cent. in Purbeck. If there is a positive side to that for Purbeck, it is that it is obviously a nice area, in which people seem to want to live, with the result that valuations go up. However, as my hon. Friend has said, the increases are considerable.
The 1995 revaluation produced little change in the total rateable value across the country, but there were dramatic changes in some regions, including Dorset. My hon. Friend suggested several ideas that I shall consider—we are looking at the issue at the moment. However, in any form of valuation, regular revaluations are needed to keep up with shifts in popularity and in the basis of property valuation throughout the country.
Before 1990, business rates were set by the local council. We should reflect—as I am sure that my hon. Friend will—on some of the effects of that up and down the country. I lived in London at that time and I remember the difference between the rates set for businesses in Tottenham Court road, under the Labour-controlled Camden council, and those next door in Westminster. Businesses were driven out by the business rates set by Labour councils.
Some of the alternatives being put forward by Opposition parties would be dramatically damaging. If we returned to a system under which local authorities set the business rates, areas with Labour or Liberal Democrat councils, with their expenditure procedures and their lack of decent co-ordination and quality control, could end up with high council taxes and high business rates.
One does not have to do research. One had only to walk the streets of London. The boundaries between Conservative-controlled authorities and Labour or Liberal-controlled authorities were clear. The shops ran away from the business rates under Liberal and Labour-controlled authorities. The doors along Tottenham Court road were shut permanently.
If we had a Labour Government and responsibility for business rates were returned to local authorities, with the inefficiency that we have come to expect from Labour and Liberal authorities and the removal of compulsory competitive tendering and of capping, the effects on businesses would be dramatic.
Let us return to the problems of today. We recognise that those ratepayers whose bills have risen need help. We have put in help through the transitional scheme, which ensured that the increases in bills caused by the revaluation were phased in over several years.
In its original form, the scheme provided for a maximum real-terms increase of 10 per cent. For properties with a rateable value of £10,000—or £15,000 in London—an even tighter annual limit of 7.5 per cent. applied. The protection given under the scheme was enhanced in 1995, with the limits on real-terms increases for 1996–97 being reduced to 7.5 per cent for larger properties and 5 per cent. for small properties. As my hon. Friend has said, this year's Budget provides further help for smaller properties—their bills for 1997–98 will be frozen at the 1996–97 level and there will no increase in cash terms. That will be a real-terms reduction of 2 per cent. I am sure that my hon. Friend recognises that that is a step in the right direction.
As a result of the Budget changes to the transitional scheme, the 1997–98 rate bills of small properties for which the rateable value rose significantly in 1995 will be, at the most, 10.5 per cent. more in real terms than the 1994–95 bills. If the property contains living accommodation, the maximum real-terms increase over the 1994–95 bill will be only 5.5 per cent.
Villages have also been mentioned. There has been a dramatic shift in the situation for villages. The Local Government and Rating Bill currently in Committee will make a dramatic difference, enabling local authorities to pitch in and help. They will have to reflect the mandatory 50 per cent. reduction for the key general stores and post offices in villages with a population of less than 3,000. Councils will be able to top that up to 100 per cent. and will also be able to give great help with business rates to small shops in the same villages.
Larger properties did not benefit from this year's Budget, but many will still be receiving help under the transitional scheme. Any property for which the rateable value rose in 1995 by the average increase of 32 per cent. in Purbeck will have a lower rate bill next year than would have been the case if the new rateable value had been reflected fully.
I know that many rateable values rose significantly in 1995. Many people in that situation found it difficult to relate that rise to what they thought had happened to the local property market. However, it is important to remember that the change in rateable values reflects the change in the property market between April 1988 and April 1993, not the change between 1990 and 1995, because the 1995 rating list was based on the rental market in April 1993 and the 1990 list was based on the rental market in April 1988. If my hon. Friend considers carefully what I have said when he reads Hansard tomorrow, he may well accept that there were considerable changes in the property market between the late 1980s and the early 1990s. Those changes are now being reflected.
As my hon. Friend has pointed out many times, valuation is not an exact science. That is why any ratepayer who feels that his valuation is too high can appeal to an independent valuation tribunal. Many are doing so. I know that because I, too, have a small business, and considered doing the same.
My hon. Friend expressed concern about the speed with which appeals against rateable values are dealt with. If he reflects on the dramatic changes in the value of property in the relevant period, he will recognise that that inevitably gives rise to an enormous volume of appeals, particularly given the complications and the downturn in the market after the date for calculating rateable values.
The rateable value of a property can be reduced on appeal. If that happens, all sums above the new rateable value are refunded and interest is paid. However, that does not ease the cash flow problem for small businesses. The Valuation Office, which is responsible for maintaining the rating lists, is committed to clearing by the end of 1997 all appeals that were made in the first year of the 1995 list. It is further committed to assuring that, by 1 April 1998, appeals will be cleared within 12 months of being made. I should stress that both the Valuation Office and valuation tribunals are prepared to give priority to appeals made by small businesses and, especially, unrepresented ratepayers. They will also give priority in cases of hardship where it is brought to their attention.
Given the lack of time, I should reflect briefly on the other aspect that assists small towns and the shops in them, such as those mentioned by my hon. Friend the Member for South Dorset the general nature of the economy. The economy is moving forward strongly. In addition, we are doing much through other systems, such as the planning and urban regeneration systems, to revive small towns and bring businesses back into them. That effort is starting to show in many towns.
I shall have to continue to look at the business rate and the business rate system. Every system—