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Ways and Means — Rating (Empty Properties)

Orders of the Day – in the House of Commons at 1:52 pm on 10th May 2007.

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Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury 1:52 pm, 10th May 2007

I beg to move,

That provision may be made for and in connection with the liability of owners of unoccupied hereditaments to a non-domestic rate.

This motion precedes a Bill being introduced to the House that will take forward recommendations made by Kate Barker and Sir Michael Lyons that the Government bring the rating of empty commercial property into the 21st century. As my right hon. Friend the Chancellor announced on Budget day, this reform has environmental, social and economic merits. Any Member who supports the continued regeneration of urban areas, the use of brownfield sites for developments to meet both our housing and commercial property needs, and the abolition of distortions in the tax system that artificially hold rents up and apply unwarranted costs to business, will want to join me in supporting the motion.

Perhaps it is worth setting out why Kate Barker and Sir Michael Lyons both considered reform of the rating of empty property to be important. Currently, a commercial property is subject to full business rates when it is occupied but is given relief when it is empty. Different types of property get more or less relief when they are empty. Shops and offices have full relief for three months after they fall empty and then 50 per cent. relief ad infinitum. On the other hand, industrial property enjoys complete relief for as long as the premises are empty. This distinction between the relief given to different types of property—which is, in fact, a very large form of state aid—has its history in the depressions of the 1970s and 1980s, when demand for industrial premises was low and demand from alternative users for such land was also low.

Two important things have changed since that distinction was drawn into the legislation. First, after a decade of sustained growth the demand for, and price of, land has increased dramatically, placing a burden on both households and businesses needing to access property. Efficient land use, and in particular the use of brownfield land to protect greenfield sites, has become a key priority for the Government. Tax relief for empty property—currently worth more than £1.3 billion—needs to be considered in this light.

Secondly, and as a direct result of this increased pressure on land, the Government asked Kate Barker to consider the incentives for efficient land use in her assessment of planning and land use. As part of her analysis, Barker found that the current empty property reliefs are not aligned with risks—there is little difference between the risks of different types of property falling empty. On that basis, the different tax treatments afforded to different types of property do not reflect real conditions in the market and are therefore creating a distortion.

On those grounds alone there is reason enough for Barker to propose reform, but the data become more startling when we look at where the tax relief is going. Sunderland, Redcar and Alnwick were each listed in the top 10 authorities with the lowest proportion of their commercial property stock claiming relief, while the City, Manchester and Birmingham are all in the top 10 authorities with property claiming relief. Clearly, land is not in such over-supply in those parts of the country that we should be offering tax relief to property that is not in use—and in doing so shift the burden of taxation on to other taxpayers.

Photo of Stewart Jackson Stewart Jackson Conservative, Peterborough

Does the Minister concur with the views expressed by the Royal Institution of Chartered Surveyors, which suggests in respect of the demise of the United Kingdom engineering industry in the 1970s that a major contributory factor was that the inability to mothball factories during recession and the requirement to pay full rates on non-producing premises frequently led to machinery being sold off and buildings being demolished?

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I will come back to the views of that institution in due course. Clearly, at that time the combination of low rents and the fact that in the '70s, '80s and early '90s recessions were a regular occurrence was a concern for businesses. As a result of the stability that we have put in place in recent years, that is now less of a concern.

The level of rents in the UK is also a key driver for reform. A series of recent reports by the private sector—including by CB Richard Ellis in 2006 and DTZ research in 2004 and 2005—have identified UK rents as among the highest in the world. That west end office space in London is regularly ranked as the most expensive in the world reflects a variety of influences; land supply and planning restrictions are two important factors. However, as London is the world's financial capital, it is perhaps less surprising that there are high rents in London than it is to find that office rents in cities such as Birmingham, Manchester, Leeds and Edinburgh are ranked as more expensive than in Manhattan, Madrid, Frankfurt and Sydney by these various reports.

There are significant regional variations in headline rents. In the south-east, Guildford's rents are £10 per sq ft but Brighton's are £5.50 per sq ft. In the north-west, rents are £6.25 per sq ft in south Manchester but £6 per sq ft in Trafford park. In the north-east retail sector, rents peak at £330 per sq ft in Newcastle, and fall to £145 in Sunderland and £65 in Stockton.

There is also significant variation within towns and cities. For example, in Newcastle rents vary from £330 in Eldon square—the central shopping mall—to just £70 on Lower Grainger street, which is within half a mile of Eldon square. Office rents in London range from more than £60 per sq ft in prime west end and the City to £48 in prime mid-town and £50 in prime Canary Wharf. In contrast, rents are £21 in Brentwood and £13 in Harlow. Rental prices have a real impact on business, and finding ways in which we can address the efficiency of the commercial property market is a key objective of the reforms.

I am sure that Members in all parts of the House recognise that land should not sit idle while labour and capital pay. Kate Barker said that reforming empty property rates

"would have a number of beneficial effects".

She went on:

"when there is the prospect of continued vacancy, landlords are more likely to reduce rents in order to encourage occupation. This is beneficial for both new and existing business tenants".

She added:

"landowners have less of an incentive to hold back land in the expectation that property values will continue to rise or to secure a change of use. This will increase the supply of land for development".

She also said that

"development is encouraged on sites which have already been developed, which reduces the need to build on greenfield sites and improves environmental outcomes."

The Government accepted Kate Barker's report and asked Sir Michael Lyons to consider the implications arising from these recommendations as part of his proposals for reforming local government finance. Sir Michael received representations from local planners and local government bodies, from regional economic development offices and from the Federation of Small Businesses. All were in favour of reform and recognised that the measures set out in this Bill will increase the supply of land and commercial property available for occupation and redevelopment.

From such local authorities as Hull city council and Hampshire county council came requests for changing the rating of empty property to increase the supply of land and to reduce speculation. Birmingham city council suggested bringing industrial premises back into the scope of rating empty property, and bodies with wider development objectives also responded. For example, Merseytravel recommended that the unlimited period of rate relief in the current system be done away with. The Federation of Small Businesses had already identified this as an important area for reform in its 2005 report. It realised, as did the Barker report, that increasing the opportunity cost of holding property empty will increase downward pressure on rents. As companies that predominantly rent their premises, the availability of property at lower rents is critically important to small companies across the country.

Photo of Stewart Jackson Stewart Jackson Conservative, Peterborough

What feedback has the Economic Secretary had from urban regeneration companies and development agencies about these potential tax changes, given that there is a prima facie case that the entrepreneurial spirit needed to regenerate some very disadvantaged parts of the country—he mentioned such places as Hampshire but, as he knows, generally speaking it is not that disadvantaged—would have a big impact? However, these tax changes will be a disincentive to intervening in those areas to get businesses—retail and others—into those properties and premises.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

Once again, the hon. Gentleman pre-empts my speech. I shall come to how we can ensure that we support regeneration in the areas that he is talking about; indeed, there are ways we can do so through these provisions. As I said, we have consulted widely and we have received a wide range of positive contributions as part of that process.

Sir Michael also received representations that did not favour change, predominantly from the property industry. Some pointed to the past as a reason for not going ahead with change today, suggesting that reform would impact, as was said, on redevelopment. Others, such as the Royal Institution of Chartered Surveyors, suggested that there are a number of other aspects of business rates reliefs and exemptions that also merit re-appraisal. These are serious issues that we have reflected on, and they will in part be incorporated into the detail of the regulation that will be put before the House in due course, and into some of the accompanying measures that I will discuss in more detail in a moment. However, on balance, the Government agreed with Sir Michael and Kate Barker that reform should go ahead. Sir Michael said:

"Demand for land for development is growing as a result of economic change and household growth, and it is clear that, more than ever, we need to ensure that all previously developed land is used most effectively.

Analysis shows that vacant property is found in areas of high demand as well as in areas of low demand and former industrial areas.

Finding ways to raise the opportunity cost of holding unused land and property in areas of high demand at such a time would be desirable. Reforming the empty property relief would help to provide this, and thus assist local authorities".

It was on the basis of Sir Michael's advice that the Budget announcement on this issue was made.

Let me discuss the detail of our proposals, which will be set out in due course before this House in detailed regulation and legislation. The proposed reform will mean that most properties will enjoy a three-month rate-free period on becoming empty; the period for industrial properties will be six months. Three months was the limit on the rate-free period already established in legislation, but because Kate Barker demonstrated in her report that there is no inherently greater risk of particular types of property falling empty, it is right that there should be convergence in the tax treatment of all forms of property. We are therefore bringing the treatment of industrial property toward that for office and retail property, allowing it a six-month period with no rates. We intend to exempt charities and community amateur sports clubs altogether from paying rates on empty properties that they own.

These reforms will impact on the owners of long-term empty property, including existing and new build premises, but because the Government now have the evidence that we need to create targeted support in areas where it is needed, we are bringing forward reform to empty property rates as part of a wider package of incentives for the future use and re-use of land and property.

Photo of Anne Main Anne Main Conservative, St Albans

I welcome the fact that the Economic Secretary appears to want to target this relief. If he has the information, will he say now whether an assessment has been made of where most of these empty properties are and what sort they are? For example, are they historic buildings or commercial premises built for speculative let?

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I said earlier that these issues apply to the whole country, in both high and low-demand areas. Particular protections are in place for charities, sports clubs and listed buildings, which will be considered as part of ongoing consultation on the legislation. However, what we can do is to target particular help on low-demand areas.

We recognise that in some parts of the country there are low levels of demand and that, as a result, commercial property can sit empty for longer periods. By way of response, we have introduced with effect from 11 April—a full year in advance of the proposed changes to empty property rating, which will not come into effect until next April—a new 100 per cent. capital allowance for the renovation of business property in assisted areas across the UK. The business premises renovation allowance is available to owners in these areas of property that has stood empty for more than one year, and it will provide a huge boost to those who want to create attractive commercial property fit for the needs of new and existing businesses.

Given that we also want to maintain high levels of development on brownfield land, especially that which it is costly to remediate, we are consulting now on the extension of land remediation relief to a wider range of contaminated sites. The consultation includes extending the scope of the existing 150 per cent. capital allowance to the clean-up of sites with long-term derelict property on them, as well as to those that have been invaded by Japanese knotweed—which I am sure at least some Members will recognise as a serious threat to many urban and rural locations. We intend also to increase the incentives for on-site remediation, thereby decreasing the pressure on landfill.

To provide flexibility for leaseholders faced with onerous penalty payments to enable them to rid themselves of leases that they no longer need, or which do not provide them with the flexibility that they require, we intend to consult on changing the tax treatment of such payments to ensure that they are fully recognised by the tax system. For those companies actively using property and paying business rates, we have also accepted Sir Michael Lyons' recommendation that the retail prices index cap on business rates be retained. This fits into our wider strategy of improving business competitiveness. We will also examine the case for local supplements on the rates, as set out by Sir Michael, but while paying the closest attention to ensuring that business has a strong and clear means of holding local authorities to account. Reforms to be outlined in the planning White Paper will help to provide an environment for the development of the quality and quantity of property that UK businesses and homeowners demand.

Finally, let me put this in a slightly broader context. Investment in property is essential to business and to creating a modern, dynamic economy. At the centre of the reforms that we have put in place in recent years has been the launch of UK real estate investment trusts. Thirteen companies have already become UK REITs since the beginning of this year. In addition to the measures that we are debating today, REITs are another way in which we can improve the quantity and quality of finance available for property in a revenue-neutral fashion.

We also announced in the Budget that we are taking the same principles that shape UK REITs and building tax equivalence for property authorised investment funds, thereby allowing open-ended investment in property through unit trusts to enjoy the same tax treatment as that enjoyed by UK REITs. These are supportive measures to boost the supply of property suitable for investment that meet the needs of British firms. Today's motion is one part of that reform and modernisation, which spans the whole commercial property market and provides incentives for owners, developers and tenants to produce the right kind of property, and to take advantage of efficiencies in the use of land and property that will increase supply and drive down costs for their consumers.

The Government are working hard to ensure that we provide the right conditions for businesses to grow, for land and property to continue to be developed, and, once developed, for it to be used efficiently. In its submission to the Callcutt review of house-building delivery, the Home Builders Federation signalled the supply of land as the major factor that will determine whether the Government's target of 200,000 new homes built by 2016 will be met. As the Government increase the supply of housing to meet the needs of households across the UK, a tax relief for property sitting empty on developed sites makes neither economic nor environmental nor social sense. That is why this is a principled reform that is overdue and forms part of a positive set of announcements on the future taxation of land and property.

The measure has had extensive work and consultation by my hon. Friends the Financial Secretary and the Minister for Local Government. It is hard to achieve a consensus with the Opposition on the importance of building new homes, given the continual opposition of shadow Front Benchers to house building in our country, but I hope that we will reach consensus at least on this measure.

Photo of Michael Gove Michael Gove Shadow Minister (Communities and Local Government) (Housing and Planning) 2:10 pm, 10th May 2007

It is a pleasure to see the Economic Secretary in his place today. I am grateful for his breaking off early from the celebratory lunch that I know will be taking place in No. 11 Downing street today, but given the scant number of contributors we may expect this afternoon there will be ample opportunity for him to return to the Treasury before midnight and I expect that the party will still be in full swing.

I also thank the Economic Secretary for being so fluent and authoritative in his remarks. I wish, however, to pick him up on just one error. He seems to labour under the misapprehension that Opposition Front Benchers in some way oppose house building and development. I have no wish to detain him from the celebrations that he will attend later, but I refer him to the variety of speeches that I, my hon. Friend Mr. Osborne and my right hon. Friend Mr. Cameron have made, in the House and elsewhere, identifying the need for more housing development in our country and making the case that without additional house building we will not have the supply to meet the demand that exists. Without that additional house building, we will not be able to help first-time buyers on to the property ladder as they deserve. I am always happy to reach a consensus with the Economic Secretary and with his hon. Friend the Minister for Housing and Planning. Every opportunity to reach a consensus on the need for more house building is one that I am delighted to take.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

We have discussed this issue regularly over the past few years in proceedings on the Finance Bill and, from time to time, over breakfast, as the hon. Gentleman acknowledges. I understand that speeches have been made containing general statements about the support for house building and first-time buyers, but statements are also regularly made on the websites of the hon. Gentleman and his Front-Bench colleagues that oppose house building in their own constituencies. Have those website references been removed or do his nimby tendencies continue to flourish in his constituency?

Photo of Michael Gove Michael Gove Shadow Minister (Communities and Local Government) (Housing and Planning)

I am flattered that the Economic Secretary takes such a close interest in what appears on my website. I hope that he has also been reading my articles in The Times. I have written repeatedly to the Minister for Housing and Planning and the Secretary of State for Communities and Local Government specifically asking for more development in my constituency. As I am sure the Minister for Local Government is aware, there is a particular issue in my constituency as a consequence of a European Union ruling. The Thames basin heath special protection area, which covers much of my constituency, has an effective moratorium on development, and I am seeking its removal. As a constituency Member and as shadow Minister for Housing and Planning, I am anxious to see more development, reflecting both the national interest and the interests of my constituents. I am grateful to the Department for Communities and Local Government for the help that I have received as a constituency Member.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

You'll be in trouble with your colleagues.

Photo of Michael Gove Michael Gove Shadow Minister (Communities and Local Government) (Housing and Planning)

No, I have no trouble with my colleagues. I receive from them a generosity of support and enthusiasm in making the case for more house building that I find more encouraging than I can say.

Photo of Anne Main Anne Main Conservative, St Albans

My hon. Friend will know that we had a good debate about housing totals in Hertfordshire. We welcome our share of development in the area, but we do not welcome unsustainable development or development that has no environmental impact assessment. Unfortunately, that is what we are suffering at present. We ask only that the level of development is reasonable, not unreasonable. The unreasonable figure of 93,200 was not acceptable, but 79,200 was. It is a case not of no building, but of sustainable building. I know that my hon. Friend feels the same about that issue.

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I have allowed some latitude, but rather than debating housing we should now be debating the motion before the House.

Photo of Michael Gove Michael Gove Shadow Minister (Communities and Local Government) (Housing and Planning)

Thank you, Madam Deputy Speaker. Your intervention enables me to make the point that struck all of us listening to the Economic Secretary. Fascinating as it was when he gave us a tour d'horizon of market rents in the commercial sector, the real aim of his speech was not so much the more effective operation of the property market as to speak in service of yet another tax increase. Fluent and authoritative as he so often is, all that fluency and authority were bent towards one end—ensuring that the Chancellor can get the £900 million additional revenue that this measure will raise every year. The most compelling argument in favour of the measure was not made at the Dispatch Box today by the Economic Secretary, but in the Red Book when that figure was produced. That is the principal justification for the change. The Chancellor's imperative is plugging his black hole, not the sensitive rebalancing of rates and reliefs to secure the better working of the property market.

The Economic Secretary mentioned Sir Michael Lyons' report, and it is fascinating reading. If the Economic Secretary had told us everything that the report contained, he would no doubt have reminded the House that it had suggested that any change to the relief be introduced only in 2010 after extensive consultation. He is introducing it two years before Sir Michael envisaged, without the consultation that he requested.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

Last week, shadow Treasury Ministers spent £500 million on opposing pension term assurance. Four weeks ago, the shadow Pensions Minister spent some £3.5 billion a year on a pledge to reverse the pension tax credit reform of 1997. Is the hon. Gentleman now saying that he would trump those pledges by spending £1 billion a year under a future Conservative Government by reversing this reform?

Photo of Michael Gove Michael Gove Shadow Minister (Communities and Local Government) (Housing and Planning)

That is an intriguing question, but it is the Opposition who ask the questions here, and I have several for the Minister for Local Government to answer when he winds up. It is the answers to those questions that will dictate what we will do. We will see what happens as a consequence of the arguments made by the Minister.

Photo of Stewart Jackson Stewart Jackson Conservative, Peterborough

Given that the CBI has estimated that the tax burden on business has risen since 1997 by £50 billion, would my hon. Friend find more merit in the proposals if there was a compensatory reduction in business taxes to match the rhetoric of the Chancellor and the Economic Secretary?

Photo of Michael Gove Michael Gove Shadow Minister (Communities and Local Government) (Housing and Planning)

As ever, my hon. Friend makes an excellent point. Some of the Economic Secretary's comments about the support that he wishes to see for small business would carry more credibility if the Budget that he helped to co-author had not been responsible for such a comprehensive tax hit on small businesses overall. The record of the Economic Secretary and the Treasury in supporting small businesses is far from exemplary. In that respect, one can understand the degree of scepticism on this side of the House.

I wish to raise three broad issues in connection with this measure, and I have several specific questions. I appreciate the kind invitation from the Economic Secretary to reach a measure of consensus. As I said earlier, I love consensus and I always like to reach it whenever possible. But we can be certain that the measure is worthy of support only if we get satisfactory answers to those questions. The three broad areas are a matter of theory, a question of principle and the reality in practice.

On a matter of theory, on what basis do we levy business rates? What is the theoretical principle behind them? As widely understood, they are a tax on business activity. As my hon. Friend Mr. Jackson might say, it is one of all too many taxes on business activity. Nevertheless, business rates are an accepted part of the Chancellor's portfolio. Business rates are supposed to be a tax not on land values but on commercial activity. That is why there is a relief when there is no activity. Changing the principle to remove that relief does more than increase revenue: it changes the very nature of the levy, and it raises key questions in turn.

The principle that there should be tax relief on empty properties was outlined by the admirable Kate Barker, whom the Economic Secretary prayed in aid in support of the measure. However, it is also clear that, in her report, she made the case for a relief on business rates when properties are empty. She said:

"The principle behind empty rates relief is to create a broadly symmetrical tax, given uncertainty. When property earns a positive revenue, it is taxed; when it does not, relief is granted. This helps remove what would otherwise be a distortion."

According to Kate Barker, therefore, the Government, by removing the existing relief, are introducing a distortion. They are levying a tax that should be designed to get revenue from activity on property that is inactive and, in the process, changing the nature of the tax itself. Why? Do the Government accept Kate Barker's argument that the change would be a distortion? If not, why not? What is the justification for the change?

We acknowledge that, all other things being equal, the change will raise revenue. The Economic Secretary said with some pride that the amount would be £900 million. However, that tax increase raises another issue. One of the principles underpinning business rates is that, overall, the yield nationally from them should remain broadly neutral in real terms. In other words, when business rates rise, they should do so broadly in relation to the retail prices index.

If the proposed change is made, the amount generated by business rates will increase by more than the rate of inflation—even as that has been adjusted under this Government, and even as inflation rises and the Governor of the Bank of England writes to the Chancellor warning of the consequences.

The question that we have to ask is as follows: are the Government contemplating a balancing reduction in the burden on business? My hon. Friend the Member for Peterborough asked that question earlier. Alternatively, are the Government breaking another golden rule—that business rates should not be used to make up losses elsewhere?

The danger in using business rates as another source of revenue to make up shortfalls elsewhere was explored in the review by Sir Michael Lyons. The Economic Secretary also prayed in aid Sir Michael in support of his argument, but we should look at what he actually said. Sir Michael said that

"the national business rate is not an appropriate way to raise additional resources to fund services...particularly given the high level of taxation on property that business rates represent, by international standards".

Are the Government therefore breaching that principle as well, and rejecting Sir Michael Lyons' advice? In his report, he made an explicit recommendation:

"The RPI cap on the national level of business rates should be retained."

Will the Minister for Local Government spell out whether the Government agree with that principle? If so, given that the measure amounts to a tax increase, will there be compensation elsewhere in the level of business rates? I shall be very interested in the reply.

I have asked a series of questions about the theory of the business rate, and all of them touch on the fact that, under this Government, business faces a bigger burden of taxation than ever. I now want to move to the key issue of principle at the heart of the relationship between business and Government—the need for certainty.

When business is asked what it wants, the answer nearly always is that it wants certainty and stability. However, some businesses fear that this change will jeopardise all that. Many will have built the rate reliefs into their plans and accepted them in their balance sheets, and altering the reliefs could throw into uncertainty a series of developments that would bring economic growth and regeneration to parts of the country.

Conservative Members' guiding principle is that the tax system should raise revenue and support economic growth and development wherever possible. The process of assembling suitable sites for redevelopment or of putting together the complex business deals that can bring regeneration is often complex, with many variables. Some companies might have to accept that some sites will be left vacant for longer than might be desirable in other circumstances. For instance, they might be left vacant until the correct combination of land sites and finance is in place to make a significant regeneration project truly viable.

For some deals, the existing reliefs will have been factored into the equation already. Under the changes proposed by the Chancellor some companies will have to look again at potential regeneration projects.

That consideration is more than theoretical. I am sure that the Economic Secretary will have read this week's Property Week. It reported that, as a result of the measure, a company called Palmer Capital Partners had suffered what was described as an £80 million "hit". The company has had to "scrap" a project on which it was planning to embark as a direct consequence of the proposed change. Regeneration projects and economic growth that would have taken place are now not happening. A director of the company, Alex Price, said that it could not go ahead with the plan

"because we couldn't quantify what business rates would be."

That shows that an element of uncertainty had been introduced into the calculations, with the result that the project could no longer go ahead. I would be grateful if the Minister for Local Government let me know what assessment was made of the potential impact on current regeneration projects that were factoring the relief into their calculations. That is not merely a theoretical concern, as it goes to the heart of the active business of regeneration today.

I have discussed the theory of business rates, and the matter of principle in connection with certainty. I turn now to some specific matters of reality, in an attempt to discern what happens on the ground when it comes to regeneration. I have a series of questions to which I hope the Minister will respond.

First, it is appropriate that we learn from history. A very similar measure to the one being proposed was introduced in February 1974, when the Conservative Government of the day were on their way out and desperate to secure tax revenue by any means necessary. If any historical parallels suggest themselves, I am more than happy that Ministers should draw them.

Photo of Michael Fabricant Michael Fabricant Opposition Whip (Commons)

Interest rates have just gone up again today, to the highest level since 2001.

Photo of Michael Gove Michael Gove Shadow Minister (Communities and Local Government) (Housing and Planning)

I am grateful for the other historical comparisons being drawn to my attention.

One consequence of the removal of rate relief introduced in 1974 was that empty properties were not proposed for development or deployed for commercial use. Instead, some properties were wrecked or left to become dilapidated so that people could escape paying rates on them altogether. What guarantees can the Minister give that the change will not create a perverse incentive? Can he assure the House that empty properties will not be turned into derelict sites rather than being proposed for productive economic use?

Secondly, the presumption inherent in the Economic Secretary's speech was that business is deliberately keeping property idle instead of using it, because it wishes to earn that relief. Will the Minister for Local Government give us the evidence base for that assumption? Can he point to specific examples of companies that have not put sites to productive use because they prefer to earn the tax relief rather than create viable economic activity? I can understand the theoretical justification behind the Minister's argument but he produced no practical examples, from any business sector or from any part of the country, to show that landlords or owners were deliberately sitting idle to earn the relief. Production of that evidence base would certainly be useful for the House.

The change in timings goes to the heart of the measure so, thirdly, what assessment have the Treasury and the Department for Communities and Local Government made of the genuine turnover in the business cycle? For example, the British Retail Consortium argues that it can often be 21 months between one business winding up and another being economically active on the same site. Have the Treasury and the DCLG conducted a proper survey into the speed with which vacant and void sites become not just occupied but economically active as new tenants take them over? What evidence base is there to justify the change?

Fourthly, there is a real risk, which has been outlined by both the BRC and the Royal Institution of Chartered Surveyors, that the change will hit the areas of the country most in need of redevelopment. Property developers face the greatest risk in those areas, because by definition that is where there is the least current demand for property, whether commercial or residential. By removing the relief, the risk of making an investment in those areas increases, because one would have to be absolutely certain of securing occupancy to make the same investment viable. What assessment has the Minister made of the impact on areas most in need of regeneration of, in effect, introducing an extra cost and an extra risk for development in those areas?

Fifthly, the change could have a particularly adverse effect on businesses in the event of a recession, as my hon. Friend the Member for Peterborough pointed out. It will add lead to the economic pendulum, because it will mean that businesses that have to relinquish property to downsize during an economic downturn will face an additional cost just as the economic weather is turning. Has the Minister factored into his calculations the impact of an economic downturn on the commercial property market once the reliefs have gone?

Sixthly, there is a clear disincentive for certain businesses to take on leases. Given the operation of the commercial leasehold market, taking on a lease could involve bearing additional cost and risk in the event that commercial activity means that the property becomes vacant at any point in the future. Again, what assessment has the Minister made of the likelihood of companies shying away from taking on leases because they have to take into account on their balance sheet an additional risk factor?

Overall, I have spelled out a number of ways in which there is increased risk. My seventh, and final, point about the genuine, practical, real-time effect of the measure is that increased risk may have an effect on property values. If there is a downward effect on commercial property values as a consequence of increased risk, it may have an effect on the share price and on the dividends paid by commercial property companies. Given what has happened elsewhere in the economy, especially in equities, over the past 10 years, more and more pension funds—public and private sector—rely on commercial property as part of their portfolio. If there is downward pressure on the balance sheets of companies that operate in the commercial property sphere and if it has a knock-on effect on the portfolios of pension funds, what is that effect likely to be? What calculation has been made? We know from the past that there can be, and often are, dangerous unintended consequences of changes made by the present Chancellor that have a knock-on effect on pension funds and the capacity of individuals who have saved to receive an appropriate rate of return?

I would like answers on those seven practical points, as well as the two theoretical matters that I mentioned. I look forward to the Minister's clarification before the debate concludes.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury) 2:33 pm, 10th May 2007

As this is a pre-legislative phase, where we are asking broad questions rather than making forceful assertions about legislation that we have not yet seen—I agree with Michael Gove that that is the best way to approach the measure—I want to start by asking about the process.

The Economic Secretary based his presentation on the Lyons recommendations, and although it is certainly true that the Lyons report recommended precisely what the Government want to proceed with, that recommendation does not quite fit with his recommendation in a later paragraph, which is not a criticism of the Government but of the report. In paragraph 8.6, Lyons recommended:

"The Government should conduct a review of exemptions and reliefs to consider the scope for removing inappropriate subsidies and distortions, and to simplify the system."

There was thus a firm recommendation, but also a recommendation for a review, so it was not clear how the two would hang together.

Having read through the relevant paragraphs of Lyons, it is fair to say that although he made a firm recommendation, on which the Government have acted, his arguments were more equivocal and balanced than those in the Minister's presentation—I know that the hon. Gentleman takes economic arguments seriously. Lyons called in aid Tony Atkinson and Stiglitz, who made a good theoretical case for keeping empty property relief, because of the risk-sharing problems. So, there are clear arguments on both sides, which is all the more reason to have proper consultation and consideration.

The other reason why the process—whatever the outcome—needs to be carefully staged is that the feedback that the Government have had from both interested and disinterested bodies is not clear cut either. The Federation of Small Businesses is quite supportive of what the Government said, but it made the interesting recommendation that the legislation should take account of the fact that some businesses are making a genuine effort to fill their property. It is not clear how the legislation will accommodate that. The Campaign to Protect Rural England was, again, broadly supportive of what the Government are trying to do, but it said that the Government must undertake the measure in conjunction with changes to the VAT regime to make it more attractive to improve property. The Royal Institution of Chartered Surveyors and the British Retail Consortium were much more critical. The first issue is about the process and why the Government cannot undertake a process of consultation over the next year or so, which is what Lyons appeared to envisage.

My second set of questions is about the revenue implications. The hon. Member for Surrey Heath has suggested that, whether we call this measure a withdrawal of state aid or a tax, there clearly are major revenue implications. That may indeed be right. First, I would like to be clear what the implications are. In his speech, the Minister referred to various offsets. I want to be clear whether he envisages a full whack of £950 million on the commercial property sector or whether there are any offsets and, if so, what they are.

My other question is about the behavioural implications of the change. I think that the Government are arguing that the measure is necessary both to raise revenue and to change business behaviour to make it more efficient. There is nothing wrong with that. In the context of environmental taxation, we argue—as do the Government—that it is possible to raise revenue and change behaviour at the same time. There is nothing wrong with the argument, but I want to be clear what assumptions the Government are making. Lyons implies that the cost of empty property rate relief is £1.3 billion. The Government say in the Red Book that they will raise an additional £950 million. Does that mean that the difference is accounted for by improvements in the utilisation of commercial property? Are the Government assuming that commercial property use will improve by a factor of a quarter? Or are the figures completely unconnected?

A related question is: who will pay the tax? As we know, with all business taxation the cost is shifted in one direction or the other. There is an assumption that the tax will be paid by inefficient landlords and over-exuberant speculators, but is that in fact the case? We must assume that, in most cases, the increased taxation of commercial property will, at some point, be paid for by occupiers. It could be paid for by the landlords' other occupiers or in the form of longer leases.

Photo of Stewart Jackson Stewart Jackson Conservative, Peterborough

The hon. Gentleman touches on an important point. Does he agree that the Government have not looked at the macro-economic impact in respect of the cumulative impact on inflation that this change may well have? As he concedes, the cost will be passed on in the form of higher rents and service charges, which could potentially cancel out any overall benefits to the economy.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

Whether the measure will lead to more inflation or to less utilisation of capacity elsewhere in the economy is not clear, but the hon. Gentleman is quite right to say that there are knock-on effects. One that has not been referred to and that is potentially rather important is the fact that a large chunk of commercial property is owned by pension funds. Eventually, the measure will feed through into reduced returns for pension funds. There will be a hit on pension funds. Of course, they have had other hits—some of which have been much more important than this—but it would be useful to have some acknowledgement from the Government and some estimate of what the measure will ultimately cost the owners, who are institutional finance bodies.

I have several questions about such a measure's possible impact on the market. I understand the basic problem involving empty commercial property and have a couple of anecdotes to illustrate it. An appalling derelict Co-op completely blights the whole of one of my local high streets. As far as I can establish, the property has been sitting empty for many years simply because of the lethargy and incompetence of the Co-op management. If a change to the tax regime would persuade the company to do something with the property, that would be welcome. However, we all know of shops in our local shopping centres that were not viable and had to be closed by the occupiers. Those people are often desperate for planning approval to convert the property into a housing development, but local planners refuse to give that because it would change the nature of the shopping centre. Are we going to penalise those shopkeepers? How will they be accommodated following the change?

Photo of Anne Main Anne Main Conservative, St Albans

I am sure that the hon. Gentleman is aware that people who wish to change a commercial building to a different form of development, such as housing, have to market it actively for a considerable time to show that the property has no commercial use. Unless the Minister tells us differently, I assume that such people would be paying business rates during all that time. The planning process can often hold things up for a considerable time, so several years could pass while there was a debate about the matter, or even during the assembling of sites.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

The hon. Lady is absolutely right and makes the point that I was trying to raise. The Federation of Small Businesses asks what we will do about commercial occupiers who are genuinely trying to do something about the utilisation of their properties. Should they be treated in exactly the same way as companies that wilfully keep their properties unoccupied, or do so due to incompetence? As far as I can tell, that distinction will not be captured. It is possible that the distinction cannot be made because it can be difficult to legislate for such things. However, we should realise that there is a distinction in the real world.

Several issues are being raised by representatives of the property industry. We understand that some of them are self-interested, but it is worth quoting the British Retail Consortium, which has considered the matter primarily not from the perspective of property developers, but in the context of its interest in the retail sector. It comments unequivocally:

"The BRC believes that there has been a fundamental misunderstanding of the mechanics of the property market and this reform will, as a result, fail to achieve its objective of bringing empty property into use."

Leaving aside the particular problems of retailers, I have received several representations from people who are interested in industrial development in parts of the country that have a regeneration problem. For example, an email that I received from a group in Wales said:

"Here in South Wales we have a number of redundant large industrial buildings. They are a legacy from when previous administrations enticed overseas manufacturers to set up here with offers of cheap land, cheap labour and big grants...By introducing a new rates liability for empty industrial buildings in particular, we fear entrepreneurs will not be prepared to take the risk and these buildings will crumble and die."

Unless the measures are properly thought through, they will have an impact on entrepreneurial risk taking and development in parts of the country that are badly in need of regeneration.

Let us consider the situation in Yorkshire, which is the part of the country that the Economic Secretary represents. I received a message from an organisation that referred to the fact that King Sturge's "UK industrial and distribution floorspace today" report—that is a bit of a mouthful—says that almost 50 per cent. of all industrial development is speculative. It said that the measure was bound to have an impact on business behaviour and cited rather marginal Yorkshire towns—Halifax, Keighley, Hull, Goole, Barnsley and Grimsby—that are trying to attract speculative industrial development, yet will struggle to attract the amount of industrial investment that they get now after the introduction of the measure. The people in the trade who are making these assertions might well have an interest in opposing the Government's proposal, but it would be useful and appropriate for us to have an understanding of whether the Government have made an assessment of those possible effects.

Finally, I have a series of questions about how the measure would be implemented. One of them relates to a point that I have already made, and to the issue that Anne Main raised in her intervention: what will happen to those companies that are genuinely trying hard to market their property and to utilise it, but that are none the less caught by the new provisions? That was the issue raised by the Federation of Small Businesses.

My second question relates to local discretion. The Economic Secretary mentioned that there is a bigger issue to do with whether commercial rates should be localised. As it happens, my colleagues and I want to push that idea as far as it can go, but the current controversy raises the question of how much local discretion should be allowed under the provisions that the Government are proposing. For example, would people in a depressed part of south Wales be allowed to implement the measure over a different time frame and in a different way from people in a more prosperous part of the country? Will local discretion be allowed, and if so, how will it be applied? There are many quite major issues to consider. At the end of the day, the provision may well be sensible—it certainly has endorsement from some authoritative sources—but it clearly needs a lot more thought and a great deal more consultation.

Photo of Robert Key Robert Key Conservative, Salisbury 2:46 pm, 10th May 2007

I am tempted to say, "What a splendid day to bury bad news," but I do not want to go there because I want Ministers to listen carefully to what I have to say and to take it seriously. So far, this has been an urban debate about the impact of the change, but I want to change the focus and consider the impact on the countryside and the greater proportion of the United Kingdom's land area. In other words, I want to focus on the impact on rural economies.

We need to start from the point that my hon. Friend Michael Gove made, which is that the measure is really no better than a window tax. It is a revenue-raising tax, and it is none the worse for that—Governments of all colours introduce taxes. They need the money and it is amazing, really, that we have avoided the measure thus far, but as a grab on a particularly vulnerable area, the proposal is not much better intellectually than the window tax. Under the window tax, windows were blocked up and light was kept out of the lives of hundreds of people across the country, and I fear that the proposal might have the same impact.

The Economic Secretary pointed out, fairly, that he is making special provision for what he called low-demand areas. Of course, those are not just the assisted areas to which he referred. Indeed, it is only nibbling at the edges to talk about land that qualifies for remediation relief. He referred us to the planning White Paper, and I want to talk about the impact on, and interaction with, planning. It is important to realise that a vacant property tax hike will hit the rural economy. It will discourage the farming sector from diversifying and from changing old farm buildings into business units.

The Country Land and Business Association has commented that there will be an impact on rural business. It says that the measure will

"slow down and reduce the overall growth of the rural economy".

Interestingly, it estimates that the measure will reduce the tax take for the Treasury over time. My hon. Friend the Member for Surrey Heath mentioned the consequences of having derelict property, which we experienced in the 1970s—property that is not capable of beneficial occupation is exempt from business rates, and I fear that we could find ourselves staring that same situation in the face again if we are not careful. I am sure that we all wish to avoid that.

The National Farmers Union also has reservations. It points out that the situation in urban areas is different from that in rural areas and that both converted buildings and new build

"can stand empty for months awaiting a suitable tenant in some rural areas."

There is a fair consensus on that point, but I want to back up my arguments with three cases taken from my constituency that illustrate my fears. The first case concerns hard-to-let village premises. Anyone with a rural constituency will know the problem of a pub closing and the owner applying to convert it into a house. The village usually reacts by setting up some sort of co-operative venture to try to buy the pub and run it. The problem is that if people do not buy their beer in the pub, it does not matter who owns it—if it does not make a profit, it is going to close. There are implications, too, for the village shop and post office, which are in a similar situation.

As someone who spent a very happy nine years living near South Newton in my constituency, I was familiar with the post office in that village. However, it did not thrive. It was run by a wonderful couple—Mr. and Mrs. Hutchinson. Heather was born in the village, so there was no question of a lack of loyalty to the village. However, the Hutchinsons decided that the time had come to retire, so they tried very hard to let the property. As far back as 2001, in fact, they tried to do so. They put the property on the market for six months, as required before a change of use, but they did not make a sale. They waited and they eventually found a tenant. They invested £14,000 to adapt their property so that it could be used as a hairdressing salon, which involved a change to A1 use. Sadly, however, the tenants' business failed, so the Hutchinsons were left with nothing.

Mr. and Mrs. Hutchinson took professional advice again and they submitted an application to the planning authority. The planning committee agreed, but the regulatory committee threw out the application. They have now been told, some seven years after the original decision, that they must go back to square one. They have spent almost £20,000 because of the planning system, which impacts on such matters, as my hon. Friend Anne Main rightly said. I referred the matter to the head of development services and asked which planning policy was causing apparent distortion in the market. It was Salisbury district planning policy PS3, which says:

"The change of use of premises within settlements that are currently used, or have been used for retailing, as a public house or for providing community facilities central to the economic and or social life of the settlement, will only be permitted where the applicant can prove that the current or previous use is no longer viable."

That is the justification for the distortion. The fear is that as a consequence of the proposals, in the intervening period after the planning authority, acting on behalf of the local community, has decided that people should not be allowed to stop a shop being a shop if no one wants to buy anything there, the owners must pay business rates on the property for years. It is not their fault—it is because the planning system has introduced a distortion in the market allocation of resources. That is a very important issue that I hope Ministers will consider.

My second case concerns redundant farm buildings. Late last year, my constituent, Philip Kitson of Manor farm in Chilmark, referred me to a problem with a unit in his farm buildings. He has wonderful farm buildings, but they are completely useless for farming. They were built in the early 19th century, and one could not get a quad bike in there, let alone a modern tractor. The Kitsons did what the Government wanted and diversified. They sought to convert the property, and they did so professionally and successfully. However, tenants move on, so they were left with a building—in this case, a B1 workshop and office premises. They therefore had to find money for business rates for an unoccupied building . Mr. Kitson pointed out to me:

"We are a farming business, not a property company, and have no alternative sources of income to offset any loss of rental income...we have invested a considerable amount of time and money renovating buildings for rental which have rarely been empty."

The district council has benefited hugely, at no risk to itself, because those buildings are bringing in business rates.

In the end, the matter went to the desk of the Minister for Local Government—I am pleased that he is in the Chamber today—and he and I have been in correspondence for some months. Referring to the Lyons report, he said to me in a letter of 17 April this year:

"We understand that these reforms will increase the liability on owners like Mr Kitson. However, as the Chancellor's announcement made clear, the purpose of reform is to enhance the supply of commercial property, reducing rents and improving access for new and existing firms. Downward pressure on rents will have significant benefits for UK business and wider UK competitiveness."

That is not what the local market says in my constituency, where there is already overcapacity. It is all very well saying that that might be the impact in urban areas, but in scattered rural communities in south-west Wiltshire there is already overcapacity in such units, and I fear that the measure will make matters worse. Can we be quite sure that when Ministers are working out the process and the machinery for introducing the change, they take due account of the need to be careful about rural proofing the measure? The least they should do is introduce it over a number of years and not say, "From 1 April 2008, wham! Bang! You're going to have to pay the bill."

My third example is a very particular example.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I want to understand the hon. Gentleman's argument. I am worried that the point he is making is not market-based and is more dirigiste. When he uses the term "overcapacity", he means properties that are unused. Are they unused because there is no demand or because the rent is too high? Are we not looking for a way to get the price down so that they can be put back into use and there can be more activity?

Photo of Robert Key Robert Key Conservative, Salisbury

That is an entirely fair point. Without getting into either endogenous growth theories or Marxism, I would point out that the Minister is right to ask the question, but the answer is no. The problem is overcapacity, not rents that are too high. I will illustrate that with my next example.

We have a large number of former military establishments in my constituency and in Wiltshire as a whole. One of them is the former royal naval armaments depot at Dean Hill, which was built in 1938 and became a major armaments depot, storing under the chalk hills enormous quantities of arms for the Royal Navy from Portsmouth, and latterly for the RAF as well after the closure of RAF Chilmark, which was another establishment that was redundant to the needs of the Ministry of Defence.

The area is huge—some 500 acres with 1,600 sq m of office space. It has a variety of business units—more than 40 of them—and 24 vaults cut into the chalk offering more than 9,000 cu m of high quality dry, secure storage. That is where the bombs and depth charges were kept. The problem is how the Ministry of Defence disposes of property. It is part of the Chancellor's remit to persuade the MOD to get rid of redundant property.

After the property had been empty for years, a splendid company has taken over the site, bought it from the Ministry of Defence, and is successfully converting it into very attractive office and industrial premises in a wonderful environment, with a site of special scientific interest on the spot. I cannot speak warmly enough of the effort of Mr. Richard Parry and his company, who have taken a substantial risk. Having taken over 500 acres from the MOD with all those buildings and facilities, which they had expected to be able to bring into use over a number of years—with the agreement of the planning authorities in order to avoid overdevelopment, too much traffic on rural lanes in south-east Wiltshire and Hampshire and so on—they could face a crushing liability for business rates if the measure is suddenly introduced now.

That will dissuade investors like Mr. Parry. They simply will not do it. The holding costs of the property will be too great. What about valuation? The district valuers already value Ministry of Defence estates, but they put them on a low value because they are of military use or are not used at all. To return to the point made by my hon. Friend the Member for Surrey Heath, they are not producing business activity or generating wealth, so they currently do not qualify for taxation. What about the district valuer now? He has been to Dean Hill park and assessed individual buildings. As they are brought into use, the district valuer assesses them and the owners rightly start paying their business rate.

What will happen in future? We need to be sure that Ministers have thought about that. Will they suddenly create an extra army of district valuers who can go round to all these Ministry of Defence sites and revalue hundreds of buildings and other facilities? Have they got the staff to do it? I guess not. When will the clock start ticking? Will people have to start paying this new business rate on 1 April next year or six months afterwards? Perhaps the Minister has not thought that question through yet, but I would be grateful if he could answer it.

We see here, once again, the need for rural proofing. I wonder what the Ministry of Defence will say about this, given that the defence budget is still strapped, despite a modest increase in cash terms. The pressure on it is enormous. Will it be liable to pay the new business rates on all its empty industrial properties, given that it no longer enjoys Crown exemption? I would be grateful if the Minister could answer that, and I dare say his colleagues in the MOD would like an answer too.

I have tried to draw the House's attention to some of the problems that will affect everybody in rural areas, from large investors to very small family businesses, as well as farming communities. If we must have a window tax, let us make sure that it does not keep the light out.

Photo of Anne Main Anne Main Conservative, St Albans 3:01 pm, 10th May 2007

My hon. Friends and I have a lot of questions about this proposal. As my hon. Friend Robert Key said, we all have our own particular set of problems that it will draw to the surface. I should like to give the Minister a few illustrations from my constituency. It is a city, not a rural area, but it has its own set of unique issues that will be exacerbated or affected by perverse consequences.

One example is the West Hall site in Napsbury, formerly the site of a hospital. It has many buildings that do not come under the national listings but are locally listed as having importance. The site has been designated for housing, but many such applications get stuck in the system for a long time, and rightly so according to local residents, who do not want bad development in St. Albans. While they accept the need to have housing on the site, they also feel that a degree of caution should be exerted. They do not want to end up with 37 flats all squeezed into one commercial building; that is also seen as unacceptable by the local authority. Being stuck in the planning system can be a good or a bad thing. The problem is that we are not sure whether the proposals will make matters better or worse.

Another example is the former Evershed's commercial print works site, which has been vacant for a considerable period. It was redesignated for housing, and housing permission was sought and obtained. However, it has since been sold on to Tesco, which is trying to develop it as a commercial site again. We would prefer that it remained designated for housing. I am worried that the rush to try to make it a commercial development will stand in the way of local people who would rather see housing on what is a truly sustainable site, and that Tesco will try to get its big building up as quickly as possible before local people can exercise a degree of pressure on their local authority to ensure that the local district plan is upheld and housing is built there. Can the Minister tell me at what point the commercial building rates will be paid? Will they have to be paid until development occurs that changes the site's use?

On the London road in St. Albans, we have a listed cinema—the Odeon, which has an art deco façade. Unfortunately, it went out of use some 11 years ago. People are desperate to keep that landmark property in St. Albans. It has been stuck in the planning system for 11 years. Perhaps it will be turned into some form of housing development, but local people welcome the fact that there is no rush to do that because they hope to bring it back into commercial use as a cinema, which we do not have in St. Albans. There is huge support for that but, because the building is small, it is difficult to find somebody who is prepared to take it on. Delicate negotiations are going on all the time behind the scenes, conducted by those who want a cinema in St. Albans.

However, 11 years have passed. At one point, the decision was held up speculatively and then applications for housing were constantly refused. However, local people do not want things to be rushed. They do not want the cinema, with its characterful façade, which could be revitalised, to be quickly put to another use because of the commercial rates that suddenly have to be paid on it.

There are flip sides. Good results can be achieved through bringing buildings back into use, but I am worried that the process may mean the loss of the slow pace of change that local people welcome when they want to ensure that historic sites and buildings are not suddenly put to commercial use or demolished, with the site used for housing. We need answers, and I believe that the planning system will play a crucial role.

A roof tax has been mentioned. However, as my hon. Friend the Member for Salisbury and many reports stated, there is a concern that it may mean that the roofs are simply removed from buildings, resulting in some vandalism. The Odeon cinema still has its roof. The vandals have picked away at it, but it remains intact. I would hate to allow commercial vandalism, resulting in the removal of the roof, simply because people who are suddenly in the position of having to pay tax on a building want to ensure that it is useless, and thus take away all hope from local people.

Estate agents, such as Cluttons, who have an interest in the matter, have expressed some views. I would like some answers to their concerns and to ascertain whether the Minister has conducted any assessments. People already challenge the Valuation Office Agency's level of rating. Several cases of buildings, which currently pay only 50 per cent. but seek a nil value, have been heard before the tribunal office. If empty commercial property owners now have to appeal against rating assessments and any new categories that are introduced, surely the appeals will create an increased administrative burden, as people in the nil rating bracket find themselves in a new rating bracket. Has any assessment been made of the extra staff that the Valuation Office Agency may need and the extra costs that it will incur through the additional burden?

I should like some clarity at some point in future, if not today—I understand that we are exploring the matter today—about buildings that might be considered exempt. I should like to ensure that the many historic buildings such as churches, which may not have charitable status and could simply be landmarks, do not face an extra tax burden. I am sure that it is difficult to identify the ownership of some buildings. I know of a house in St. Albans that was caught up in that sort of confusion for some time. It was eventually compulsorily purchased. I am also concerned to ensure that a retrospective charge is not levied against families who are unaware that they own and may have some ongoing interest in a building, which suddenly comes to their notice. There are some complex probate cases and I wonder whether the Minister has taken them into account.

We are being asked to vote for a pig in poke if we are not absolutely sure that all the questions that my hon. Friends have asked today are considered. We do not want properties to remain empty. The Economic Secretary made the valid point that that makes no environmental sense, and I agree with him. However, it does not make environmental sense to rush towards removing roofs or damaging buildings in some way, yet such acts may be the perverse consequences of the proposals. As my hon. Friend the Member for Salisbury said, it makes no environmental sense to charge people who are genuinely trying to market a building.

In areas where there is a commercial property, people often have to fight the rigmarole of a local district plan to prove that the building no longer constitutes viable commercial premises. That can take such a long time that some poor family or small business could be left with an enormous charge on a property that has been incurred through no fault of their own. That is perverse.

I welcome the exploration of the idea of bringing back buildings into use, because St. Albans is very tight on space. It is a matter of record that I feel that we are put under enormous pressure to build and develop in St. Albans, but we also consequently have commercial premises sandwiched in areas that we do not want to be vandalised. We want to see buildings brought back into use, but where that is not feasible, we want to ensure that time is spent considering the best uses for them and that nobody pushes through a quick commercial use order to avoid paying any form of development tax.

I would welcome the Minister's consideration of all the points raised in the debate, and particularly of whether, when a change is made under the planning system—as on the Evershed sites, for example—it should apply when planning is granted or when development occurs. Those vagaries will not provide much confidence or support for the measure.

I agree with some of the business-related comments that have been made, as the proposal is seen as a stealth raid grab. If it is seen as a stealth raid grab with good consequences, there may be some support for it; but if it is seen as a stealth raid grab with perverse consequences, I feel that many Conservative Members will view it as a move too far. Given that the Federation of Small Businesses also has many concerns, I am sure that we are going to hear a lot more detailed comments about the measure in the future.

Photo of Stewart Jackson Stewart Jackson Conservative, Peterborough 3:11 pm, 10th May 2007

If I may pre-empt the Chancellor and beg the House's indulgence, I would like to congratulate the Economic Secretary on his inevitable promotion in approximately seven weeks' time.

It is a pleasure to follow my hon. Friend Anne Main and, indeed, my hon. Friend Robert Key. They were perhaps far too polite to state the obvious and place this particular proposal in context by observing that it is one of 111 stealth taxes that the Government have imposed over the past 10 years. It represents the big clunking fist approach to commercial property, and we are no doubt going to see a lot more of it over the next few years.

This proposal has all the characteristics of the stealth taxes that we have learned to know and love. It is a consummate stealth tax because it is typical of the sleight-of-hand taxes that we have become used to over the past 10 years. It is sneaky. It has been announced only in the last few months, but its effects will not come into force until April 2008. Of course, it does not appear in the Finance Bill, but has been brought before the House through a Ways and Means resolution. It is also ill considered and damaging, and, as my hon. Friend the Member for Salisbury eloquently explained, it will have unintended consequences. It is indeed, as my hon. Friend the Member for St. Albans said, a straightforward tax grab, netting the Treasury £1.85 billion over the next two years. The proposal is, of course, dressed up in euphemistic language, when it is described as modernising empty property relief. That is rather like the Prime Minister saying that Labour's local government election results were a springboard for a general election victory, when we all know that it was more like a belly-flop.

We can see a dichotomy in the Government's treatment of private and commercial property. This is a Government who have entrenched the principle of holding capital by way of property—forgive me if I sound rather like Mr. Meacher, who is the Minister's parliamentary neighbour—when foreign nationals who are non-domiciled in this country own huge portfolios of property, which are left empty while people are left homeless and more people than ever before in the past 10 years are on waiting lists or in bed-and-breakfast accommodation. There are 6,000 of those people in my own constituency. At the same time, the Government seek to penalise and disadvantage British business people with this particular tax grab.

As I said when I intervened on my hon. Friend Michael Gove, this has been a £50 billion tax grab over the past 10 years, and there has been no corresponding offsetting tax reduction, as expounded by the Treasury. Indeed, small businesses took a significant hit in tax increases in the Budget.

The proposal will have the effect of pushing up existing business rents and adding to inflationary pressures. It will distort the commercial property market by driving up service charges as well as rents, as a result of businesses quite properly attempting to recover empty rates. The Royal Institution of Chartered Surveyors describes the proposal as

"purely a revenue raising exercise with no thought of the potential consequences".

The measure will also inevitably lead to a rise in on-costs in respect of rating appeals and valuation tribunal cases. That will incur significant costs across the economy. A further consequence will be a policy of deliberately damaging buildings, as my hon. Friend the Member for St. Albans pointed out. Of course, we would not condone that, but we have to accept that it happens. It will be an unintended consequence of this tax policy.

The policy demonstrates a fundamental ignorance of the fluctuations and cycles of the commercial property market. No business wants to keep a commercial property empty, but the mechanisms and vagaries of supply and demand mean that it is an inevitable feature of the market that, owing to commercial considerations or to reasons such as time lag, some properties will sometimes be empty.

The policy will do nothing to encourage local regeneration. I know that that is a subject dear to the heart of the Minister for Local Government. It was interesting that the Economic Secretary skipped past my direct question about the consultation to ascertain whether regional development agencies and urban regeneration companies wholly supported the proposals. The corollary of this policy is that entrepreneurs will take far fewer risks when investing in difficult areas—areas that find it difficult to attract niche entrepreneurs—which will affect the creation of jobs, businesses and, obviously, the tax take for the Treasury.

In 2005, the business rates revaluation penalised small, medium and large business by tightening the grounds for appeal and decreasing the reduction in rate bills for firms whose rateable value had fallen. That was another typical sleight-of-hand policy. The Government are ignoring the underlying factors relating to the fact that some commercial premises are sometimes empty for longer than is desirable. This can happen, for example, as a result of restrictive alienation clauses preventing sub-letting or assignment. I do not think that the Minister mentioned that, although I might have missed it.

Photo of Anne Main Anne Main Conservative, St Albans

My hon. Friend prompts me to inquire whether the Minister has taken into account restrictive covenants on buildings. It is sometimes almost impossible to find exactly the tenant prescribed in such a covenant. Might that also be an issue?

Photo of Stewart Jackson Stewart Jackson Conservative, Peterborough

My hon. Friend makes a pertinent point, and I agree with her.

Why does the Treasury seem to be at odds with the voluntary leasing business premises code that was produced by the Department for Communities and Local Government? That code has not yet had a chance to bed in, and it has not been given adequate time to work.

I want to return to regeneration. I speak not from a rural perspective, as did my hon. Friend the Member for Salisbury, but from an urban one. My constituency has an ambitious regeneration programme for the next 15 years. It is highly dependent for jobs on logistics, warehousing and transportation. It also has pockets of considerable urban deprivation—Peterborough has three of the poorest wards in the eastern region—and there is a great need for more employment. The proposals do not provide sufficient incentive to business to be entrepreneurial and to create new businesses. I am talking not about mass-market chains but about the niche businesses needed to create new jobs and to help the area to go from strength to strength.

As I mentioned earlier, the evidence of the Royal Institution of Chartered Surveyors does not necessarily support the Minister's argument:

"This is a repeat of the situation in the 1970s when an empty rate was introduced in the form of penal rating surcharge. However, no new lettings were created by the surcharge and it led to the deliberate vandalising of property, such as removing roofs, in order to avoid rate liability. If there had been a consultation on this topic the potential impact could have been considered."

The message from the RICS is that there has not been appropriate consultation.

I shall finish with some key questions to the Minister, and I hope that he is able to allay my concerns and answer all my hon. Friends' questions. Is he confident that regeneration will not be affected by the change? What steps does he think it prudent to take to prevent deliberate vandalism of empty property? Will he consider the suggestion of the Federation of Small Businesses that exemptions should be put in place for firms that have made a demonstrable effort, even though it might be unsuccessful, to fill their property? Finally, why is there no recognition of the regional differences in the commercial property market across England and Wales?

To conclude, the tax change will do nothing to make the property market more dynamic. It will stifle efforts to regenerate some of our most deprived areas. I fear—call me cynical—that it is a good old-fashioned tax grab. Ministers need to think hard again about whether they should proceed with the proposal.

Photo of Phil Woolas Phil Woolas Minister of State (Local Government & Community Cohesion), Department for Communities and Local Government 3:22 pm, 10th May 2007

We have had a good, short debate. I commend hon. Members on the thoroughness of their research. The points have been made reasonably and, in response to the tribute to my hon. Friend the Economic Secretary, eloquently and authoritatively. It is right and proper that we reply as fully as possible to the points made. [Interruption.] Michael Fabricant on the Opposition Whip's Bench is teasing me; I am not going down that route.

Mr. Jackson questioned the process that is taking place. The Ways and Means resolution arises from the Budget and, being a matter of local taxation, cannot be considered in the Finance Bill, as would be the case with other Budget measures. It is also worth pointing out that I considered whether there was appropriate scope for the measure in the Local Government and Public Involvement in Health Bill, but it is specifically not a finance Bill. We have therefore facilitated debate through the resolution and, to allay Members' fears, there will be further debate on Second Reading. Although it is a finance measure, there will be consideration of the detail of the Bill in the other place, should the House pass the resolution today, as I hope that it will. If I am not able to answer all the points that have been reasonably raised, I commit the Government to attempting to do so, should the House pass the resolution, in further consideration.

An important point has been made about the possible impact of the measure, and constituency Members of Parliament have done their research. Robert Key in particular has researched the possible impact on the three examples that he gave. The law of unintended consequences bedevils legislation, so we must give the matter proper consideration.

Michael Gove set out a logical argument based on theory, principle and practice. Let me deal with the theory first. Non-domestic rates are not a tax on business activity, but a tax on property. The domestic rate is partly a tax on property, for property services, and partly a tax on individuals. Although Members have referred to business rates today, the motion refers to non-domestic rates. That answers the points made by Anne Main, who sought exceptions.

As for the hon. Gentleman's points about the principle, there is a misunderstanding—I forgive him for perpetuating it—that bedevils the debate about non-domestic rates, and I am grateful to Sir Michael Lyons for shedding light on it. Many people assume that the retail prices index cap on non-domestic rates is a cap on the individual bill paid. Non-domestic rates, unlike council tax, are based on the rental rather than the capital value, although some argue that the system should be different. In considering the impact of this measure, therefore, we must consider its impact during the two periods before and after revaluation.

That pulls the rug from under the feet of those who say that this is a smash-and-grab raid on businesses. The intention of the measure is to decrease rents across areas. By increasing the supply of available premises, it will decrease rents after revaluation. In this country there are regular revaluations every five years, as there have been since the system was introduced. It is worth noting that revaluation for the purpose of non-domestic rates proceeds without a murmur in the House or a column inch in the newspapers, in stark contrast to the hundreds of thousands of column inches devoted to the non-revaluation of domestic properties. That, to my mind, justifies my policy of not proceeding with the domestic revaluation: goodness knows how many column inches would be spilled if such a revaluation took place.

The principle of the RPI cap is clearly there, and I restate our commitment to it. That is important, because it will decrease rents in the future. The hon. Gentleman assumes, however, that it is a simple cap on the yield. In fact, the cap is on the increase in the business rate multiplier—what we all know as the penny in the pound. We used to call it rateable value, and I think we should reintroduce the term because more people understand it. I make that commitment as well: I shall not use the horrible phrase "business rate multiplier" again.

The exception arises at the time of the revaluation, when overall rateable values increase if that is the way in which the market is going. The multiplier is adjusted, and the resulting increase in yield is pegged to inflation. That has been the case throughout the system of non-domestic rates, and it is a very strong pro-business measure. It deals with the point that the hon. Member for Surrey Heath rightly made about general stability. We must remember why uniform business rates were introduced in the first place. I think it right for me to concede that my party got it wrong before that. Our actions led to instability, and were bad for business.

As for the practice, the hon. Gentleman asked a number of questions—more than he said he had. I counted 10, although he said there had been seven. In any event, I shall try to answer them as best I can.

The accusation has been made that pension funds may be damaged because they hold property portfolios. Empty properties are only a small part of pension fund portfolios, and properties that are occupied will benefit in the medium and long term from the reduced rents that will result from the pincer effect that I have described. I do not accept the hon. Gentleman's point in respect of the short term either. The actively managed property portfolios experience low levels of voids. However, the most important determinant for growth in yields to pension companies and other investors in property is demand from the wider economy. I do not dismiss the point that has been made, but I always think that it is a good debating point to look at one side of the equation. The argument about pension fund tax misses the point that corporation tax was reduced at the same time; from the overall point of view, that must also be considered.

I hope that I have answered the point about consultation and proper parliamentary scrutiny. The next question that was asked was about the alleged failure to consult on what is an appropriate rate-free period. A three-month rate-free period currently exists, and we will not change that—there is certainty in that regard. The Kate Barker review found that there is no structural difference in the propensity of properties in different sectors to fall empty. None the less, we will provide an additional three months of rate-free period for industrial property, returning the total rate-free period to six months, so there is movement in that direction. We can debate these matters.

It has been argued that there is no evidence to justify the making of the reforms that alter the rate and the length of the rate-free period and that there is also no evidence of what their exact nature will be. That was also addressed by Kate Barker and Sir Michael Lyons. As has been said, she carried out a fairly thorough assessment of the case for reform, and so did Michael Lyons. That is part of the evidence base that we are using in bringing forward our proposals. However, I concede that there is a question to do with balance in respect of some of them.

The hon. Gentleman also asked questions that perhaps anticipated an economic downturn should his party ever form the Government; the DNA and mindset of the Conservative party is to plan for recessions, as that is what its experience shows happens. The Bill will provide—I appreciate that Members have not seen it, so I do not criticise those who asked about this—a new power for the Secretary of State to reduce the rate for empty properties from the new level of 100 per cent. of the occupied rate back to a minimum of 50 per cent. There is some flexibility in that measure. The hon. Gentleman should not now rush away and write in his newspaper column that the Government plan for a recession; there is always a danger of that happening when we talk about introducing prudent and cautious measures. It is important that measures such as this one are not locked in stone.

The hon. Member for Salisbury referred to the Valuation Office Agency. It is already the case that an empty property is valued, so we do not anticipate a surge, or even a blip, in the work of the VOA. Its work is already part of the tax base. The hon. Member for Surrey Heath will know—perhaps from reading lurid headlines, which I think of as scaremongering—that we are computerising the valuation process. [Interruption.] Well, it is the central premise of the Conservative argument against our policy that we are doing that, so it is not fair of Members to criticise this point. We are successfully computerising the valuation process. The VOA has been successful at non-domestic rates revaluation, which has passed without a comment; I have been surprised about that. That is a reasonable point to make.

The question was also asked why this measure will be implemented in 2008, rather than in 2010. Lyons' recommendation was of course linked to the revaluation process, and we propose to introduce the measure in 2008 because we believe that its benefits—I do not mean just the increased revenue, which I shall come to in a moment—are required now. As my hon. Friend the Economic Secretary explained, relatively speaking we have very high rents. In my view and as the Financial Times reported this morning, it is daft that the taxpayer effectively subsidises empty properties, given that we have among the highest rents in the world. When my constituents heard that rental values in Manchester are higher than in Manhattan, they were surprised, as was I. So I checked it out and it proved to be true.

On the question of certainty, I appreciate the point that the hon. Member for Surrey Heath was making about the micro level. However, stability will be provided at the macro level because, as evidence shows, if the policy is successful—as we of course expect it to be—it will have a beneficial effect in the medium to long term. I have already dealt with the point that he made about the Lyons report and increased revenue from empty properties.

Members also asked about assessing the location of empty properties and whether there will be differential effects. It is clear that the policy needs to be examined in relation to areas such as the cities of London, Manchester and Birmingham, and Slough, which my hon. Friend the Economic Secretary mentioned. Analysis of England by region and by value shows that, unsurprisingly, the north-east and the south-west have the lowest figures.

Some important points have been made about regeneration areas, and I was grateful for the recognition earlier of my own commitment to regeneration; I did indeed not only read the available evidence, but consulted some of the urban regeneration organisations. Renovation funds are available in areas with Department of Trade and Industry assisted area status. However, compared with areas such as the City of London, a major obstacle in regeneration areas is of course the availability of land. We do not believe that there will be a negative impact on business confidence as a result of this measure. For example, redevelopment and regeneration schemes in Liverpool are already making available £8.2 billion for development, with planning permission already granted. That is not related, except in a tiny way, to the empty property issue. I concede that one has to consider the impact in different parts of the country, and Members have made strong points about the potential impact on their local economies. If I cannot deal with those points today, I hope to be able to do so on Second Reading, should the House resolve this motion today.

Dr. Cable called for further consultation, which is clearly desirable. However, we in this country sometimes suffer from consultation fatigue, and Opposition Members have criticised us for having too many independent reviews. One cannot have one's cake and eat it, but the point about consultation, particularly parliamentary consultation, is a fair one. The hon. Gentleman also referred to the twin objectives of raising revenue and changing behaviour, both of which are indeed objectives in this policy area. Such measures are part of the revenue-raising measures in the Budget. They have to be taken in the round, alongside decreases in corporation tax over the years—and, of course, the most successful stewardship of the economy in our country's history over the past 10 years. I shall say that especially loudly today. However loudly or softly I say it does not change the fact that it is true, and I wish that people would sometimes listen to the argument and not who is making it.

The hon. Member for Twickenham asked about the £1.3 billion in Sir Michael Lyons' report and the £950 million. It is important to point out that in our assumptions we build in a £900 million figure in year two, recognising that the impact overall will be to lower rents. That addresses the point that Mr. Jackson rather sceptically—I do not say cynically—raised. I think that he called the measure a stealth tax or a smash-and-grab raid. It is not. It is part of the revenue-raising measures, but it will also have the desirable consequence of changing behaviour, as the hon. Member for Twickenham pointed out.

We want to bring empty properties into the market. It is ridiculous that companies leave properties empty, whether intentionally or not. I do not have examples of companies that deliberately set out to do that, and I suspect that it would take a private detective agency—

Photo of Phil Woolas Phil Woolas Minister of State (Local Government & Community Cohesion), Department for Communities and Local Government

My hon. Friend reminds me that Property Week has looked into the issue. The example of Palmer Capital Partners—I take it that that is Palmer, not Palma as in the capital of Majorca—was given. I am not making an accusation, but for the figure to be valid the company had to assume that the property would be vacant. I do not suggest that that was that company's deliberate policy, but there are many examples of companies who build offices, turn the lights on brightly to advertise them, stick a For Rent notice outside, hire a security guard and disappear to the Mediterranean. In my view, that is undesirable.

The hon. Member for Peterborough made the point about the increase in homelessness—which is not true—and sounded like my right hon. Friend Mr. Meacher. The hon. Gentleman harked back to the days of Centrepoint, but the Centrepoint charity for the homeless came into existence because the Centrepoint tower was wilfully kept empty. We are not into that policy and we are trying to change the situation. We want to bring empty property into active use for business and commercial activities.

It is interesting that the hon. Gentleman and my right hon. Friend should concur on the issue. I have to disappoint the hon. Gentleman and tell him that he is not eligible to sign the nomination form for my right hon. Friend on Monday—

Photo of Phil Woolas Phil Woolas Minister of State (Local Government & Community Cohesion), Department for Communities and Local Government

I shall move swiftly on, Mr. Deputy Speaker, as both you and the Whips are looking at me very sternly.

I have answered the point made by the hon. Gentleman about increased numbers of the homeless in bed-and-breakfast accommodation and the resolution. Other hon. Members asked whether the measure would result in companies deliberately vandalising properties or removing roofs, as happened in the past. It is proposed that we consult on measures to prevent that from happening. Generally, we take the view that that is not a likely consequence because the economic circumstances are so different from those of the 1970s. However, it is an issue that we need to address. We have, of course, consulted organisations, as I have said.

The hon. Member for Salisbury made three strong points. I wish that he would make those points to the supporters of the Sustainable Communities Bill. I agree with their objectives, but they seem to think that simply passing a resolution would save Manor farm, the pub and Dean Hill in his constituency. Clearly, those are matters that we will have to look at.

The hon. Gentleman also talked about planning policies that obstructed success. All constituency MPs are familiar with that, and there are empty pubs in the urban areas of my constituency as a result of planning problems. The proposals that the Government are bringing forward today must be seen in conjunction with our planning proposals, but I point out that the small business rate relief scheme applies to such businesses when they are active. The hon. Gentleman made a well researched speech, and we will reply to the specific questions that he raised.

The same is true for the hon. Member for St. Albans, whose speech contained four broad points. The third and fourth concerned deliberate vandalisation and the Valuation Office Agency, and I have answered those, but she also referred to Tesco. It amuses me that the Opposition have discovered that company to be public enemy No. 1, as I should have thought that the party of the free market would support successful companies such as Tesco.

Curiously, the hon. Member for St. Albans also said that the local development framework had been overridden. If that is the case, I should like to help her.

Photo of Anne Main Anne Main Conservative, St Albans

For clarification, the local development framework has allocated that site for housing, and housing permission was granted on the Evershed site. The site was sold on to Tesco and, although any commercial development business could have acquired it just as easily, that company has kept it and now wants to develop it. The matter has not got as far as planning but remains at the consultation stage. That means that the original permission has not been overridden yet—thank goodness!

Photo of Phil Woolas Phil Woolas Minister of State (Local Government & Community Cohesion), Department for Communities and Local Government

I understand the hon. Lady's point, and the whole House will be familiar with it. In fact, I visited a similar case in north Liverpool only recently.

The hon. Lady also mentioned the Odeon cinema, and I am with her in wanting that to be reopened. It would be a lovely asset to her town—

Photo of Phil Woolas Phil Woolas Minister of State (Local Government & Community Cohesion), Department for Communities and Local Government

I apologise. The cinema would be an asset to her city, but the fact remains that there appears to be no developer willing to take the project on, despite the public support that it enjoys. Nothing that the Government might do about planning legislation will change that. I do not believe that the proposal before us would hinder that process: on the contrary, I believe that it will help because, if it impacts business activity by changing planning decisions, that will be beneficial. That is part of its purpose, and it is an exact corollary of what the hon. Member for Surrey Heath said.

I therefore hope that the House will support the motion. I appreciate that serious points have been made in what has been a good-natured debate. I look forward to discussing them further on Second Reading and as the Bill proceeds through a Committee of the whole House.

Resolved ,

That provision may be made for and in connection with the liability of owners of unoccupied hereditaments to a non-domestic rate.


That a Bill be brought in upon the foregoing Resolution: And that the Prime Minister, Mr. Secretary Prescott, Mr. Chancellor of the Exchequer, Mr. Secretary Darling, Mr. Secretary Hain, Secretary Ruth Kelly, Mr. Stephen Timms, John Healey, Mr. Phil Woolas, Ed Balls and Angela E. Smith do prepare and bring it in.