My Lords, the Government are committed to ensuring that our tax system is in step with the digital age. Paying tax should not involve unnecessary administrative burdens and business should be able to take full advantage of modern technology to support an efficient and straightforward process. We believe that the administration of business rates, in line with all other taxes, should reflect these principles and be designed around the needs of the taxpayer.
Of course, HMRC has already taken significant steps to roll out digital tax services, giving businesses more control over their finances and allowing them to spend their time focusing on innovation, growth and the creation of jobs. The Bill builds on those foundations by paving the way for a similar digital-first approach for business rates. It is a simple measure that will allow HMRC to explore a future digital system for the administration of business rates. It will give it the necessary statutory powers to expend resources on designing a digital business rates system, potentially linking local authorities’ billing systems with HMRC’s.
We are bringing forward this paving legislation—I stress that it is paving legislation—in response to the feedback to the 2016 comprehensive review of the business rates system. As well as inviting views on the tax itself, we asked for feedback on the administration of business rates and how they are billed and collected. Following the 2016 review, the Government have taken extensive action to improve the operation of the current system. They have answered calls from businesses for more frequent revaluations and to change the annual indexation of the business rates multiplier from the retail price index to the consumer price index.
In their responses to the review, businesses also called for the modernisation of the billing and collection of business rates. This was also reflected in the Institute of Directors’ evidence to the current Treasury Select Committee inquiry into the impact of business rates on business. It called for HMRC’s Making Tax Digital efforts to extend to business rates. Businesses are already highly engaged with digital services, making sales, banking and paying bills online. The business rates system needs to reflect these changes so that it is easier for businesses to manage their bills.
Currently, businesses receive separate business rates bills for each non-domestic property they occupy, and large businesses with properties in different areas will receive bills from each of the local authorities responsible for issuing bills and collecting payment. While the Bill is a simple paving measure, it will allow HMRC to explore some potentially significant long-term changes to improve this system. To be clear, the Bill does not implement any specific reforms at this stage. It simply gives HMRC the powers to undertake the work and engagement to develop options for improving the system. It will ensure that any further changes meet the requirements of businesses.
I should stress that some noble Lords have written with inquires and points not particularly related to this legislation. I will ensure that they get a response, but this is a very simple piece of legislation relating just to paving the way to explore the possibility of digitalisation helping businesses along with HMRC and the tax system.
During the passage of the Bill in the other place, the point was made that digitalisation could reduce local authorities’ control over the business rates system. I therefore reassure noble Lords that the Government remain committed to giving local authorities greater control over the money they raise in their area and greater business rates retention. We aim to increase local government’s retention of business rates from 50% to 75% from 2020-21. As local government will retain more business rates, individual local authorities will also be able to keep a bigger share of growth in their own business rates. This will provide an incentive for all local authorities to grow their business rates bases. These commitments will be totally unaffected by the Bill. Local authorities will still be able to make local decisions about their local business rates, and the Government will, of course, engage with local government in the next phases of the design work on digitalisation.
The Bill is a first step towards creating a digital business rates system. It will enable HMRC to begin exploring potential options to link business rates with the administration of the wider tax system and expend resources in undertaking the initial development work. This is necessary as HMRC’s statutory functions do not currently include activity in connection with the administration of business rates. HMRC will also begin to undertake engagement with stakeholders to ensure that any reforms work for business and local government. The Bill will begin to meet the Budget 2016 commitment to transform business rates billing and collection. We cannot say what the final product will look like as this will be subject to that design work. Once complete, further primary legislation will be bought before this House for full scrutiny before the new system is bought in after 2024. It is therefore important to stress that this is paving legislation that provides power to explore the possibilities of a full digital system.
Following the passage of the Bill, the Government will begin development of a proposal for what this digital service might look like. This will involve engagement with stakeholders and the evaluation of possible options to ensure the best value for money. HMRC aims to develop a series of outline proposals in time for the spending review later this year. What will be taken forward will depend on the outcome of the spending review discussions. I assure noble Lords that there will be appropriate scrutiny and accountability in respect of this project. This is in addition to the role that Ministers in MHCLG and the Treasury will have, and it is also common for the Treasury Select Committee to examine large HMRC projects.
The Bill received cross-party support in the Commons, where it passed quickly without amendment. We want swiftly to grant HMRC the ability to begin early design work so that it can explore what a new system would look like, working with business and local government. I hope, therefore, that the Bill receives the same level of support in this House. It paves the way for an initiative to update business rates for the digital age. I commend it to the House and I beg to move.
My Lords, in welcoming the Bill I draw attention to my profession as a chartered surveyor, with a career-long involvement, on an off, in the business rates system. I am also an honorary member of the Institute of Revenues Rating and Valuation—the professional body most closely involved with business rates—and a vice-president of the LGA. My observations, I suspect, will be on principles that the Minister may feel are perhaps to one side of the Bill, and I have alerted him to some of the points that I shall raise. I make these comments because promises such as predictability, fairness and improvement have been made in the past and have certainly not appeared as the jelly bean at the bottom of the machine in the way that businesses expected. Therefore, my comments are fairly broad.
The Bill is the first stage that will lead to a logical extension of the online payment system that HMRC already has for dealing with things such as PAYE, VAT and tax returns. I agree with the Minister that it makes sense to have a single payment portal for a supermarket chain, mobile mast or ATM operator, to give just three examples. However, the recent introduction of digital tax returns under the Making Tax Digital initiative, characterised by truncated lead-in times, inadequate information for taxpayers and a lack of provision of properly tested online software systems rightly attracted the criticism of your Lordships’ Economic Affairs Committee. The system for rating appeals against rating assessments—check, challenge and appeal, or CCA—also shows that HMRC is capable of producing some poorly designed systems that fail basic tests of user interface, coherence of IT architecture and operational competence. Even now, that system is short of what was intended and what was promised.
As if mistakes applied only to fallible taxpayers, HMRC has failed to address customer service and allied issues, which are the very basics of justice, transparency and fair treatment for ratepayers. Rather, barriers of complexity and underresourcing, and the principles of the Court of Star Chamber, appear to prevail.
HMRC sometimes appears to forget that it has a concurrent duty to treat the taxpaying public and businesses in a reasonable manner and with a degree of humanity. They are human beings, not automatons. This means having an intelligible tax code with proper back-up and operational judgment while it is being managed, and proper resourcing of new tax initiatives with adequate access to a system of redress. HMRC’s priority in recent times seems to be to protect itself rather than delivering services to taxpayers.
A demand for business rates might, on the face of it, be a simple multiplication of rateable value and a non-domestic multiplier, were it not for the extensive range of reliefs and exemptions—so the geometry is not quite the same as for other taxes. Business rates also depend on the government valuers’ increasingly questioned opinion of the annual value of the property. So the tax base at the moment does not command universal confidence.
There are some key issues. Study after study has revealed that digitising an already overcomplicated system will not help, and attaching a new payment system to an inadequately resourced tax base does not do so either. HMRC presides over a very complex series of systems, but this also creates vulnerability to evasion, cyberattack and software malfunction and, ultimately, to the simple inability of staff to deal with the monster that has been created. If, on top of this, systems are introduced with half-baked design that use the taxpaying public as a guinea pig, what the chief executive of the IIRV dubbed the “test and learn” approach is unacceptable. By all means let HMRC devote time and energy to researching and developing framework systems, but it should not impose them without prior testing. That, necessarily, must be part of the budget and the specifications submitted to Ministers for approval.
Again using the example of CCA, it is clear how system overload, resource cuts and poor design, compounded by what I believe is a rather disgraceful gaming of the business rates revaluation process, lead to wholesale mistrust. This comes at a time of acute vulnerability for, in this case, high-street retailing—all of which was foreseeable but was largely ignored. So I am afraid that I do not absolve HMRC of throttling the goose that once laid if not golden eggs then at least a regular and highly cost-effective supply of cheaper ones. This suggests that there needs to be a steadying hand somewhere on the tiller. Spending money on a payment system when the tax base management is still wanting puts the cart before the horse. I can never overlook an opportunity to quote a dictum of Jean-Baptiste Colbert, who observed:
“The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing”.
To that I say, “Hear, hear”—but I question whether HM Treasury can tell the difference between a hiss and a last gasp.
Although I am now reasonably clear about how the exercise authorised by the Bill will be funded, I would like to know the cost. If the payment system is to be operated by HMRC instead of the billing department of the local authority, what are the employment and ratepayer inquiry implications? How are reliefs, both discretionary and mandatory, to be given, and what will be the process of transmitting information on exemptions, vacancy and occupation? Further, how does a business rates retention system apply if all the money goes to HMRC in the first instance, and what implications would there be for refunds and responsibility for errors? I cannot expect answers at this stage but I hope that the Minister has noted those questions and that in due course we will get clear explanations.
It has frequently been made clear that any change to the business rates system must be fiscally neutral; in other words, that the cost of adjustments must be met by countervailing ones to ensure equality of the tax yield—or, to put it more cynically, that the taxpayer funds HMRC’s mistakes. Can we be assured that any system eventually proposed as a result of the Bill will, as a minimum, be as efficient to operate as the current one and, further, that the costs of any changeover will be funded from other HMRC sources or from demonstrable savings and not loaded on to businesses by dint of fiscal neutrality or laid at the door of billing authorities?
What I am really asking for is proper parliamentary scrutiny of the activities of a department of state that does not always get it right first time—or at all—and should not be left entirely on its own to design, specify, construct and operate a new system without external overview. I also suggest that, having delved further, it should report to Parliament with a proper cost-benefit analysis and options paper before implementing anything. I would certainly be very grateful for the Minister’s reassurance to that effect.
My Lords, I draw the House’s attention to my interests as listed in the register: as a councillor in Kirklees and as a vice-president of the Local Government Association.
The Bill brings forward a sensible proposal: to examine the potential for business rates, currently managed by local authority systems, to move to HMRC digital tax accounts so that businesses can manage their tax liabilities in one place. This is likely to particularly benefit larger businesses with premises in different local authorities. The Bill states, as the absolute minimum, that the purpose is simply to enable such an investigation to occur. However, the lack of detail leads to concerns and questions about changes that might result from any implementation. I have some questions for the Minister, which he might or might not be able to answer, but I assure him that they are not of the expert variety just demonstrated by the noble Earl, Lord Lytton. Mine are far more prosaic.
First, is it the Government’s intention that businesses, local government and HMRC will work as a partnership of equals in the project? I emphasise the idea of a partnership of equals, partly because of the obvious background to this: HMRC has experience in tax collecting, while local authorities have knowledge and experience as the long-standing billing authorities for business rates. Businesses of all sorts—one-person businesses as well as big corporations—should be able to take part in this and contribute to the project; otherwise, it will be doomed to failure.
Secondly, is it the intention that local authorities retain responsibility as billing authorities? This is something that the noble Earl, Lord Lytton, has already asked, but I emphasise that it is one of my concerns as well. I believe it is crucial that they do retain this responsibility as local government is increasingly reliant on business rate income to fund local services. The consequence of this project may well be that the link between businesses and the local authority to which they pay their business rates is broken. That would be unfortunate, as the existing direct link means that businesses are able to have a considerable influence in local government spending in their area, and vice versa: local government can aid businesses that have temporary problems of cash flow or whatever. If that direct link is broken, it would be detrimental both to business and to the local authority.
Having made these brief remarks, I reiterate our general support for the Bill.
My Lords, I make my usual declaration of my relevant interest a vice-president of the Local Government Association. I am very happy to support this two-clause Bill and the general principle of the digitisation of tax payments and services, making them simpler for businesses and individuals. Making things easier for business is to be welcomed, and I know that this is paving legislation, but perhaps the Minister could confirm the intention behind it. Can he confirm that nothing in the Bill will change the role of local authorities as a billing authority? I think it is quite important to get that on the record.
Again, I accept that this is paving, but we have to be clear about the principle. When this is finally resolved, we must have an efficient process of transfer of payments from HMRC to local authorities. I would not want to see us here in a couple of years’ time discussing a situation where local authorities are worse off because the system in place has made things more difficult for them. I am also conscious that what local authorities call for can imply a whole range of discounts and amendments to the system. We need to make sure when we design the system that all this is taken into account.
I did have two or three questions for the Minister, but he answered them all in his introduction. I was very happy with the answers in his initial speech, so I have no questions at all for the Minister. I am so grateful to the noble Earl, Lord Lytton, who demonstrated the importance of expertise in this House. I am confident that there will not have been that level of scrutiny in the other place. A number of points raised by the noble Earl were very valuable; I am sure the Minister will respond to those. When further Bills come to us to implement all this in more detail, I am sure that the noble Earl’s expertise will be valuable once again. If we are going to make these changes, we have to get them right; this will involve computers, IT and digital, and we always worry about that, about what we are designing. We need to make these things better and more efficient for business and for local government. But, in principle, I fully support the Bill.
My Lords, I thank noble Lords who have participated in this debate. I am most grateful for the support of the noble Lord, Lord Kennedy, the noble Baroness, Lady Pinnock, and the noble Earl, Lord Lytton. I understand the concerns that they have raised. I sought in my opening remarks to provide the reassurance that this is simply paving legislation to enable HMRC to explore options and to firm up a proposal that will then have to come back to us. Further legislation will be needed to implement the new digital system and it is perhaps then that the detailed scrutiny that we have been touching on will become appropriate.
I will ensure that the noble Earl gets a detailed response to the questions he has asked, both today and when he wrote to me. I had prepared answers, but when I first saw the speakers’ list I do not think he was on it, so I was reassured and did not prepare my speech on the basis of answering some of his questions. However, I will ensure that he gets a detailed response to his very good points.
I thank the noble Baroness, Lady Pinnock, for her support. To reiterate her point, this is enabling legislation. It is important that we involve all the stakeholders in looking at the possible options before we come back with the design that will then be voted on.
I thank the noble Lord, Lord Kennedy, very much. It is not often that I show that degree of prescience and foresight, but clearly something was working when I was developing the speech earlier. Again, I reassure him that we will ensure that a detailed proposal comes forward after being honed by HMRC. It is important not to put HMRC in the dock here; this is something that business has been asking us to look at because it wants to remove some of these administrative burdens. Businesses—representative as they are of individuals, as the noble Earl said—have asked us to do this. HMRC is responding to that call and we will look at its proposals in detail. I am most grateful for the comments made and I commend the Bill to the House.
Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.