What is wrong with the Bill, in your view? Obviously, the Minister thinks it is wonderful, but no doubt you will be slightly sceptical about whether that viewpoint is completely accurateQ .
From a business point of view, we support the Bill. Our concerns are about the notion of giving councils the opportunity to reduce the multiplier. We support that, but how realistic is it that the powers will be used and applied? That is partly because of issues with local government funding that you will know about much better than I do.
From our perspective, the Government have already introduced powers for local authorities to give discretionary rate relief for whatever reason they like. That can be used to support high streets, or particular sectors or areas. That is very under-used—it is being used by about 12% of councils at the moment—which makes us sceptical about the likelihood of councils using the powers in the Bill to reduce the business rates burden, given the pressures we all know they are under. Against that, while there are many good checks and balances against the introduction of increases in business rates and levies, there is a concern to ensure that powers in the Bill are not pushed as far as they can to try to increase business rates revenues. That would be our summary position.
Professor Tony Travers:
In that the Bill carries on the work started by 50% business rate retention back in 2011—and even going back to the previous Labour Government, when they had the local authority business growth incentive scheme—those things are both rational in moving towards a system where local authorities at least have some chance of retaining the uplift in any growth in the tax base they generate. That makes sense, in my view. What is wrong is what is often wrong in UK—or, in this case, English—systems of local government finance. Although this looks like a move to a system where councils are completely dependent on council tax and business rates, in truth there are still many ways in which the Government of the day can intervene, making the actual business of running local government not as predictable as would be the case if it was a purely locally funded system of local government finance.
This is a question for Mr Lowman. On Second Reading I agreed with the point made by your organisation that there is a potential for local authorities to try to increase business rate revenues by signing off larger planning applications for developments at the cost of small businesses. How can that be mitigatedQ ?
That is a concern regarding having a greater incentive to bring in large chunks of business rates through large developments, which was touched on in the previous session. There is a danger in our sector if a big out-of-town supermarket application is granted because of the effect it will have on the high street, other surrounding neighbourhood retailers and so on. In the grocery market, that is less common than it was a few years ago. None the less, it is true that out-of-town developments can harm high streets. The temptation to grant those applications concerns us because that may lead to a large slug of business rates coming up in the first instance but, over time, business rates income will diminish as those town centre and high street businesses come under pressure—of course, there are other effects.
The most effective way of mitigating that would be to have a long reset period. We have suggested 10 years, but some people have suggested longer. The reason is that the impact of those big developments can be felt more fully across that longer reset period. If you have a short reset period, you may see the upside of the development without the downside of the closures and other consequences. That long reset period would be one way of reducing that temptation for authorities.
Q Mr Lowman, your members provide a very important community service. Do they feel they are on a level playing field with the large supermarkets?
They do not. They feel there are a number of ways in which they are under particular pressure—that is the system. Supermarkets do much of their trade through online delivery, which is a very efficient system in terms of business rates. It is arguable whether it is an efficient system from a business point of view—not many companies make a lot of money from their online operations—but it is a very effective system in terms of business rates because the places where those businesses distribute from have relatively low land values. They are out of town and in unattractive places, but it doesn’t matter whether people can get to them. What matters is how quickly they can link to road networks and other ways to get the product out to their customers. By contrast, convenience stores and all sorts of local shops are bricks-and-mortar retailers. Some of our members do various things online—parts of their business—but fundamentally we are bricks-and-mortar businesses. Where business rates increase, all our sector is hit.
There are things the Government have done to support small businesses. The increase in the 100% rate relief up to £12,000 rateable value is very welcome, but many businesses fall outside of it. As you know, business rates are calculated on the basis of notional rental value, so it varies case by case, but essentially, businesses in prime areas, or even strong secondary high street businesses of probably more than 1,000 square feet—decent-sized stores—are still likely to be paying business rates. Therefore, with annual increases in business rates, some have been hit by revaluation badly, some better, but those small stores on high streets are still paying proportionately much more per square foot or square metre than big out-of-town stores. Yes, we are damaged by the business rates system.
Q A view has been expressed in different places that, because many convenience stores are family-owned businesses—they might have a brand but they are essentially family-owned businesses—cash flow is tied and the time taken deal with appeals can have a serious impact on the viability of many of them. One suggestion was a differential, backdating element, whereby convenience stores have a longer period to backdate if they are successful in their appeal—they might need it for cash flow—while backdating for supermarkets potentially should not be as generous. Is that something you have discussed within your industry or with your members?
Yes. The business rates appeals system is a concern to us. The system is clogged up, it takes a very long time to resolve appeals. We are in discussions with the Government about the degree to which our members will be able to appeal and about the reasonable professional judgment of what constitutes a wrong valuation. I am not sure in terms of the appeals whether this is about us versus supermarkets or other businesses. The appeals system needs to be more effective, more efficient and fairer for businesses that have been misvalued and overvalued.
Q Professor Travers, you are widely regarded as a leading expert in your field—rightly, in my view. We spoke to the Minister earlier about the pressure of adult social care and asked whether he agreed with people in the industry that it was in crisis in terms of its funding. What is your professional assessment of social care funding?
Professor Tony Travers:
There is no doubt—it is an objective, visible reality if we still have them—that local government spending has been held down more than the average of UK public expenditure. Within that total, local authorities have broadly protected real spending on children’s and adults’ social care in cash terms but not in real terms. Clearly that item of public expenditure has been squeezed in real terms at a time when numbers are increasing.
Having said that, how the new system operates and the total of local government spending are, in theory, unrelated. Of course, in practice, coming back to the point I made earlier, in the end in this new system the Government will still, in reality, control the total of local government spending. They have to do that because local government is a component of total managed expenditure in the UK. In a sense, moving to this new system of 100% business rate retention gives rise to an interesting question of whether local government spending in total—on aggregate, nationally, in England—could ever escape a cap set on it at the national level, even if individual authorities could build up their tax base in order to gain more income. That is an unanswered question in the system.
Q Has any research been undertaken to assess what the impact might be? If there is limited growth in the tax base for business rates and council tax within the total, but the demand for services is outstripping that available resource, is there any assessment of what that gap could be?
Professor Tony Travers:
Over time, the amount of growth in the business rate base is clearly unpredictable, both at an individual authority and in total—the total will depend to some extent on the strength of the UK economy. As for the amount produced, I cannot give you an answer, in the sense that the Government would have to decide, particularly at the point of resets, which were mentioned earlier, whether they were going to ensure that local government spending always fitted back to the number that central Government had first thought of.
It is not unique: moving forward, this is the way the system operates now. So in a sense we are not truly moving forward here to a system where local government is free to determine the overall total of its income, partly because of all the new responsibilities transferred to it in the short term. In the long term, we must assume that tariffs and top-ups, which were discussed earlier, will be adjusted to the point that local government spending over time cannot significantly exceed the total first thought of so that it fits within total managed expenditure and therefore public spending planning purposes.
There is concern. Half our members’ trade comes from within a quarter of a mile of their store—they are the local shop. Our reach into communities is pretty much unparalleled in any business sector. One thing that concerns them from that perspective is that large infrastructure projects may not be that relevant to them. New motorway links, new transport or major new developments will be less relevant to their particular trading position.
They are concerned about mechanisms for increasing their overall business rates bill. They broadly support the business improvement district model and the opportunity to have a very specific programme and proposal on which they can vote, and which needs an endorsement of business rates value from the majority of premises. That seems like a good double lock on ensuring that things that come through in business improvement districts are relevant to them.
We would encourage a similar sort of level of consultation without being very specific about what is being proposed. We are concerned about consultation. It is perhaps damming our own sector, but it is not routinely engaged with local authorities, local chambers of commerce or other local bodies. Perhaps they should be, but it is a fact that they generally are not engaged day to day. We are concerned about reaching those businesses in order to consult them. The relevance, the location and the mechanism of consultation is a concern, but it has been taken on in some of the checks and balances in the Bill.
Q Let us imagine that you are the ruthless, hard-nosed treasurer of a council that sees this Bill coming into force. Presumably, you are going to want to try to negotiate a very low top-up, assuming that you are a reasonably well-off area in terms of finance and land. Presumably, you are not going to look at small businesses. You are going to rush, as much as you can, to encourage the Amazon-style warehouse or JD Sports kind of warehouse. Surely that is the only incentive that is wise in the Bill in terms of business rates growth. You might actually put to one side the engine of future economies or businesses because they are not going to bring you any reward.
Unfortunately, Amazon warehouses do not pay that much in business rates, which is one of the challenges here. This is why we need a long reset period. There is a benefit in the intention of the Bill, and we fully support it. The benefit is that, if a council can make itself a more attractive area for businesses to invest in and to set up there and to stay in business when they are already there, they will benefit from that overall. We do support that as a principle, but as I said in answer to an earlier question there is a danger that they will be tempted by and attracted to big hits of business rates coming in with big developments. So that is a very active concern.
Professor Tony Travers:
Small business has lobbied for a number of years for relief, which hundreds of thousands now have. If you move from a system where a substantial number of small businesses receive a relief, to a system where local authorities are given an incentive to build up the tax base, you must accidentally create an incentive to give planning permissions for those that are more likely to pay the business rate. It is not intended to work like that, but it must inevitably produce an incentive to give planning permission for businesses that do pay the rate rather than those that get exemption. Of course, the reliefs are partly, I suspect, built in to the base on which all of this starts, but I doubt over time that that would be uprated in line with overall growth. There is inevitably an incentive—not intended—for local authorities to give planning permissions for and to build up businesses that pay business rates compared with those that get relief, I would have thought.
Q Do you think there should be an element of independence in the needs assessment process that is being done at the moment, and that might be done at future points?
Professor Tony Travers:
The needs assessment process that underpins local government finances has been an element of pressure and complexity going back to the 1920s, but particularly since the 1960s. We are now going to have a reset, after some time without a reset. Any time there is a reset, you would expect—all other things being equal—a big jump in the change, inevitably. The longer you have a period without a change, the bigger the jump between those places that have become needier and those that have become less needy, relatively speaking.
There is another tension here: the longer you leave the period between resets, the more instability you will get at the point of the reset, but you get less within the period during which there is no reset. There is then the issue that the longer you leave it without a reset, the greater the perceived—I stress perceived—unfairness for those that feel that they are being left behind. The truth is that the English system of local government finance has a very high expectation of redistribution buried within it that goes back a long time. There are a lot of pressures from politicians of all parties to make it fair—I am sorry to say this—for their authorities. Fair is more for us—which is fair enough. At the point of the reset, there will always be a war of all against all to get it right for our class and our type of authority. Having said that, I think most politicians centrally and locally would share the view, and I say this again in front of a number of politicians, that that is a reasonable thing to do—that is, to have a system that is seen to be and is fair—but delivering fairness is difficult, particularly at a time when local government finance in total is either static or the total is falling.
If you think about it, in the world we are moving to, local government spending will be lower in total in 2019-20 than it is today. At the point of the redistribution—this is also true for schools’ funding redistribution, by the way—it is not as if you are redistributing at a point where it is growing by 6% a year; it is when it is growing. That makes it a far more painful business for Ministers and other MPs, simply because there is less money in the system. It is just a fact of life.
Q Something has just come to me while listening to the discussion and following on from the question about granting planning permission for large units. I represent a fairly rural constituency in Cornwall, where we have seen a number of convenience store-type premises that qualify for relief, perhaps small business or rural rate relief, being converted to residential units. I wonder whether there will be an unintended outcome from the Bill and whether there may be an attraction for local authorities to grant permission for change in use to residential. They are not getting the income from the business rates, because of the relief, but they will suddenly get council tax if it converts to a residential unit, therefore increasing their income. Has that crossed your mind and is there anything we can do to try to prevent that happening?
Professor Tony Travers:
Before James says anything about his sector, the whole purpose of introducing this system, which, as I said, I broadly sympathise with, is to create more incentives for authorities to think about their economy and to build it up. But it is absolutely the case that, if you face a choice, particularly now there is permitted development—you can change from non-domestic to domestic more easily than in the past—if the small non-domestic property does not pay a tax and the small domestic property would, inevitably, that creates—I am not saying all authorities would take it on every occasion, but it is within the realms of the incentive that you describe.
Alongside that there is a significant incentive to the operator or the property owner. In most cases, that property would be worth more as residential than it would be as a business, although there would be exceptions to that. There has to be a strong and effective planning system and local plans, so that we do not have case by case, site by site conversion from retail to residential. That may have to happen—some high streets may have to get a bit smaller—but it has to be done on a planned basis. It cannot be simply site by site—the lease comes up and it is converted to residential. That way you get very long, incoherent, pockmarked high streets without a clear centre to them. I think it is really important that the planning system mitigates that. As well as the commercial incentive for that to happen sometimes, there may now be—I will leave it to councils to say to what extent that will actually act as an incentive, but I entirely take the point you are making.
Q My question is particularly to Professor Travers. How do you build resilience into the process? I am thinking particularly about an area such as mine, Redcar, where the loss of one company—the liquidation of SSI—resulted in the loss of £10 million in business rates overnight to our local authority. If we are going down the route of more devolution and moving potentially to more and more being retained within a local authority, how can you mitigate that over-reliance on a large company within that process?
Professor Tony Travers:
Clearly, England has an economy that is heavily interdependent. Geographically, it is quite a small country; it feels big, but it is quite small compared with a number of American states, for example. We are now moving away from the system in which local authorities were largely protected; in fact, so long as the national non-domestic rate involved 100% retention, they were completely protected from any of the vagaries in the local business rate base. However, as we move back towards a system—this is a back to the future reform; we had local business rates up to 1990. We have moved away from the national non-domestic rate, which was introduced in that year. From 2011 onwards, there was more risk of the kind of change you described—and with the introduction of 100% retention, even more still.
I have always been in favour of greater local autonomy, but it begs the question whether there is a need, in a relatively small and relatively homogeneous country such as England—that would be true for Scotland and Wales, too—for central Government to retain, as they did in Corby, when the business rate yield fell there after the Corby plant shut, the capacity to intervene in the short term when something like that happens. It is an anti-localist measure, but I think it is the way most councils and MPs in Britain would expect central Government to behave when there is a one-off hit to the system. I think you would have to retain some form of capacity for national Government to help when some massive change takes place in the short term. When there is a huge new plant or some other big growth in the business rate occurs that is not on the central list, that is a different question—would you take account of that the other way round?
Professor Tony Travers:
It is an inconsistency. I am trying to say that, so far as possible, most local authorities in England could easily operate on the basis of council tax, business rates and some mild redistribution most of the time. However, there will be cases, particularly when there is a radical change in the local tax base or some unexpected need, in which the Government may need to intervene.
Personally, I like to separate out the occasional need to intervene from trying to use the underlying local government finance system year to year to take account of all of the changes that go on in a complex economy such as ours. I am a localist, but I concede that there is always going to be a role for central Government in a country such as England—or Wales or Scotland—to intervene to smooth out the big changes that inevitably and randomly occur.
Q You mention redistribution, which is key and underlies the whole policy in the Bill. How fair is the current system, and what system should we move towards?
Professor Tony Travers:
The current system has been in place for a long time and has not been reset for some time. I answered cautiously before about the fairness issue. Clearly, there has been radical social and economic change in various parts of England in the past 15, 20. 25 years, and you would expect the needs and resource equalisation system to catch up with that over time, so long as we have it.
The point was made earlier—I suspect that, when those new needs factors or the new reset based on need and resource changes are built into the system, you have to avoid too radical a change. If you have a big change, with huge numbers of big gainers and losers, people notice. I do not need to say here that local government finance, unlike national Government finance, is very, very visible. People understand immediately changes in spending and in tax bills. With that in mind, you have to be careful not to produce too much redistribution. In the direction of fairness, yes. Massive redistribution, never good for the system.
Q You mentioned that the money coming into the system was declining by the end of the decade, but there is obviously a lot more money coming in—£12.8 billion of extra money—and it has yet to be decided what local authorities’ responsibilities will be for that money. So there is actually more money in the system.
Professor Tony Travers:
Of course, but there is no doubt that the overall figures in the spending review, which I think have been taken forward a year by Philip Hammond in the most recent spending review, take us on a generally flat, slightly declining, then flat total for local government’s own controlled expenditure up to 2019-20 and that in real terms is something of a reduction.
It is true that we do not know what will happen thereafter. At the point of the reform to 100% rate retention, there will be a transfer of services, so that local government is neither better nor worse off at that point. The question is, what is the total effect of 100% retention minus, as it were, the new responsibilities? How does that leave not only the pressure on the total local government expenditure but individual authorities? The distribution of responsibilities and the full effect of all the reforms we are describing will clearly have a different effect from place to place. In fairness to DCLG officials and Ministers, they are generally very good at balancing these things quite closely, but this is a big reform all going on at once.
Q Therefore, is it not all the more important that the future formula is based on those cost drivers? There will be some new cost drivers as a result of the additional responsibilities at that point.
Professor Tony Travers:
It is true. Public health is one of the grants that is up there as a possible new responsibility. There is currently a ring-fenced grant but it could in future be funded purely by local government. Clearly, the needs formula would need to reflect that if that were distributed differently from if it were all transport, further education and skills, which might be thought to be more linked, by the way, to building the local economy. That is a separate issue. So there is no question but that the responsibilities that are handed to local government as part of the reform will affect the need for the needs distribution arrangements; they will have to reflect them.
Q In the debate about how to even out changes in the tax base, let us take the example of Heathrow. The third runway is coming. One would have thought that that would inevitably make the area around Heathrow attractive to a number of businesses. Councils such as Maidenhead, perhaps, and Hillingdon will be hoping that their treasuries will benefit from substantial business rate income down the line. How do you think that sort of major structural change at local level should be dealt with under the system?
Professor Tony Travers:
I will offer a personal view. I was always surprised that the potential impact of the decision about where the additional runway in the south-east was to be located did not take into account, as far as I could see, the knock-on consequences for the local authorities in the area, given the business rate retention scheme that we are discussing. Any additional runway capacity, be it in the south-east, Manchester, the west Midlands or wherever, must have significant knock-on impacts. You are right.
In principle, when properties are revalued that uplift will be captured. Then the issue, which has always been an element of challenge to even the 50% business rate retention, is whether councils keep only the uplift on new business, or the uplift for the existing properties paying higher rates. As the Bill goes through Parliament, how much of the uplift as a result of a major national change of this kind is retained locally, and how much goes back to the Exchequer through its tax mechanisms, is a very interesting question.
Q My businesses in Taunton, particularly since I have been an MP, have had a constant gripe that they pay business rates and so little is kept locally. I am told that 7.5% is what we get. Do you foresee that this new Bill will enable a much closer relationship to be forged between business and the local authorities, now that there is the concept of keeping 100% of the business rates? It has been quite antagonistic, has it not, Mr Lowman, particularly from your experience?
Honestly, that is not a gripe we get back. The level of business rates, the perceived fairness of business rates in comparison with neighbouring businesses, larger businesses or internet businesses—absolutely. What then happens to that income is not something we hear back about a great deal. I think that the perception of increased business rates and worsening service in areas that matter to businesses—whether that is waste, licensing or, in some cases, things such as policing—gets drawn into that. Whatever the realities of what is funded by what, the perception is, “I am funding the area I am operating in” so if the services in an area appear to be worse, that may be part of that overall perception. But I have never had a business come to me and say, “I don’t mind paying more business rates, but I have a problem with where it goes”.
I would love to. Where that does come through is with things such as business improvement districts—but people see that as slightly separate from the business rates system. That would be about saying, “This area needs support, regeneration and growth; needs things doing locally”. Yes, the business rate system is then the mechanism through which businesses make a commitment to part-funding improvements. It works more that way round, from our point of view.
Professor Tony Travers:
Central Government set the tax rate and the rules for the base, so it has been central Government’s responsibility up to now. All the rules will continue to be set by central Government. But there is a separate issue, which I realise is beyond the Committee’s remit. There are significant problems with non-domestic rates, notwithstanding the fact that they are the business property tax that we have. They are not a great tax—they are effectively a tax on inputs. They are inflexible in relation to profits, and so on. But—I respect the Treasury’s, and DCLG’s, problem—they are the tax we have got. Moving away from that to something different, which might be a radical change, is a reform that successive Governments have not been willing to make. However, there are good arguments for looking at business rates from first principles—starting all over again. That is not where we are with this Bill, I fear.
Q This is a more rounded debate about the sustainability and funding of local public services. If we are going to move to a localised method of funding, we need to make sure that it is robust and can fund the demand for public services. I have a concern about council tax in that context. People already believe that they pay far too much council tax and that all they get in return is their bins emptied—and now that is happening less often than it used to, in many areas. People are questioning why they are paying council tax and a potential 25% increase is programmed over the life of the Parliament. Is there not a risk, with business rates, in the way there is with council tax, that although a lot of this conversation has been about cost, the real debate is about the value that people believe they get in return? I would welcome a sector view, not about the total cost, which is always a bugbear for council tax and business rate payers, but on the perceived value in return.
I think that our members see it as a cost of doing business, rather than a payment for something. They see their contribution as business rates, the jobs they create and the tax they collect on VAT and excise duty. Where local businesses have to use local government, they pay for that. If they go for a licence, they have to pay licensing fees. Rates do not cover all the services that businesses receive from the local authority; they are seen as just a tax and a base level that they have to contribute in order to trade.
On that point, do you think the Bill might change that relationship? Rather than it being a straight tax, will people see it almost as a contract of joint benefit and joint growthQ ?
Professor Tony Travers:
We should try to get nearer to a system in which it is all set in the long term—this comes back to James’s earlier point about resets—and councils depend for all their income on council tax and business rates. If there are not further shifts in responsibilities, not many resets, and local spending is flat in the medium term, I think you would re-establish a more comprehensible link between changes in local taxation or spending patterns, the quality of services and so on. You could get back to that. For many years under successive Governments, spending has gone up while council tax has gone up less, and spending has come down while council tax has gone up. There is no particular link over time between spending changes and tax changes, which I think we all agree are the bedrock of the comprehension of a properly operating public expenditure and taxation system. The nearer we can get back to that the better, but that requires stability over time.
Do you think there is resilience in the valuations and the multiplier to take into account the fact that the world is changing? I do not think we have yet taken into account even the fact that we heavily tax plant and machinery. A lot of manufacturing towns have now changed to warehousing and distribution towns, and their tax base has been completely destroyed by that calculation. We are now moving to automation, which could have an impact. Do you think there is resilience in this to protect post-industrial townsQ ?
Professor Tony Travers:
As I said earlier, the short answer is that business rates are not a great tax—you have just outlined some of the reasons why. To make a very obvious point, they tax property-related businesses more than those that are less property-related, and there are more non-property-related businesses today than there were 100 years ago. That is why I said earlier that there is a need—I realise that this is beyond the scope of this Committee and the Bill—in the medium term to look at the way in which business property taxes, local property business-related taxes, or whatever we are going to call them, work with a view to creating a better tax. The Institute for Fiscal Studies convened and oversaw the Mirrlees review a few years ago, and way back in the 1970s there was the Layfield committee; they both had their doubts about the way in which business rates operate. I share those concerns.
Q I have just a couple of questions. Mr Travers, you mentioned risk at some length, which DCLG certainly understands is a real challenge. We obviously want to get the system right to mitigate risk. Obviously, we have removed the levy, which has acted as an impediment in many areas to retaining the proceeds of growth. What is your view of the provisions in the Bill relating to lost payments, the changes around pooling and the interaction with the safety net? How do you see that working? The second question I want to ask very quickly is about multi-year settlements and the certainty for the sector that will come from having a longer-term view, rather than a very short-term view, which has generally been the case until very recently.
Professor Tony Travers:
I have one minute for the interaction of safety nets and the other instruments—I can try to answer it all together. The more these things can be operated to produce broad predictability and stability in the short, medium and long term, the easier it will be for the Government, and certainly for local authorities, even if some of them feel a bit cheated that they did not get the big win out of the big reform that some of them hoped they would.
The great thing about not having big winners, is that there will not be great losers. In any reform—in some ways you know this better than I do—the nearer you get to not too many winners and losers the easier it is to introduce. When it comes to matters like safety net resetting, the more one can seek to deliver broad stability in the short, medium and long term the better. I can talk more about that, perhaps, some other time.