Power to remove or reduce mandatory reliefs in cases of business rates avoidance

Local Government Finance Bill – in a Public Bill Committee at 3:45 pm on 21st February 2017.

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(1) Part 3 of the Local Government Finance Act 1988 (non-domestic rating) is amended as follows.

(2) In section 43 (occupied hereditaments liability) after subsection (8C) insert—

“(9) For any hereditament for any charging day to which this section applies, if the relevant billing authority has reasonable grounds to suspect that the occupier is taking inappropriate steps to reduce liability for business rates, the billing authority may treat that hereditament instead as if section 47 (discretionary relief) applied to it.”—

This would enable billing authorities to have powers to treat mandatory reliefs (which are specified in section 43 of the Local Government Finance Act) as discretionary reliefs, which are dealt with in section 47 of the same Act, if they had reasonable grounds to suspect that liability was being reduced through business rates avoidance.

Brought up, and read the First time.

Photo of Jim McMahon Jim McMahon Shadow Minister (Communities and Local Government) (Devolution)

I beg to move, That the clause be read a Second time.

Again, like the best ideas, this one has been nicked. It was taken from the LGA, which has been consulting its members on how the business rate scheme has been abused by some landlords who have sought to avoid their liability to pay business rates. During the consultation, which was held in 2014, the LGA asked local authorities what types of tricks and techniques were used by companies and landlords who wanted to avoid paying business rates.

Some of the methods shared included repeated short-term periods of occupation; declaring that vacant properties are intended for future use by a charity; and fictitious occupation of properties by charities: for instance, certain window displays are used to decorate the building, but the activity carried out inside is quite different. Landlords also use insolvency to rack up high bills. When the moment comes for them to face court, the company is wound down, and people avoid paying them. Avoidance also results from properties not being on the rating list at all; people not reporting where properties have been split and should be subject to separate assessment for rating liability; the use of shell companies or offshore companies; and the use of vacant properties whose ownership is not known, although the owner might be local and using a fictitious address or name to avoid liability.

The new clause would ensure that when such techniques are discovered, safeguards are in place to ensure that the same occupier is not entitled to apply for a discount in future. They have effectively abused their chance to play the system fairly; the intention was to support those businesses and landlords who need it. I hope that the Government see that it is about fairness and balance. It is also about showing that where fault is discovered and people are proven to have been abusing the system, the Government have no truck with them and will hold them to account and restrict them from taking advantage again in future. If the Minister supports the new clause, he will win friends in local government and show that the Government have listened to what they have said.

Photo of Marcus Jones Marcus Jones Parliamentary Under-Secretary (Department for Communities and Local Government) (Local Government)

I thank the hon. Gentleman for giving us the opportunity to discuss the important matter of business rate avoidance, which the new clause seeks to address. New clause 11 would provide billing authorities with power to treat any hereditament to which section 43 of the Local Government Finance Act 1988 applies as if it were subject to section 47 of that Act where they have reasonable grounds to suspect that the occupier took inappropriate steps to reduce their business rates liability.

The effect would be to provide the billing authority with the discretion to grant or withhold any mandatory relief that the hereditament would otherwise be eligible to receive under section 43. That would include charitable relief, rural rate and small business rate relief; however, it would not extend that discretion to empty property rates relief.

The Government have been clear that we wish to retain the benefits that the system of mandatory reliefs brings. Mandatory reliefs provide businesses and charities with certainty and a consistent framework within which to operate and grow. For example, the small business rate relief scheme provides uniform support for all small businesses, applied evenly across the country. I have some sympathy with the hon. Gentleman’s intention to ensure that mandatory reliefs and exemptions are used appropriately, and I recognise some of the questionable methods used to avoid paying business rates; I have seen them in my own area. However, I do not agree that giving local authorities a power to decide whether to grant mandatory reliefs where they have reasonable grounds to suspect that steps are being taken to avoid business rates is the right approach. Nor would it follow due legal process to enable a local authority to withhold reliefs without evidence, solely on having reasonable grounds of suspicion. It would create inconsistencies in the application of reliefs and risk penalising legitimate charities and businesses that are rightly entitled to these important reliefs and penalise those whom the policy is designed to support.

The vast majority of ratepayers pay business rates that are due. However, as we know, there are a small minority that seek to avoid paying by exploiting legislation, which was not what Parliament intended, solely to reduce their business rates liability. I certainly agree with the hon. Gentleman that that undermines the confidence in and fairness of the business rates system and has a direct financial impact on council services.

Local authorities already have powers to tackle and prosecute fraud to protect the public purse. For example, under the Local Government Finance Act 1988, if a ratepayer provides false information in their application for small business rate relief, that individual is liable to a summary conviction, a fine, or both. Additionally, the 1988 Act makes a similar provision. If an individual provides a false statement following a request for information from the valuation officer, they will face the same penalties. The Fraud Act 2006 provides local authorities with the legal powers to prosecute fraud and protect the public purse.

The Government have been clear in their commitment to tackle tax avoidance in all its forms. Although I disagree with the approach taken in the new clause, which would undermine the system of mandatory reliefs and exemptions, I would welcome the opportunity to work with the LGA, the Charity Commission and others to explore what legislative and non-legislative steps we might take to protect the system and tackle business rate avoidance. In that spirit, I hope the hon. Gentleman will have a degree of assurance and withdraw his amendment.

Photo of Jim McMahon Jim McMahon Shadow Minister (Communities and Local Government) (Devolution) 4:00 pm, 21st February 2017

We had intended to press the new clause to a vote. We are committed to it and are convinced we had the support of local government, but equally we appreciate the Minister’s constructive response. We will watch with interest how those conversations with the LGA develop. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

New Clause 12