Jim McMahon
Main Page: Jim McMahon (Labour (Co-op) - Oldham West and Royton)Local Government Finance Bill (Second sitting)
Jim McMahon Excerpts(7 years, 3 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text
Jim McMahon (Oldham West and Royton) (Lab)
Q There is a tension here between business and public service in respect of the role of business rates. Businesses do not like rates, because they have to pay them whether they make money or not. Governments tend to like rates, because rates are property-based and the Government can know where to knock on doors. I have two separate questions. The first is to business: is there an alternative to business rates that takes into account the new world of commerce and how businesses make money and are taxed? The second is to local authorities: would you welcome it if the types of powers that are offered to combined authorities and Mayors were given to all billing authorities?
Christian Spence: I will start on that complex question. You are right that there is a natural tension between the business community and local authorities with respect to paying business rates. One of the opportunities that the Bill may offer is to look at trying to repair some of the disconnect that there has historically been between the payer and the recipient and spender of the funds. As for how you repair that, the Bill goes some way towards starting to advance and better connect the opportunities for businesses to further contribute, through the business rate system, to schemes and economic development opportunities of strategic importance in their area—either through the business rate supplement or through the proposed mayoral infrastructure levy.
There are some challenges. From the business side, the one thing that we must see is a way to ensure that there are sufficient democratic checks. In the fiscal climate, across all local authorities, there is a fear from business that it could very easily be seen as an easy cash cow to fill funding gaps that are being determined not through the Bill but through wider Government fiscal policy.
There are undoubtedly opportunities for better engagement, for building those relationships and for allowing those two sides of the coin—the businesses and the local authorities—to start to understand each other a little more. But I think that there are two separate issues: the Bill itself, how it deals with the relationship with business and the financing of business rates in a world of devolution and retention; and, separately, the core funding of local authorities through the supplement.
Dominic Williams: In autumn 2015, I think it was, the Treasury asked for submissions on the future of business rates and turned its face against major reform. The reality is that it is highly unlikely that a Government would suddenly give up more than £25 billion a year of certain revenue, particularly given what happened to poll tax. So I think dramatic reform is unlikely, but we may see business rates gradually becoming a smaller proportion of Government taxation. The move from RPI to CPI, which the Bill paves the way for, is likely to be a helpful step on that road.
The Chair
I think Ms Miller wants to answer the second question.
Jo Miller: The second question from Mr McMahon was whether the proposals in the Bill should be extended beyond mayoral and combined authorities in London to all local authorities, and the answer is yes. It seems to me that the more we enshrine a two-tier system, where one lot of people can have more and another cannot, the more we put inequality in place and prevent economies from being productive and growing. That said, I am clear in my day job that it must be arm in arm with business. We have a fantastic chamber of commerce and we have prioritised services to business, precisely in order to grow the economy, grow the business rate, grow skills and re-enable people to participate in the economy, so that they cost the public sector less. But we should not be in any doubt that simply saying “This type of local authority can have these powers to enable growth and this type cannot” is as regressive as council tax, if I may say so.
Jim McMahon
Q Perhaps my question was too narrow. For instance, I might have expected some contributions to make a bid for the retention of other taxes and duties that are raised at a local level, such as stamp duty, fuel duties, air passenger duties, as a way of having a broader tax base from which to generate income for public services.
Jo Miller: Where local authorities, with businesses, can demonstrate that there is a win-win, they should have the power to do so. We are in the most centralised state in Europe. Let me give another example from my day job—forgive me if I talk in examples, but it is what works for me. We put together a road scheme that was initially heralded as costing the taxpayer £110 million, when we had to follow guidelines from the Department for Transport. In fact, we worked out that it could cost £56 million: £18 million came from Government, and the rest was raised through local taxation and through business. It unlocked 10,000 jobs, 10,000 houses and £1.7 billion of private sector investment, equating to 3% of GVA in the region. That is the type of thing that good local authorities can do, working hand in hand with business, so we should grab with both hands any opportunity to make that work on a greater level.
Kevin Hollinrake (Thirsk and Malton) (Con)
Q To touch on distribution, which has been referred to a couple of times, the key now is how this pot of extra money is distributed. There seem to be some real disparities in the system at the moment; unfairnesses, I would call them. I will give a few examples at random. Harrow, for example, gets £80 more per head in spending power than North Yorkshire, despite the fact that Harrow has a wealthier, younger population. There does not seem to be any correlation between the spending power of local authorities and the need in those local authority areas.
Jim McMahon
Q Just to reflect some of the debate, is there a conflict in that there are different measurements of success when we talk about growth? There is net jobs and the number of people in employment; equality, or the amount of income people can get in different types of jobs; and there is square footage—building big sheds to generate large business rates, so why not? Is it not far better to have a more rounded system of taxation and incentives so that local areas can determine for themselves what type of rounded economy they need, without being driven down one particular route depending on the flavour of the Government of the day? What I hear form businesses is that they need a long-term plan, strong local leadership and long-term certainty. It strikes me that business has not had that for quite a long time.
Christian Spence: I would certainly agree with your last point. We have not tested specifically with the national membership exactly how local government taxation works, the different tools they may or may not have at their disposal in future, or any one of those other individual points. To lift it to a higher level, I agree broadly with what you say. Business is looking for a long-term stability in the system so that it can plan for its own success as well as the success of the wider community on which it is so dependent. It wants a long-term, fruitful and strategic relationship with government in its area, locally and nationally, about how to support its own growth and how to deliver skills. You talk about generating revenue through large RV sheds on the outskirts of towns. That is right, but there is often a natural tension between local government strategic plans and the draft Green Paper on industrial strategy about whether they are generating the jobs the country would like to generate.
We have no specific answer on the detail, but business is pragmatic enough to say: “If you can deliver a solution which works in our area, both for an individual business and the wider community, we will be open to those discussions.”
Sean Nolan: The skills agenda seems to be a great bridge between what a local authority can do and business needs. That plays into an opportunity in how new responsibilities are played out. On Mr Thomas’s question, the examples you quoted—RSG and public health—are relatively neutral because they are existing grants that will be funded from the quantum. I guess the real game is the new responsibilities that will be passed over with which local authorities can influence skills for the better. The skills agenda is definitely a bridge into the business agenda.
Jo Miller: The answer to the question about whether there is a more rounded way to incentivise growth and deliveries is undoubtedly yes. It seems to me that growth is a number of issues: growing your business, starting to grow the jobs in it, and having more and better jobs. It is also about the ability of people to participate in the economy. That could be through jobs or through not costing the state money by, for example, being a carer. The challenge—I tend to think of it as profit and loss rather than as just one way—is to have a taxation system that encourages growth but that helps people to cost less money. Looking at a place enables us to do that.
The challenge for us with business rates and with what is now, ultimately, a regressive system in council tax—the council tax raised per person in Doncaster is £300, whereas in Richmond upon Thames it is £900—is that there is a better way to fund what local people expect from services than through a combination of business rates and a system that relies on 26-year-old property values, particularly in the context of businesses changing in a digital economy that will not always be property based.
Justin Tomlinson (North Swindon) (Con)
Q This is a question for Mr Spence. In the briefing that you provided to us, you said:
“We also believe that there should be a maximum amount a billing authority can raise its multiplier, alongside the maximum reduction limit per year.”
Could you expand on that, please?
Christian Spence: Certainly. This is about the provision in the Bill whereby local authorities will have the power, within limits set by regulation of the Secretary of State, to lower the multiplier in their area. Again, for all the reasons we have already discussed, there are potential incentives to local authorities and businesses in doing so. Broadly, there is a challenge regarding how much that power would be used within the current fiscal conditions that local authorities see. However, although we see in the Bill that the power to raise rates at the national multiplier level will remain set by the Department and the Government centrally—the national multiplier will rise by its new indexation from 2010—local authorities appear, as the legislation now stands, to be able to lower their multiplier in any one year and do so again the following year.
If a local authority were, for example, to lower its multiplier to tuppence below the national multiplier in year one, over three or five years the national multiplier might continue to rise and we would have a position in which that local authority’s multiplier could be 10p different from the national one. As we see the Bill now, there is no reason why that local authority could not reclaim all of that 10p difference overnight in one fiscal year. If there are limits, capped nationally, by which the rate that the national multiplier can rise from one fiscal year to the next, it would seem perfectly reasonable that local authorities should also be capped regarding how much, when recovering from a previous rate, they can raise theirs from one year to the next.
The Parliamentary Under-Secretary of State for Communities and Local Government (Mr Marcus Jones)
Q Mr Spence just made an interesting point regarding the way in which the multiplier may be increased at the point when a particular authority decides to change that policy of having a reduced multiplier. By definition, I take it you are, therefore, against local authorities having the ability to increase the multiplier, as has been suggested by some people.
Christian Spence: There is no real consensus across the entire chamber network about the rate and about how those work in individual local authorities. You can see examples in situations such as business improvement districts. There is potentially a very good example, if we can agree and move the Bill to a position where there is a ballot on mayoral infrastructure levies. Business might be happy to see increases in levy provided that the reasons given are clear, that it is a strategic scheme, that it is additional to that which has already been committed, and that businesses have been openly and genuinely engaged, consulted and balloted on whether that can take place.
The specific question for us is this: do we want a position where national Government are capping the national multiplier to CPI but local authorities retain an ability to raise their own multiplier by a rate greater if they have chosen to deviate from the national multiplier in earlier years?
Jim McMahon
Q Is there not a slight tension with that approach? Areas with historically low tax bases have to charge more council tax per property just to generate the same total. We could find ourselves in the same situation with a business rate base—local areas could be forced to increase it dramatically just to keep their heads above water. Although I am not always in favour of a national cap, I think there might be a call for it, so that the gap does not widen and so that there are proper top-ups and tariffs in place. Do you not accept that businesses can thrive only if local areas thrive? Businesses do not sit in isolation.
Christian Spence: I absolutely agree with that point. A fundamental principle is that business can never exist in its own cocoon—it is dependent and co-dependent within its wider community. The challenge for us is a very narrow point in the Bill. If a local authority chooses to lower its rate, that is its decision, and it must fund that gap on its own. I would hope we could develop a system in which a local authority is not subsidised for deciding to lower its multiplier by any redistribution. That would essentially pull at a natural tension and create perverse incentives. If a local authority does not need more money and has chosen to cut, the understanding should be that the onus is on the local authority. Yes, that may need to rise, and our fear is how we control that rise. The fear is that, in an extreme situation, we might see a 10p rise in one year.
Jim McMahon
Q But it is more likely that a local authority will be increasing or decreasing the business rate base as part of an economic assessment of growth. It is not going to do it in isolation simply in cash terms. You could see a situation, for example, where town centres have been massively hit by office relocations to out-of-town centres and out-of-town parks—we perhaps see the same with retail. If the powers were extended to a building authority to raise and to lower, you could easily see a council looking to reduce business rates in a town centre for office accommodation for retail, and creating a levy on out-of-town retail parks and office blocks as a way of making that a neutral exercise.
Christian Spence: Absolutely so, but for us it is about the profiling of those changes and ensuring that we protect against any very sudden and very large one-off rise, essentially to rectify a disparity that has grown over time.
David Mackintosh (Northampton South) (Con)
Q 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 mitigated?
James Lowman: 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.
Jim McMahon
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?
James Lowman: In respect of business rates?
Jim McMahon
General taxation, of which business rates are part.
James Lowman: 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.
Jim McMahon
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?
James Lowman: 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.
Jim McMahon
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.
Jim McMahon
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.
Kevin Hollinrake
Q Mr Lowman, how comfortable are your members with things like business rate supplements and infrastructure supplements?
James Lowman: 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 damning 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.
Rebecca Pow
Exactly. They blame central Government— so now they are going to.
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.
Jim McMahon
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.
James Lowman: 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.
Jim McMahon
Q 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 growth?
James Lowman: It would be interesting if it did. I think it would be a really good opportunity. I start from the position of quite a bit of scepticism about getting to that point, but I do not think it is a bad objective.
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.
Jim McMahon
Q 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 towns?
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.
The Chair
Minister, there are only a couple of minutes left. Do you want to ask a final question?