Committee’s concerns over business rates not shared by Tax Minister

10 July – Valuation Office Agency witnesses

The witnesses in this session were Melissa Tatton, Chief Executive Officer, Valuation Office Agency (VAO) and Alan Colston, Chief Valuer, VOA. Most of the questions were about the check, challenge and appeal process which came in on 1 April 2017.

Melissa Tatton defended the Check, Challenge and Appeal (CCA) process, saying it has been improved recently, is easy to use and works fine. She explained to Chair Nicky Morgan that people have to provide evidence supporting their check and their challenge, particularly at an earlier stage. That is different from the old system, where it was possible to put in a speculative appeal with little or no evidence. Asked to explain why there are still appeals outstanding from 2010, she stated it is a reflection of why the previous system was not working. VOA has had over a million appeals—many of them speculative—and 70 per cent of them resulted in no change. So 30 per cent of them overall result in change, but over 50 per cent of the change relates to a change in the property or location that happened after the date of the list. ‘So they are changes that happened subsequently rather than inaccuracies’, she said. Alan Colston reminded the Committee  that under the 2010 list you can make proposals and challenges for lots of reasons—it is not just about the valuation, and it is similar for the 2017 list—so it is not necessarily about valuation accuracy.

Tatton said VOA is clearing the majority of checks within three months and challenges within 12 months. She told Conservative Steve Baker that in 2018-19, the VOA achieved 79 per cent of checks within three months. The target is 90%. VOA recovered in quarter one, so that has gone up. For last year, it had quite low volumes—81% of challenges were resolved within the 12-month period. Explaining why it takes a year, Tatton blamed ‘legislative backstops’ in that you have to have an opportunity for the ratepayer to progress their case through the system. An appeal can be accelerated if a company says it is in financial hardship. Tatton went on to say there is publicly available evidence that enables you to compare your rates with others.

Colston explained the process of CCA. He said: “At check, we supply our information. They check it and supply additional details if it has changed. At challenge, we require three things. We require what rateable value they want, what evidence they hold to support the figure they have asked for and a supporting statement as to how the evidence links to the reduction.”

Wes Streeting asked about antecedent valuation dates and its implementation and why does the VOA need a two-year gap. Tatton said the gap set out in the legislation enables VOA to collect the evidence in advance. Streeting then asked how VOA can deliver more frequent valuations if they need so long to agree each listing. Tatton explained that the process for each revaluation is normally around three years.

A 2018 staff survey has only 28 per cent positive responses to the question: ‘Senior managers in the VOA actively role model the behaviours set out in the civil service leadership statement.’ But Tatton said there is no correlation with CCA.

The reality is you have taken away the direct lines for the surveyors, which they had before, said Conservative MP Kevin Hollinrake. Colston said quite a lot of our information is done online now through our digital portal.

Tatton explained to Simon Clarke that registering a business can sometimes happen in moments, but for some it can take up to 15 minutes.

The full session can be found here.

10 July – Ministerial and Treasury witnesses

The witnesses in this session were Jesse Norman, Financial Secretary to the Treasury, Rishi Sunak, Minister for Local Government, Ministry of Housing, Communities and Local Government and Mike Williams, Director Business and International Tax at the Treasury.

Committee Chair Nicky Morgan said the firm conclusion of the committee is that the Treasury has a big problem because business rates are regarded as ‘inconsistent, inaccurate, unfit for purpose’. Morgan said the pillars of good taxation are that it should be fair, support growth, encourage competition, provide certainty and be coherent. The business rate system fails on every single one of those, she said.  Many businesses are unable to work out their own valuations due to the inadequacies of the information on the system, she said.

Jesse Norman replied that the system of business rates is struggling for contingent reasons, which have struck it over the past few years, but is ‘not chronically broken’. The system collects 98 per cent of the tax that is due, he said, adding that it is hard to evade and easy to collect. Norman said the system is fair because the rates are based on rents, which are agreed in open market transactions between two sides, they are based on the same calculation and there is the capacity for appeal. He said the use of reliefs is a temporary measure, in part because the background to the 2017 valuation and a unique combination of relatively high inflation applied and there had been a relatively low increase in rents. If we had more frequent valuations, you would have a more responsive system, he speculated. Asked if the business rates system is responsive to changes in the local economy, Rishi Sunak said a move to three yearly valuations would achieve the right balance.

Clive Betts – a member of the Housing, Communities and Local Government Committee who joined the session – asked if it is fair that Amazon pays 0.8 per cent of its turnover on business rates, but most shops on the high street pay between two per cent and six per cent. Norman said the criticism is fair but went on to cite the planned UK Digital Services Tax as a ‘pioneering attempt’ to reach into the online marketplace and to fillet out some of the tax that is due. Norman agreed with Betts’ concern that while business rates may have been increasing by more than CPI and RPI, the fact is that the pressures on local government finance from care are going up faster than RPI and CPI.

Rishi Sunak told Conservative Charlie Elphicke about the heavily over-subscribed business rates retention pilots. There is about £2.5 billion of cash that local authorities are retaining in excess of the baseline funding level that they get through those programmes, he said. He went on to say the Government has doubled the threshold for small business rate relief and doubled the relief from 50 per cent to 100 per cent, which took 670,000-odd businesses out of paying business rates at all on the small business side.

Norman accepted Conservative Colin Clark’s view that the separation of business activity and value generation from property is becoming manifest, adding that the appeals system is designed to resolve matters of equity. Norman said it is reasonable to suggest that the VOA has very long response times because it is underfunded.

Sunak claimed there is ‘good joined-up thinking’ between his department and the Treasury when new reliefs are announced and changes to business rates suggested. Clark asked Sunak whether he has received evidence that business rates are contributing to the demise of the high street, to which he replied that the Government is giving local authorities the incentive to keep the growth they generate from business rates and economic activity on the ground.

About £2.6 billion is being kept in reserve by local government awaiting the outcome of business rates appeals, Morgan pointed out. Sunak replied that, in terms of the appeals that relate to the 2010 backlog or list, there are about 70,000 outstanding. The expectation is that all the ones that do not relate to litigation—that is, the ones that the VOA is responsible for— will be cleared by this September, he claimed.

Conservative Steve Baker pointed out that the Royal Institution of Chartered Surveyors says utilisation of Section 44A relief dropped from £54.5 million in 2007-08 to £14 million in 2018-19. Mike Williams said small business rates relief has gone up from 50 per cent to 100 per cent. You would need to look into the numbers to see whether some of the people who were claiming discretionary relief were getting mandatory relief in the later period, so that they would not have needed to claim discretionary relief. We need to ensure that all the pieces match up, Williams added.

Simon Clarke, Conservative, asked Williams if he would rebut the idea that it would be fairer or simpler, or make for easier rateable calculations, if you were simply to remove plant and machinery from the calculation. Williams replied: “It wouldn’t necessarily be easier. You would then be having to extract, if you like, from the thing that the market operates on, which is what you have to leave behind. You would be having to extract parts of that and work out what the rent would be on a net basis, which I think would add complexity.”

Kevin Hollinrake – another Housing, Communities and Local Government Committee member - said the check, challenge, appeal system has been described in previous sessions as ‘shambolic’ and ‘not fit for purpose’. Sunak claimed it is a harsh characterisation of it, but there clearly are teething issues. He said: “Some of the comparisons that people make, for example saying that the volume of appeals is very low compared to the old system, are probably unfair. The point is that the old system had too many no-fee appeals, 70 per cent of which ended up not resulting in any change.”

On a separate point, Williams said if you go back 30 years, the UK had relatively high annual business property taxes, and has continued to have relatively high ones. “I don’t think there has been any manipulation of the multiplier to add to that amount, to give extra to local government, for example,” he said. If you charge more on property tax, compared with say, France, you charge less on consumption and profits; it is broadly the same cake, he said.

It would be possible create a tax on online sales facilitated by Amazon and then have an enormous number of small businesses in this country saying, ‘Hold on a second, you are clobbering our business’, said Norman. But Hollinrake said you may be levelling the playing field. This led Norman to say you would not necessarily for Amazon, because Amazon is just facilitating the sales of third-party business goods.

The full session can be read here.

By Hamant Verma