Non-Domestic Rating Bill Lords Second Reading: Government responds to questions on land value and online retail taxation

The Bill seeks to reform the business rates system in England by increasing the frequency of valuations from five years to three and introducing a new business rates relief for improvements to properties.

In a briefing, CIOT said there is “much to welcome” in the Bill, but asked whether a new consolidated Business Rates Act, simplifying and laying out all the legislation, would have been better than amending the existing Local Government Finance Act. The Institute added that while moving to three-yearly valuations was a good step, “even more frequent valuations should remain under evaluation”, while also raising concerns about data provision and penalties.

Opening the debate, Baroness Scott of Bybrook, the Parliamentary Under-Secretary of State for Levelling up, Housing and Communities, said that the Bill responded to concerns about the fairness of the tax and its impact on a competitive business environment. She told peers that the Bill will modernise the business rates system by bringing valuations in line with the property market, improving the data underpinning the system and removing obstacles to investment.

Recognising that there have been calls for greater ambition in this area, she continued: “Let me be clear: we are prepared to explore how we can go further in future. In particular, we wish to reduce the gap between the date against which rateable values are assessed and when they come into force, which has been set at two years for the 2026 revaluation. We will also carefully consider the case for an annual revaluations cycle in the longer term. However, we must take these steps sequentially. To deliver a revaluation, the VOA must carry out 2 million valuations in the time available—a major endeavour. Moving to more frequent revaluations means that other changes are necessary to enable the Valuation Office Agency to compile more accurate valuations at greater speed.”

Lord Shipley (Lib Dem), welcoming the Bill, acknowledged that business rating is not an easy issue. He noted that there has not been the ‘fundamental review’ of the system promised in the Conservative manifesto. Pointing out that that business rates are not paid on properties with a rateable value of less than £12,000, he wondered what assessment has been made of the case for increasing the threshold level.

“At a levied rate of more than 50 per cent of the assessed annual value of every business property, this remains a tax that is objectively excessive to the point that it imperils its own stability” stated the Earl of Lytton (Crossbench). He continued that business rates burden businesses disproportionally by reference to property value and discourage a certain amount of investment activity.

Discussing various clauses, he expressed concerns about clause 13 (a new reporting obligation) and said that it is unclear how the tax works for a sole trader operating as an incorporated business. The reporting process for this is through HMRC's portal, and the necessary information is already known to government departments.

He claimed that it is hard to believe that the government’s call to postpone the 2015 revaluation was done to provide businesses certainty. “It was all to do with maintaining tax yield”, Lytton disappointedly declared.

Lord Etherton, another Crossbench peer, suggested that business rates are too high. He said that there are good provisions in the Bill; however, there are also significant flaws and omissions including:

• Obligation to notify the Valuation Office Agency (VOA) of any changes affecting a property’s retail value – which he called a “bureaucratic exercise that will not result in any increase in the business rates receipts”
• Annual revaluation – he suggested that the bill should consider at least two yearly revaluations in the interim.

Baroness Thornhill (Lib Dem) pointed out that business rates are an excellent source of revenue for the Treasury as they are easy to collect and ‘difficult to avoid’. Furthermore, they contribute 5 per cent of the UK’s tax receipts. She raised the concern that under the current system, there are no incentives for councils to invest in business and economic growth.

While businesses on the whole have welcomed the Bill, they are still asking for ‘full’ business rate reform, Baroness Thornhill added. “If there is one part of the system that is hit hardest, it is retail, because it is a tax on existence, not profit.” She explained that shops are property-based, dependent on having a physical existence in the most profitable and expensive locations. Online shops are not penalised to the same extent and these sorts of discrepancies have not been addressed in the Bill.

“The reality for our high streets specifically is that high rates discourage casual lettings of vacant properties, and in general they disincentivise improvement or expansion, let alone innovation”, Thornhill concluded. She noted that the bill will not reduce the burden of tax on businesses and asked the minister to ensure that the relevant bodies (including local government and VOA) have been consulted regarding the changes in the Bill.

Lord Thurlow (Crossbench) called the Bill a ‘missed opportunity’ saying it fails to address some current injustices, such as valuation transparency issues, rogue surveyors and the low-cost internet sales model rendering traditional retailers uncompetitive. He said that the current business rate system is not fit for purpose, arguing  that “simply throwing taxpayers’ money at the SME sector” cannot fix this problem.

Liberal Democrat local government spokesperson Baroness Pinnock agreed that the fundamental inequalities in the current system have not been addressed in the Bill. She supported the grace period for improvements, especially those designed to decarbonise or promote net zero. She noted that the changes in the Bill will mean a potential reduction in overall income to councils. There is a reference to compensation, she said, but “[i]t does not explicitly state there will be full compensation”. She asked the minister to provide the assurance that any loss of income will result in full compensation.

Pinnock noted that clause 1 of the Bill makes changes to unoccupied hereditaments (inherited property). She asked if the minister could confirm that this will mean the continuation of the three months’ total relief from business rates for a property that is unoccupied. She asked the minister to explain how this will encourage owners of empty high street shops to relet or find a new use. She argued that this is opposite to the way the council tax levy is used to encourage residential properties back into use as homes.

Shadow minister Baroness Hayman of Ullock (Lab) emphasised the important role of small businesses in the economy and communities, saying that business rates for these businesses should be cut and paid for by increasing the digital services tax paid by online giants such as Amazon. She also inquired about the government’s progress in “implementing fair taxes on the major online businesses”.

Raising a concern brought to her attention by the British Beer and Pub Association, Hayman asked about the proposals for improvement relief. The proposed improvements made by landlords in a period between tenants, who are the ratepayers, or with any change in tenant during the relief period, will not be eligible for relief. She argued that in practice, this will mean that pubs that are not directly owned or managed by ratepayers become a much less attractive proposition for investment, as improvement relief can be guaranteed only on directly managed pubs. She asked if the minister could take this into the account and see if the Bill could be improved in this respect.

Hayman concluded her remarks by asking whether the exemptions for the charity sector will be affected by the Bill. Additionally she wondered whether the government will use this Bill “to tackle the fraudulent exemptions claimed when non-charity businesses let a charity occupy a small part of their premises, so that they can then claim that charity exemption”.[GC1] 

Responding to the debate, the minister, Baroness Scott, said the government was striving towards “the best possible business rates system: one that balances the needs of the taxpayer with the importance of sustainable services in local communities”. She acknowledged that business rates are high, but noted that if they go down, that would affect the money that councils receive.

In response to inflationary pressures, the government has taken measures to keep the tax rate steady for the past three years, resulting in a cost of approximately £3 billion annually from 2023-24, she continued. Considering the challenging fiscal situation, it would not be responsible to further reduce the rate, as even a 1p cut would incur a cost of approximately £600 million per year.

The minister told peers that the government is happy to consider a revaluation cycle of one to two years in future, however, it is important to approach these changes step by step to avoid ‘destabilising the tax’.

On increasing the threshold in the small business rate relief scheme, she said it already covers over a third of properties. “Further increases in the threshold for the SBRR would be a broad-based and indiscriminate way to provide support, and would therefore be a poorly targeted type of relief,” she argued.

Regarding the transparency and performance of the VOA, the minister said that the VOA will publish targets for its timeliness under the new system and measure performance against them. In addition, the VOA will implement its offer of improving transparency.

Responding to comments by Lord Shipley on the role of land values in the current tax system, Baroness Scott explained that the government considers that the arguments supporting a land value tax lack sufficient evidence. She added that implementing a land value tax would result in a higher tax burden for properties situated on extensive land areas like golf courses or farms, while densely developed land such as the Shard would face lower tax bills.

The minister told Baroness Hayman that improvement relief helps occupiers make improvements to their existing premises instead of subsidising general commercial property development. The government’s view is that a 12-month relief will allow time for benefits of the property investment to flow though into businesses.

Responding to the question about an online sales tax, the minister said it would be very complicated to design and implement such a tax. This would create an administrative burden for businesses as there are many challenges, including defining the boundaries between what is online and what is instore retail, click and collect issues and so on.

Read the full debate here