Local Government, Housing and Planning Committee
The following changes to Committee membership occurred during the course of this inquiry:
Graeme Dey MSP was replaced by Marie McNair MSP
Meghan Gallacher MSP was replaced by Annie Wells MSP
The Non-Domestic Rates (Coronavirus) (Scotland) Bill (“the Bill”) was introduced in the Scottish Parliament by the Cabinet Secretary for Finance and the Economy on 14 December 2021.
The Bill and its accompanying documents can be accessed on the Parliament's website.
The Local Government, Housing and Planning Committee ("The Committee") was designated lead committee for consideration of the Bill on 22 December 2021. The Stage 1 deadline is 29 April 2022.
The Committee previously considered the Valuation and Rating (Coronavirus) (Scotland) Order 2021 (“the Order”) in Autumn 2021. The Order specified that in calculating the rateable value of any properties on the 2017 valuation roll after the instrument comes into force, no account can be taken of any matter arising on or after 1 April 2021 that is directly or indirectly attributable to coronavirus.
However, the Order could not be applied retrospectively. The primary purpose of the Bill therefore, is to extend this rule to cover both net annual value and rateable value and to cover the period back to 2 April 2020, the date on which the Scottish Government amended the definition of “material change of circumstances” (MCC) to exclude changes in economic circumstances.
The Committee issued a call for written views on the Bill in early January in response to which four submissions were received.
Non-domestic rates are a property tax based on the rateable value of a property. The non-domestic rates (or ‘business rates’) bill for a property is calculated by reference to the rateable value, although a number of different reliefs are available for certain types of property and for those with a lower rateable value.
There are over 250,000 non-domestic properties registered on the valuation roll. Non-Domestic Rates are an important source of revenue for local authorities. In 2022-23, they are estimated to raise £2.8 billion, although this includes the effect of a continued package of rates reliefs reflecting the ongoing impact of the coronavirus pandemic. In future years, they are estimated to generate in excess of £3 billion in revenue.
For most properties, rateable value is based on an estimate of the rental value of the property. Assessors take rental values from the same point in time, known as the 'tone date'. For current valuations this was 1 April 2015. The next tone date is 1 April 2022.
If an owner, tenant or occupier disagrees with the rateable value that has been entered on the valuation roll for their property, they can lodge an appeal to the Assessors.
An appeal can be lodged at any time in the revaluation cycle if the appellant considers there to have been an MCC or an error.
Between 1 January 2020 and 31 March 2021, over 40,000 properties had an appeal lodged in relation to the impact of COVID-19 or COVID-19 restrictions. These appeals would be on the grounds of an MCC.
The Order provided that in calculating the rateable value of properties in the 2017 valuation roll, no account could be taken of any matter arising on or after 1 April 2021 that is directly or indirectly attributable to coronavirus. The rule does not apply to changes to the physical state of a property. Whilst the Order covers the period from 1 April 2021 onwards, it could not make retrospective provision before that date.
During its scrutiny of the Order, the Committee took evidence from three panels of witnesses. The meeting papers and official reports can be found via the links below.
26 October 2021: Meeting papers and Official Report;
9 November 2021: Meeting papers and Official Report;
16 November 2021: Meeting papers and Official Report.
At its meeting on 16 November 2021 the Committee agreed to recommend to Parliament that the Order should be approved. The Committee’s report on the Order can be accessed via the link below:
The Order was subsequently approved by the Parliament and came into force on 1 December 2021.
Whilst the Committee was content to recommend approval of the Order, it highlighted the following issues in its report—
Consultation: The Committee encouraged the Scottish Government to take the opportunity afforded by the Bill to undertake further consultation with stakeholders on the issues raised by the proposed legislation.
Principles of Taxation, particularly “certainty” and “engagement”: The Committee did not want the Order to be seen as setting any kind of precedent and sought assurance from the Scottish Government that the principles of certainty and engagement would apply to the future setting of non-domestic rates policy.
Workload of Assessors: The Committee asked what was being done to ensure that there are sufficient resources in place to facilitate the revaluation.
Barnett Consequentials: The Committee asked to be kept updated on what the Scottish Government intended to do to ensure that any additional resources resulting from UK Government measures to support businesses are targeted at those most in need of the support and in particular small and mid-sized enterprises.
The policy rationale for the Bill is broadly the same as for the Order. The Bill is required in order to cover any period before 1 April 2021 and the Bill specifies that this will be applicable for the period from 2 April 2020, in recognition of the change to the definition of an MCC under the Non-Domestic Rates (Scotland) Act 2020, effective from that date. The Bill also applies to the calculation of the net annual value of properties, which provides the basis for the rateable value.
Given the level of scrutiny given to the Order, the Committee previously agreed that an extensive programme of evidence taking on the Bill was unlikely to be necessary. It issued a call for views on the Bill in early January, the purpose of which was to identify any issues that had not arisen during its scrutiny of the Order. Four responses were received.
As no new issues of significance were raised in the submissions, the Committee agreed to take evidence on the Bill from the Minister for Public Finance, Planning and Community Wealth but from no other witnesses.
The Finance and Public Administration Committee also issued a call for views on the financial aspects of the Bill as set out in its accompanying Financial Memorandum (FM) in response to which three responses were received. The Finance and Public Administration Committee agreed to forward the submissions to the lead committee to assist its scrutiny of the financial implications of the Bill and agreed that it would give no further scrutiny to the Bill's FM.
The Scottish Parliament Information Centre (SPICe) also published a blog providing an overview of the Bill and of previous scrutiny given to the Order.
The Committee took oral evidence on the Bill from the Minister for Public Finance, Planning and Community Wealth on 15 March 2022. The Official Report is available on the Committee's website.
The Minister explained that "the aim of the bill is to ensure fairness for all Scottish ratepayers while maintaining the integrity of the non-domestic rates system and the stability of Scottish public finances" and stated that it "provides ratepayers with clarity and consistency on the policy" around MCC appeals. Typically, the term MCC "has been used to reflect either physical changes to a property, such as an extension or demolition, or certain major changes in a specific area, such as the tram works in Edinburgh." The intention of the change in the definition of MCC that was introduced by the Non-Domestic Rates (Scotland) Act 2000 was "to reflect recent case law and the move to a three-year revaluation cycle by restricting the circumstances in which general economic factors can be regarded as being relevant to a change in valuation."1
Noting that more than 40,000 MCC appeals had been lodged since the start of the pandemic, the Scottish Government's view is that "economic changes to rateable values that have resulted from Covid-19 should be considered not under the MCC provisions but at revaluation, at which point the impact across all properties will be taken into account."1
The Minister further noted that this view was shared by administrations across the UK.
However, the Minister made clear that the Bill would not remove the right of appeal and it would be "for appellants to decide whether they want to pursue or withdraw their Covid appeals." Given that such appellants "might not feel that they are in a sufficiently informed position to take such a decision until Parliament has finished its scrutiny of the bill," he confirmed that the Scottish Government intended "shortly to introduce legislation to extend the disposal deadline by a further year beyond 31 December 2022."1
The Committee welcomes the Scottish Government’s intention to extend the disposal deadline from 31 December 2022 to 31 December 2023 and looks forward to considering the relevant legislation in due course.
The Minister explained that, following the Barclay Review of non-domestic rates, the Scottish Government had "strengthened revaluations to ensure that they more closely reflect market circumstances" by increasing the frequency of revaluations from five-yearly to three-yearly and reducing the time between tone date and revaluation. The next revaluation had also been delayed by one year to 2023 and the Scottish Government had brought forward its commitment to a one-year tone date "which will be 1 April 2022." Both measures had been "universally welcomed by the business community in Scotland."1
The Minister went on to state that whilst Covid-19 has had "a major impact on the economy," the Scottish Government had "responded swiftly and on an unprecedented scale to support businesses throughout the pandemic." He highlighted the introduction of a 100% retail, hospitality, leisure and aviation relief for 2020-21 and 2021-22 and the prevention of a "cliff-edge return to full liability on 31 March 2022" by continuing relief of 50% for the first quarter of 2022-23 for the retail, leisure and hospitality sectors capped at £27,500 per ratepayer.1
When asked by the Committee whether the primary driver behind the Bill had been to protect the public finances or to manage the volume of appeals relating to Covid-19, the Minister confirmed that, as with the preceding Order, the primary driver was to clarify what was meant by an MCC to provide certainty for ratepayers. He went on to explain that "of course, public finances are a consideration too" and pointed towards illustrative scenarios in the FM setting out potential impacts on the public finances. However, for the Minister, "The key point that I come back to is that, fundamentally, there is uncertainty about the outcome of appeals on the basis of a material change of circumstances, their duration and any potential impact on ratepayers or the public finances."1
The Minister noted that during scrutiny of the Order-
there was recognition of the general principle of the need to clarify and provide certainty around material changes in circumstances as being clearly delineated, local and specific, and recognition of the fact that broader considerations with regard to the general economy were best captured through revaluation."1
As a result, the Scottish Government had-
changed the revaluation process from a five-year to a three-year cycle and put in place a tone date that precedes revaluation by a single year to ensure that revaluation means that rateable values and net annual values are more reflective of the market at the time that they are introduced."1
The Minister went on to confirm that, given the unpredictable nature of appeals, there was no guarantee that any outcomes would be fair to ratepayers in targeting support at those businesses affected by Covid-19. Instead, he highlighted the Scottish Government's approach to supporting businesses through the pandemic by providing "in the region of £4.5 billion of support to businesses in Scotland" which had allowed "a much more bespoke, tailored and needs-based approach to business support." In addition to the unpredictable nature of MCC appeals, a further issue was the timescales involved in dealing with them and the Minister explained that the Scottish Government's focus had been on "getting support to businesses as quickly as possible."1
In its report on the Order, the Committee noted that a number of stakeholders had raised concerns about a lack of consultation prior to the introduction of that secondary legislation and encouraged the Scottish Government to take the opportunity afforded by the Bill to undertake further consultation. Similar concerns were reiterated by some stakeholders in respect of the Bill itself. For example, the Scottish Chambers of Commerce highlighted the fact that a Business Regulatory Impact Assessment (BRIA) had not accompanied the Bill. i
The Policy Memorandum accompanying the Bill states that Scottish Government Ministers have-
concluded an extensive consultation and engagement exercise with all the major business representative bodies as well as a large number of businesses from a diverse range of sectors and regions across Scotland. Although these meetings were not specifically intended to discuss COVID-19 appeals, they nevertheless presented a comprehensive and constructive opportunity to discuss the Scottish Government’s approach to supporting businesses during the COVID-19 pandemic and the priorities in terms of the next stages of re-opening and recovery."1
When invited to respond to the concerns of some stakeholders, the Minister pointed out that the Scottish Government had indicated its intention to act on this matter in late June 2021 and that "extensive consultation" had been undertaken by ministers who had "engaged thoroughly with all the major business representative organisations across Scotland." The Minister had then "conveyed to the committee that the issue that you have highlighted was not raised as a priority at that point."2
The Minister noted the Committee's extensive evidence taking on the Order and stated that "Throughout that process, we have been clear about what we are doing. Indeed, we even announced in the programme for government that we would introduce primary legislation in year 1 of this session, a commitment that I reiterated to this committee in November." He reiterated that throughout his extensive engagement with the business community, in his experience, the issue "was not raised to any meaningful extent."2
The Minister was therefore
confident that there has been sufficient opportunity for engagement and consultation in the extensive process that I have outlined. The process has allowed issues to be aired and considered, and business has had the opportunity to feed into it."2
When invited to respond to specific concerns about the lack of a BRIA, the Minister explained that " What we are doing, ultimately, is clarifying an existing provision in the 2020 Act." He further noted that "there was also an opportunity during the passage of the 2020 Act to consider its policy intentions."2
The Committee welcomes the engagement that has taken place between the Scottish Government and businesses but notes the absence of a Business Regulatory Impact Assessment (BRIA) to accompany the Bill which departs from the Scottish Government’s guidance. We would welcome assurances from the Scottish Government that this does not set a precedent for future legislation.
The Committee also invited the Minister to respond to concerns expressed by some stakeholders such as the Scottish Chambers of Commerce and the Royal Institution of Chartered Surveyors about the retrospective nature of the legislation, something that appeared contrary to the Scottish Government's approach to taxation based on Adam Smith's four principles of taxation (which include "certainty") in addition to two new principles of "effectiveness" and "engagement".
In response, the Minister stated that "the policy intent was clear when Parliament passed the 2020 Act" and would not remove any appeal rights. In his view, the Bill simply sought to provide clarity and it would still be for individual appellants to decide whether they wished to proceed with their appeal or to withdraw it.
When invited to confirm whether retrospective changes to taxation would be considered again in the future or whether alternative approaches would be considered, the Minister stated that "any provisions that have retrospective effect must be given careful consideration" and reiterated that the Scottish Government was informed by its tax framework and underpinned by the Adam Smith principles. However, the Minister did not want to speculate on "any unknown unknowns and future hypotheticals."1
The Committee pressed the Minister on this point and sought assurances that the principles of certainty and stakeholder engagement would underpin the setting of non-domestic rates policy in the future, in response to which the Minister was happy to provide this reassurance. He went on to confirm that the Scottish Government had responded to stakeholders' "key ask" of avoiding a "cliff edge" on 31 March. This, along with the certainty provided by the Bill and the engagement previously undertaken by the Scottish Government demonstrated that it was "absolutely committed to being consistent with the principles that are outlined in the tax framework."1
The Committee reiterates its position on the Order that it would not want to see this policy decision as setting any kind of precedent in terms of retrospective changes to tax policy and welcomes the Minister’s assurances that the principles of certainty and engagement would underpin future NDR policy. However, the Committee recognises that the challenging realities of dealing with Covid-19 have meant that the Scottish Government had little option other than to act, both to mitigate the impact of large volumes of appeals on assessors and to protect the public finances more generally.
The Committee welcomes the Scottish Government’s decision to respond to stakeholders’ “key ask” in avoiding a “cliff edge” on 31 March and intends to continue to monitor this situation after the three-month period in which relief of 50% remains available for the retail, leisure and hospitality sectors has concluded. The Committee notes that this relief only benefits certain sectors of the economy and invites the Scottish Government to confirm whether any reliefs will remain in place after the first quarter of the 2022-23 financial year for these and other sectors.
Turning to the issue of workload pressures on assessors, the Committee highlighted evidence from the Scottish Assessor’s Association, about difficulties in recruiting staff to deal with revaluations and asked whether the Minister felt that assessors were adequately resourced to deal with this. In response, he explained that this issue had helped inform his decision to extend the disposal deadline for revaluations which would give assessors more time to deal with any appellants deciding to proceed with their appeals in the event of the Bill passing.
The Minister explained that the proposed subordinate legislation, if agreed by Parliament, should also have a "knock-on effect of helping to support assessors and free up resource." However, he did recognise that there would be a tone date "in two weeks' time" (on 1 April 2022) and that a revaluation process was currently underway. He accepted the point in respect of assessor's resource and capacity "which is why I took the opportunity to inform the committee of the legislation that will be introduced." Part of the reasoning behind this approach was to support assessor's capacity management.1
In respect of the one year extension, the Committee asked whether the appeals would be "smoothed out" over a longer period, giving assessors more time to deal with them or whether the backlog would simply be moved back by a year, meaning the same pressures could be expected to arise further down the line. In response, the Minister highlighted the independence of assessors and valuation appeal committees and stated that "ultimately, how they choose to manage their workload and proceed is a matter for independent assessors."1
However, the Minister pointed out that should the deadline not be extended, statutory deadlines for referrals to the Lands Tribunal for Scotland meant that any cases would need to be referred to it by the end of June which would create "more immediate and proximate pressure." Extension of the deadline would increase capacity and space for assessors but it would not be appropriate for him to comment on how those bodies carry out their functions independently.1
When asked whether he had any concerns about workload pressures relating to appeals predating 2 April 2020 as highlighted in written evidence from the Scottish Assessors' Association, the Minister confirmed that whilst he recognised that there were concerns, "the key point of setting the date to 2 April 2020 was to be consistent with what was in the 2020 Act."1
As noted above, the Committee welcomes the Scottish Government’s intention to extend the disposal deadline from 31 December 2022 to 31 December 2023 and looks forward to considering the necessary legislation in due course.
The Committee recognises that it is not for the Scottish Government to direct assessors on how they manage their workloads. However, the Committee remains concerned about the potential volumes of work assessors may face over the coming years and invites the Scottish Government to provide an update on the numbers of appeals withdrawn should the Bill be passed by the Parliament.
The Committee would also welcome six-monthly updates from the Scottish Government on the volumes of MCC appeals assessors have to dispose of.
As noted above the Scottish Government has provided "in the region of £4.5 billion in support to businesses" during the pandemic and the Committee sought to explore how effectively this support had been targeted and what information the Scottish Government held about businesses which had not met the criteria for such support."
In response, the Minister acknowledged "that it has not been possible to help every single business" as the Scottish Government was "restricted, to an extent, by the mechanisms for getting money out of the door that are at our disposal."1
The Minister went on to explain that-
One of the ways that we are seeking to solve that is through the discretionary funding that we have provided to local government, and I have already referred to the latest tranche of £80 million. That reflects the recognition that councils have local knowledge that they can bring to bear in supporting businesses."1
The Minister also highlighted other support mechanisms such as the Scotland Loves Local Fund, sector-specific grants, and discretionary funding for local authorities, but returned to what was for him the "key point" that £4.5 billion had been provided of which £1.6 billion "responded to the key ask of business, which was to avoid the cliff edge on 31 March.1"
When asked what monitoring of such funding had taken place and how the Scottish Government could assess whether the support had made its way to those businesses most in need, the Minister replied that he did not have the detail to hand but that the Scottish Government had "published our most up-to-date statistics on the delivery of resource on the Scottish Government website, and local government provides the Scottish Government with returns on its spending for statistical analysis and monitoring."1
In respect of discretionary funding for local authorities, the Minister noted that the latest tranche of £80 million was "subject to principles agreements [with COSLA] about what we are trying to achieve" He explained that-
Whether it be through the publication of overall business support, monitoring the returns from local government, or the principles agreements that we have with COSLA for allocating funding, there is a range of ways in which we monitor the money...and make sure that we can evidence that it gets to those who need it."1
The Committee then invited the Minister to clarify whether the Scottish Government had received expected Barnett consequentials of £145 million arising from the UK Government's £1.5 billion business support fund announced in March 2021. In response, the Minister explained that whilst this funding had been contingent on the passing of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 which has since been passed, the Scottish Government had "undertaken not to wait but to provide support in advance, so we provided the £375 million of support in relation to omicron."1
The Minister further explained that the £4.5 billion in funding provided by the Scottish Government was-
over £400 million more than we have received in consequentials. Therefore, even including the money to which you referred, in supporting businesses, we have gone above and beyond what was allocated to us via UK consequentials."1
He continued-
We have not hung about. We have been working to get the money to businesses as and where it is needed through a range of methods, whether by grants and support for specific sectors, such as wholesale or taxi drivers, or through discretionary funding for local authorities that they can use to support businesses in their areas in the way that they think is most appropriate."1
When invited to confirm, for the record, whether the consequentials had been received from the UK Government, the Minister explained that the UK Government had initially given the Scottish Government "an indication of money that was to come." Whilst there had been occasions on which "the money was less than indicated and new commitments had to be met from it that we had not been led to believe would have to be met from it, such as the cost of living package," the Minister was clear that the funding "has now been transferred and incorporated into our existing spending plans."1
The Committee welcomes the support that has been made available to businesses throughout the pandemic and recognises that the Scottish Government has acted rapidly in very challenging circumstances to mitigate the impact of the pandemic on businesses to a significant degree.
However, the Committee would welcome further information from the Scottish Government on its monitoring of this funding and whether it had been provided to those businesses most in need (whilst recognising that other committees including the Finance and Public Administration Committee, the Public Audit Committee, and the Economy and Fair Work Committee also have an interest in these matters and will be conducting their own scrutiny in this area).
The Bill does not provide for any delegated powers so a Delegated Powers Memorandum was not published and the Delegated Powers and Law Reform Committee gave no scrutiny to the Bill.
As noted above, the Finance and Public Administration Committee also issued a call for views on to the financial aspects of the Bill as set out in its accompanying Financial Memorandum (FM) in response to which three submissions were received. The Finance and Public Administration Committee agreed to forward the submissions to the lead committee to assist its scrutiny of the financial implications of the Bill and agreed that it would give no further scrutiny to the Bill's FM.
As outlined in the FM, allowing MCC appeals on the ground of coronavirus could have a significant negative impact on Non-Domestic Rates income. The exact impact is difficult to determine as it would depend on the success of COVID-19 appeals for which there is no precedent.
The FM notes that the combined rates bill of all the properties for which appeals have been lodged is an estimated £1,117 million in 2020-21. On this basis, a 50% reduction in rateable values would reduce Non-Domestic Rates income by £558 million, while even a 5% reduction would reduce revenues by £56 million. These are purely illustrative figures as there is no way to determine what the outcome of the appeals might actually be.
As the Scottish Government provides a guaranteed amount to local authorities comprising the general revenue grant plus Non-Domestic Rates income, any reduction in Non-Domestic Rates income, including through successful appeals would require the Scottish Government to provide additional funding to local authorities via an increased general revenue grant to compensate for the reduced Non-Domestic Rates income.
The Committee recognises that, if passed, the Bill would protect the Scottish Government from the risk that successful appeals would reduce Non-Domestic Rates income and require the Scottish Government to provide additional funds to compensate local authorities for this loss of income.
The Policy Memorandum provides examples of alternative approaches considered by the Scottish Government along with the reasons why they had been discounted. The Committee found these to be helpful in its consideration of the reasoning underpinning the Scottish Government's approach.
This is a complex issue. However, the Committee is satisfied that the Policy Memorandum accurately describes the policy objectives of the Bill.
As noted above, the Committee recognises that the challenging realities of dealing with Covid-19 have meant that the Scottish Government had little option other than to act, both to mitigate the impact of large volumes of appeals on assessors and to protect the public finances more generally.
The Committee further recognises the need for the Scottish Government to act quickly on this issue. The Committee also acknowledges that the development of the policy underpinning the Bill took place under less than ideal circumstances but reiterates its position that it would not want this Bill to be seen as setting any precedent in terms of the application of the principles in the Scottish Government Framework for Tax, particularly "certainty" and "engagement".
Notwithstanding the concerns set out elsewhere in this report, the Committee supports the general principles of the Bill.