Local Government and Communities Committee

Meeting date: Wednesday, February 22, 2017

Official Report 668KB pdf

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Subordinate Legislation

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Non-Domestic Rate (Scotland) Order 2017 (SSI 2017/8)

Under agenda item 2, the committee will take evidence from the Cabinet Secretary for Finance and the Constitution on the Non-Domestic Rate (Scotland) Order 2017. Andy Wightman has lodged a motion to annul this negative instrument, which will be formally considered at agenda item 3.

I welcome Derek Mackay, the Cabinet Secretary for Finance and the Constitution—good morning, Mr Mackay. I also welcome from the Scottish Government’s local government finance, local taxation policy and business rates unit, Graham Owenson, team leader, and Douglas McLaren, unit head—good morning and thank you both for coming along.

I understand that the cabinet secretary has some opening remarks to make.

Thank you for the opportunity to discuss with the committee Mr Wightman’s motion to annul the Non-Domestic Rate (Scotland) Order 2017. This is a very simple instrument, which is required annually to set the non-domestic rate, or poundage, for the coming financial year. The instrument will set the poundage at 46.6p for 2017-18, which is a reduction of 3.7 per cent compared with the rate of 48.4p that applied in 2016-17.

Although the instrument is simple, the implications of it not coming into force would have a profound impact on our budget, which is due to complete its final parliamentary stage in the stage 3 Budget (Scotland) Bill debate tomorrow; in particular, if the order were not to be approved, that would not support the resource to be provided to local government. We should all be absolutely clear that a decision to annul the instrument would leave a hole of more than £2.6 billion in our public spending and would specifically affect the funding that goes to local government.

I wish to maintain a competitive rates regime, and I have engaged directly with business and retail groups and responded to their concerns, which is why the draft budget recognises the business rates revaluation and proposes a competitive package of measures to reduce rates across Scotland by £155 million. That will give small and medium-sized enterprises the security and confidence to grow in tough economic times.

Next year, across Scotland, more than half of premises will pay no rates and 70 per cent will pay either no rates or less rates than they do now; the total package of reliefs that we offer will increase to more than £600 million. Additionally, this year we have increased the threshold for the large business supplement, which means that 8,000 fewer premises will pay it. As members are aware, we have also increased the small business bonus threshold to ensure that 100,000 properties will no longer pay business rates.

As I announced to Parliament yesterday, in light of the revaluation of non-domestic premises, we will ensure that no restaurant, pub, hotel or cafe in Scotland will have its bill increased by more than 12.5 per cent on 1 April. Additional support is injected into the north-east economy to recognise the impact of the oil and gas downturn. We are also supporting our renewables sector with a further package. The estimated cost of the additional support package that was announced yesterday is £44.6 million. That takes the total package of support to businesses in 2017-18 through rates relief to more than £660 million.

Mr Wightman is looking for further debate on non-domestic rates. I suggest that the strategic time to do that would be following the external review led by Ken Barclay. That review is due to conclude this summer.

In light of all those comments and my undertaking to engage fully in further discussions on the wider scrutiny of non-domestic rates, I hope that Mr Wightman will withdraw his motion.

The policy note on the order says, under “Background”:

“the 2017-18 business rate multiplier for England”

was set

“at 46.6 pence. This instrument will result in the poundage rate”

in Scotland

“being 46.6 pence.”

In other words, the only explanation that we have for the poundage rate is that it is the same as the rate in England. I am well aware that, in the previous session of the Parliament, the Scottish National Party had a manifesto commitment to maintain parity with the English rate for the duration of the session but it has made no such commitment for this session.

Yesterday, in the Parliament, you said that, back in December, you had

“announced a range of actions that the Government will take from 1 April”.

You also said:

“to reduce the impact of bills overall, I confirmed plans to reduce the poundage”—[Official Report, 21 February 2017; c 18.]

It seems explicit that you chose the rate

“to reduce the impact of bills”

but, from the policy note, it appears that you chose it to bring the rate into line with that in England. Will you explain something about the background to that decision and the criteria that you use to decide what the poundage rate should be in any financial year?

In essence, it matches the poundage in England. It is also correct to say that the Government had a manifesto commitment to do that in the past. It did not feature in the 2016 manifesto on which we were elected, but we still believe that matching the poundage in England puts us in a strong competitive position.

I also did not insist on a revenue-neutral revaluation. The range of actions that I have been able to take will mean that bills for 70 per cent of companies will be the same or lower. I also refer you to all the other key points that I outlined to the committee and in the chamber yesterday.

Reducing the poundage results in a reduction in the tax through non-domestic rates but the general poundage is matched to that in England. When determining that, any finance secretary would take into account the overall budget position, the support for local government and the right balance of measures to support business, which include setting the poundage and the other reliefs that the Government has decided to provide.

In other words, the desire

“to reduce the impact of bills overall”

and the desire to maintain parity with England bring you to the same number by coincidence.

Both have been achieved.

I understand that. You said in answer to my previous question that you did not insist on a revenue-neutral revaluation.

That is right.

Will you amplify what you mean by that? What were your other choices?

The Government considers the range of reliefs that it has and what support it wants to give to businesses. That comes at a cost. The rateable values in England will be different because they have gone up more than in Scotland. The decisions that we have taken on the poundage, the small business bonus and the large business supplement represent £155 million of reliefs or change to the poundage.

We have determined what is right for our budget—as set out in the draft budget and beyond—matching the poundage but being more generous with reliefs. We have taken decisions in the context of the wider budget, the business environment and what has happened south of the border. In principle, we are matching the poundage in England, but we have taken decisions that have amounted to Government using our resources to ensure that there is a competitive environment for Scottish businesses. That is why we have arrived at our decisions.

When you published the draft budget back in December and first indicated that the new rate would be 46.6p, were you fully sighted on the possible new tax base that would be the result of the revaluation?

We would have had some preliminary evidence at that point, but by no means all the detail. Evidence has emerged over the past few months and we now have more information about what revaluation means. Some of that will continue to change as businesses take appeals to panels, if they have reason to appeal. Those figures are still fluid but, as time goes on, we have more certainty about estimates and forecasts, and about the decisions that we can take. It was important to give certainty when I outlined the draft budget and the local government settlement on 15 December. That was an early action knowing some of the impacts from revaluation, but more has emerged over the past number of weeks.

When you set the rate, what consideration is given to regional variations in land and property values around Scotland? For example, values in one part of the country might be rising very fast, but values in another part might be dropping very fast, yet you have only one rate to set.

There is a wider debate to be had about whether we should have a nationally set rate, or locally set rates. I understand that, before the Scottish Parliament was able to set the poundage in Scotland through the recommendation of Government, the secretary of state used to set it, so the process that is going through Parliament is far more democratic. When I have arrived at the decisions, I will look at impact, forecasts and estimates. I have described how the revaluation and the decisions that the Government is able to take on poundage and the reliefs that are being put into place will make a difference for people.

It is true that there is a difference from area to area in how the economy has performed, not least in the north-east, which is why I have taken specific measures on the reliefs and the support there. That is also why, when I was taking forward the Community Empowerment (Scotland) Bill as Minister for Local Government and Planning, we gave empowerment and enablement to local authorities to create local rates relief schemes that were right for them. It gave them a sense of empowerment to design systems that can adapt to local circumstances.

The national poundage rate is set by Government and by Parliament and there is room for flexibility around that with reliefs at a local level. It is a nationally set rate in which I take into account the national budget position and the business environment that we are trying to create, and the reliefs can be designed as appropriate.

In all that, was your starting point matching whatever the poundage in England was?

The starting point is to look at all the information and evidence that we have in terms of the budget and the principles that we want to pursue. In general, having a good, competitive regime for business rates is absolutely worth pursuing. Although it is not a 2016 manifesto commitment, I would like to maintain and match the poundage in England. However, the Government has done a range of things to make Scotland more competitive, particularly for small businesses.

To answer Mr Simpson’s question fairly, I support matching the poundage in general but I have to look at the total budget position, the income forecasts and what that means for local government, and take that all in the round. That is important, but it is one of many factors that any finance secretary would have to take into account when determining the rate.

I get all that. The question is about the poundage—you seem to be saying that you are keen to match the English poundage in order to make Scottish businesses competitive. Is that correct?

10:15  

Yes. I am keen to do that, but many other factors come into play in determining the budget. In principle, that is something that I have pursued.

Have you done any work on the effect that it would have on Scottish businesses if you were not to reduce the poundage?

It is self-evident that, if I had not reduced the poundage, businesses would be paying more. The decision that I have taken comes at a cost of £108 million, in terms of the revaluation, to reduce the poundage.

Have we got a figure on what that would mean for Scottish businesses?

The reduction is 3.7 per cent.

What would the cost be to Scottish businesses if we did not reduce the poundage?

£108 million.

£108 million.

That is the figure that I have reduced the poundage by—£108 million that, as a consequence, businesses will not need to pay. That is every business that pays business rates in the country. Their poundage will be reduced as a consequence of this order.

Right; thank you. Clearly, if we were to agree with Mr Wightman, and not with you, that would have a major impact on Scottish businesses.

First, if the order is not agreed to, the biggest loser would be public services because I would not be in a position to raise that tax to invest in public services. If we then had an argument over the rate being right or wrong, that is almost a separate debate.

The order is a technical instrument to raise the revenue to invest in our public services; the rate at which I have set it is reduced.

Okay. I think that that is very clear.

I agree with your earlier point that, if we were to go down Mr Wightman’s route, we ought to wait for the Barclay review if we want to look at how to reform things. Do you agree that that would be the way to proceed?

I have said that I am open-minded on further debate and discussion. The Barclay review will be very helpful on the subject of business rates. I am happy to have further cross-party engagement and to continue to engage with business—as I have been doing—to study that further.

Thank you.

Cabinet secretary, I am sure that you are aware that this committee will also take evidence on non-domestic rates and will ask Ken Barclay, or someone from his team, to give the committee information ahead of publishing the review. We will do a piece of work on that. There is a feeling that non-domestic rates have perhaps never had so much scrutiny in the Scottish Parliament. I think that that is a good thing.

Following the publication of the Barclay review, will you come to the committee in short order and give evidence? We have to consider that review, and we would be quite keen to get you back to get your initial thoughts on it.

Of course I am happy to engage with the committee in further discussion and further evidence. In any event, I do not think that it is in ministers’ gift to refuse to attend a committee, but I would happily and proactively come to do that. It is not exactly the same proactivity that the committee enjoys from United Kingdom ministers; I would be happy to engage with the committee.

I would not dream of making that political point, cabinet secretary. We would always politely ask cabinet secretaries to come to the committee, before we went down the road of insisting. I appreciate that.

I made some notes during your opening statement. Can you repeat, for the record, the specific financial cost to public services—the revenue that would be forgone—if the motion were to be annulled today? That weighs heavily on every member at this meeting.

It is £2.6 billion.

It is just over £2.6 billion.

By and large, that is money that will go into the pockets of local authorities across Scotland.

Yes, entirely. The non-domestic rates are kept within the local authority area. It is the same as council tax; the difference with non-domestic rates is the multi-year budgeting, but it all goes to local government.

I suspect that, if the motion to annul is moved, that figure of £2.6 billion, which would be forgone by local authorities, will be repeated by several members as a very negative and dangerous thing. I have no further questions on that.

I want to ask about the process, in line with what the convener has just been asking about.

However, I will ask first about the cap, which you mentioned in your opening statement and in the announcement that you made yesterday. There is a rates cap for certain businesses such as hotels and so on, as well as a further advantage for the north-east of Scotland to offset the problems with the oil and gas industry. Could you tell me a bit more about how that will impact on businesses?

The national action that I have taken in the draft budget includes measures on the small business bonus and the large business supplement, and lowering the poundage. Those were the early actions that I was able to take. Then we come on to understanding the impacts of the independent revaluation. Of course, companies can still appeal if they think that they have information with which to challenge the assessor’s assessment. There is still an appeals process.

The extra action that I am taking is around specific sensitivity in the hospitality sector. There are two reasons for that: first, the highest rates increases seemed to be in the hospitality sector; and, secondly, the methodology that was used relies on turnover—it takes into account turnover at a specific point in time, rather than profitability. That made a justifiable case for our looking at that sector, which includes hotels, pubs, cafes and restaurants. That is why I felt that a cap of 12.5 per cent—within state-aid rules—was appropriate.

The downturn in the industries around the North Sea has had an impact on the economy in the north-east of the country. Hospitality in that area, as well as hospitality nationwide, will have issues, but in Aberdeen and Aberdeenshire, the rental values of offices, for example, have also had an impact. Looking at the evidence, the circumstances and the exceptional case that the area has been able to make, it is appropriate to take a regional approach.

At the same time as acting on the national reliefs and the nationally targeted reliefs, I have been working with local authorities, which are important because they have the power to create appropriate local rates relief schemes. Perth and Kinross Council has been a trailblazer in that regard, having previously targeted support at retail. Any council could have done that using its own resources—the legislation is very flexible and empowering.

Aberdeenshire Council’s administration had already agreed a business rates relief package. It can now shape a local package of reliefs around what the Scottish Government is proposing. It might augment schemes or cover other sectors—whatever it chooses to do, it can take that forward. Similarly, Aberdeen City Council will have a local rates relief package, and I understand that Perth and Kinross Council is looking again at how to augment its scheme.

Any other local authority in the country can design local rates reliefs that suit local circumstances. Councils should be encouraged to do that. Addressing outstanding local issues is the right thing to do.

I recognise that, in any revaluation, there will still be hard cases, and local authorities should have the flexibility to look at them. That is why I have done a national scheme around hospitality and targeted the north-east. In addition, local authorities are empowered to look at further support.

That brings us back to something that Andy Wightman said about local circumstances. Perhaps that issue is better looked at in the review, and I am sure that the committee will look at some of that when we take evidence.

Can I pin this down slightly more? Reading some of the stories about what small and medium-sized enterprises, local publicans and little cafes, for example, were going to face, I can understand the problem. You mentioned hotels. Are big chain hotels included? I will give you an example that has sprung to my mind. President Trump has premises in the north-east. Will those premises benefit twice—from the cap and then from relief in the north-east?

Elaine Smith would fully expect me to say this: I cannot design a tax policy to suit individual owners. The tax system should not be designed to target individuals; it must be based on fairness and an approach that takes into account different sectors and different geographies.

The scheme for the hospitality sector that I have described will benefit premises across the whole country. As I said, 70 per cent will enjoy no rates or reduced rates as a consequence of our actions. I cannot itemise the rateable values of individual premises; I do not think that Elaine Smith would seriously expect me to do that. However, I can say that our relief scheme has been designed in light of the evidence that has been presented to me by the sector, and it has been warmly welcomed by the sector’s business representatives, whom I will meet later today.

As far as the 12.5 per cent cap is concerned, small hotels would have paid no business rates anyway, because of the small business bonus. We have targeted our support at smaller and medium-sized companies. When it comes to the larger hotels that Elaine Smith mentioned, state-aid rules would apply. State-aid rules mean that only a certain amount of support can be provided. That works out at £170,000 over a three-year period. Some of that support might be consumed in the first year, but that cap applies to the amount of support that can be provided. There is only so much support that any individual company can get.

It feels right to target our support at small and medium-sized enterprises, but to have a balance. Many hotels made a legitimate case with regard to how their business might be affected. I heard about big hotels that faced the threat of a huge increase. That is why it is right to take a balanced approach that provides as competitive a regime as possible and relief for as many businesses as possible. Businesses in every council area will receive support in a fair and proportionate way.

Before I turn to the process, I want to clarify something. Will keeping the poundage at the same level as in England through the reduction that we are talking about result in a loss to the public services that you say would lose out if we annulled the order? I suppose that I am asking the opposite of Graham Simpson’s question.

There is the view that if we did not lower the poundage and raised more money from businesses, we could invest more money in public services, but I take the view—I hope that the committee agrees with me on this—that we have struck the right balance. We are matching the poundage in England. That represents a reduction in the tax rate for businesses, but an adequate amount of money will still be raised. All the reliefs and support measures that I have described, including the small business bonus, will be applied, supporting 100,000 businesses. From the regional support to the capping, it is a comprehensive package, and I think that it is the right one.

However, public services will still be adequately funded, because Government is using other resources, and has taken other tax decisions and other measures, to ensure that we invest in our public services and in our local services. On 15 December, I published the local government settlement and the circular. Since then, as a consequence of the budget negotiations with the Greens—I give credit where it is due—I have allowed further resources to go to local government. There is huge investment in local services, which, alongside the council tax changes that we have made, represents a substantial increase of well over £300 million for our local services. It is also an appropriate tax decision.

We have already had that debate, so I will not go down that road again. There are differing points of view on whether we are talking about an increase in funding for local government.

That is a fact.

What is a fact is that if you did not decrease the poundage, more funding would be available. However, whether you want to do that is a different point.

I will move on to the process. You have said that, if the instrument were to be annulled today, local government would lose—what is the figure?

Members: It is £2.6 billion.

You have said that £2.6 billion would be lost to local government.

I should point out that, if a member asks about a figure, the other members should not answer—they should leave that to the cabinet secretary.

I have given the figure three times.

For clarity, the member was asking what the loss to public services might be if the instrument were to be annulled today.

10:30  

If the instrument were annulled today, would that money simply be lost, or would processes be put in place? What would happen to the budget process? It is clearly not an option not to take the matter forward in some way. We do not know what is going to happen under item 3, but let us suppose that the committee were minded to annul the instrument. What would be the process then?

I do not think that the committee would be so reckless as to risk losing more than £2.6 billion for public services in Scotland. I do not believe that any member would let that happen. Although the Government could produce a new statutory instrument or the matter could go before the full Parliament, I know that the members of this committee are reasonable and sensible people who would not jeopardise more than £2.6 billion for public services.

That is not what I am asking. What would the process be?

In terms of the process—

I am sorry to interject, but I feel that we are drifting into a debate that we should have under agenda item 3. I apologise for stifling that debate, but if we could have questions and answers that would be quite helpful.

Because we have discussed the money that would be lost to local government under this item and because we have discussed the consequences of a motion to annul the instrument—which you pointed out, convener—I need to know what the process would be. Whether the committee members will decide to go down that road is conjecture at the moment. Whether the committee members are sensible is also conjecture. I would like to know what would happen if the committee were to agree to annul the instrument. The motion is on the table—someone has lodged it. What would be the consequences of annulling the instrument? What would be the timetable? This is the only opportunity that I will get to ask those questions, because we will not be allowed to ask questions under the next item.

I would like to clarify the timetable that would be set if the motion to annul were agreed to. When would the matter go to the chamber? When would another instrument be produced by the Government?

In fairness, you are asking me questions that are more about parliamentary business. What would happen next? The matter would go before the whole Parliament, and it would be for parliamentary business managers to determine the timetable for that. Ideally, however, I would like that to happen before stage 3 of the budget, as I do not think that it would be appropriate to proceed with the budget without certainty about non-domestic rates income.

I point out that the process is not a new one. It is the same annual process by which we set non-domestic rates—there is no change—and I have outlined the Government’s position on the poundage. That is what the statutory instrument is about; everything else is peripheral to that. The key issue is the poundage, which is what we are setting through the statutory instrument. If the instrument is approved, that sum of more than £2.6 billion can be raised and distributed to local government, as set out in the Government’s draft budget and circular. If the instrument is not approved, the matter will go to the full Parliament for a vote, in a timescale that Parliament will determine. That is the process, and it has not changed. The poundage will be set by Parliament and people will have the certainty to get on with things.

I want to make a point about scrutiny. It would be wrong to say that there has been no scrutiny of business rates since 15 December, when I outlined the draft budget. I covered rates issues in the draft budget and, on the very same day, I sent out the local government settlement and the circular. Therefore, from that point, there has been awareness of and engagement on business rates in the local government settlement. That has been augmented by the budget negotiation process, in which there have been many opportunities to engage through the debates at stages 1 and 2 and my appearance at committees, and there will be a further opportunity to engage through the stage 3 debate and scrutiny of any further statutory instrument that may be required for further reliefs—all subject to established parliamentary processes.

That is the process. I hope that that helps. The timescale would be in the hands of the parliamentary business managers. However, realistically, I do not think that the committee would put at risk the £2.6 billion of non-domestic rates that will be used to support our local services.

Anything additional on that point from the deputy convener can be left for the debate under agenda item 3.

We will move on to questions from Alexander Stewart.

Thank you, cabinet secretary, for outlining where you are in the process and why you made the decisions that you made on some of the reliefs to industries and to locations.

For those who are in those categories, you have talked about an appeal process, with a panel, that can take place. Is it anticipated that the majority of people who find themselves with rates that are in excess of those that they faced previously will appeal? The appeal panels will take time to make progress and go through the process to point of making decisions. Have you factored into your process how that will happen?

There could be thousands of businesses that feel aggrieved, want to appeal and have to go through that process. There is a knock-on effect on what will happen with their rates, depending on whether their appeal succeeds or the decision stands. Have you factored that in?

Mr Stewart asks a very good question, recognising that both the revaluation process and the appeals are independent of Government. I cannot direct them.

We factor in assumptions on appeals as part of the budgeting process. I cannot predict how many will appeal. Experience tells us that most do. In some sectors, there is evidence that some businesses withhold information and present it at appeal. That means that there is a different outcome for their rateable value and therefore what they pay.

The experience of the past is that most appeal and have to work through the system. I see no reason why that would not be the case this time round.

My second question takes us back to local government. You commented on what Perth and Kinross, my own council, had achieved in trying to support local schemes. Are you disappointed that other local authorities have not gone down that route? Are you surprised, or did you expect that?

I do not want to criticise local authorities. I have taken appropriate action on the issue in the draft budget and since then, as information has emerged.

I welcome the fact that Perth and Kinross took action. It was the first council to use the powers. In view of the revaluation, Aberdeenshire has moved quickly to produce a scheme and has engaged with Aberdeen City as well.

I had a very constructive meeting with Aberdeen and Grampian Chamber of Commerce, where I met businesses, discussed the way forward and set out the range of actions that I have taken, which that chamber of commerce has welcomed. I have been true to my word on how I would engage and what I would do on business rates. The chamber of commerce has also asked the councils—Aberdeen City and Aberdeenshire—to take action and I think will continue to lobby the councils to provide an appropriate local rates relief scheme.

I would encourage every local authority in Scotland to look at their local circumstances and decide what would be appropriate. Some councils might conclude that a scheme is not appropriate, but some might conclude that it is. The legal powers are there, and there are extra resources in the system as a consequence of the budget negotiations. Local authorities should feel empowered to build in any augmentation or additional support that they feel is appropriate and should engage with local business in arriving at that decision. That is a matter for them.

There is encouragement from the Government, and my officials will provide whatever support is necessary, as we have done with Aberdeen and Aberdeenshire.

I will follow on from what Elaine Smith asked. The implication was that the £108 million that you are putting in to cut the rates poundage is money lost to local authorities, but is it not the case that, without competitive business rates, some businesses could be lost, so no money whatever would be collected from them? The Federation of Small Businesses said at the peak of the recession that, without the small business bonus scheme, one in six small businesses would have gone bust. If that had happened, it would not have been possible to collect any rates from those businesses and there would therefore have been less money for local government. A balance has to be struck.

Kenneth Gibson raises a fair point. Elaine Smith was saying that, if I had taken another decision and put business rates up far more, that would—in theory—have generated more income for the public sector.

The budget already delivers £900 million more for the public sector and public services in Scotland, including a substantial increase for local services. I am already doing the public sector investment bit, but what I am not doing is undermining business. That is why I have set business rates at the appropriate level.

Kenneth Gibson is also right to say that business could be damaged if the rates were not set appropriately. If there were inappropriate decisions about the tax rate, or an absence of reliefs, some businesses would be stressed.

I know that Kenneth Gibson is fond of Paisley, as am I—I launched the business rates policy there. The business that I visited there was one of many that, for the first time, will be eligible to enjoy the small business bonus. It will use that new resource to employ new staff and grow the business. That shows specifically how the small business bonus is supporting businesses, helping them to grow and helping to sustain our high streets at this difficult time.

I think that we have got the balance right, while not jeopardising income.

I will ask about something that is completely unrelated to the issue that we have just discussed. Rural rates relief is worth about £5 million per year, so it is less than 1 per cent of the total support that the Scottish Government provides to business through rates relief. How does that tie in with the small business bonus, given that rural relief has a rateable value threshold as low as £8,500, compared with £15,000 for the small business bonus? How does rural relief fit into the big picture? Rural Scotland is a lot bigger than the £5 million of rural rate relief suggests. That relief seems to be fairly small beer relative to other reliefs that the Scottish Government implements.

That is a good question. A lot of our national reliefs, such as the small business bonus, help a lot of rural businesses. They catch a lot of rural businesses and are concentrated in certain areas. Rural rates relief is a further safeguard or catch-all to support businesses that might not benefit from the other rates reliefs that support urban and rural businesses. Dougie McLaren can give a bit more detail on how the additional rural relief does that.

The small business bonus scheme has the higher eligibility threshold of a £15,000 rateable value but, as the committee may be aware, if an occupier has multiple premises, the cumulative rateable value can take them over that threshold. Irrespective of whether there are multiple premises, the rural relief catches premises up to an individual rateable value of £X as set for a store, pub, hotel, restaurant or filling station. I accept that there is a case for adjusting that value. The rateable value threshold has been the same for a number of years but, because so many of those properties are caught by the small business bonus, in practice very few rely on the extra safety net of the rural relief.

That is what I thought, given the amount of money that is involved. One of the concerns about the system is its complexity, which the Barclay review will look at. Recipients of rural relief will take the view that it has a role to play, but I wonder whether the system can operate more efficiently and effectively, given the huge amount of support that has gone into the small business bonus scheme relative to rural relief.

Administratively, the system is complex. I will not dwell on this, but some of the reliefs have a hierarchy in the legislation—councils have to apply one before the other. However, in the case of the small business bonus and rural relief, the council just makes sure that the business gets the best benefit across the two reliefs. I accept that there is a case for a bit of administrative streamlining.

There are no further questions from members but, before I give the cabinet secretary the opportunity to make closing remarks and before we move to the next agenda item, I have one brief question.

Politicians being politicians, politics often comes into play in relation to things such as rates. The next time that we consider any revaluations or changes to non-domestic rates, should we look at this kind of dynamic as a normal part of the political process? Is it not reasonable for a Government to collect data, hypothesise about what a rates poundage and a rates relief scheme might look like, take the temperature on that in wider Scotland and make amendments as appropriate? Should we see that as part of the normal process and embrace it, rather than getting into the adversarial position that we have got into as a Parliament?

10:45  

That ideal world—where the approach is not adversarial and everyone is happy at the outset—sounds good to me. I am happy to engage with you if you can help me to design a process that achieves that.

In all seriousness, in answer to Andy Wightman’s question in the chamber yesterday, I said that the budget process review group is looking at how the Parliament delivers its tax and budget powers and that the issue is worthy of further consideration. As I have said, the process that we have inherited and traditionally used is being used for setting non-domestic rates. We are happy to engage on the issue through the budget process review group, which has experts on it.

I again make the really important point that revaluation is independent of Government. As we and representatives of businesses get the evidence, we respond. I took early actions in the draft budget, as I have described, and I have taken further actions as the evidence has emerged.

Parliament has had the opportunity to discuss the issue at the stages that I have described. The first stage is the issuing of the local government settlement. There is time to debate the matter further at the second stage, if that is what people want to do. The third stage involves committee appearances, as well as appearances in other places. The issue has had a good airing. Is there a better way to do that? Let us engage in that discussion.

I was not being naive in asking the question. Politics always comes into things, but the process should be normalised. From what I can see, it is reasonable for the independent assessors to do their job, it is reasonable for the Government to make a first cut at whatever a rates relief scheme might look like and it is reasonable for business in Scotland to take views on that. That is an entirely normal part of the process. It is reasonable to expect a cabinet secretary to react and act appropriately on the basis of those concerns. Should we find a better way of normalising that process?

As I said, I am happy to engage if you think that there is another—or better—way of operating. I reassure the committee that, when the Government gets evidence, we consider it. The Government then presents its proposals. Opposition parties can present alternative proposals if they think that we have got the wrong poundage, balance of reliefs or budget decisions. That can happen in Parliament—that is normal. There are also the budget negotiations. If Parliament does not like the package that the Government has offered, it can vote against that and alternatives can be suggested.

It would be interesting if, after the Government had engaged with the business community, looked at the evidence, delivered a budget to invest in our public services to the tune of more than £900 million and set fair and balanced tax rates, any Opposition party dared to vote against all those progressive, proactive and pro-enterprise measures.

I fear that we have moved to the debate, which was not my intention. Does Mr Wightman want back in?

No.

That might have been your closing statement, cabinet secretary.

It feels as though it was.

In that case, I thank you for taking part in that fairly robust evidence session. It was longer than we expected it to be, but I did not want to stifle debate on such an important matter. I also thank your officials for their attendance.

Under agenda item 3, the committee will consider S5M-03997, in the name of Andy Wightman, which asks the committee to recommend that the Non-Domestic Rate (Scotland) Order 2017 be annulled.

I will set out the procedure. Andy Wightman will first speak to and move the motion. There will then be an opportunity for members to debate the motion and for the cabinet secretary to respond, for up to 90 minutes. I will not be devastated if that does not take 90 minutes. Following that, Andy Wightman will be invited to wind up the debate and, finally, he will be asked whether he wishes to press or withdraw his motion.

First, I will clarify why I lodged the motion to annul the order. Since 1989, the tax rate—the poundage—has been set by central Government under secondary legislation. Prior to 1989 and prior to the Conservatives centralising this local tax, it was set by individual local authorities.

Since the order is considered under the negative procedure, the only means of scrutinising the decision of ministers about the rate that is to be set is through a motion to annul the relevant Scottish statutory instrument. I therefore lodged the motion to allow a modest degree of scrutiny. It is not and has never been my intention to deny local government these important resources, and I add that I decided to lodge my motion before the recent publicity about revaluations. My intention was solely to provide an opportunity for some scrutiny and not to introduce a Trojan horse for any wider political goals of other parties.

Originally, I intended also to lodge a motion to annul SSI 2017/9, which concerns the small business bonus scheme, but I decided to take things one at a time. However, I will illustrate why that, too, would benefit from greater scrutiny. I am engaged with constituents in Edinburgh to reform the planning regime for short-term lets because of concerns about residential amenity and the accelerating clearance of the residential population in central Edinburgh. I mention that because the holiday let properties that declare themselves to be liable for non-domestic rates—not all of them do so—and which I have looked at so far have been eligible for 100 per cent rates relief, despite having tens of thousands of pounds in turnover.

Because of the regulations that we will consider under another agenda item, the owners of those holiday let properties, who are often outside Scotland, will pay absolutely nothing to the City of Edinburgh Council to contribute to the costs of maintaining the city that provides their income. Instead, the Parliament subsidises those—in my view—undeserving proprietors by compensating councils with public funds. That is just one example of how the small business bonus scheme is flawed. However, I reiterate that, notwithstanding the merits of any criticism of that, there is no easy means of scrutinising the detail of such policy that arises from the legislative regime for non-domestic rates.

I hope that the cabinet secretary will agree that Parliament should be able to scrutinise relief schemes that involve the expenditure of hundreds of millions of pounds. Under the previous agenda item, I heard him talking about the opportunities at stages 1, 2 and 3 of the budget process but, with respect, those are debates and not opportunities for detailed scrutiny. It is scrutiny that I am concerned about.

I am aware that the Barclay review is examining non-domestic rates and I expect Parliament to debate its findings, but I want Parliament also to be given an opportunity for more fundamental examination of the non-domestic rates regime. There are much more fundamental questions of tax design to consider that go well beyond the Barclay review’s terms of reference and, indeed, bring into question the very existence of the non-domestic rates regime. One of the Scottish Government’s economic advisers, James Mirrlees, has argued that we should scrap the business rates system.

The public consultation for the Barclay review asked one question, which was:

“How would you re-design the business rates system to better support business and incentivise investment?”

It said nothing about the degree of central control versus more local control and nothing about the range of exemptions that have historically existed for things such as agriculture. The Barclay review will not be looking at those important things, and that is why, in this place, we need to consider deeper questions about the future of the non-domestic rates regime.

As I mentioned, the Barclay review says nothing about local government per se, but non-domestic rates are an important part of local government finance and they should be part of any future review of local taxation. I know that the cabinet secretary is keen to talk to other parties about how we take forward further reforms to local taxation, and I look forward to those discussions, which I hope can take place once the Budget (Scotland) Bill is safely on the statute book.

In the meantime, first, will the cabinet secretary assure me that he recognises that there is a case for better on-going scrutiny of all the variety of secondary legislation that comes to Parliament? We should not have to lodge motions to annul to get that scrutiny. Secondly, does he recognise that there is a case, whether he agrees with it or not, for returning at least part of the rate setting and tax design to local authorities so that they can take decisions on their tax bases to suit circumstances in their different areas?

I move,

That the Local Government and Regeneration Committee recommends that the Non-Domestic Rate (Scotland) Order 2017 (SSI 2017/8) be annulled.

Do not answer those questions now, cabinet secretary. You will have an opportunity to respond to all the points that have been made in the debate. Does any other member wish to participate?

Yes—I will probably not speak for 90 minutes.

There is probably a better way to do such things. The only option to allow the committee to debate the order was via a motion to annul, so that is what we have in front of us. In a way, it is disrespectful to the committee to assume that it will not press forward with recommending annulment because of the possible loss of revenue to local government. I say that because it assumes that the Parliament would not be willing to schedule a chamber debate in good time.

The cabinet secretary said that it would be difficult for the budget to be debated or voted on this Thursday without the order, but it would not be impossible. I have confidence that the Parliamentary Bureau would manage to get a motion to the chamber in time for it to be debated and voted on. We might want that to happen so that there could be further scrutiny.

I accept what the cabinet secretary said about the process that is being followed being the normal way to operate, but that does not mean that it is always the right way to do it. There can be some commitment to better scrutiny than just having a negative instrument, where the only option is for a committee member to lodge a motion to annul. That is not ideal at all, and that has to be taken on board.

It is rather dramatic to say that there would be a complete loss if we recommended annulling the order because, as part of the process, the business managers could get a motion into the chamber for debate and scrutiny. However, given the points that have been made, if Andy Wightman were to withdraw his motion, I would not be inclined to argue with that, although if he decided to press it, I might well be inclined to vote for it.

In the future, proposals on non-domestic rates undoubtedly need to have much greater scrutiny. We know that rates are the second-largest single source of revenue under the Scottish Government’s control, so it seems wrong simply to dispose of them through secondary legislation and the negative procedure. There has to be more discussion and scrutiny of them and, like Andy Wightman, I think that that should not be just during budget debates in the chamber, because not all members can participate in them. We know that there is limited time for debates—just as we have only 90 minutes for the committee’s debate this morning, if we want to use it.

The whole point is scrutiny. It is good that we have had a debate. Perhaps the committee could have delved a bit more into the issue during its own budget scrutiny—we need to think about that for the future.

The engagement has been positive this morning, and I will wait to see how Mr Wightman sums up and what he decides.

I will not speak for long. I take Andy Wightman’s point about scrutiny in general; he is right that there is not enough. It is a shame that he felt that he had to go down this route to get some scrutiny.

To cut to the chase, what is before us is an issue about poundage—pure and simple. I cannot sit here and vote to recommend annulment when I know that that would cost Scottish businesses £108 million. To be frank, that would be irresponsible. As the cabinet secretary said, there is also a threat to local government finances, which we have to be aware of.

As I said earlier, the right process to follow is to wait for the results of the Barclay review. We know that it is under way and that the results will come before the committee. I hope that there will be a great deal of scrutiny as a result of that review, and that will be the opportunity for people such as Andy Wightman and all the committee members to have their say on a future system of business rates. On that basis, if Andy Wightman wishes to press the motion, I am afraid that I will not vote with him.

11:00  

I want to follow up on what Graham Simpson has just said. I do not think that local government would thank us for throwing a spanner in the works at a time when councils are setting their budgets. I know that businesses would certainly not thank us for the potential loss of the £108 million, so I will not support the motion. Scrutiny is important, but we do not want to kill the goose that lays the golden eggs for our businesses, which rely a lot on the reductions in the poundage and other reliefs that the cabinet secretary is introducing. I therefore do not think that we should support the motion to annul the order.

I recognise that there is probably a wider debate to be had on rate setting and I welcome the cabinet secretary’s comments on whether it should be national or regional setting. However, I agree with colleagues that we have to allow the external review process to move forward and explore how business rates can best reflect economic conditions and support growth. The big issue for me today—it should not be minimised—is the profound impact that agreeing the motion would have on the budget-setting process and that £2.6 billion of public spending.

I acknowledge that the committee has the opportunity today to debate the issue of non-domestic rates, and it is right that we have that opportunity. However, I have to take on board that there will be an external review, and it is right and proper that that should take its course. Following that process, we can become involved with regard to any actions that are recommended or opportunities that are presented. Like other committee members, I firmly believe that we should wait to see what comes from the external review at the end of the summer and give ourselves the opportunity at that stage to agree or disagree with the review’s conclusions.

I will also make a brief contribution to the debate. I suppose that a defence of where we are is that things have always been done this way. However, I think that Mr Wightman is trying to say that it would be good to develop and modernise our scrutiny of non-domestic rates. It is fair to put it on the record that the Scottish Government commissioned an independent review of non-domestic rates before the issue received all this political attention and that must be commended. Perhaps there is a meeting of minds in the Parliament in relation to modernising how we look at the process.

Given how close we are to the final budget debate on Thursday, I asked the clerks what the earliest date was on which a motion to annul the order could have been lodged for discussion at committee and I understand from them that it was 8 February, which is not that long ago. The timescale for taking the motion to the chamber for full parliamentary debate and consideration of alternative proposals would have been tight—it is the result of the pipeline from the Delegated Powers and Law Reform Committee. I know that there is an independent review of the Parliament’s budget process but, even if there is no change to the process, we should perhaps think about its timing.

That said, the committee is undertaking a significant piece of scrutiny today. Had we done it a number of weeks ago, it might have been pretty good. We had the option of looking at the issue in some detail during our budget process, but the committee chose not to do that. We therefore have to look at our working practices, too. It is not just a matter of asking what level of scrutiny the Government or the Parliament affords non-domestic rates. It is only fair to put it on the record that we have to look at the role of the committee system, too.

Again, I put it on the record that the committee will now do a piece of work on non-domestic rates. As part of our on-going work on that, we will hear from the Barclay review and will get feedback from the Government after the Barclay review is published. To me, that sounds like a heck of a lot of scrutiny. Given that scrutiny, I therefore feel that there is no reason to support the motion to annul the order. However, even if I thought that there was such a reason, the issue of the £2.6 billion for public services would be more relevant for me.

The question whether there is a potential risk or a direct threat does not really matter to me, and I would say to other MSPs that I do not think that we can afford to have any uncertainty as councils across the country set their budgets. We are talking about social work and education departments in my city and in other MSPs’ constituencies and regions. For that reason, I, too, would certainly not be minded to annul this instrument.

That is my final contribution to the debate. I want to give the cabinet secretary the opportunity to respond to the comments that have been made and then give Mr Wightman the chance to come back in.

Thank you, convener. First, I genuinely appreciate the comments that have been made and the discussion that we have had. I have not objected and do not object to the scrutiny. As you have said, convener, I could have answered questions on this issue at my appearances at this committee, the Finance and Constitution Committee or any other place where I have talked about the budget. The Government published its budget proposals on 15 December and from that point, any party, business or other interested stakeholder was able to engage with the Government on its draft proposals, all of which are subject to due parliamentary and political process, concluding with stage 3 of the Budget (Scotland) Bill. Of course, further statutory instruments will, where appropriate, be laid on any other relevant matter.

On a consensual point, I note my comment yesterday that I am open to the budget review group, in which Government, Parliament and experts are working in agreement and are looking at how the Scottish Parliament’s scrutiny and legislative process should adapt to our new powers. We can, of course, look at our existing powers, of which the setting of non-domestic rates is a very substantial one. I have said that I have been open to and, indeed, have been very proactive about engaging with the budget review group on how we can adapt our parliamentary processes. Of course, all that has been made even more significant as a result of the chancellor’s decision to change his budget-setting timetable from spring to autumn—although I note that, this year, we will still have two budgets.

Members will also want to reflect on the fact that the UK chancellor can essentially propose his budget one day, with the scrutiny largely coming thereafter, whereas under our process a lot of the scrutiny is done in advance of the budget being set. We have to get the balance right. I hope that that covers some of the points about engagement and normalisation.

I think that, as the convener has described, it is impossible to take the politics out of this issue, given that tax is a very sensitive matter. However, I want to make any decisions in a research-based, methodical and orderly fashion, and that is the approach that I have taken. Indeed, that is essentially the question before us: if this process is wrong now, has it actually been wrong for the years in which it has been in use? As I said, I am open-minded about how we can improve things, but I think that members who are new to the Parliament and therefore new to the process—and I, too, am a relatively new finance secretary—have turned a fresh pair of eyes on things, and I have no objection to that as part of the overall approach. The Barclay review has a very specific and self-defined remit with a key purpose, but further consideration can be allowed. However, I must point out that if these revenues are not able to be raised and then distributed, there will be a local impact.

Going back to a key point that members have raised, I think that this is all about certainty. There is an administrative element to all this, in that councils need to get on with issuing bills and businesses need to be able to appeal if they want to. We need certainty in the system in order to get on with things.

Actually, the question before us relates not to those other matters of great interest but the poundage, and since the day and hour I published the Government’s position on it, I have heard no variance from anyone in that respect. The question before us is all about the poundage, but I have heard no party saying “Put it up” or “Bring it down”. We seem to have general consensus and agreement on reducing the poundage by 3.7 per cent, which, for all the reasons that I have given, feels like the appropriate balance to strike. Members therefore need to reflect on the fact that that—and not anything else—is the question before us, and the setting of the poundage and therefore the raising of revenue for distribution could be put at risk if we do not proceed with this instrument. I do not want to be too negative—indeed, I have tried to be consensual and constructive—but I find it a bit strange for some members to say, “Tell me what I’m voting against and tell me what you’re going to do to fix things” if they are going to be so reckless and proceed along such lines.

As I said, I have conducted myself in an orderly fashion from 15 December, when I published the poundage, and it feels that some members are making an 11th hour bid to look at the issue again when in fact there seems to be no disagreement on the actual poundage that the Government is proposing. For all those reasons, I suggest that we approve the instrument and continue with the budget as it works its way through Parliament and is subjected to the appropriate scrutiny.

Thank you for that contribution, cabinet secretary. I now ask Andy Wightman to respond to the debate and to indicate whether he intends to press or withdraw motion S5M-03997.

Thank you, convener, and thank you, cabinet secretary.

I have heard what the cabinet secretary has said, and I want to put it on the record that I have no criticism of any of the actions that he has taken or the processes that he has adopted, which have been strictly in line with our legislative requirements. To be perfectly frank, I do not know whether the rate that he is proposing or last year’s rate is the best; I am not in a position to know that, because I cannot avail myself of all the evidence and analysis that the cabinet secretary was able to examine last year in order to arrive at this particular rate. My sole motive in lodging the motion is to try to have a bit of scrutiny of the process of setting the poundage, the considerations that come into play and how he has arrived at the figure. Once the figure is arrived at, I might or might not agree.

Secondly, on the Barclay review, I repeat what I said in my opening remarks, which is that the remit of the review is limited. I do not actually agree with it—it is not the kind of remit that I would have given a review of non-domestic rates. It is not looking at some of the issues that I, for example, am interested in, and I hope that we can return to some of those issues in Parliament.

Again, as I said in my opening remarks, it has never been my intention to put these revenues at risk. However, because the rate is set by a negative instrument, the only way of having any formal scrutiny is by lodging a motion to annul.

I realise that all this has come very late in the day. Stage 3 of the Budget (Scotland) Bill is tomorrow. I have heard what the cabinet secretary has had to say and, in those circumstances, I seek to withdraw my motion.

Motion, by agreement, withdrawn.

As the motion has been withdrawn, that concludes our consideration of agenda item 3. I thank the cabinet secretary and his officials for their attendance, and I briefly suspend the meeting to allow the witnesses to leave.

11:12 Meeting suspended.  

11:21 On resuming—  

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Non-Domestic Rates (Levying) (Scotland) Regulations 2017 (SSI 2017/9)

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Non-Domestic Rates (Rural Areas) (Scotland) Regulations 2017 (SSI 2017/22)

Welcome back, everyone. We move to agenda item 4, which is consideration of subordinate legislation. The committee will consider two instruments. The instruments have been laid under the negative procedure, which means that their provisions will come into force unless the Parliament votes to annul them, and no motions to annul have been lodged. I invite members’ comments.

I have quite a lot to say about the Non-Domestic (Levying) (Scotland) Regulations 2017, but I do not intend to say it. I merely want to draw committee members’ attention what I said under the previous agenda item and the comments made by the Scottish Trades Union Congress, as reflected in the Finance and Constitution Committee’s report on the draft budget. Given the limited opportunity for detailed scrutiny of the regulations, I will not go into detail. I merely note that there are issues that need proper scrutiny in future.

Thank you. As there are no further comments, do committee members agree that they do not wish to make any recommendations in relation to either of the instruments?

Members indicated agreement.