Official Report 497KB pdf
Non-Domestic Rates (Levying) (Scotland) (No 3) Regulations 2010 (SSI 2010/441)
Good morning, and welcome to the second meeting in 2011 of the Local Government and Communities Committee. As I usually do at this point, I ask members, as well as members of the public, to turn off all mobile phones and BlackBerrys.
I see that the floor is mine, so I will go for it. I am a new member of the committee—the rest of them are throwing me in at the deep end.
We have had serious concerns about the Scottish Government’s presentation of this policy to the Parliament and beyond. It has been confusing and misleading. The proposal has been presented as an out-of-town supermarket tax to support town centres and small businesses. Before we go any further, we would like to clear up a few things. I will also cover the point about small business support.
That is absolutely right—as Fiona Moriarty has said, the small business bonus has made a real difference to those members who receive it, and we should never lose sight of that. However, about half of those of our members who pay business rates cite them as a major barrier to the continued success and viability of their business.
The interests of large and small retailers are closely entwined. Large town centre retailers act as anchor stores, which footfall-draw customers into urban shopping areas. They act as a magnet for people from a broad geographical area, and they drive footfall among the small and medium-sized retailers that are located alongside them. In such situations, it is vital that the viability of large town centre retailing is not undermined.
You all seem to accept that there is a need to ensure that small retailers are competitive against large ones. Do you think that the measures before us have a genuine role to play in achieving that objective, or would a further entrenchment of and better funding for the existing policy do that more effectively?
It is clear that the funds raised will disappear into local government funds. If the policy had been presented or managed differently, and if there was a guarantee that the £30 million could be ring fenced for town centre or city centre development, for support for small retailers or for the retail mix, our position might be somewhat different. However, there is no guarantee, and I repeat that the money will disappear into local government funds rather than being channelled back into supporting small businesses.
I agree with the Scottish Retail Consortium that the proposal is not the complete answer. We have to consider what the money is to be used for. I accept that we do not have a system of hypothecation in the truest sense in Scotland to allow us to ring fence the money. However, we made the point in our written evidence that, once the immediate pressing economic situation has eased, we would like the money to be invested in rebuilding our town and city centres.
Do you agree with the suggestion that the measure is basically a revenue-raising one that can be of only marginal benefit to smaller businesses?
There is also a question about fairness and proportionality and whether we agree with a system of progressive taxation whereby those at the top pay a higher rate than those at the bottom. Fiona Moriarty makes the point that, to an extent, we have that with the large premises supplement, which is 0.7p on properties with a rateable value over £35k. That raises about £37 million. The notional cost of the small business bonus scheme—without going into the details of why this is not the complete figure—is about £117 million for this year and for next year it is projected to be £128 million, so it is not the total answer.
It will be a serious outcome when there are large vacant units in our towns and city centres across Scotland that will not be filled because doing so is not economically viable. Town and city centre managers, and others who know a lot more about the viability of town centres and how properties are let and leased, are seriously concerned. New stores that have a rateable value over £750,000 will be harder to shift and existing larger footprint stores that become vacant will be hard to shift, too. There will then be gap sites in some of our key cities and towns, which is a worry because there will be a spiral of decline.
Do you see the measure as a threat to jobs and investment? You seemed to say that, if the take of £30 million was ring fenced and was genuinely used to support businesses, you would be more amenable to the proposal. I am just trying to get clarity on whether the issue is how the £30 million would be used, or whether you feel that the take is bad in the first place because it will have a detrimental impact on jobs and future investment decisions.
Our basic position is clear: we feel that the measure is unfair, unjust and inequitable and that it targets one part of one sector, which will be one of the key sectors in driving investment growth and opportunities across Scotland in the next few years. If you were to push me to give our fallback position and to say whether we would support the proposal if the money was ring fenced, in that situation, we would probably be less vocal in our opposition, although we would not support the proposal. At least there could be some justification, because the money would be put back into our town centres and, of course, my members—mid-tier and small members—would benefit from that. However, to be clear to the committee, our absolute position is that we feel that the proposal is unfair and unjust and that it targets one sector to penalise us in many ways.
Would it be more acceptable to you if the levy was spread over a greater number of people or businesses and if the Cabinet Secretary for Finance and Sustainable Growth assured you that the money would be targeted at supporting businesses and services that local government provides to businesses, as he said in his statement on 9 December?
We would understand the rationale better. None of us wants to pay more business rates and certainly no business of any type wants to pay more business rates in the current economic climate, when margins are tight. I keep asking myself, and in group discussions our members keep asking me, why the Scottish Government has targeted one sector and why it has not looked at other successful and profitable sectors, such as oil and gas, other utilities and whisky. I leave the question open for other people to answer.
The cabinet secretary will give evidence to the committee next week. What discussions have you had with him on the range of other options? What has he said about all that?
It has been well documented that we met the cabinet secretary last Thursday, after we called for an emergency meeting of the retail forum—that is the standing group that we have with the cabinet secretary and Mr Lochhead—to deal with a range of issues to do with some of our larger members. Mr Swinney presented his arguments and we presented ours, but we probably did not move on much. Our feeling is that it is not the sector’s job to come up with solutions to budgetary shortfalls; it is our job to present the reasons why it is inappropriate to target the tax on our sector.
Is the cabinet secretary aware that you would be less vocal in your opposition and more understanding if the burden was being distributed more fairly? Is he aware of that position?
He cannot have failed to be aware of it, because I have been quoted on it in the press and our members have put it forward. Let me clarify that we feel that the tax is unfair—full stop. It would be marginally more palatable if the money was ring fenced and could be seen to be going to some other area, but our fundamental position is that the tax is unfair and should not be targeted at one part of one sector in the Scottish economy.
We said in evidence to the Scotland Bill Committee that we are not opposed to additional revenue-raising powers, but it is vital that powers are used responsibly and equitably. The way in which the current business rates proposals have come forward does not satisfy those criteria.
Tom Ironside and the SRC made a good point about whether it is valid to target retail. I refer to what I said to Mr Johnstone about fairness and proportionality. The issue is pronounced in the retail sector, but it might well be that similar unfairness pertains in other sectors. If that is the case, by all means let us investigate. As I said, the new approach is not a complete answer or the be-all and end-all. The business rates system in Scotland is incredibly complicated and there is an awful lot wrong with it, which we could be fixing. However, this is a step along the road, and retail seems to be a good place to start.
I am grateful to the panel members for their written submissions. The FSB said of the proposed supplement:
You are right—the small business bonus has made a huge difference to those who receive it—but as I said earlier the most recent figures from our members show that, for those who pay them, rates remain a significant barrier to their business success.
It was about whether the introduction of this Scottish statutory instrument will not only strangle larger businesses but have an inverse disproportionate effect on smaller business.
I am not entirely sure. Some of the FSB’s research into the impact of the creation of large new supermarkets on areas shows a rise in the amount of vacant floor space and a drop in trade for local businesses.
We can all quote various figures but it is quite clear that this so-called Princes Street levy will hit not only out-of-town supermarkets but many large retailers in our towns and city centres and damage their viability. If this SSI goes forward, they might either pull out or not bring forward planned investment, which of course would also have an impact on your members.
I am perfectly willing to be corrected, but I have not yet heard anyone say that they will pull out of Scotland as a result of this legislation and I remain to be convinced that anyone would genuinely abandon a profitable expansion programme. If the net result is that it is less attractive to build a large out-of-town retail park and more attractive to invest in a town centre, that will not be the end of the world for small businesses or, indeed, the Scottish economy.
I am grateful for those comments, but I am a bit surprised by them. I genuinely feel that if we support this SSI there is a likelihood that many of your members will be hit, along with the big retailers.
As you would expect, we have to pursue and examine all options. In any case, the regulations are subject to due parliamentary process, which means that we have 40 days before they become law, and until then we will concentrate on feeding into that.
Thank you.
Having listened with interest so far, I get a sense that the larger retailers are overegging the argument. Let me quantify some of the figures: the levy will affect an estimated 225 stores, more than 90 per cent of which will be the large four supermarkets and B&Q. That leaves only a couple of dozen others.
I will take that question, Mr Doris, and start with your last point first. It is important to understand the difference between turnover and profit; that is an important distinction. We need to remember that this is a tax on individual stores, which means that it will impact on the viability of those stores. We must put it in that context, whether an individual store is located in a city centre, a town centre, on the edge of town or out of town.
To augment that, it is important to emphasise that property costs are the second-largest line after employment costs on an individual company’s profit and loss sheet. Any uplift in property costs is clearly a serious matter for the companies concerned, and they will consider a store’s viability on that basis.
Does Mr Borland wish to add anything?
No, the others are best placed to comment.
I agree that it is unhelpful to your argument for me to give statistics on how many hours of trading it would take to raise the money to pay for the levy. It is unhelpful for me to point out the basic stats that more than 90 per cent of the 225 affected stores will be the large supermarkets or B&Q.
We would be more than happy to share that information. A plethora of research has been done over the past five or six years on what happens when a new store of any size or type—food or non-food—opens in an area. It shows a picture in which some businesses could be struggling, but many businesses are opening on the back of the footfall that is generated by a new store. We need to move beyond just retail businesses; any new store of whatever size, and irrespective of whether it is food or non-food, has a plethora of services and industry supporting it in terms of construction and logistics. It is therefore a complicated mix and supply chain.
Another important point is that retailers have finite investment budgets. They operate in a range of different territories, of which Scotland is one and England is another, as are Wales and Northern Ireland. The proposed changes to business rates affecting large properties would make the rates in Scotland the least competitive of anywhere in the UK. Clearly, that will be a factor when companies consider their investment programmes.
I refer you to the FSB report, which we referenced in our written submission, on the effect of new supermarkets; I referred to that in my answer to Mr Tolson. The report points out that when a new supermarket opens, the impact on existing businesses in the area is significant, with a decline in business and an increase in vacant floor space. Allied to the information in the written answers that I quoted earlier, which shows a decline in the number of small and independent retailers in Scotland, that shows that the rise in shopping at out-of-town superstores has not been a complete success for small and independent retailers.
That is all I wanted to quantify. With due respect to the witnesses, I moved away from the issue of supermarkets’ operating profits and spoke about large retailers in general. The expansion of large retailers is not a cost-free option—when they expand and develop, small retailers can be pushed out of business and there may be an overall employment loss rather than an overall employment gain.
We can put a bit more flesh on the bones in that regard, which you might find helpful. The retail sector has a different distribution of employment between large employers and small and medium-sized employers compared with other sectors. Typically, around two thirds of employment in other sectors derives from SMEs, but for retail it is the other way round. The top third of companies in the retail sector in terms of size provide employment for around two thirds of the total population employed within the sector. So, large retailers really are the engine of employment growth.
I look forward to the figures.
When the measure was first announced, there was some confusion about whom it would impact on and what its aim was. The Scottish Retail Consortium’s briefing refers to the lack of
It would have put everything into context. As you know, it is Government policy, or best practice, for a full BRIA to be carried out for any new piece of legislation. Having such an assessment in this case would have moved us away from the soundbites and misinformation and would have allowed us to have a clear and thorough debate about the facts from day one. We have written to the regulatory review group to ask whether a BRIA can be undertaken. I stress that it is a major issue for us that a BRIA was not undertaken at the earliest opportunity. The fact that the regulations are time bound adds an extra dimension to the situation.
The regulatory review group has received a request to look at the issue. The Federation of Small Businesses is a member of that group, so I do not want to say anything that will prejudice how the issue is approached.
Mr Ironside, do you want to add anything?
Only that a BRIA would play an important role in ensuring the transparency of the process and allowing everyone the opportunity to take a rounded view of whether the measures that are being introduced are beneficial in the way that is being asserted.
In view of the facts and figures that are being handed out at the moment, it would have been useful for us to get some idea of what the impact might be from a Government report, but we are where we are.
The levy will definitely impact on expansion. The process of development, expansion and redevelopment of current stores is quite complex, but it is basically to do with the individual store’s profitability and its short, medium and long-term viability. If the store’s profitability is reduced in any way—and, of course, we are talking about a levy on stores not on businesses, and some stores will be paying hundreds of thousands of pounds, which comes out of their profit line—it leaves less money to invest in developing the store. That store could eventually fall down the pecking order of stores within the broader portfolio. If the investment opportunity is missed, it is harder to get back on track.
How will we know whether any decision that is taken not to expand a store or open a new one is a result of the proposal rather than other factors in the company? How can we know whether the measure will have an impact or whether you are just concerned about paying extra rates?
That is a fair point. We are not saying that the proposal will be the death knell for any future development of any store across Scotland. People still see Scotland as a marketplace in which there is room for growth, investment and job creation. Many of my larger members have made it quite clear that they want to continue to invest in and support Scotland. A complex range of factors will dictate whether companies decide to, first, expand their current footprint and activities and, secondly, open new stores. I cannot sit here and tell you that a certain company is not going to open two or three new stores. However, I can tell you that there are serious concerns, and that there will be some interesting discussions in estates departments and boardrooms over where the most appropriate place to locate new store development is, across the UK and beyond.
The SRC is far better placed than I am to comment on the issue, but I would like to make a general point about threats to expansion. We are just beginning to emerge from the recession—there were some positive figures this morning—and we must be careful not to repeat the mistakes of the past and end up again with communities that are overreliant on a small number of large employers. We made that mistake with heavy industry and then again with information technology and financial services companies. Communities that rely on large employers and do not have a broad economic base are more vulnerable to international pressures and can find themselves tossed on the waves of global financial considerations. The endless expansion of certain businesses and certain sectors is not necessarily always a good thing.
A number of the submissions use the phrase “unintended consequences”, and you used that expression this morning, Ms Moriarty. Have you done any work on the issue? Do you have an idea what the unintended consequences might be? We have discussed some of the obvious consequences, but have your members highlighted ones that might not be so obvious?
Definitely. I have briefly mentioned a few already this morning. There could be an impact on investment in current store formats and future investments. Opportunities to create jobs could be lost, not only in the retail sector but in other sectors, too, because, for every large store that is opened in Scotland, anywhere between 200 and 300 construction jobs are created, as well as jobs in ancillary services, including small businesses.
I will highlight two additional areas. The first is the impact on local partnerships. Retailers are key supporters of business improvement districts, which are just starting to come through across the country. They make substantial voluntary contributions to those business improvement districts, following five-yearly ballots. Retailers have finite budgets for business rates. There could be a serious unintended consequence for the partnerships if retailers’ business rates bills rise and they feel that there is no other way in which they can address shortfalls in their property budgets.
You are absolutely right to say that there have been many claims and counterclaims around the issue. It is in everyone’s interest that we get some facts on the table and look at exactly what will happen. If there are to be unfair consequences, we should look at those. If the regulations are too tightly or too broadly drafted, we should consider redrafting them. None of the problems should be insurmountable. I do not know whether it is worth looking at other jurisdictions in which similar levies have been imposed. I understand from colleagues in London that there is a levy to fund crossrail, but I do not know what effect that has had down there. We could start to look at similar schemes to see whether they have had the intended consequences and whether expansion in those jurisdictions has been put on hold.
The crossrail business rate supplement is a really interesting example. The supplement was introduced with widespread business support. However, it is planned that a ballot of affected businesses will have to be held before business rate supplements can be introduced outside London. That ensures that only proposals that demonstrate clearly and transparently that economic development and positive benefits from that will flow through can move forward. We see such transparency and consultation as being integral to the process.
We are talking about crossrail in London; unfortunately, there are no similar proposals in Glasgow. I presume that, as Ms Moriarty hinted, if there were to be such proposals and the levy were to fund an individual project that would benefit the retail sector, your view might be slightly different.
I suspect that we would look at such proposals differently from the one that has been introduced.
When reading the Evening Times last night, I noted the comments of the manager of the St Enoch centre that, when the development was being refurbished and it was seeking to attract businesses, it might have had more difficulty attracting businesses such as Hamleys, the large toy store, if the rate had been applied at that time. Has any work that you have done with your membership indicated that companies consider that their profitability and trade capacity may be in danger as a result of the measure? The point has been made that the big supermarkets can manage the cost across the range of their business, but that may not be true of one-off large retailers. Have any of your members indicated that the measure will be a particular problem for them?
It is still fairly early days in the process. We have not had a lot of time to look at the measure, as the announcement was made only in November. We are working through some of the options. When we have definite examples, we may be able to share them with you privately, through the clerks.
We have heard assertions, but the case has not been made—in fact, Mr Borland made the opposite case—that a levy on large retailers would not necessarily deliver the kind of mix that you have spoken about. The argument that you are putting forward is that new developments with a rateable value of over £750,000 might be jeopardised. Surely such developments do not add to the retail mix but skew it towards the larger stores.
Any town or city centre manager who is asked about non-food retailers will say that they need unique retailers in a mix of retailers. We all co-exist; we all need each other. Large retailers, including new types of large retailer that are not yet trading in Scotland, are needed, particularly in our cities, as are mid-tier and small retailers. If you were to ask the question of many small retailers, they would say that the footfall drivers are the big retailers, particularly the new, big-format retailers. Those big retailers bring people into our towns and cities. People come to see the big stores—the new and exciting stores or other new development—and then stay, linger and use other services, whether that is leisure or other types of retail. The mix is all important.
Mr Borland, have we not got enough big shops in Glasgow?
Having a mix is vital. The point is that it is not just retail that is important. We have to ensure a vibrant mix of service-led and hospitality businesses in our city centres. We have some niche, high-end retailers in our city centres, but most of our members are not in business slap bang in our city centres but are in our suburbs and towns.
I have a follow-up question on the point that Mr Tolson made at the end of his questioning, which you did not get a chance to answer. He implied that some of your members may be affected by the proposal. Do any of your members have properties with a rateable value of over £750,000?
I do not have the full list of who is in that position. However, the information that I have been able to gather from publicly available sources, through the Scottish Assessors Association website, suggests that I do not have such members.
Given that I was criticised for not talking about food retailers, I turn to them now. The process for a supermarket opening a new store is often tortuous because of the number of objections that are lodged. I imagine that the costs that a supermarket faces for the lawyers, consultants and so forth that they employ are significant. The costs are higher than those that they will face in one or two years’ time as a result of the levy. Will the levy put off any supermarket opening a new store where it thought that a reasonable proposition?
This is about the difference between the known and the unknown. If a retailer decides to open in a location, past experience makes it aware of the likely costs of the planning process and development stages. As I think we said in our submission, our members have already set their budgets for next year, including for business rates. The levy came out of the blue; it allows no time for forward planning. We know the costs and types of investment that are required to open a new store—whether it is food or non-food—but the levy is an additional cost that is unknown, unanticipated and unplanned for.
I was comparing it with costs that are also fairly unplanned. The point is often made to me that the big retailers—the big supermarkets—throw money at getting planning permission for their stores. Money seems to be no object in getting such permission, and the retailers do not seem to be upset about meeting those unplanned costs.
Local councillors may say that throwing money at it is not the best explanation of what—
The councillors may say that.
Right. There is a robust planning framework, all elements of which can be costed thoroughly. All large retailers will be able to cost out the likely costs of opening a new store to within a few thousand pounds. The point with the proposed new tax is that it is an unknown quantity and cannot be planned or budgeted for. We need to remember that it is a tax on individual stores, not on groups or businesses, and that takes us back to the viability of the store. When an individual store puts in a planning application, all the associated costs can be factored into its short, medium and long-term profitability.
I want to come to the generality of the situation. The cabinet secretary has introduced the measure because he has a straitened budget to deal with. Regardless of whether the money goes to local authorities, should the cabinet secretary find the £30 million elsewhere and, if so, where? Should he just cut it from expenditure somewhere and, if so, where?
The first thing to say is that we fully appreciate that we are in a tough fiscal environment and that all levels of government need to make savings. That is a given; we are operating in the same straitened economic environment as the one in which the cabinet secretary is trying to balance his budget. I do not think that it is up to an individual sector to come up with solutions for how the cabinet secretary should balance his budget.
I thought that you might say that.
If you make the playing field as level as possible and make it easier for small businesses to trade us out of this mess, which is what they are best at, the need to cut services will probably recede in the rear-view mirror.
Ms Moriarty, you referred to developments that some companies and developers might have in the pipeline that might be affected by the decision to increase the rates. The difficulty that I have is that it is all conjecture because we do not have any facts at the moment. As a committee member, I have to consider whether the SRC’s evidence is strong enough to say that the increased rates will have an impact on the business decisions of major retail companies that operate in Scotland. You have indicated that you might be able to provide the clerks privately with some details about the concerns of some of the SRC’s member organisations. Could you be firmer in your responses today? We are being asked to consider and vote on the regulations next week.
I would love to be able to come here and say that the levy will stop X number of supermarkets or non-food retailers opening, but I cannot do that any more than I could if I had a range of my members here such as Marks and Spencer, Debenhams, Next, Boots and any of the supermarkets. They could not and would not say that for a raft of commercially confidential reasons. We need to be sensitive to the current economic climate. We are talking about people’s jobs and the viability of current stores and we have to be aware of that. I am being honest in that I am saying to you that I cannot say that X number of stores are not going to open.
That was an interesting response. You talked about the viability of current stores. Are you telling us that certain stores that might be affected by the rates increase are currently looking at their viability and that the rates increase might push them over the edge and make them decide to close?
I am not saying that. I am talking about viability in terms of future growth, investment and development.
Just to clarify, you did mention the viability of current stores.
I am talking about the viability of current stores to grow, invest and improve their infrastructure.
Earlier, though, you said that the levy would affect individual stores not groups or businesses. How could we apply the same levy to groups or businesses to achieve the level in revenue that we are trying to achieve with this increase?
You cannot do that through the business rates system. It would require another form of taxation that I cannot think of and over which the Scottish Parliament has no power.
You are right. The Scottish Government and Parliament do not have those powers—unlike, of course, the UK Government, which recently raised national insurance contributions for all employers throughout the UK. I am simply trying to be clear in my mind whether the imposition of this rates increase will have a major detrimental effect on business investment in Scotland and any employment opportunities that might come from that. As I have said, the evidence that has been provided today gives no indication that, as a result of this measure, businesses will make any major changes to their forward planning or business development in Scotland.
I am sorry, convener—perhaps I have not expressed myself clearly enough. I cannot say that company X will not invest in store 1, 2 and 3 and not open store A, B and C, but I make it clear for the record that there are serious concerns and worries about the signal that the proposal sends to those with stores over a certain size about the security of investment, the ability to grow and the cost base associated with continued growth in Scotland.
With regard to concerns over whether the regulations are too narrow or too tight and whether they target the wrong people and so on, I should point out that we have a very complicated system of collecting business rates. Indeed, at the end of last year, we published a paper exploring the difficulties faced by many of our members in interacting with it. Forgive me if I am speaking out of turn, but would it be an idea to speak to someone in the Scottish Assessors Association, the expert body on such matters, which might be able to suggest how, through using the current business rates system—it is not perfect, but at least the work has been done—one might amend the proposal to deliver the result that the committee and, by extension, the Parliament want?
I am sure that we can put that question to the cabinet secretary next week. I thank the panel for their responses.
I should point out, Mr Borland, that you are here to answer questions, not to pose them.
I apologised in advance, convener.
As members have no other questions and as the witnesses appear to have no further points to raise, I thank them for their attendance and, indeed, their evidence, which I am sure will prove very useful when we debate the regulations further next week.
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