Local Government Committee, 28 Feb 2000

Meeting date: Monday, February 28, 2000

Official Report 187KB pdf

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Non-domestic Rating Revaluation

I welcome Kenneth McKay, who is the committee's adviser on non-domestic business rates. He will give us a presentation and we will question him on the comments in his paper. We will then decide how to progress.

Members will recall that, when we took evidence on this matter, Fergus Ewing attended the committee regularly. He cannot be here today, although he wished to contribute to this discussion. He has read the paper but, because of a constituency engagement, could not get down here. In some ways he might be thankful for that, as the weather is bad north of Perth.

I must confess that, when I was asked to become the adviser to the committee, I was not sure what advice would be most helpful to you so I wrote my own thoughts on this issue.

If the committee is convinced that there is a case for a permanent small business rates relief scheme, it should not get involved in working out the detail of a scheme as that is a matter for the Scottish Executive. The committee should concentrate on the main principles that it believes should apply to a scheme and outline those in a report. It might want to come back to the subject to assess how any scheme that emerges from the Scottish Executive measures up to the principles on which it agreed.

If the committee agrees with the approach that I have outlined in my paper, it might be useful for members to examine the questions that I have asked in paragraphs 6 to 13. They cover the main points that would govern any scheme, so the committee would reflect those in its report.

I am happy to answer any questions.

We will examine paragraphs 6 to 13. Paragraph 6 states:

"It would seem clear from its deliberations to date, that the committee wants to ensure that only the former would qualify for relief."

Only small firms would qualify. Is that the feeling of the committee?

Members indicated agreement.

Does anybody have any questions about paragraph 6?

Members indicated disagreement.

Paragraph 7 questions whether a relief scheme should

"be free-standing and apply to all genuinely small businesses",

or whether it should

"attempt to dove-tail with the 2000 Revaluation and TR scheme".

In the following paragraph, Ken McKay goes on to explain his position.

I think that the rating system is inherently unfair to small businesses and that that must be corrected permanently. That need is quite different from the temporary relief scheme. I am therefore a keen supporter of option 7(a).

Ken McKay points out in paragraph 7 that there might be differences in different geographical areas. Does anybody want to comment on that?

One of my concerns is that there might be disparities. I am therefore concerned about an option (a) commitment stating simply that everyone should benefit. Some small businesses that do fairly well under the present system might not benefit. A comprehensive system would benefit those who might not necessarily require support.

It was the outcome of the revaluation that I had in mind. In previous revaluations, as I point out in the paper, there have been gainers and losers. There have also been geographical swings.

This is essentially a political point that must be addressed by those who represent an area that has a high loss relative to the average. Will businesses in that area feel happy just to get the standard scheme while other areas have gained from the revaluation? Businesses in some areas will get a double benefit, gaining because their rateable value has gone down and because a permanent scheme is introduced. Other areas would get the benefit of a permanent scheme, but would still feel worse off compared with other areas. Human nature being what it is, the perception will be that there are winners and losers, so a political balance must be achieved.

The simplest arrangement, as Mr Gorrie has said, is to introduce the system right across the board. It would be complicated to dovetail the revaluation and transitional relief as suggested in option 7 (b), and a lot of work would be needed to ensure that it was phased in properly. Experience has shown that revaluations cause lots of difficulties between geographical areas.

The free-standing option would not be able to take account of the revaluation at all. The second option seems to have many disadvantages, as it is complicated to dovetail the system and take account of the revaluation. Both options seem to have difficulties. Is there any middle ground?

I suspect that there could be a compromise between the two, giving everyone a little bit of help and weighting it towards those who lose from the revaluation. There are all sorts of options.

I thought that both options stood alone: either small businesses across the whole sector would be disadvantaged in their ability to earn compared with big businesses because of the impact of rates as a percentage of their profits, or the transitional scheme would offset big fluctuations. The valuation of a business may increase dramatically. That dramatic change would have to be factored in. In my view, the two options should be seen as entirely separate. A scheme that can take care of the discrepancy between big business and small business should be brought in.

I think that that is a vote for option (a), if I am interpreting your comments correctly.

Yes, it is.

Members will see, in paragraph 8 of the report, that Ken has included another comment on option (b), which is that we could invite the Scottish Executive to consider a feasibility study. Perhaps there is no enthusiasm for that.

Are there any comments on paragraphs 9 or 10?

Paragraph 10 seems to present a reasonable solution. For the reasons suggested in the paragraph, it is clear that we should avoid using a band, which creates a sudden upsurge in the amount of money that people have to pay. Paragraph 10 seems to catch the spirit of what most members want.

I agree. It is also important, as paragraph 10 states:

"to encourage businesses to grow without the risk of step increases in their rates burdens".

The last thing we want is for companies to think that if they move to bigger premises or employ more people they will face a huge increase in rates. That is one of the reasons why we would prefer tapering to the creation of cliffs. I am certainly in favour of a tapered approach.

If there are no more comments, let us move on to paragraph 11, which suggests that we might want to propose a limit for any relief scheme, in a range of £75,000 to £11,000—that is not right.

No, there are too many zeros in the report. It should say £7,500.

It is suggested that we propose a limit between £7,500 and £11,000; the current limit is £10,000. Does anyone want to suggest a change to the limit or are we happy with £10,000?

We need to retain an element of consistency. A limit of £10,000 seems reasonable. Unless members have particular reasons for changing that, we should stick with £10,000.

Before the committee reaches a final view on that, I would like to add some comments. I did some sums on the difference between banding and steps, using steps of £1,000, going from £5,000 to £10,000. If we stop at £10,000 and people up to that point get 25 per cent relief and people above £10,000—say £10,001—get no relief, the cliff would be £1,125.

Surely those people would still get 25 per cent relief on the first £10,000?

That is not how it worked in the past, although the committee could suggest that approach.

Would that not be more appropriate? Perhaps the committee could consider that approach. The point of tapering is to avoid any such cliffs.

I do not think that we need to fix on a particular figure at this stage. I took Ken's suggestion of proposing a band to mean that we give ourselves some flexibility. It might be more appropriate to reach a final decision when we have considered the effects of the current revaluation. I am attracted to the suggestion that the committee proposes a band, rather than fixes a final position.

I like the point that Ken made in the paper—about waiting until the revaluation has occurred. It is possible that all village shops, for example, will end up at £10,500 and that we will want to shift the limit slightly. I assume that avoiding cliffs means that, at the top end, one would go from 5 per cent to 0 per cent relief. Going from 25 per cent relief to no relief is far too big a cliff and the difference needs to be more tapered.

I support Donald Gorrie. I expected the taper to be such that there would be a very small variance between £10,000 and £10,001. The broad end of the taper would be 50 per cent but the thin end would be 5 per cent, so there would be only a slight difference between the effect on a rateable value of £2,000 and the effect on a rateable value of £10,000. We are talking about a thin wedge rather than the cliffs you describe. I would prefer there to be many stepping-stone bands.

A sliding scale.

Yes.

Does anybody disagree with that?

Previous discussions have led us to prefer a sliding scale.

On paragraph 12, do I take it that we agree that we should say that the introduction of any scheme should not be delayed beyond 1 April 2001?

Members indicated agreement.

I do not know how we can do anything else.

No, we cannot.

Who would pay for the scheme? Are there any bids?

Gil has told me that he is willing to sell all his garages to make a contribution.

There are three suggestions for paying for a scheme. It could be self-financed, with businesses with a rateable value above the limit of the scheme paying a higher rate poundage; it could be paid for from the Scottish block—I do not think Jack McConnell would be happy about that; or it could be paid for by a combination of those two.

The scheme will have to be self-financing. One cannot please all the people all the time, and certainly not in business, but most people will accept that the scheme has to be self-financing. In the longer term, everybody will benefit from it.

Of course the block grant arises. There will be discrepancies in Scotland—blips such as that caused by the oil industry in Aberdeen, which makes properties there more valuable. A political decision was taken some time ago that the rates at which people pay would be exactly the same in Scotland and England, so there may be scope for Jack McConnell to examine this issue. It is evident that the value of property is rising faster in England than in Scotland.

Major differences may develop between Scotland and England, and we will be back in the same hole as before, when values in England were much higher but rates were much lower. If we are to be fair, we cannot factor in a shop in Aberdeen paying the same in rates as a shop in Glasgow. However, valuations should come into play. The same should apply for England.

The Government cannot get off the hook by saying that properties are rising in value in England, when increases are much slower in Scotland. Jack McConnell should address those issues.

Although the Confederation of British Industry and the Federation of Small Businesses perhaps disagreed, it seems from reading the Official Report of our meetings that we were leaning towards the first option.

I am rather confused by what Gil Paterson said. He seemed to argue for a unified business rate for the whole of the UK but, if there were, we could not proceed with the sort of scheme that we are considering here.

What we are proposing would, if implemented, increase the variance between the way in which businesses are treated in Scotland and the way in which they are treated in England. I do not see how we can consider this proposal if, at the same time, we are saying that we would like things to be exactly the same as they are in England.

That is the position. We have a unified business rate that is based on the charge—the amount people pay. The only difference is that we are constrained by the decision to hold rates at the same value north and south of the border. That is why there is a discrepancy of roughly 10 per cent at present. The Government has made a political decision for both countries to set rates at exactly the same level for like properties in like areas.

I cannot follow Gil Paterson's argument either. When we spoke about whether we should have dovetailing or whether the scheme should apply across the board, I asked about geography and we said that we could not take it into account. If we cannot distinguish between areas in Scotland, why should we distinguish between Scotland and England? We need to decide whether we intend to take geography into account, and the decision we make must be best for rates in Scotland.

Can I come back—

Yes, but I do not want to prolong this argument. You have a couple of minutes.

Let us assume that every property value in Scotland is the same, and every property value in England is the same. The Government has decided that, although property values in England have grown by 10 per cent, it will charge properties in both England and Scotland at the same price. That means that the Government is funding the discrepancy between the two.

That would be the case here as well.

No, it is not the case here as well, as values are lower.

If there is a geographical discrepancy in Scotland, someone must be paying for someone else, to balance things out. I do not see why, if we take a decision to implement this scheme across the board in Scotland, we should concern ourselves with how businesses are valued in England. We should take a decision on the basis of what is best for rates in Scotland.

If the block grant were bumped up by the relevant amount, we would be happy, would we not?

In an ideal world, the Scottish block grant would be big enough to prevent us having to get other businesses to finance the scheme. As that is not the case, we are stuck with option (a).

I agree. The big businesses will kick and scream, but they must be compelled to pay if the Scottish block is not to pay. We have a choice between a difficult thing and an impossible thing, so we must go for the difficult thing.

Mr McKay, if smaller businesses were to benefit as we envisage—many getting 50 per cent relief, and others getting a little less—would the rates for Standard Life's or the Bank of Scotland's headquarters have to rise by 5 per cent, 10 per cent or 50 per cent? Can you give us a back-of-the-envelope figure for that?

Honestly, I cannot give an estimate. Everything depends on what the revaluation produces and what sort of small business relief scheme is implemented. We need to establish what the scheme costs before we can establish what we need to add on to the poundage for businesses that do not qualify for the scheme. It is impossible to do that sum on the back of an envelope.

If the increase for big companies were very great, that would discourage people from settling their businesses in Scotland. We need to give careful consideration to that. However, if the increase were fairly marginal, companies might shriek and wail, but it would be reasonable for them to pay. From papers that we have received in the past, we know that rates make up an infinitesimal percentage of large companies' turnover or profit, compared with normal shops.

Can we agree option (a)?

Members indicated agreement.

We will now move to the conclusions. Under paragraph 14, Ken Gibson is suggesting that we may wish to invite Jack McConnell back before the committee; we would probably want to do that around December, so that we can see what progress the Scottish Executive has made towards introducing a permanent scheme by April 2001. Is there any disagreement with that?

It might be better to have it before December—perhaps in October. December is only three or four months before implementation.

We will check our timetable and consider moving the date.

Do we agree option (a) of paragraph 13?

Members indicated agreement.

It seems that Kenneth McKay does not think that we have to do an in-term report. The suggestion is that we work towards a report that outlines the main principles of the revised scheme and that we should not get bogged down in technicalities that we do not have the resources to deal with. The Scottish Executive has the resources and I think that it should deal with the technicalities.

Kenneth McKay also feels that we have taken enough evidence. However, if any member feels that we have not, we will hear more evidence before producing the report that Kenneth has offered to help us draft.

Do members agree that we have taken enough evidence?

I would like to clarify that we have agreed option (a), described in paragraph 7, not (b), described in paragraph 8.

Members indicated agreement.

Could Mr McKay tell us a bit more about the geographical difference that Michael McMahon mentioned? How big is the geographical variation?

It is impossible to tell. That will become clear only once the full results of the revaluation are known. At the moment, we have only a sample that the Scottish Executive did to produce the poundage calculation for next year. History suggests that each revaluation brings big swings, so the Highlands might be better off than the Borders, or Glasgow might be better off than Edinburgh after this revaluation.

If the scheme were applied universally, everyone would have a lower bill than they would otherwise have got, but some would have gained from the revaluation and would therefore have been given a double benefit. If that happened, other areas would think it unfair when their rates—even with the influence of the permanent scheme—went up dramatically. A political balance must be struck. Geographical variation has always been a big issue in revaluations, but it will not be clear until we have the full results in May or June.

It might be useful to revisit this matter then.

We could do that, if members want to.

I agree with Sylvia. Our decisions today do not have to be hard and fast. It is fairly safe to make decisions today based on what Kenneth McKay has put in his report. If a problem develops, there is no reason why we cannot revisit the matter.

I have no problem with that.

I suggest that we ask Kenneth McKay to help us draft a report and give ourselves to the end of March to think of things that should be included in it. We could say that we intend to revisit certain parts. I also suggest that we invite Jack McConnell to update us in October rather than December. We will consider our timetable to see whether that is feasible.

I am a wee bit confused. I cannae see the benefit of waiting. We know that there will be discrepancies and changes; otherwise, there would be no need for a revaluation. If we decide that scheme A should be the basis for those changes, and we are deciding on the mechanics, I do not see the benefit of waiting.

I am suggesting that we make a decision today on the evidence that we have. If, over the course of time, we discover a particular problem, there is no reason why we cannot revisit that.

I am sorry. I misinterpreted.

We are not delaying anything. We are asking Ken to produce a report for us, but with the proviso that we may reconsider parts of that report later. Ken, is there anything that you would like to add?

No. You could say that you are inclined towards scheme A, but that you want to revisit it if there are wide geographical variations in the outcome of the revaluation.

That would be fine.

In that way, you could keep your options open.

I thank you for your time, Ken, and wish you a safe journey home.