Local Government and Regeneration Committee

Meeting date: Wednesday, May 30, 2012

Official Report 510KB pdf

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Local Government Finance (Unoccupied Properties etc) (Scotland) Bill: Stage 1

The next item of business is our final oral evidence-taking session in our stage 1 consideration of the Local Government Finance (Unoccupied Properties etc) (Scotland) Bill.

I welcome Derek Mackay, Minister for Local Government and Planning, and Keith Brown, Minister for Housing and Transport. They are accompanied by Scottish Government officials Sam Baker, head of the tax and markets unit, housing supply division; and Marianne Cook, policy manager, local government finance unit. Thanks for coming, and I apologise for keeping you waiting after calling you in early.

We propose to deal with the bill in three parts, looking first at empty property rates relief. One of the criticisms that we have received is that there was no formal consultation before the introduction of the bill. Can we have some comments on that? The Finance Committee was particularly concerned about that.

I am happy to pick that up. I do not know whether you want any opening remarks, convener. However, specifically on your reference to consultation, it was felt that it would not be proportionate to carry out a consultation at that stage because of the number of properties involved and the scale of the issue. It affects £18 million of income generation in the context of £2.3 billion income from non-domestic rates.

The decision to undertake a business and regulatory impact assessment is at ministers’ discretion. On this occasion, it was decided not to undertake one. In the same way, it was felt that such a process was not required for the decision to implement the public health supplement. Having said that, I point out that there is on-going consultation on how the policy intent of the bill is being progressed. At this stage we seek only the enabling power to vary the reliefs. The regulations that will specify what the reliefs will be will come to the committee at some point in the future.

11:30

If the consultation is on-going now that the bill has been drafted, is the Government still minded to be flexible about how the regulations will be applied? It was a concern of businesspeople that they had not had the opportunity to feed in. Are you saying that, in spite of that, you are still listening?

Yes. The Government continues to listen on the issue. The consultation has been on-going. The bill gives ministers the power to introduce regulations that can vary the reliefs in the same way that we can vary the small business bonus. The on-going engagement with stakeholders will ensure that they and Parliament are listened to.

I will press you a little on that. As recently as in advance of today’s meeting, you have issued a press release that still talks about £18 million being raised from these properties. You say that you are listening, but you do not appear to be hearing what businesses are saying. There is a very clear message coming from them that these properties are unoccupied because there is a lack of demand and because of the economic circumstances, yet you seem to have taken no cognisance of that. Would you like to comment on that?

The committee should be aware that what we are being asked to approve at this stage is the enabling power for regulations to be introduced to vary the rates relief. We believe that the figure of £18 million that was announced in the budget will incentivise landlords to open up premises and to bring premises back to life. That is the policy that was announced at the time of the budget.

In response to the convener’s question, I have said that we are still listening on the specifics of what we might introduce through the regulations. When those are introduced, the committee will take a view on the regulations and the absolute levels that are set at that time. The policy statement as outlined at the time of the budget contains the figures that we are working on at the moment. I say again that the Government continues to listen to all the stakeholders, some of whom the committee has had as witnesses—this is not the end of the process. However, we believe that the empty property rates relief review is necessary to bring some commercial properties back into useful operation.

Perhaps you can provide some evidence for that. Throughout the evidence that we have taken, there has been no indication that there are empirical statistics to prove that what you say is the case. In fact, it is increasingly looking as though the whole proposal is based on the Walter Mitty school of economics.

There is no empirical evidence either way. Similar reforms in England were enacted by the UK Government in 2008 and then took place in Wales but, because of the various factors that affect local economies—including the euro zone crisis, the general recession and the VAT hike, which cost Scotland £1 billion—it is very hard to establish empirical evidence to show what impact the empty property rates relief policies in England and Wales have had either way. For that reason, we have learned lessons from, for example, policy on rates relief for industrial properties. We are not simply following what happened in England but are adopting a slightly different approach and continuing the 100 per cent relief for industrial properties because of the experience in England.

It is fair to say that there is a lack of evidence either way to show what specific difference the policy could make. However, many people believe that subsidising closed premises does not feel like a fair sharing of the burden.

What is the cost of empty property rates relief just now?

Over the five-year period, the cost is £757 million. That is the amount that the Scottish Government gives in empty property rates relief. If the proposals were enacted as announced at the time of the budget, it would still cost the Government £721 million in rates relief.

The policy is two pronged. It is about income generation as well as incentivising landlords to open up premises, and we are honest about that. It is expected that, as an income generation measure, it will generate £18 million a year.

There seems to be an assumption that the 5,500 vacant properties will come back into use. Where is the evidence for that? You are asking us to consider legislation and a proposal that are backed up by no statistics. We have heard witness after witness say that empty property relief will not achieve either of its objectives of regenerating the economy and bringing those properties back into use, and that it could in fact end up costing the Government money, given the public liability.

There has also been some confusion about what organisations such as the Federation of Small Businesses are saying about it. Perhaps the minister or his advisers could clarify that on the record.

We are satisfied that the figure of £18 million, which is calculated according to a formula, is robust. That does not assume that 5,500 properties would necessarily be brought back into use, but simply outlines how those properties will receive a lesser relief under the proposal. That is how we arrived at the figure of £18 million, but we do not assume that those properties will all open. Although we aspire to bring as many properties as possible back into use, the figure is predicated not on how many come back into use but on the fact that the relief that the Scottish Government provides is lower. It is down from £757 million to £721 million, which does not seem completely disproportionate in terms of sharing the burden.

I am not surprised to hear from Margaret Mitchell that many of the witnesses who have appeared before the committee do not want to pay more tax. I am not familiar with many groups who come to committee and volunteer that their organisation or members should pay more tax. I had the same experience with the public health supplement, which many members supported.

I have specific quotes from some of those who have taken a position. The Federation of Small Businesses welcomed the review, which must be set in the context of the business rates incentivisation scheme, the small business bonus scheme and the rates review that we have announced will take place shortly. That context, along with the regeneration strategy that the Cabinet Secretary for Infrastructure and Capital Investment, Alex Neil, will be promoting over the summer, creates a wider picture that many stakeholders support and appreciate. The Federation of Small Businesses welcomed the Government’s direction and the rates review in so far as it encourages landlords to bring properties back into use. Whether the FSB supports the policy as it stands is for the organisation itself to answer. I think that, at present, the FSB does not necessarily support the statistics. However, in a press release and in further stakeholder meetings with me and others, it has been broadly supportive of the Government’s direction. If the FSB is not supportive, it is for the organisation to say so.

The FSB said in its written evidence that it was unfair that we were paying out more for rates relief than we were for the small business bonus scheme.

Post-reform, in what ways will the empty property relief scheme here be more generous than the schemes in the rest of the UK?

The Scottish Government has protected the poundage, and the small business bonus scheme, taken in context, has been incredibly helpful. Under our current proposals, we would still give relief of 10 per cent where none is given in England. Industrial properties, which were affected in England, are protected in Scotland, and we have ensured that we are applying some of the lessons that have been learned.

There are specific differences between what is proposed for Scotland and what has happened in England. The important point about the power is that it is very helpful to Scotland and to our economy to always have a competitive edge over other parts of the United Kingdom, specifically on business rates relief. That will come through in the consultation later this year. As with the small business bonus scheme, it is better to have the power—subject of course to parliamentary scrutiny—to vary those rates so that we will always have a competitive edge over what other parts of the United Kingdom are doing.

We have provided for a range of other reliefs for charities and other organisations; I have a list that I can circulate to members. On empty property rates relief specifically, the period in which it kicks in, the level of relief that is given, the nature of industrial properties and the scale of rateable properties are all set at an appropriate level. As I said earlier, we are listening to stakeholders to ensure that we get it right when we bring the regulations forward.

The evidence that we have heard in response to lines of questioning about empty properties in certain parts of the country suggests that there might be geographical differences. In my patch, for example, some folk seem to be willing to hold on to properties until they get the right price even though such a price cannot be sustained in the current market. Others have wondered whether changing the use of certain empty properties might allow them to be let. Are you willing to be flexible and examine some of those issues in the formulation at the end of the bill?

Absolutely. We have asked stakeholders to give us their suggestions, highlight best practice and tell us what might help to incentivise owners to bring their properties back into use, and we will remain a listening Government in that respect. Of course, we will also learn from Administrations in other parts of the UK and, through our officials, find out what policies they are adopting or, indeed, reviewing to ensure that our part of the UK is the most competitive.

As for rents, a key issue is that, as evidence to your committee has suggested, rents in certain places remain stubbornly high and it is clear that doing nothing will cause stagnation in some communities in Scotland. If the reduction in business rates focuses the minds of some landlords—in particular, those described as “remote” landlords—on bringing properties back into use, it might be a very effective incentivisation tool in areas where there has been stagnation and no impetus to find tenants. We know that there is a range of factors, but stubbornly high rents are often cited as a reason for unoccupied properties.

I might be about to sound unreasonable, but I should make it clear that I generally support the bill.

You said that you are seeking an enabling power, but some have expressed concern that the power is for ministers’ use only. As a result, we would like an assurance that you will take any further consultation on board and come back to Parliament to discuss the matter before any decision is made.

Secondly, I want to explore an issue that Margaret Mitchell has already touched on. You have said that the £18 million figure has been reached as a result of robust analysis but, if that is the case, why has the Finance Committee said that there is no detail behind the figure and that not enough work has been done to produce that evidence?

I would be the first to say that you are a very reasonable man, Mr Pentland, and I am sure that you will find the Scottish Government to be very reasonable in turn. When we consider the regulations on varying the reliefs, we will bring them back to Parliament before any change is made; indeed, I understand that this very committee will examine the matter. Ministers will not act in isolation and the regulations, which, I hope, will reflect some of the comments that have been made by committees and stakeholders, will still be subject to a level of parliamentary scrutiny.

On the £18 million figure, you are right to suggest that the Finance Committee was somewhat frustrated at the lack of detail, but my understanding is that the detail that we had on how we arrived at that figure has since been circulated to the committee.

I should add that the Cabinet Secretary for Finance, Employment and Sustainable Growth, John Swinney, has made it clear that there is flexibility in the policy to ensure that we get it right. If the amount generated by this measure were to be substantially more than £18 million, it would act as a further incentive for the Government to review the levels at which the reliefs are set. We think that, to remain competitive, what is important is the power to vary rates, rather than the full three-stage process, which you just do not have for many other schemes, including the most comparable—the small business bonus scheme.

Given the difficulties that you have already highlighted in separating out the effects of empty property relief reform from wider economic factors, how do ministers propose to monitor the impact of the reforms?

11:45

We will remain in dialogue with assessors, councils and all stakeholders to ascertain the impact of the policy. For the reasons that you fairly acknowledged, it will be hard to produce evidence on how many properties are brought back into use, because we will not be able to isolate the policy from other policies that might have had an impact, such as the small business bonus or support through the regeneration strategy, and other factors that might determine the economic climate in which the business world operates.

We will monitor the situation. If we thought for a minute that the policy was counterproductive, we would have to review it. However, we think that the policy will make a difference and that many landlords will decide to use properties that have been left neglected in some way.

Do you have a period in mind for reviewing the impact of the bill?

There is the budget process, from which the policy emerged, which is on-going. We must regularly consider the income from non-domestic rates, so of course there will be on-going monitoring of the perceived impact of the policy and the actual numbers. It is worth remembering that all non-domestic rates are returned to local government, and that that part of the local government settlement is assured by the Scottish Government.

The Finance Committee’s report gave me extreme concern. You said that you have provided evidence to the committee about the £18 million. Do we have that evidence, or are we able to get it?

We are able to get it.

There remain concerns about enforcement. How will the Government recoup the £18 million? Even if you do recoup it—which is not likely, from what you are saying—what will you do with it?

The income that we would generate from the reduced relief as proposed would be generated in exactly the same way as the £2.3 billion raised through non-domestic rates is generated. Assessors identify the properties that are liable and the council collects the rates.

The small business bonus and charitable reliefs can be varied. The infrastructure to do that exists and councils and assessors understand their responsibility, so new infrastructure is not needed to deliver the policy. Varying the rate relief simply requires a change in the calculation of what people are entitled to. We are confident that the money will be realised.

When the Finance Committee considered the financial memorandum, it did not have all the detail that it wanted to enable it to understand the policy. On request, the detail was given to the committee, which passed its report to this committee, so that it could probe the policy. I understand that all the information has been given to the committee.

My major concern is that a business and regulatory impact assessment has not been carried out. Do we have the evidence in relation to the national health service and Scottish Enterprise, which was mentioned?

We do, and I can share it with the committee: the impact on the NHS is £0.3 million; the figure for Scottish Enterprise is £0.4 million; and the figure for councils is £1.7 million. Members should bear in mind that non-domestic rates income is £2.3 billion per year. Those figures are calculated on the basis that none of the properties concerned is brought back into use. They represent the cost of the policy to those organisations. I hope that that answers your question.

There are a number of schemes in councils to try to give council properties to community groups and so on, at a peppercorn rent. Would such properties be exempt from the charge?

An organisation or property that is entitled to charity or associated rate relief would continue to enjoy that after the proposed reform. Over the five-year period, the cost to Government of relief to charities is £734 million. The policy will not affect non-profit-making organisations that are covered by charity relief.

So the costs to local government could be less if those groups use the property.

The answer to that question will depend on how the groups construct their assets. We are about to launch the community empowerment and renewal bill, which has the purpose of releasing more assets from the public sector for community use. If organisations have the appropriate constitution and ownership, they could be relieved of non-domestic rates, which I am sure will delight the cabinet secretary, John Swinney.

I fully appreciate the sentiment behind the proposals, but we have taken evidence from Glasgow City Council that the bill might well lead to its having to demolish properties. I thought that the bill aims to encourage regeneration and the use of empty buildings.

I would have thought that the new burden on local government of £1.7 million seems like a drop in the ocean compared with the £11.5 billion that is given to local government by way of the settlement. The non-domestic rate income is given back to local government in full, so it funds the services and is part of the budget process and balancing the books. That would have been made much easier if the UK Government had not savaged the Scottish Government’s budget.

Will you explain a little more fully why industrial premises are not included if the policy is such a great idea and will generate more income and result in more properties being brought back into use?

There was evidence from the English experience that, because industrial premises are so specific by nature, it is hard to adapt them to new use. Therefore, it would be disproportionate and unfair if the empty property rates relief policy was applied in such a bland way to industrial premises. Learning the lessons from England, we felt that it made sense to exempt industrial properties. Some of the more glitzy stories in the press suggested that some industrial properties in England were demolished. There is not a huge amount of evidence on that, but if the policy was not implemented in a sophisticated way, it could have that impact on industrial properties. For that reason, industrial properties are not covered.

Is it not a bit of a contradiction that you are prepared to look at the experience in England in relation to industrial premises but you discount the experience there in relation to retail premises? We know that, as a result of the policy and the pressures of bank lending, the retail vacancies figure rose from 3 to 14 per cent. That is the nearest that we have to concrete evidence, yet you seem to discount it while using the English experience in relation to industrial premises.

There are specific circumstances with industrial properties. It would be wrong to say that the empty property relief policy in isolation caused the increase in vacancies in England. As we have discussed, the international recession, the euro zone crisis and the UK Government’s increase in VAT were in the mix in that context. We have to consider all the factors. The policy was introduced by the previous UK Government in 2008 and has been sustained by the current one. We will learn the lessons from across the United Kingdom on how policies have been applied and on innovative packages to incentivise the use of our town centres.

Yesterday, I was at Glenburn seniors forum and was asked what I was doing in Parliament today. When I told the members of that forum, they agreed unanimously that the burden should be shared across council tax payers and property owners. We are talking about a property tax to generate income to balance the books and revitalise our town centres. A great many taxpayers support the policy and feel that it is not fair to let some landlords off the hook when they should be trying to stimulate and encourage growth in town centres.

Do you honestly believe that, in the current economic climate, anything but the teeniest proportion of people would wilfully not try to let their property? A host of people, including the CBI, Scottish Chambers of Commerce and the FSB—the list goes on—as well as the Finance Committee in its damning report have told us that the major cause of empty properties is the lack of demand in the current economic climate.

The consequences of this policy could be a negative impact on speculative development—it is hard to see how that would regenerate the economy; a risk of demolition, which has already been covered; and more businesses ending up in administration, which is a real concern. Surely it is time to say that this is a counterproductive policy that should be shelved. The fact of the matter is that witness after witness has said that this policy is not going to deliver on its principle or its objectives.

Perhaps Margaret Mitchell should reflect on the fact that the UK Government does not share her views—the policy of the previous UK Government has been sustained by the current one.

I am not dismissing the concerns of the business community. That is why I said that we will continue to work with all stakeholders to ensure that we get the policy and the regulations right. The policy has to tie into the bigger picture of regeneration strategies, the business rates incentivisation scheme and other support that we can provide to ensure that town centres are healthy and vibrant.

However, many owners of occupied properties and local businesses might feel that it is unfair that they are paying the burden of keeping the shop next door empty. I get the point that there is a lack of demand in the economy at the moment. That is why there perhaps should be further support for Scottish Government policies to stimulate the Scottish economy—and why other UK decisions, such as the VAT hike, were unhelpful.

On local circumstances, stubbornly high rents have been referred to in evidence to this committee and the Finance Committee to explain why some properties have not been brought back into use. The Government, the Parliament and the local authorities have to do something to make landlords and developers think about the rents that they charge. One way to do that is through the non-domestic rates relief that is given. It is a huge subsidy by the taxpayer in tax that is not being received. We have to capitalise on that in a way that does not cause an imbalance across Scotland.

On Margaret Mitchell’s point around speculative development, the Scottish Government sympathises with the point about the liability costs of any new development. However, the advice that we have received is that the exemption of new properties would not comply with European Union state aid principles and therefore we cannot exempt them, although we sympathise with the point about the viability of developments. To suggest that there has to be complete rates relief for new properties would be wrong. The current policy is 50 per cent rates relief, so it is not the case that some unoccupied properties and landlords should pay nothing—that case has not been argued, even by stakeholders. The level at which relief is set is what we have to consider closely in the mix of all the other policy tools that we have at our disposal.

You say that you are listening, but you are not hearing the clear and unambiguous message that is emerging—that this is a counterproductive policy and that you really should think again.

I make the point once more that the purpose of the bill is to give ministers the power to vary the reliefs. We will do that in the context of all our other policies. When we set the reliefs and arrive at that policy we will return to this committee. I am sure that we will evidence how we have taken on board the views of the Finance Committee and this committee and the views of stakeholders and we will show that we are indeed a listening Government.

We are not dismissing the arguments that are being put forward, but we have to bear in mind that some people are making a case for not paying more tax. That is understandable but, as a Government, we have to balance the books and show that we are stimulating the local economy and continuing to invest in the public services that these properties and these landowners depend on.

Like most committee members, I am sure, I welcome the minister’s commitment to continue to listen and to be flexible as to how the policy is finally implemented—particularly the point around speculative development. If someone invests in a property, sometimes—precisely because it is speculative—it might not work out. If that issue is going to be looked at, that is to be welcomed.

12:00

I certainly do not think that the move will be counterproductive in certain areas of the country; in fact, I think that it will be welcomed by folk who are looking for premises in areas where rents are still stubbornly high.

Turning to the planning part of your portfolio, minister, I wonder whether you are willing to examine the time that it takes to change the use of certain empty properties to bring them back into use and the bureaucracy that surrounds such moves. What do you envisage might be the change to rates if real attempts were being made to bring such properties back into use?

You ask a very good question about planning considerations. You will be aware, for example, of the planning consultations that were launched in March, some of which are about simplifying and streamlining the system and being more flexible and responsive. The solution for many town centres lies not in simply expecting retail to come back as it was 10 or 20 years ago but in diversifying their use, and that issue will be picked up in the regeneration strategy that Alex Neil is leading. I will certainly do all that I can within the planning remit to make that approach quick, effective and real.

Of course, I am relying on a culture change in the planning system, which includes the 32 planning authorities and the two regional park authorities, to ensure that that happens at a local level. After all, such moves do not necessarily require legislation; they might just need appropriate decision making on material considerations on the ground. If ever there was a time that we had to be flexible in the use of our town centres, given the financial climate in which we are operating, it is surely now. I will do everything that I can under the planning part of my brief to make that happen.

It has been suggested in evidence that this might not be the right time to introduce such a bill and that bringing back so many empty properties into the kind of use that we hope for might be counterproductive. What guarantees can you give that that will not be the case? What safety measures have you put in place, and what other help and assistance are you prepared to offer to deal, in particular, with the properties in some town centres that, as Kevin Stewart suggested, might not be appropriate for the use that they might once have had?

Let me, once again, set this in context: this measure will effectively generate £18 million-worth of income, whereas year on year the Scottish Government provides £0.5 billion in rates reliefs to a range of different people. We have to put this in perspective. This £18 million burden will be shared among a potential 5,500 properties across the country, but I point out that a host of Government support packages is available from Scottish Enterprise or business gateway, or through local government’s regeneration function, to stimulate local companies and support them in developing new businesses. However, we will no longer subsidise closure and the commercial inactivity of properties that remain closed at everyone else’s expense. A range of measures is available to support individual businesses that want to open up or, as the convener suggested, properties could be released for other functions that would not incur non-domestic rates but would still serve a good community function and complement whatever else is going on in town centres.

You mentioned Scottish Enterprise and business gateway. How much have those partners bought into your bill?

All Government agencies are expected to deliver the Government’s outcomes and all community planning partners, including the private sector, will work together on the regeneration strategy. We will ask everyone for their views on the business rates review, the consultation for which will be launched fairly shortly and carried out over the summer.

Would the minister consider the reforms appropriate if they had no impact on the number of empty properties but succeeded only in raising revenue?

If this was simply an income-generation measure that had an adverse effect on the business community, we would not be progressing with it. However, the Scottish Government believes that it will not only increase income through lower rates relief but incentivise landlords and owners to open up premises that up to this point have been closed. We genuinely believe that the policy is about incentivisation as well as income generation. If it were just about income generation at the expense of the business community, we would not be progressing it.

On the back of that, what other measures were considered in relation to this?

In relation to what?

The policy objective of reducing the number of empty properties.

As I said, the regeneration strategy—which the Cabinet Secretary for Infrastructure and Capital Investment, Alex Neil, will take forward shortly—will outline more of that work. The policy should be set in the context of preserving the small business bonus scheme, which is a highly targeted measure to support small businesses. If we view the policy in the context of the planning reform that we have spoken about and the regeneration strategy, the fact that it will generate £18 million out of a tax take of £2.3 billion means that it is fairly proportionate to the challenge that we face.

I will not ask you to give away any of the cabinet secretary’s secrets.

I was not a member of the Government when the budget was composed, but I am sure that the cabinet secretary had to consider a range of financial options for balancing the budget, which, as I have pointed out, was drastically reduced by the UK Government, whose business rates relief policy is less generous than the Scottish Government’s.

It is worth pointing out again that, even if the proposals were accepted in their present form, our system would still be more generous than the one that is enjoyed in England. Business rates in Scotland would still be more competitive. The power to vary the level of relief will give us the opportunity to continue to be more competitive than other parts of the UK.

Do you think that the legislative process should be paused while a proper consultation takes place?

As a former councillor, I am not sure that local government would appreciate the Scottish Government saying that it intended to pause the prospect of its receiving new income. We will have time to consider the matter. The bill will not be enacted this week or next week; it will not come in until the next financial year. We have time to consider the regulations, to bring them to Parliament and to implement them in time for the next financial year. We are not rushing to a decision. If you are looking for time to consider our proposals, that is already built into the process.

As a former councillor, I am well aware of the Scottish Government’s previous big ideas. It was at the implementation stage that the difficulties arose. I am glad that you will take on board the result of the proper consultation that is taking place.

It could be argued that the policy in question is a policy of the 2008 Labour Government. I can only commend your party’s Government for coming up with it.

Given the concerns that have been raised—both with us and with the Finance Committee—about the fact that a business and regulatory impact assessment has not been undertaken, why will you not consider undertaking such an assessment?

At the risk of repeating myself, given that the policy will generate £18 million out of a total tax take of £2.3 billion, it would not be proportionate to carry out such an assessment. We are talking about a unitary national system of reliefs, unlike the council tax benefit system, on which there might be 32 different policies. There is a difference between the two systems. It was not felt that it would be proportionate to carry out a BRIA on a national system at that level.

I am asking the committee to consider the principle of the enabling power rather than the exact levels of rates relief. The committee will consider the extent to which rates relief will be varied at some point in the future. In many ways, an assessment of the impact is on-going, as we explore and refine the policy and listen to the committee and stakeholders. It is not as if the decision has been taken in the budget and that is the end of the matter. As the cabinet secretary has said, there is some flexibility. I have outlined why we think that the policy direction is important, but we will be flexible. The process of assessing the impact, the consultation and the engagement is very much on-going.

Thanks very much.

We move on to section 2 of the bill and the issue of the council tax. In the evidence that we have taken, there has been a bit of debate around what should happen to the extra income. Most people agreed with the general principle that it should not be ring fenced, but some people said that, as the money would be generated from empty properties and that the aim was to bring those homes back into use to tackle a housing problem that a local authority had identified, it should be ring fenced. What are the minister’s thoughts on that?

First, I thank the committee for asking Derek Mackay and me to give evidence today.

I will preface my answer to the convener’s question with a few remarks on the general content of the bill, which is about making the best use of our housing and commercial property resources by discouraging their being left empty. It is also about ensuring that Scottish Government funding for housing can be targeted at delivering key priorities, such as more affordable housing, rather than it being used to pay councils’ interest costs on their debts.

As the committee knows, the bill has two topics, the first of which is about changes to local taxation charges for empty properties through business rates and the council tax. The second topic is the proposed abolition from April 2013 of the requirement on the Scottish Government to pay the housing support grant.

On the council tax increase on long-term empty homes, it is clear that housing is critical to Scotland’s economic prosperity, the strength of our communities and the health of our people. Despite the tightest budget settlement since devolution, as Derek Mackay outlined, the Scottish Government has a clear commitment to deliver 30,000 affordable homes over the lifetime of this parliamentary session. In fact, earlier today I announced that the first figures for the first year showed that there have been around 6,800 completions, which is substantially above the average target that we would have to achieve. The target is very challenging, but I am confident that by focusing on more innovative approaches we will deliver the 30,000 target, with the support of councils, registered social landlords and our other partners.

Our approach to increasing supply is not just about ensuring that more new homes are built, although that is vital. The bill will provide us with an additional tool to assist councils to deal with the scandal of long-term empty homes. Such properties do not raise any income for their owners, they can be an eyesore in their community and they reduce the supply of housing that is available to those who most need it. Around 70,000 homes are sitting empty in Scotland at any one time, about 25,000 of which have been empty for six months or longer and are liable for council tax.

The bill will enable us to introduce regulations to allow for increases in council tax charges on certain long-term empty homes. The regulations are expected to give local authorities the flexibility to charge the owners of empty homes up to double the standard council tax rate after a home has been empty for at least one year. That provision is first and foremost about providing an additional tool to help councils in encouraging more owners to bring their empty homes back into use. That can help councils to meet their housing need and adjust the size of waiting lists in their areas. Again, the provision is not just a revenue-raising power. Councils, assisted by the Scottish empty homes partnership, will be able to provide advice and assistance to owners on the best way to bring their home back into use and so avoid paying any increased charge.

The last part of the bill is on housing support grant. The provisions on abolishing the housing support grant are aimed at avoiding the Scottish Government budget needing to be used in future to fund councils’ interest costs on their housing debts. Obviously, the grant was needed in the past to help some councils meet their housing debt costs, but the introduction of the prudential borrowing regime means that councils should now borrow money to fund housing or other projects only where they can demonstrate that they can afford to repay that borrowing. In that context, the grant should no longer be needed.

At the moment, only Shetland Islands Council claims housing support grant, but its reliance on the grant has been reducing over a number of years. I have just written to the new leader of the council, who was appointed yesterday, I think, proposing a meeting to talk about the council’s request for write-off of that debt or, as the council puts it, transitional funding.

To return to the point that the convener raised, we considered whether the money should be ring fenced, but our view is that we should try to encourage councils and give them discretion, which is consistent with the concordat and the way in which we now work with councils. They will, of course, continue to ring fence the moneys that they get for current income from council tax in relation to discounts. They will continue to be obliged to use that towards providing more housing. However, in this context we thought that a collaborative approach was best, such that councils would have discretion and we would put in place other means that could support them to bring housing back into productive use.

It has also been suggested that there is a danger that property owners who were keeping properties empty for a particular reason might reclassify them as second homes. Has the Government considered that matter and whether the bill should also cover second homes?

12:15

We have looked at the matter but it will take more work to formulate a working definition of second homes that will allow us to distinguish between the two types of property. That said, we think that second homes often provide economic benefits to and improve the areas in which they are located, although I admit that the reverse can be the case if there are too many of them. However, that is not the case with empty homes, which is why we have focused on them. We intend to put together a proper definition to distinguish between the two types of property and that will come down to factors such as the length of time for which a property is occupied in the course of a year.

One could argue that it would be more appropriate for local authorities to decide whether second homes have a negative economic impact in their area and so should have the rate applied. Will you consider that issue?

Councils have different views on the issue of second homes and if we want to ensure that the measure is as workable as possible we must take a consistent approach across the country. We will look at the responses that we receive as the legislation proceeds and try to be flexible in the way that Derek Mackay suggested. However, our view at the moment is that a consistent approach to second homes, which we do not intend to capture in this legislation, and empty homes, which we do, is the best way to move forward.

What is your reaction to Waverley Housing’s suggestion that to tackle the problem of empty properties the Scottish Government use more of its affordable housing supply budget to allow registered social landlords to purchase empty properties on the open market or to convert empty retail units to housing rather than focusing on new build?

Although such suggestions are worth considering on their own merits, they should not preclude what we are attempting to do in the legislation. The problem of empty homes goes much wider than RSLs and I believe that the basis of the bill, which is to provide some form of disincentive with regard to keeping properties empty, stands on its merits.

As for the proposal that you highlighted, I point out that we have become increasingly flexible with regard to RSLs. That trend will continue and, as I have said, such ideas should be considered on their merits.

Many local authorities have a lot of empty homes because they are in hard-to-let areas. How can the bill help in solving that problem?

Secondly, the Finance Committee noted that the financial memorandum assumes that, as a result of the changes, 10 per cent of long-term empty homes will be brought back into use each year. On what basis was that figure reached?

On your first question, we have worked with housing lobby groups such as Shelter Scotland on that matter. The proposed council tax increase is only one of a number of measures that we are considering to bring long-term empty properties back into use. For example, the main aim of the Scottish empty homes partnership, which is run by Shelter and has been funded by the Scottish Government up until next year, is to support local authorities, private owners and others in reducing the number of empty homes and it can therefore help councils in working with owners.

In addition, we have provided £400,000 of innovation funding to South Ayrshire Council to run an empty homes loan fund. That fund has drawn a very positive reaction from the rest of the UK, and the Scottish Government is keen to encourage more councils to apply for similar loans. Moreover, there will be an opportunity to apply for funding through the £2 million empty homes loan fund in order to increase the supply of affordable housing.

We have committed to contributing £40,000 in this financial year to the employment of three shared empty homes officers, who will cover seven local authority areas across the west and south-east of Scotland. It is clear that the measure that is set out in the bill is not the only one that we are introducing to help councils to bring empty homes into productive use; we have developed a suite of measures to try to help the situation.

If councils raise revenue from the measure, it will of course be open to them to use it—should they wish to do so—to provide loans or assistance in the form of grants to owners of empty homes who do not have the resources to bring those homes back into public use. It is quite easy to foresee schemes that would allow councils to bring into productive use—to make available for let to people—homes that would otherwise have no chance of reaching that status. A scheme could even be created under which a council or an RSL provided to a home owner a loan that was repaid through rental income that would not otherwise be realised. Councils could take a number of measures.

The 10 per cent reduction in empty homes is an estimate, and the financial memorandum notes a significant margin of uncertainty about that. It is true, and we have said from the start that we recognise, that the prevalence of empty homes and the ability to bring them back into productive use will differ in different council areas. The number of homes that are brought into use will depend on other factors, such as the amount of support that local authorities provide. I have given the committee ideas about ways in which councils could provide support, which will increase the numbers that are brought into use.

Why are all the estimates based on the assumption that all councils will use the power and charge 100 per cent of council tax or apply the maximum levy?

I am not sure how else a workable estimate would be arrived at. The figure is the potential amount that could be realised.

We have made it clear from the start that the discretion will lie with councils. The bill will allow councils to vary the level if they want to, so the only meaningful figure that we can advance is the potential maximum figure.

Why was that approach used? Some sort of variation could have been built in to make a more realistic assumption about the financial impact.

I do not accept that. We have said that the power will be an option for councils to use. Given that, there could be innumerable permutations of some councils using or not using the power and some councils providing different discounts. We could not have arrived at any other meaningful figure. We have specified the maximum that could be achieved. That makes sense to me, at least.

I do not think that starting from such a figure is realistic, and that is never good for a policy decision.

Will you give guidance on the evidence that local authorities will require for an exemption from or a grant for the increases in council tax charges?

I am not sure whether I understood the last part of your question.

Will you give examples of circumstances that would qualify for exemptions? You will obviously want such matters to be clear and transparent.

That is right. The issues will take time to work through. If it was clear that a sincere effort had been made to sell or let a property, for example, we would not want to punish somebody for a genuine attempt to bring an empty home into productive use. Those matters should be considered further. They are not easy to resolve; we will deal with them in conjunction with our local authority partners. The judgment will be about what is prescribed in primary legislation or regulations and what is left to local authorities.

It will be possible for local authorities to work out whether something that has been left empty should be brought back into productive use and whether a property owner is genuinely trying to bring it back into productive use. The provisions would not apply if someone was selling their own home, because they would be occupying the property.

Would someone be required to keep advertising their home and to incur more costs?

I imagine that someone who was genuinely trying to sell their home would want to advertise it. There must be further discussion about what is a genuine and sincere attempt to market a property. Putting a “For Sale” sign in a back garden would not be a sincere attempt to market a property.

Councils will have the right to make a proper judgment about whether somebody is trying to market their property for sale or let. We can work with local authorities to reach a suitable conclusion that allows them to do that.

What is your view on the suggestion from Scottish Land & Estates that an additional exemption from any council tax increase should apply when an owner has a long-term empty property that is subject to a live planning application?

What you suggest is not something that I support. It would be quite possible for an owner to lodge a planning application to try to circumvent their liability for additional council tax. When we look at tax issues—of course, we do not currently have many tax powers—we have to be careful to ensure that we do not make it easy for people to avoid the tax. We have seen evidence of that happening over many years in the context of the UK Exchequer, to the substantial loss of taxpayers in this country. It is fair to everyone if the rules are applied consistently and are not easily avoided.

Can you at least give the committee an indication of the timescale for the laying of the regulations before the Parliament?

We hope to lay the regulations as soon as the bill receives royal assent. When that happens will depend on the committee, to some extent, but it will probably be in early December.

There will be no substantial delay.

Some of the more sensible suggestions from Scottish Land & Estates were to do with empty properties in rural areas. Some houses will never be brought back into use, because they are in the middle of fields or up on the top of hills or whatever. Would it be more realistic to remove such properties from the council tax register? Will you talk to valuation boards about some of the bizarre situations in which properties that no one in their right mind thinks will ever come back into residential use remain on the register?

There is some sense in the suggestion, but I understand that currently a derelict property can be removed from the list that is kept by the relevant assessor. If a property is removed, of course, it is no longer subject to tax. It is for the assessor to determine whether a property remains on the list; neither local authorities nor the Scottish Government have control over that.

Additional exemptions are set out in the Council Tax (Exempt Dwellings) (Scotland) Order 1997. For example, certain dwellings on land that is used for agricultural purposes can be exempt. Some of the homes that Scottish Land & Estates described might fall into that category and be eligible for exemption. The two mechanisms that I described should address the issue that the organisation raised.

I realise that that is a matter for local authorities and valuation boards. Is guidance issued to authorities and boards, to encourage a uniform approach across the country to dealing with such properties?

I do not think that local authorities have a role; it is strictly a matter for the assessors. The Government cannot issue guidance in that regard, as far as I understand it. Neither local authorities nor the Scottish Government have direct control over what is a matter for assessors.

There are a number of assessors in the country, and consistency is important. I will look into whether the Scottish Government can give guidance on the area that you asked about and get back to you.

I appreciate the offer.

In its evidence to the Finance Committee, the bill team acknowledged that not all councils will apply the maximum levy. Why then was the maximum figure used as the basis for the modelling in the financial memorandum?

I think that I have answered that question as well as I could do. I do not know what other figure could sensibly have been used. Local authorities might want to apply an increased charge to a varying extent—and bear it in mind that we will enable them to use the power in different ways in different parts of the council area—or they might not want to apply an increased charge at all, so there is no limit to the potential for variation.

It is fair to use the maximum figure, as long as we say clearly that that is what we are doing. Right from the start, we acknowledged that we were talking about the maximum amount of money that could be raised if all councils were to use the power to the limit. If it has been suggested that another figure should be used, I would be interested to hear the basis for arriving at it, because I genuinely cannot see that it would be sensible to use any figure other than the maximum.

What is the likely impact of only some local authorities using the powers? Given that that is the key variable that would affect the financial impact of the proposed powers, why was modelling for that not carried out?

12:30

It is hard to predict or model on the basis of what individual councils might do. We believe strongly in local democracy, so if a council feels that it is important to use the power, perhaps because it has a preponderance of empty homes that it wants to deal with, it can do so. Another council that does not have the same problem might not do that. It is very hard to model decisions that will ultimately be taken at individual local authority level.

I think that you might have been asked the same questions, minister, no matter what assumptions you made. Are there any other questions on this area?

I have a brief question, which is similar to that which I asked the Minister for Local Government and Planning. Is there not a realisation that vast numbers of properties are unlet because there is no demand for them? Again, that aspect undermines the policy intent.

The straightforward answer to that is to suggest that you look at the housing waiting lists across the country. There is undoubtedly demand for more houses. What we have just now is an underused resource. Mr Mackay made the point that we provide a benefit in the form of the Scottish small business bonus, which is an incentive to businesses. The power in the bill will be a disincentive to being economically inactive by leaving houses empty.

We need more houses. As I said in my opening remarks, we are doing what we can in that regard and increasing by about 30,000 the number of affordable homes over this parliamentary session, which is not an inconsequential thing to do in terms of the money that it requires. If we can provide additional houses to address waiting lists and satisfy existing need, that is the right thing to do. What the bill proposes is an effective way of doing that.

The houses may be empty because they need more money spent on them, but there is no guarantee that the additional finance will be used for that purpose.

No, but we will try to encourage councils to do that. I mentioned the three or four different ways in which we have given money to help to achieve that. For example, we have helped fund some councils to take on an empty homes officer. Such a post is common in England. An empty homes officer can go around the local area and ascertain what houses have been lying empty for some time. I am not trying to suggest that somebody would be happy to sit on a string of empty houses. They might not have the resources to upgrade a house to a lettable standard.

An empty homes officer—this is the purpose of the current pilot project—can tell an owner that, if they need a new bathroom or kitchen, for example, to get a house to a lettable standard, they can be loaned moneys for that. The owner could then make the property available for renting. That method would, of course, be a council decision and not something that we would prescribe in legislation. The council could perhaps then nominate someone from its council house waiting list to the property and from the rental income the owner could repay the council loan. It seems to me that everybody would benefit from that kind of arrangement, so I cannot see why councils who are already doing that in the areas that I mentioned would not want to develop it.

But there is nothing in the bill that would make that happen. It would very much be the choice of councils.

Councils are answerable to their electorate. If they were to take in money and not use it for a productive purpose, they would have to answer for that. The nature of the relationship that this Government has with local government is that we have said that local government has its own mandate and responsibilities and that we leave it to local authorities to take decisions in their areas.

If the policy proved counterproductive and the money did not achieve the policy intent, would it be reconsidered or rescinded?

There are two things to say on that. If the policy was not productive because councils did not use the resources to improve properties—

My concern is that the policy would end up being just a revenue-raising exercise.

To the extent that it reduced the number of empty homes because there was a disincentive for owners to continue to have empty homes, it would have a beneficial impact, even if homes were not brought into productive use through the other route that I mentioned. We are confident that the policy will have a beneficial impact in the way that we have described.

What is the solid evidence for that?

My previous answers set out the solid evidence. There is evidence from the empty homes work that we have done in the south and west of the country. We have evidence on the existing demand—huge numbers of people are waiting, not least because of the prolonged period of the right to buy, which has diminished the public housing stock over many years. We know that there is demand, so we are trying to increase the supply. Perhaps we have enough faith in the market to realise that the additional supply will be met by that willing demand.

I have one quick question. When the bill team gave evidence to the Finance Committee, it acknowledged that not all councils would apply the maximum levy that the proposals would allow. Why was the maximum figure used as the basis—

I think that we have covered that.

Has it been done?

Yes—more than once.

Sorry.

We are probably finished on that issue, so we will move on to the housing support grant. Committee members recently visited Shetland to speak to council officers and tenants. We felt that it was important to understand the historical reasons why Shetland Islands Council is in the unique position of being the one council that still receives the grant. One thing that was said loudly was that the council feels that there was a commitment, followed by a promise, to write off the debt, which the council sees as arising from Shetland doing its bit to ensure that accommodation was available when the oil industry came to the area. It is felt that the debt was almost written off in 1997, but there was a change of Government. What is the Scottish Government’s view on the history of the debt?

You are exactly right about Shetland’s point of view. We have found no evidence of a commitment apparently given by a previous Government, many years before the Scottish Parliament came into existence. We have seen no evidence that a commitment was given by a UK Government wanting to write off housing debt. There was a link in that the UK Government had an interest in ensuring adequate housing supply for people coming to work in the oil industry, but we have seen no evidence that the UK Government—not the Scottish Government—made a commitment to write off the debt. Shetland Islands Council has written to the UK Government on the issue, so it will be interesting to see the response.

Another area that we touched on while we were in Shetland was the potential writing off of the debt as part of the proposed stock transfer, which failed. Our understanding is that the debt in Shetland is different from that in other authorities, in that it is internal. How would that have worked with stock transfer?

As far as I am aware, the stock transfer arrangements for Shetland would not have been different to those for other authorities.

Other authorities’ debts would be from public loans, whereas Shetland’s debt is probably to its oil fund, so it is an internal debt.

I ask Sam Baker to comment on that.

I cannot speak for the Treasury, but my understanding is that the Treasury’s position has always been that it would write off only debt that was owed, in essence, to itself. Therefore, it would not have written off Shetland’s debt, which as you say was an internal loan from one part of the council to another. The Treasury would have written off the debt only if the stock had been transferred. My understanding is that Shetland Islands Council argued to receive grant to write off its debt, but not to transfer the stock. The Treasury would not have considered that.

The issue of an internal debt, rather than a debt to the Public Works Loan Board, has just become apparent to us, probably only this morning, to be honest. It has been quite difficult for the committee to get to grips with that.

I have a question on the proposed stock transfer that probably cannot be answered at the moment. We have heard from some that the Shetland stock was undervalued and by others that it was overvalued. Beyond that, it now seems that even if stock transfer had gone ahead, the debt would not have been written off by the UK Treasury. Are you able to look back at the stock transfer situation under previous Administrations to see whether that was one of the reasons why the stock transfer did not proceed? Stock transfer would have been beneficial to no one if there had been no write-off of debt. It would be interesting to know what your records say about a situation that has become apparent to us only this morning.

We will partly rely on Shetland Islands Council to provide us with information, but we are happy to find that out and come back to the member or the committee on that. However, as was suggested previously, the main reason that stock transfer did not go ahead was a valuation disagreement.

It is also true to say that, when the UK Government has written off debt in the past, it has been Public Works Loan Board money. The UK Government took on loans that were taken out by councils to finance previous council house stock. According to recent information, what is different in this case is that the council owes the money to itself in one guise or another. That may well have been a sticking point but, as I understand it, the main sticking point was a difference in the valuation. We will find out more information on that and provide it to the committee if that is helpful.

As I said, I have written to Shetland Islands Council asking to meet its convener to discuss the matter further. There are a number of points of difference between us. If the debt write-off was to happen, it would be the only one of this nature. It is not easy for me to see a basis for doing that, because the rents that are currently paid are comparable with rents in councils that are similar to Shetland. There are other issues. The council has substantial reserves, which, it argues, are committed elsewhere. It is true that some of those reserves could not be used for this purpose, but many of them could be. That is a choice that Shetland has made.

I would be keen to ensure that we did not treat one council differently from other councils. If we were to commit £40 million to writing off the debt of one council, that would equate to about £1 billion of debt write-off if we treated all councils the same way. We have to be very careful about that.

If Shetland has, as it says it has, a unique justification for asking for debt write-off, it is right that we should examine that. In the process of doing so, I am happy to pass the information back to the committee.

I am pleased to hear that you will try to engage with Shetland about how it manages the process. What we were originally faced with was that either it continued to get the grant or there would be a huge rent rise. There did not seem to be any modelling in between, or any effort. We have had a commitment from Shetland Islands Council that it will look at the modelling. I hope that when you go up you will look at whether there are transitional arrangements that could help the council to make some of the models work and that do not put up the rent of every Shetland Islands Council tenant overnight by a huge amount.

There has been virtually no rent rise in real terms in Shetland for a number of years. Other councils have had that rent rise in many cases. We have to try to treat people on a level playing field.

There is also a question about the repairs and maintenance service offered by the council, which is very expensive compared with those of other councils. That may be because it is a gold standard service and that is what people want and should have in Shetland, or there could be other reasons for that. It is only right that we try to get to the bottom of that.

As you say, the right thing to do is to engage with Shetland Islands Council, and that is what we intend to do.

Minister, you said that you would look for information about stock transfer. When we visited Shetland there was a comment that, in the course of the Labour-Liberal Scottish Executive—I do not know which years—there was a budget line for writing off housing debt. I assume that, if it was ever there, it would have been entirely attached to stock transfer. It would be good for those who were on the Shetland visit, and the others, to get clarification about that point. The position is very difficult, because a lot of the comments that were made were not evidenced, but we are obliged to follow them up if we possibly can.

12:45

That is a fair point. Obviously we have a view on a number of those issues and Shetland Islands Council might have a different view. I have not yet worked out exactly how we can do it, but we will try to make an objective assessment of the case. One of the things that we can do is check back to find out whether there was indeed such a budget line.

It would surprise me if there was, because we are essentially talking about how Shetland Islands Council sets out its housing revenue account. It is not and it never has been up to the Scottish Government or previous Scottish Executive to do that; it is up to the council. Since 2007, we have slowly reduced dependence on the grant, as should happen and as has happened elsewhere. We have discussed with Shetland Islands Council ways of balancing the housing revenue account over the past three years. We consulted the council and COSLA on changing the methodology in 2010 because it had not been changed for many years. We have now introduced legislation to end the grant in 2013-14. That is a great deal more than was done in previous years, although that might be understandable because the HRA was an issue for several years. As members will recall, the prudential borrowing regime came into force in 2004-05, which was eight years ago, so at that time, the council had to move towards a more businesslike and prudential environment, as other councils did.

Shetland Islands Council also received its grant for 34 years, which is longer than any other council, so it has had the longest period of any council in Scotland to adjust its HRA’s financial position. If there are particular reasons why that adjustment has not happened, beyond those that we already know about from our discussions, we should discuss those reasons, and we are happy to do that.

Minister, you said earlier that there had not been any rent increases for the past so many years, but it is also important to point out that Shetland Islands Council is sitting second highest in a table of rent amounts.

Convener, that is according to Shetland Islands Council. Other tables are different.

The minister can answer the question.

I will come back on that point, but before I do, I should say that I have just been advised that the previous Scottish Executive did discuss a possible grant for Shetland Islands Council, but only on the proviso that it transferred its stock. That was the previous position. We will come back to the committee with more in writing.

On the question of rents, it is not for the Scottish Government to advocate a change in rents one way or the other. That is up to Shetland Islands Council. However, out of the 22 rural and island social landlords that are in Shetland Islands Council’s peer group—members will be aware that councils are classified in different peer groups—the average weekly rents were the fourth lowest at £61.04 per week. The rents are £3.84 per week below the median rent of those 22 rural social landlords, which was £65 per week in 2011-12, and £6 per week below the Hjaltland Housing Association rents, which is around £67 per week.

Shetland Islands Council’s rents have fallen by an average of the retail price index minus 0.2 per cent over the past 10 years, and RPI minus 0.5 per cent over the past five years, whereas rents have risen in real terms everywhere else, so there is a difference there.

Now, those are the figures that we have. If Shetland Islands Council has a different point of view, that will come out in the discussions that we have with it.

As there are no further questions for the minister, we will move into private.

12:48 Meeting continued in private until 13:07.