Annie Gascoyne, Councillor Richard Watts and Adrian Blaylock gave evidence.

Welcome. We will now hear oral evidence from the Local Government Association, the Confederation of British Industry and the Chartered Institute of Public Finance and Accountancy. We have until 11.25 am for this panel. I invite the panellists to introduce themselves for the record.

Annie Gascoyne:

Hi, I am Annie Gascoyne. I am director of economic policy at the Confederation of British Industry.

Councillor Watts:

I am Councillor Richard Watts. I chair the resources board at the LGA, and in my spare time I run Islington Council.

Adrian Blaylock:

Good morning. My name is Adrian Blaylock. I am the lead revenues adviser for the Chartered Institute of Public Finance and Accountancy. I provide specialist technical advice to local government on council tax and non-domestic rates.

Thank you. Who will be the first Member to ask a question? I call Jim McMahon.

Q Thank you, Chair. I thank the panel members for taking the time to come and give evidence. This is a question for each of you in your different guises. We heard in the previous evidence session that there is concern about the Valuation Office Agency’s capacity to deal with the revaluations and the appeals that may follow. Have you got any views on that?

Annie Gascoyne:

I am happy to go first. It is an issue that the VOA has struggled with the number of appeals in the past. There would be a challenge with VOA capacity if we moved to annual revaluations, which is what businesses would like to see in the longer term, because it would mean that the revaluations were more in sync with the economic cycle and what businesses are able to pay. However, we think that the three-year revaluations are a good stopgap, and are something that the VOA should have the capacity to deal with. That said, there have been issues with the check, challenge, appeal system and the VOA’s IT systems, which were implemented too quickly without due thought to some of the more complex business relationships when it comes to property.

The VOA has some work to do to look at modernising its IT infrastructure, perhaps taking lessons learned from how making tax digital for VAT was implemented. We should see whether there are ways that the VOA can streamline the process so that, in the longer term, instead of three-yearly revaluations, which is what we are talking about today, we can move towards annual valuations, and potentially in the future self-assessment, which would simplify the process for everyone in the long term.

Councillor Watts:

Thanks for the question, Jim. We have significant worries about the VOA’s capacity. Clearly, if we are going to give it more work, which this Bill does, it will need to be properly resourced. It is worth adding, even at this early stage, that this is not just about the VOA’s capacity to do extra work in the future. There is a very significant backlog of work stored up at the VOA and the appeals tribunal. It is a sad fact that there is more than £2.5 billion tied up in council reserves that could be spent on public services. That is currently being kept back to guard against the risk of appeals from the 2010 revaluation. Clearly, if that money is to be freed up to be used on public services, as we all want, we need to crack through the backlog of appeals rapidly, and we must recognise that more regular revaluations will lead to more work in the future. We think that more resource is needed at the VOA so it can get through what is already a pretty big mountain of work, and there will be more work if the Bill passes.

Adrian Blaylock:

I agree with my colleague from the LGA. He is right that the VOA is struggling with its capacity, in terms of the backlog of appeals from the 2010 list. I do not think we have yet seen the impact of the 2017 list and the switch to the check, challenge, appeal system. Moving to three-yearly revaluations will certainly have an impact on the VOA’s resources, which has an impact on local government because of the provisions it has to set aside for loss on appeals. It is really important that the VOA is resourced sufficiently under the new CCA system to deal with the revaluations and the appeals, or whatever we want to call them, coming out of the more frequent revaluation.

Q My next question is probably more for Richard and Adrian, in terms of your member authorities and your members. It is about the impact of rate retention. Are you confident that the floors and ceilings are sufficient to mitigate a potential shift in values away from many of your member areas? We know that the 2017 revaluation led to significant shifts away from many regions, towards London and the south-east in particular. In fact, only London saw an increase across all value types; many other areas saw declines. Do you have concerns about what that might mean for members who are part of rate retention pilots?

Adrian Blaylock:

It depends where we go in terms of rates retention. The consultation that happened in December and the switch to the alternative model for rates retention give local authorities certainty, in terms of a guaranteed baseline funding level, regardless of what a revaluation does. If we go down that route, I do not think it will be an issue, but you are right that, if you look at the impact of any revaluation, there are winners and losers in the different regions across the country. It is important that there is a rebalance of funding across local government so that no single authority is overly adversely affected. The safety net built into the current rates retention system seems to be working adequately for 50% retention. It probably needs to be reviewed as part of the move to 75%, and ultimately—hopefully—100%. I guess that will have to be part of the consultations about how we move to that sort of system.

Councillor Watts:

I agree with that. There is a wider point, which I will stray into only briefly because it is not precisely the topic of the Bill. The risk we face on business rates is that we represent a council area that has seen a very rapid rise in valuations, which has put enormous pressure on many of our small and medium-sized businesses, and we are seeing holes in our high street for the first time in a while as a result of rapid increases in rates and rents. There is a disparity between the amount being paid locally and the amount being received locally, which at some point stops adding up for people. There is a challenge relating to the wider business rates system. Some areas are seeing very rapid rises in the value of property. Most businesses do not own the property they operate from, and therefore do not feel the benefit of the rise in its capital value; they just get a high rent bill as well as a high rates bill.

I recognise from the outset that this is slightly expanding the scope, but I will try to be disciplined about it. Do your members have a view about the treatment of plant and machinery in the revaluation?

I think we cannot go there, given the timeframe. You were right to give a warning. Do you have another question that is in scope? Stephen Morgan, you have one.

Do you have any concerns about the Bill as drafted? That question is for all panel membersQ .

Annie Gascoyne:

I will go first. I do not think we have any technical issues with the drafting of the Bill. One aspect of the Bill is that it effectively rolls over the current transitional arrangements from the last revaluation to the next.

One challenge with that is the point about fiscal neutrality; where to get upward transition, you must also have the downward transition. The challenge with that, of course, is that businesses that have seen their property value drop have had the asset base of their business affected and, effectively, their company value, and then they do not benefit from that. So, they are already in a difficult situation, where their asset base is reduced, and then you are saying that we need to keep the rates at the same level.

One challenge with the current Bill is that it requires those transitional arrangements to continue into the next revaluation cycle and those beyond that. That should be looked at to see whether it should continue. Those transitional arrangements were introduced because of the length of the last revaluation cycle and the fact that it spanned the recession. They were introduced for that reason and so we do need to ask whether they remain fit for purpose.

There is one point to make on the rates retention question. Although it is not directly about the impact on local authorities, there is one important point to note. Rates retention does mean that local authorities are less inclined because they have the option to give partially occupied relief. They are less inclined to do so because it obviously affects their income to pay for vital public services. A lot of businesses tell us that that does not really incentivise them, if they have got an empty building, to occupy or lease out part of it. There is an opportunity cost there in terms of economic potential.

Councillor Watts:

The LGA is not opposed to the principle of the Bill. There are, though, a couple of points of detail on which we would welcome some further reflection. The first point is about resourcing the VOA. If you are going to do that, there has to be recognition that we need to resource the VOA effectively to do it.

Although we welcome proposals for businesses to inform the VOA more regularly about valuation changes to their properties that might inform more frequent valuations, we worry about the effectiveness of that without effectively having a duty on businesses to inform the VOA or without more powers for the VOA to ask for information about businesses, which is something we have called for previously.

We have a big concern that, if we are going to move the last date of the draft rating to 31 December from 30 September, once every three years, there are profound implications for the way in which local authorities set budgets for one year out of three. Local government was not consulted on that before it was announced, which is regrettable. Settlement timing has previously been based on the new rateable list and, if that is now not available until 31 December, that either pushes the state of the settlement into January, which would be incredibly problematic for local government, or the settlement is based on information not yet published, which is also less than ideal. That is something that needs to be resolved, though I am sure it is perfectly soluble.

We also think there are measures about business rates avoidance, looking at some of the successes of the new Welsh system, which has cut down on some sharp practice around empty property reliefs and a whole range of other stuff. There is an opportunity to look at that through this piece of legislation.

Adrian Blaylock:

I agree completely with everything said there. The VOA needs to be resourced; we have already talked about that in the initial question. I have other concerns about moving the dates from the end of September to the end of December for the draft rating list. Local government have a return that must be submitted to central Government by 31 January. There are certain steps they have to take from receiving the draft rating list to be able to do that return. If we are not going to get it until, at best, early January, we are going to struggle for time to be able to do all the necessary work to get that return done.

I notice that it says in the regulations that it will be “by the end of”, so that is the latest date and it would be nice if it could be moved to earlier than the end of December.

Q Councillor Watts, you mentioned consultation with the local government sector on the Bill. What would you like to have seen?

Councillor Watts:

The specific concern we have is about the shift in the date. It would have been helpful, I think, for the Local Government Association, on behalf of its member authorities, to have been consulted on it before the principle was announced. There are those arguing for that and we understand why the Government are proposing it—you can see that it makes some sense for businesses and others—but it has significant implications for how councils set budget, which, as we all know, is way in advance of the end of the financial year. My authority has finished budget setting by the end of November, because you have to run your statutory consultations from 1 January onwards. Therefore, this is a very late date indeed, and we would welcome any further dialogue with the Ministry of Housing, Communities and Local Government about ensuring that the date works for local government budget- setting cycles.

IQ am interested, Councillor Watts, in the comment you made in one of your earlier responses about the level of reserves that local authorities have had to retain, pending the outcome of appeals dating back—is it nine years?

Councillor Watts:

To the 2010 revaluation, so from 2013 onwards.

Q That seems an extraordinarily long time for anyone to be waiting and holding finance that, as was rightly mentioned, should be being spent in local communities. Do you anticipate that the potential change from every five to every three years will improve that situation for local authorities, or make it harder for them?

On the financial position of local authorities and the level of reserves, are local authorities across the country fully prepared to deal with the potentially increased rate of appeals? The Minister has mentioned that he expects there to be fewer because the rates will be altered more regularly and there will not be such great changes.

Councillor Watts:

We do not have a view on whether shifting the revaluations from five to three years will increase or reduce appeals—we will have to wait to see. What we need is some resourcing of the Valuation Office Agency and the valuation tribunal just to get through the very significant backlog from the 2010 revaluation. There is no structural fix to that; the Valuation Office Agency and the appeals tribunal just need to get through that backlog, quite a lot of which, it has to be said, is stuck in the courts at the moment. Therefore, it is not an easily soluble problem.

What we have not yet got, partially because it is early days in the check, challenge, appeal system, is any real sense of the number of appeals from the 2017 revaluation, and they could come through relatively late. That is one of the reasons we support a six-month deadline for businesses to lodge appeals, after the new valuations have been published, to give us some sense of the level of risk. But it could be that one of the impacts of the CCA system is that people are sitting on potential appeals, which will come through in due course, creating another layer of risk for businesses, and we will have to see about that.

As I understand it, the deadline for appeals on the 2017 revaluation has not yet been announced. We would hope that it was in line with the precedent, which would mean it would be the end of 2021, but we would welcome an early announcement on that to give us some sense of the scale of risk. It could well lead to more money having to be kept in reserves to manage a second or third round of risk around those appeals as well.

We would welcome the extra resources going in to clear the backlog. Whether more regular cycles lead to fewer appeals—I hope so, but we have no evidence to be able to comment on that either way.

Q Do you have any idea of how much is held nationally in reserves for this purpose? Did you mention that?

Councillor Watts:

Yes, it is £2.5 billion.

Adrian Blaylock:

It was £2.5 billion at the end of March 2017. If you look at the returns that local government is submitting to central Government in terms of their estimates, roughly £1 billion a year is being added to the appeals provision for loss for that particular year. Obviously, as appeals are heard and settled, some of that provision is released, but roughly £1 billion a year is set aside to settle appeals.

In answer to your question, do councils have enough reserves to pay for it? The way it works is that they will reduce their income from non-domestic rates; when they submit that return to central Government, they assume a level of loss and therefore that they will get less income. In effect, it creates its own provision—if that makes sense. That is where the reserve comes from.

Do you foresee any problems with the roll-out of the business rate retention scheme and this Bill? Do you think any anomalies or complexities will emerge from those twoQ ?

Adrian Blaylock:

Nothing obvious occurs. There are a lot of unknowns about rates retention—we are talking about whether we carry on with a similar model to what we use now, just with the 75%, or whether we go for the alternative model, which was favoured in the December consultation—and what local government needs is certainty of funding, and understanding of when and how the money will come. So I do not think that the Bill particularly causes any issues, but it would be nice to get some early indication of where we are going with rates retention and how that will change.

Councillor Watts:

I do not think there are any in-principle reasons why the Bill creates problems for business rates retention.

Annie Gascoyne:

I agree.

Q Is there a call from your members for a more fundamental review of business taxation, rather than the silo approach of the review of business rates?

Annie Gascoyne:

You mean beyond business rates? We would see a fundamental reform of business rates as being high on our priority list—

May I just intervene? Sorry to interrupt. To be in scope, a question has to be about timing, so do you want to rephrase that question to be about the timing of change? Otherwise it is not in scope.

The question has been answered. I need no further response.

Okay. We have time for more questions. I will ask the Minister if he has any questions, but if people suddenly, spontaneously, have questions, I will allow some more within the timeframe, if necessary.

I am fine, thanks. Thank you for all coming, and thanks for your evidence and comments. Everything has been perfectly well answered.

So you have no questions?

No.

Q May I ask one question of Richard? Is the LGA making a specific request that the change of date from September to December be reviewed as part of this process?

Councillor Watts:

We are, yes. In effect, our request is that we would welcome further conversations with the Government about getting a date. We understand the arguments for shifting it, because it is quite a long time and 30 September is quite early in the process. However, for one year out of three when that impacts on the potential local government announcement, we would like to understand more about how the Government would like to co-ordinate between this announcement in December and the local government spending announcement having to be earlier than it, because that is a change in precedent. We cannot push the local government spending announcement each year beyond 31 December—it is already too late where it is, given that local budget setting for any authority of size is effectively always concluded before the spending settlement on the basis of guesswork, then tweaked when the settlement is announced in the House.

As there are no further questions, I thank all members of the panel for their evidence. I invite the Government Whip to move the adjournment.

Ordered, That further consideration be now adjourned. —(Jeremy Quin.)

Adjourned till this day at Two o’clock.