Rating (Empty Properties) Bill

As I will explain, I am seeking to highlight merely the degree of taxation raised in the measure. I am not suggesting that the Government are doing anything inappropriate; clearly, they have a job in raising tax. It is the manner and extent of the tax and the measure that I am concerned about. Sir Michael Lyons pointed out in section 8.9 of his report:"““Business rates are a significant tax for businesses—in 2006-07, they are expected to raise about £18.4 billion in England (£20.3 billion across the UK), compared to £47.5 billion (net of tax credits) in UK corporation tax””." Business rates are now raising almost half the amount that businesses pay in corporation tax. The impact of that is distorting, depending on the sort of business. Many contemporary businesses—recently established businesses that are developing their business as a result of technological change—do not require many premises to operate from. Operating online, it is possible to exist with a very modest proportion of one’s profit going in the form of business rates. I want to develop that point. The suggestion in the Lyons report was that, on average, about 3 per cent. of turnover is paid by business through business rates, but he acknowledged that that varies significantly between companies in different parts of the country and different sectors of the economy. The impact noted by Kate Barker in her report was: "““The principle behind (empty rates relief) is to create a broadly symmetrical tax, given uncertainty: when a property earns a positive revenue, it is taxed; when it does not, relief is granted. This helps remove what would otherwise be a distortion and helps to share risk between property owners and the government.””" I quote that because the Government are arguing that they are removing a distortion by reducing this relief and are claiming support for that argument in what Barker and Lyons have said. Barker pointed out that the distortion is itself balanced by the relief. Lyons made the point that the impact falls very disproportionately on different parts of the economy. Therefore, this measure will also fall disproportionately and will have unintended consequences on different parts of the economy. I shall discuss that later. Let me illustrate the extent of the differential. As my hon. Friend the Member for St. Albans (Anne Main) rightly said, some major supermarket chains can afford to retain land banks and pay rates on vacant property. In responding to the Barker review, it was pointed out that in 2005 Tesco spent 13 per cent. of its profits on business rates, compared with 1 per cent. of profits for a mobile telephone operator, which is a high-street competitor. I therefore contend that the evidence from Lyons and Barker is somewhat contradictory and does not necessarily support the Government’s argument that the measure is not distortive. The retail market is changing so rapidly as a result of the internet that the measure will compound the problems being experienced by many retailers with significant high street presences. Trade is moving online and out of premises, and this measure will exacerbate that. I will talk about the retail sector shortly. Another impact addressed in the Lyons review and which has been misunderstood by the Government is to do with the timing of rental voids. The Lyons review assumed that properties remain empty for the duration of the relief, but that is not the case. As my hon. Friend the Member for St. Albans said, speculative developments tend to be large and complex and have many occupiers, and there is often a considerable period of time between the point when the property is completed and the point when it is entirely let. I contend that one reason why vacancy rates are higher in areas such as the City of London and Westminster is that they are desirable locations. That draws in speculative development during periods of strong market growth, and it is in the interests of the developer to hold out for the highest possible rent because that will enhance the capital value of the project. The capital value of a project is what is of greatest significance to the developer undertaking a speculative development, rather than the running rent, which is of most interest to the occupier. It is therefore unsurprising that there are higher vacancy rates in areas of strong demand. This measure will have little impact on that, as it is relatively insignificant in relation to the overall rent that the developer anticipates he will have to forgo for the period until the property is fully let. That was not well understood in the Lyons report. A British Retail Consortium submission to the Chancellor in advance of the Budget referred to the fact that surveyors conducting appraisals for development in regeneration areas typically anticipate letting voids, following completion of construction, of 18 to 24 months—the voids are, I assume, slightly longer for properties in regeneration areas than for those in areas where there is already a ready demand. That suggests that the duration of relief for retail and office premises is already relatively short when compared with the void periods for such properties, and this measure would exacerbate that problem. I referred in an intervention to a point that the Federation of Small Businesses made to Sir Michael Lyons, and that was repeated by my hon. Friend the Member for Bromley and Chislehurst. I hope that when he responds to our debate, the Minister will acknowledge that the FSB wants to understand the exemptions on which the Government intend to consult, because it hopes that its members can benefit from them. I would therefore welcome a little more explanation from the Minister. May I touch briefly on the commercial consequences of the relief, particularly for retailers? I had a 20-year involvement in retail until last year, most of it in provincial high streets. However, we also had exposure to shopping malls, both in and out of town, so I have some experience of the impact of business rates on retail premises. It is in that particular area that the FSB seeks to develop exemptions, and I hope that the Government will show it some sympathy. The Government argue that by increasing the amount of business taxation on empty properties the Bill will consequently reduce rents in some way. That is probably a correct interpretation when applied to vacant industrial units in run-down areas that require regeneration and where ownership is likely to be not on a continuing lease, but in the hands of a developer or owner who can reduce rents. However, in many cases, and certainly those where properties are empty yet still subject to tenancy, that does not apply. The Financial Secretary referred to the complexity and rigidity of the structure of lease documentation and tenancy contracts. That problem should be well understood by the Government because it is not easy, even in legislation, to rewrite commercial contracts that, in many cases, stretch over decades rather than years. Indeed, in the 20 years that I spent in the retail business, the average duration of leases into which we entered was initially 25 years. After 20 years, it came down to about 15 years, but it will take many years to change practice in the property market and the problem cannot easily be solved in legislation by any Government. Consequently, as developers seek to build, for example, a shopping mall, they will wish to take into account the probability that they will have to pay more to the Government for voids as a result of the measure while they develop and let their properties. Far from reducing the rents that they charge tenants in the mall, they will increase them because they must recover the outgoing additional tax that they would not otherwise have to pay. That is the nature of evidence submitted to my hon. Friends and me by professionals in the property industry and those who represent retailers. I hope that the Minister recognises, as I said earlier, that while it may be true that rents will come down for certain types of property, for many others that simply will not happen. The initial developers will raise rents, and that will apply in the office sector, too. In cases that do not involve new build but existing premises, the rents are fixed, and there is nothing that the owner can do about it until the end of the lease. May I dwell a little more on some other consequences of the measure for the retail trade? Where trade takes place in a strong location, in a strong retail market, if a property becomes empty a void can be readily filled, so the measure will probably make very little difference. However, that applies to only a relatively small proportion of retail space in periods of economic growth. The retail sector is not in that situation at that moment—a lot of retail trade, as I said, has moved online and many retailers are not looking at a growing market: they are defending their market share, which is subject to competition. In many other instances where there is a strong location and a weak retail market, an empty property void might take many months to fill. Equally, in a weak location with a strong market it might take many months to fill premises. However, the real problem arises where there is a weak location and a weak market. That situation might cover some of the examples given by my hon. Friend the Member for Bromley and Chislehurst regarding one end of Bromley high street. Who has to solve that problem? It is not the owner of the property, which is what the Bill indicates, but the tenant—the occupier of the property. I hope that the Minister will be able to convince me that that fundamental misunderstanding has been, or will be, taken properly into account when looking at these exemptions. Nor is it necessarily the problem of the tenant who has just vacated the property—as a result of the lease contract, the problem often reverts to the previous occupant. Should the tenant who has had to close down the business also become bankrupt and cease trading, the lease reverts to the previous tenant. I do not know the circumstances of the new Kwik Save company, which has just decided to close a lot of its stores, but it would not surprise me if the original vendor of the new Kwik Save stores—I think that it is Somerfield—is feeling a bit anxious about what might happen to those leases. Should the business not be able to fund the business rates and rents of those premises, having been unable to get rid of them, the cost may revert to Somerfield. Such situations arise throughout the country and are particularly applicable to small chains of a relatively small number of stores, which are often unable to trade satisfactorily in all those stores and therefore seek to close the worst-performing ones. All portfolios of retail stores have some strong performers and some poor ones. If the business is strong enough to cope with the closure of a small number of stores, all well and good; if it goes out of business, the problem is writ large. The problem is particularly applicable to small provincial high streets. We are already experiencing a shift of trade out of the small market towns and into the larger retail catchments, where there is greater choice and more destination shopping, and which can compete better with the internet than many local high streets can. So as part of the consultation, the Government need to look carefully at high streets in provincial areas throughout the country. The Royal Institution of Chartered Surveyors said that the Bill will undoubtedly affect many businesses; it seemed to be thinking in particular of businesses in the smaller town high streets. I want to pick up on a few of the points made by the Financial Secretary. He referred to local authorities’ enthusiasm for the Bill, and in discussing their response to Lyons he touched on Hampshire county council, in order to bring the point home to my hon. Friend the Member for Fareham (Mr. Hoban). It does not surprise me that local authorities might see this provision as an easy way of raising revenue because it is a stealth tax. It is not paid by the people who—[Interruption.] The Minister for Local Government says from a sedentary position that it is not a stealth tax, but it is a classic stealth tax, in that nobody who puts their cross on a ballot paper—[Interruption.]