Non-Domestic Rating (Collection and Enforcement) (Local Lists) (Amendment) (England) Regulations 2009

My Lords, that is a positive note on which to end. I am very grateful to the noble Earl, Lord Attlee, for giving me an opportunity to set out the Government’s concerns on this issue and the reasons for our having come forward with our propositions. I am grateful, too, to all noble Lords who have spoken in the debate. It has been a measured debate, which the noble Earl, Lord Attlee, introduced extremely clearly. A spread of expertise has been shown around the House which has aided the debate. I completely understand that the debate has aroused considerable concerns and accept that noble Lords’ anxiety is well placed. The issues were raised in the context of the Non-Domestic Rating (Collection and Enforcement) (Local Lists) (Amendment) (England) Regulations 2009 that were laid before the House on 10 February. Concern is not confined to this House: there have been two Adjournment debates in the other place. Much of what I say will reflect what Ministers in the other place have said, and I shall refer to some of the correspondence between Ministers and the Insolvency Service, to which the noble Lord, Lord Bates, has already referred. Before I address the arguments put by noble Lords, I should put the regulations and their aim in their policy and regulatory context—I shall perhaps address some of the grievances raised by the Merits Committee in doing so. The noble Earl, Lord Attlee, gave a good summary of the history of why we are in this position. Although the debate has been largely about ports, the relevant regulations are not aimed exclusively at ports; they apply equally across England to all businesses, sectors, and areas which now find themselves with a significant and unexpected backdated rates liability incurred by their property being separately rated by the VOA—I shall use the short term to save time. Therefore, although the debate is concerned primarily with ports, there is certainly a wider concern, which has obviously been made worse by the current economic situation. The regulations are designed to ease the pain and go beyond ports alone. For example, in the current financial year up to 31 October, 1,666 properties had a backdated adjustment to their rates liability of more than 33 months, including some in ports. I start by saying that the Government are deeply concerned. Those concerns were set out in a letter from the right honourable Stephen Timms and the right honourable John Healey, from my own department, to the Treasury Sub-Committee on 10 February. They said: ""We have consistently said, in the current economic conditions, the Government is concerned about the impact of backdated rates liability on the trading prospects of businesses and we believe that there is a general case to assist businesses receiving large, unexpected backdated liabilities that have to be paid immediately, as the position for a number of port occupiers has demonstrated"." We are providing such assistance. That is why the regulations allow businesses in such circumstances the unprecedented scope to schedule payment of backdated business rates over eight years. I shall come to why we have arrived at that position rather than some of the other options put forward by noble Lords. The current situation in law is that each of our 55 major ports and container terminals in England and Wales is run by a designated port operator which has overall responsibility for business rates, except where any part falls to be separately rated. Properties have been separately rated over the years depending primarily on whether the occupier of that separate part is in "paramount" control; for example, a port chandler’s shop independently controlled of the port operator. There has therefore always been a mixed economy within the ports: it is a rather murky picture economically. There were 1,600 separate assessments within 45 ports in England, and more than 250 assessments within 10 ports in Wales, on the list at 1 April 2005 before the ports review commenced—I shall come back to that. The situation now facing port occupiers stems from two separate developments which I need to put on the record. The first issue, as the noble Earl pointed out, was the move away from prescribed rating for the statutory port operators. The larger statutory docks and harbours were, until 31 March 2005, subject to a methodology for valuation—prescription—by which the valuation was determined by reference to a formula set by the Secretary of State. The Government decided in the Local Government Act 2003 to end prescription and replace it with conventional rating. That formed part of the long-term policy to apply conventional rating to ports and other utilities, which meant essentially that we were anxious to ensure that everyone was rated on the same independent basis. As with all other forms of rating, the Valuation Office Agency relies on the provision of accurate information to assess the rateable value of property. The second issue was the review of ports, which became necessary after a change to the Southampton Container Terminal valuation in 2004 identified some properties which should have been rated separately from the port operator’s assessment. The physical, in situ review of ports by the VOA which commenced in 2006 was able to establish the full nature of the situation in all ports and ensure that all individual businesses within and outside of ports were treated in the same way. It was clear that the same situation could exist elsewhere, so, in May 2006, once the Southampton appeal was settled, which took some time, and the status of some port tenants was clarified, the VOA immediately began its review across all 55 major ports in England and Wales. Noble Lords might well ask why that physical inspection had not been done previously and why the VOA had been content to take the information unchallenged. The VOA is reliant in all its work on information that it receives to keep the ratings list accurate. It was only when it discovered an inaccuracy that might have been replicated that it was under an obligation to conduct a proper and full review. The review discovered that there were many properties eligible for separate rating which had never been listed, and the result was to increase from 1,643 to 2,248 the number of properties in ports separately assessed for business rates. They were rated with a rateable value of around £53 million from 1 April 2005. It is those properties that now find themselves with significant and unexpected backdated liabilities. Noble Lords have put on the record the scale of some of those unexpected liabilities. That is not the whole story, however, because the rating review has not had the same impact on every business in every port; indeed, it has been reported by local authorities that some £1.7 million of backdated liability has been paid. However, I can say to the noble Lord, Lord Bates, in particular, in view of his powerful summing-up, that there is a case to be answered where businesses have been badly affected. The VOA is not under the control of my department, which is responsible for the collection and distribution of business rates; it is the responsibility of the Treasury and HMRC. The VOA has acknowledged, in response to the Treasury Select Committee, that there were serious failures of communication, particularly with the occupiers, and by implication that too much reliance was placed on information being provided by the port operators. Andrew Hudson, head of the VOA, indicated to the Select Committee: ""With the benefit of hindsight we have learned a lesson and please God this does not come up again: if it were to, we would seek to improve our communications with the occupiers as well as the operators"." Indeed, Mr Hudson accepted that, ""in practice some of the people who have written in were not aware that this work was going on"." So the VOA has put its hands up and said that yes, there was a communications failure. I do not think that apologies are often sufficient. However, there is another explanation of why the review took so long—because it did take a long time. It was a slow process. Part of that explanation is that deciding which operators should be separately rated was not straightforward. It was not just a matter of going out and looking at the properties; it was a matter of trying to establish the exact degree of control exercised by either port operator or port occupier. It was also complicated by the varying nature of ports and continuing changes in operational practice. The VOA said that some operators were more helpful and co-operative in that regard than others. The review would have been completed sooner if operators and occupiers, some of them large businesses with professional advisers, had supplied information more willingly. That point is important, because it was the length of time that the review took that made the bills accumulate. The VOA recognises that its communications could have been better. The Director of Rating accepted: ""Perhaps with hindsight we should have done more investigative work"." Yes, I think that it should have done. However, The VOA wrote to all port operators in May 2006 advising that a full review of assessments would need to be undertaken, and followed this up in October 2006 when detailed replies had not been received. The letter explained the background and requested that the operators ensured that their tenants, whose identity would not necessarily be known to the VOA, because of the previous inclusive formula basis of valuation, were alerted. There seems to have been a lack of communication between operators and occupiers as well. Another issue has been raised in another place, which I should also like to put on record. Many commentators have indicated that it is doubly unfair on the occupiers that these companies have to pay their rates liability as some port occupiers claim they had already paid their rates via their fees to the port operators. It is described as the Cumulo system. Port occupiers have told CLG that, when the designated port operator was regarded as liable to pay business rates, the contractual arrangements between the port operators and port occupiers typically contained explicit or implicit fee elements to cover the business rates incurred by the port operator. The Treasury Select Committee indicated that payments should be taken into account. However, it is not all that simple; nothing in this story is simple. First, the liable party for business rates is the business in occupation of a property, not the landlord. Secondly, there is a serious absence of evidence that the port occupier’s fees made a specific contribution to rates. We have asked the CLG for that evidence; the only contract that we have seen is ambiguously worded, saying that when the property is separately rated the occupier is liable for rates. Clearly that is a matter between the port operators and the occupiers—between the landlords and tenants. It is part of the background of why the situation is so murky. I quite understand that the grievance felt by the port occupiers is compounded by the fact that, with independent rating, the rates payable by the port operators themselves have in some cases declined. Although the review has resulted in an increase in the aggregate rateable value from around £201 million to about £211 million, the main issue for the newly assessed port occupiers is backdating the effect of the review. The port operators’ liability has in some cases reduced. I merely raise the question whether there is not a moral issue here for the port operators themselves. That is the background. I hope that I can be forgiven for putting that on the record, because it is very important that we understand the complexity of the situation. I turn now to what can be done to ease the situation, and the options that have been put forward. The suggestions put forward, outside this House and by the noble Earl and other noble Lords, include the suggestion to waive liabilities entirely by postponing or changing the alteration and its effect to the ratings list until 2010; to prescribe, as the noble Earl, Lord Attlee, suggested, the value of the separately assessed properties as zero; or to return to prescription of the statutory ports. The noble Earl has not raised the question of a waiver, and it is sensible not to do so, because it would raise some massive issues about the ratings system. It is worth saying that the integrity of the ratings system, to which we all subscribe, is that it has to be fair and equitable and that, therefore, any solution must not confer a disadvantage among other rate payers who have paid rates and were billed on time. It is also inescapable, as the noble Earl said, that valuation officers are required by law to maintain accurate rating lists. When they become aware that a change is needed, as they did in the ports, they must make the alteration and specify the date when the change should take place. The date of the change is governed by legislation. When the correction is to insert into the rating list property that existed prior to the compilation of the 2005 list, backdating to the beginning of the list is required. Backdating is an integral part of the system of non-domestic rates; it reflects the volatility of the constant changes in the commercial property market. Furthermore, no discretion is given to either the Valuation Office Agency or Ministers to waive a liability to taxation. I think that that is right, as it would not be in the interests of fair competition or in line with the principles of taxation for such a liability to be waived. It is because of this, and the fact that we cannot now pretend that we do not have the full facts of the case, that we cannot undo what has been done and maintain the list as at 1 April 2005 and hold off until 2010 when the next rating list comes along. That proposition introduces a much bigger issue; it would mean that, unlike all other tenants across England liable for rates, including the separately assessed properties in ports identified from the start of the 2005 list, these newly rated businesses would be given a directly favoured tax advantage over assessed properties. That is where the unfairness would lie in this context. The second option is that the Government should prescribe the values of the separately assessed properties. I return to the Treasury Select Committee recommendation. In effect, it would be a return to prescription, but maintaining the rateable values of properties as at 1 April 2005 would require these newly assessed properties to be given a zero rating as from 1 April 2005. In effect, it is still tantamount to a waiver. There are other serious problems with doing that, as it would not solve the problem that noble Lords identified. The Secretary of State still has the power to prescribe rules for ascertaining rateable values and, in theory, she could use those powers to prescribe rateable values for the individual businesses at ports. However, it is very difficult to see how it would assist, because, first, the businesses within ports would still be rated separately from the port as they should be and, in some instances, were prior to 1 April 2005; the power is not retrospective, so she cannot prescribe a value which is to apply for the purposes of ascertaining rateable values for a day before the order prescribing the formula was made; and the businesses within ports would still be faced with three years’ backdated liability, payable immediately on top of the liability for this year and next year; and to deliver some benefit to the businesses, she would need to prescribe a value which generated results below the market rental value. None of the other 1.7 million properties on the business rating list is valued other than on the basis of market rent and there is no clear rationale for special treatment. In particular, there is no basis on which a low rateable value could be established. If the valuation methodology were challenged in the courts by any other ratepayer whose property is valued conventionally, it would be difficult to defend in rationality and reasonableness terms. With regard to prescribing the statutory ports by a formula again, even if we were to return to prescription—the old system, as the noble Earl explained it—the properties now separately identified for rates would nevertheless continue to be separately rated, because that is what the legislation requires, and the only effect would be to alter the rating method for the port operator. I know that this is disappointing in many respects because it would seem that some of these options offer a solution. In fact, we have come to the limits of what the Government can do in what we have done. Following the Chancellor's announcement in the Pre-Budget Report, we have quite exceptionally put in place a scheme to help all businesses, which may include some occupiers of ports, pay significant and unexpected backdated liabilities over eight years. We have never done that before: it is a long period of time. The Government have estimated that that will benefit up to 1,500 properties a year across England both within and outside of ports and will give help with cash-flow problems faced by some companies. If we were simply to say that it is all too difficult and let the law take its course, the port occupiers and other businesses would still be liable for a backdated rates liability, but that liability would apply from the end of March and would have to be paid within two weeks. That would be the effect of revoking the regulations as well, which why we were so pleased to hear the noble Earl say that he was in favour of the principle of the regulations. Furthermore, local authorities will, in order to act diligently, have to bill the businesses and take collection and enforcement action. Otherwise, they may be required to fund the required contribution themselves to central government. What else are we doing? The Valuation Office Agency is playing its part. It has put in place a fast track for appeals so that businesses that face significant bills can challenge their assessments. I understand that 70 have already done so. Local authorities, once they knew that this was likely to come their way, began to gear up immediately and they have been given information by the CLG so that they can prepare schedules of payments. They are very organised. I can also give some assurances about technical insolvency, which I hope will be of some help. I am aware that many businesses have said that, despite this exceptional arrangement to spread payments, they will have to add this liability to their balance sheets. That will mean that they will become technically insolvent, and as a result, although they may be in a position to continue their businesses, technically they will have to cease trading. That is a serious matter. The department has taken advice from experts in the Insolvency Service and the Department for Business, Enterprise and Regulatory Reform. Clearly, the outcome will depend on the individual circumstance of each business on a case-by-case basis, but it will depend on the level of both the existing assets and liabilities when the backdated rates bill was received and the directors’ reasonable expectations of being able to meet their liabilities as they fall due in the future. The advice that the department has received is clear on the fact that the additional liability is not in and of itself a de facto reason for a company becoming insolvent. We want to ensure that that is widely understood, so that companies can continue trading where there is a reasonable expectation of being able to meet their liabilities in the future. The substance of that was put in a letter from my right honourable friends John Healey and Stephen Timms to the Treasury Select Committee. I shall put that letter in the Library and I hope that noble Lords will feel that they can make use of it. We will also see whether we can put it on government websites so that it will be accessible. In addition, companies can of course get advice from legal support, qualified accountants, authorised insolvency practitioners and so forth. I am sorry to have taken the time of the House at such length. Nobody would deny that this is an extremely difficult matter. It is one that we wish had not arisen and certainly not at this time. We do not deny that. We have done what we can do to assist within the current law and system of business rates. I hope that noble Lords who have spoken will accept that and will not press their case to a vote.