Communities and Local Government Committee

Oral evidence: Business Rates, HC 665
Monday 11 April 2016

Ordered by the House of Commons to be published on 22 March 2016.

Members present: Mr Clive Betts (Chair); Bob Blackman; Helen Hayes; Kevin Hollinrake; Liz Kendall; Julian Knight; David Mackintosh; Jim McMahon; Mr Mark Prisk; Mary Robinson; Alison Thewliss.

Watch the session

Evidence from witnesses:

Questions 191 – 266

Witnesses: Joe Anderson, Chair, Liverpool City Region, Sharon Gregory, LGSS Group Accountant, Cambridgeshire County Council, and Richard Paver, Treasurer, Greater Manchester Combined Authority, gave evidence.

              Chair: Good afternoon. Welcome to this evidence session: an inquiry into the Government’s business rates reforms. Before I pass over to the witnesses, can we just get members of the Committee to put on record any specific interests they may have? I am a vice-president of the Local Government Association.

              David Mackintosh: I am a Northamptonshire county councillor.

              Helen Hayes: I am no longer a councillor in the London borough of Southwark, but I do employ a councillor in my parliamentary team.

              Jim McMahon: I am a councillor in Oldham, of course as a member of the Greater Manchester Combined Authority, and I employ a councillor in my office.

              Q191 Chair: Thank you for that. Thank you for coming to join us this afternoon. Could I ask you, for our records, to go down the table and say who you are and the organisation you are representing today?

              Joe Anderson: I am the elected Mayor of Liverpool.

              Sharon Gregory: I am the group accountant with LGSS Finance.

              Richard Paver: I am treasurer of the Greater Manchester Combined Authority.

              Q192 Chair: Manchester and Cambridgeshire, you already have pilots in place, up and running. Could you indicate how it has been working so far? Is it working well? How did you begin by getting all the authorities together and agreeing to the pilot that you are running?

              Sharon Gregory: The pilot in Cambridgeshire actually covers all of the Cambridgeshire authorities and Peterborough City Council. We were approached by the Treasury and it was a very quick decision that all authorities would enter into the negotiation with the Treasury and DCLG. It’s not a true 100% retention pilot. Essentially, the current 50% scheme runs as usual, and then the pilot repays the central share back to the authorities within the scheme above a secondary baseline. That baseline for 2015-16 is the NNDR1 forecast—the business rates forecast for 2015-16, which had been lodged before the pilot was launched. The baseline thereafter has a 0.5% stretch target added to the 2015-16 forecasts. The scheme is initially set to run for three years, with a review after that time for Peterborough and Cambridgeshire. Across the pilot areas, it is an 80:18:2 per cent. split between the upper tier, lower tier and the fire authority. Peterborough, as a unitary, get 98% of their reward.

              We have agreed, in principle, that the impact of appeals will be addressed and disregarded from the growth calculation, but we are still trying to do that. There is no penalty in this scheme if we do not meet our targets. There was some talk of that right at the start, but we did not agree to it. We have some problems at the moment with implementing the scheme. It has been quite slow to bring about, so the regulations are not in place yet, although I understand we have until September to bring them into being. We are struggling, as I am sure Richard will agree, to agree a process on how to strip out that impact of appeals. It seems to be a bit of a stumbling block between ourselves and the DCLG.

              The other issue is that we have received a directive from the DCLG to close our accounts down as fast as possible, but we cannot do that because the NNDR3 forms have not been released yet. We are slowly getting there, but it is taking its time.

              Richard Paver: Similar, although our discussions with Treasury have flowed through from the wider devolution debates that have gone on in Greater Manchester for some time. It was a natural follow-through from the devolution debate. We are a little odd, in that we have a pool—we have business rates pooling across Greater Manchester and, at the time, Cheshire East Council, which is a tariff-paying authority and therefore beneficial to have in the pool, so we had a natural starting point for working together on business rates. The 2015 pilot includes Cheshire East as well as the Greater Manchester districts.

              We have had all the same sorts of problems in trying to establish a measurement base, but we are about there now. I think we are a little further progressed than the Cambridgeshire pilot at the present time, and we are swapping information as we go along. We think we are about there, and we have managed to calculate some numbers for Manchester City Council and a number of other districts, so we have some idea of the benefits of the pilot in 2015-16.

              As Sharon mentioned, it was crucial that this was on a no-loss basis. We, likewise, were approached to say, “If it doesn’t work, you could lose money,” and we said, “Well, on that basis, we wouldn’t sign up to it,” so it was crucial that it was on a no-loss basis. We did not really have any problems getting the authorities signed up to it once it was on a no-loss basis, because in a sense there was nothing to lose. That was, in a sense, the easy part of the exercise. The technicalities of how you measure and then subsequently share the proceeds can be the more difficult bits of the exercise.

              Q193 Chair: We will come on in a second to look at the lessons that might be learned and taken forward. Cambridgeshire is not going to move on to be one of the 100% pilots. Is that because you did not want to be, or because the Government did not ask you?

              Sharon Gregory: We were not invited to be part of the second pilot.

              Q194 Chair: So you didn’t go knocking on the Minister’s door, saying, “Please can we be”?

              Sharon Gregory: We were not aware that the second pilot was going to come into being.

              Q195 Chair: So you got no information about it.

              Sharon Gregory: Not to my knowledge.

              Q196 Chair: Okay. In terms of what was raised there, we have had so much reference to appeals and difficulties. Is getting this issue sorted a major obstacle to any form of moving forward on business rate retention?

              Sharon Gregory: Very much so. For me one of the key areas is around the revaluation that is coming up. The appeals that we are expecting to be generated from that revaluation potentially could significantly impact the baselines going forward for the 100% retention scheme, as any new baselines get reset. That is quite a big concern for myself, certainly.

              Q197 Chair: Coming on to Liverpool, Cambridgeshire was not aware of the 100% scheme, but presumably Liverpool was because you will be part of it. Did the Government come to you and say, “Please join us,” or did you go knocking on their door and say, “We want to be”?

              Joe Anderson: No, we were asked would we participate and we accepted that request. For me, I am a big fan of all forms of devolution, including fiscal devolution, but I have always argued in terms of looking at the rate support grant and reductions, which has been iniquitous and unfair to local authorities—some have benefited and some have lost.

              With this pilot study, if, for instance the business rates retention was to start today, we would be £52 million worse off, so we are glad to be involved in the pilot so that we can show how there is an unequal, one-size-doesn’t-fit-all approach. We want to make sure that we can prove that this is unfair to the Liverpool city region—it is not just Liverpool. That is the amount that we would lose out. So we are happy to be involved in the pilot, because it will explore why that is the case, and we have got a guarantee that we will not lose out, so we are happy to do that.

              Q198 Chair: It sounds almost a bit like we are setting off, knowing that this will demonstrate failure. That is hardly the most enthusiastic commitment to begin a new scheme with. Is that unfair?

              Joe Anderson: I think that is unfair. I think if they wanted to pick on a model that was going to show success, they could probably pick on areas that would clearly be at an advantage if they were retaining business rates, but they have got to show it across the whole country, where this one-size model doesn’t fit all. So we are happy to be participating in the pilot scheme to demonstrate exactly that.

              That does not mean that we are against it. I am supportive of the principle for the whole Liverpool city region, but it has to be fair and equitable and has to protect those. The Government seem to be good as passporting responsibility over, but not so good at passporting the funding and money to go with it. That is why we are engaged in this to prove that there is a discrepancy.

              Q199 Chair: You have got the fall-back of not losing out.

              Joe Anderson: Absolutely. Otherwise we would not do it.

              Q200 Mr Prisk: I’d like to come back initially to the current pilots and then I will come to Liverpool, if I may, in a moment. Clearly it is very early days, but Mr Paver has already said that the issue about appeals has the danger of sweeping away any potential gains if it is not dealt with properly. At this early stage—the Committee appreciates that it is very early—are any particular lessons starting to emerge from the two pilots? I will start with Manchester city and then come to Cambridgeshire.

              Richard Paver: Clearly the appeals issue is the biggest single one. Certainly for the pilot we are working in a sense to disregard them and take them out of the calculations so that we can get a true measure of growth. We have accepted that variations in reliefs, collection, academies and things fall within the purview of what the 10 authorities are responsible for in terms of business rates calculations, but appeals just swamp those, so the work we are doing at the moment alongside Cambridgeshire is to strip that out so that we do have a measure.

              We have calculated Manchester’s numbers and we have cross-checked those with what we know is happening on the ground so that the numbers look plausible. We came up with some initial numbers that looked implausible because they were too high, so we worked back through them and we have got an answer now of a couple of million pounds as the benefit from the 2015-16 pilot, which is growth of about £5 million net in RV, which seems to fit with what is going on in the city. So we have certainly dealt with that aspect. I think the information flows—

Q201 Jim McMahon: Is that net figure derived because Cheshire East is part of the pool, or would that be there regardless?

              Richard Paver: No, that is Manchester’s own figure.

              Q202 Jim McMahon: Manchester City Council?

              Richard Paver: Yes. We think the GM figure is around £5 million at the moment. The other authorities are validating those. Interestingly, we also have the pool working, and the pool beneficiaries are your Traffords and Cheshire Easts of this world. They are not showing growth in terms of the pilot; it is actually some of the other authorities that are showing growth. It comes back to the fact that what you are trying to measure through a pool and a pilot are actually quite different things because of appeals, and they are throwing out different answers for the different authorities: none of the pool beneficiaries are pilot beneficiaries, and vice versa. It is a strange outcome of the numbers.

              Going back to the question, the other thing that we are finding with colleagues in CLG is that extracting information in a meaningful way is difficult. The rating list of the city council is about 24,000 hereditaments, which range from £30 million-plus at one end for the airport as a single hereditament to £5 or £10 at the bottom end for a car parking space somewhere. Trying to understand the numbers, the flows of money and the way the valuation office works has been a real problem. I think we are getting there. We have a much better understanding, but working closely with the VOA, getting better information flows and getting the forms that we have to fill in—the NNDR1 and NNDR3—to be meaningful is going to be crucial to making this work.

              Q203 Mr Prisk: Just on that, certainly a number of members of this Committee and other Members of the House have argued that the tiniest hereditaments can clutter up lists in a way that makes the revenue generated completely ridiculous in terms of cost of administration and revenue gained. Would it have been beneficial if central Government had actually cleared some of that very low clutter out so that the lists were easier to manage and clear on things where, frankly, you will get a net revenue rather than the administrative costs that were in some cases outweighing the process? Would that be your view?

              Richard Paver: Yes, I think that is the case. We have had a look at the changes the Government announced in the Budget, with the reliefs changing to £12,000 and tapering. That would affect potentially 17,000 of our circa 24,000 hereditaments—something like 70% of the rating list. That is for a major urban area; you would think that in a smaller area a greater proportion would be affected by that, so it potentially takes large swathes out. Under the current small business rates, in a sense, properties are aggregated up, so if you own 15 car parking spaces and an office, you do not get the reliefs on those. These are on the basis of just the hereditaments in the rating list, so I suspect in practice not as much will be taken out, but I think we will see huge swathes of numbers taken out by the changes that we have coming through. In terms of rateable value, 70% of the hereditaments are less than 10%—something like 7%—of the rateable value of the area, so it is a disproportionate impact. I think the changes will really help that process.

              Q204 Jim McMahon: For clarity, is the 70% for the Manchester City Council area or for the combined authority?

              Richard Paver: No, that is for the city council. We do not have access to others, but I would assume that it is actually a greater proportion for the likes of Oldham.

              Q205 Jim McMahon: It would be quite helpful in terms of making notes of the meeting if, when you are referring to figures, you could differentiate between the combined authority area that you are here to talk about and give evidence on and the city council administrative boundary.

              Richard Paver: Yes. I am the city treasurer as well as the CA treasurer, so I do have the city’s information and I do not have the others’.

              Jim McMahon: It is just to capture the information; that is all.

              Q206 Mr Prisk: In terms of Cambridgeshire—this is, again, looking at what the lessons are from the pilots—you mentioned this challenge around the revaluation date. This is always a vexed issue: where is the beginning? For some areas, the date you choose is an advantage and for others, of course, it becomes a disadvantage, depending on the cycle. From what you have seen so far, would you want to see more frequent revaluations? The Government have announced that they would like to move to three years. Is that something that you feel would be advantageous? Is that something from the pilot that you feel, having looked at this, would be helpful?

              Sharon Gregory: I am not sure that that is something I could glean directly from the pilot, but, as I think I mentioned the last time I was here, I believe that if there is a robust distribution mechanism supporting the 100% retention, there is very much an argument for moving towards more frequent revaluations and smoothing out the impact of appeals over time.

              Q207 Mr Prisk: Moving to Liverpool—it is very good to see you, Mayor Anderson—you have six authorities within your city region, which are all top-up authorities, I think. At this early stage, it is always dangerous to spend the money before you have got it. Have you had any discussions yet about the implications of being a pilot and what that will mean not just for the specific city authority that you represent, but for the city region as a whole, which you chair? Have you had any discussions about how you would use that revenue and how you would come to a decision about how you use the revenue?

              Joe Anderson: No, simply because the details have yet to be revealed to us by Government. Other than we are in a pilot scheme, we have yet to have any more conversations about how the whole thing will work. Clearly, if we are to have a city region that is sustainable and looking after itself, we need to grow our business base and create more businesses. That is what everybody within the city region believes. We are working with Government through the devolution process with the gainshare and the regional growth fund money to create new opportunities and new business growth, and we will continue to do that. Liverpool City Region is in receipt of about £200 million in rate support grant, which is a top-up that protects us because of the funding challenges that we have. It is clear that that is the reason why we are delighted to participate in this project in terms of the pilot. It shows that we need to have that protection.

              I have said on many occasions—this is probably a question for later on—that there is a clear difference between Kensington in Liverpool and Kensington in London. If we had the business rates of Kensington in London, I would not be sitting here talking to you; I would be creating new business in Liverpool. The argument for participating in the pilot is to show that unfairness. That is why I made the point to the Chair at the beginning. If we participated in this now—if it was to start today—on top of the £200 million, we would then lose on top of that another £51 million across the city region.

              Q208 Mr Prisk: And in these early discussions, is the Department receptive to the fact that there is this £52 million gap that you have talked about, and are they reflective of that issue?

              Joe Anderson: With the greatest of respect to the mandarins who work here in Whitehall, I think it is very difficult to accept anything that local government says. That is why, for me, the pilot study is a unique opportunity for us to demonstrate that. This is not us just happening to be negative about it. We are actually on board with the trajectory of devolution, but it has to be a level playing field because one size does not fit all. As I said, this is an opportunity. That is why we are engaging in it, and that is why we have got the protection that we will not be worse off. We are comfortable with that engagement and hopefully it will be able to demonstrate the points that we are making, because we are not making these figures up. They are clearly there for everyone to see.

              Q209 Kevin Hollinrake: Just on those figures, can you tell me how you get to the £51 million figure in terms of where you think you would be worse off?

              Joe Anderson: What we will get is based quite simply on the figures that have been given to us on the basis of what we know and the full retention of business rates. If we take our full business rates now and the rate support grant as it is, we will be between £51 million or £52 million worse off simply because if our rate support grant is taken away—this is the purpose of business rates retention—as well as the top-up that we get to support the social needs and the things that we have to deliver, it comes out at that figure.

              Q210 Kevin Hollinrake: Part of these proposals is a redistribution, of course. It is not simply you getting your business rates that you collect in Liverpool City region. The plan is a redistribution of those rates throughout the country, so that is a situation where you will not be worse off, but you’re assuming a situation where you are keep your specific rate. Is that correct?

              Joe Anderson: There will be some parts of the country that will clearly benefit from business rate retention and other parts of the country that will be in deficit from business rate retention, because of the top-up, the protection and the blanket that is there to protect the worse-off—those that haven’t got huge amounts of business rates coming in. What we are clearly saying is that if we were told today to retain our business rates without the rate support grant offer that we currently get, we would be £51 million worse off. We are very happy to continue with the devolution and the fiscal retention in the devolution process, but we want it to be equal and fair so we can create growth, create new businesses and balance that out, and we have got to be given the opportunity and the time to do that.

              Q211 David Mackintosh: Specifically on Liverpool, what early analysis have you carried out in relation to how the pilot might play out across the city region?

              Joe Anderson: Clearly, you can only gather that evidence when you have run the pilot and seen how it operates. All I can tell you is what we get now in business rates, what we get as a top-up in the rate support grant, and what the difference will be. As I said, there is a guarantee that we won’t lose out. Liverpool is growing. I’ve got new businesses. I think that there’s been a benefit of about £7 million or £8 million over the last 12 months in new business growth and new business rates. We want to see that, and we want to be in a position where our city and the city region are sustainable and able to look after itself. I want this Select Committee and the Government to see how that works out over the next five years and what support needs to be given for us to be able to sustain ourselves, and it is during the pilot that we are going to be able to get to those details.

              Q212 David Mackintosh: To all of the panel, I would like to know your views on whether you think there will be a difference between the north and the south, in relation to business rates.

              Richard Paver: Perhaps I’ll kick off. Just picking up the comments of Mayor Anderson, I think the pilot needs to work through the equality of starting point through the needs and resources, because 100% retention of business rates is only one part of the retention. The needs and resources formula that is going to set us off on an even basis is imperative, because your Westminsters need to release some moneys to help authorities not that far away. A lot of those in the south-east are not rich in business rates; it is concentrated in a small number of authorities. I am assuming that that is the precursor to this. I think that the majority of authorities will then have the scope to grow their business rate bases.

              Going back to the pilot that we are running for 2015, Manchester seems to have generated extra growth in there, but so does Rochdale, which does not have many of the characteristics you would assume would generate growth in business rates. There are opportunities, as long as the starting point is fair.

              To pick up one of the points about the three-year review, which one of the Members asked, on the whole issue of resetting tariffs and top-ups, it is important to look at retention of business rates in the longer term. Greater Manchester will be looking to benefit from direct investments that are made by either individual districts or the combined authority in infrastructure and the like. Therefore, the benefits that flow from that are retained locally and not passed back either through some revenue sharing with the Government or at a reset, almost in the same way that enterprise zones work—you keep your benefits for 25 years. I think that’s going to be crucial. It is not for everything you grow, but where you are putting in investment that directly generates it, I think there needs to be some carve-out. We hope that the pilots will allow us to explore that possibility going forward.

              Q213 Mr Prisk: On that, is your preference to take that route, rather than look at a supplemental business rate in addition? If you are putting in a major rail station, a new connection or something of that nature—maybe broadband in a particular locality—is your feeling that, as an area, you will have the powers to put a supplemental rate in, albeit there has to be a vote on it by the businesses affected? Will the simple fact of being able to retain under the new system adjust your decision-making around whether you then think about supplementaries? Have you looked at what is preferable for that? Do you think businesses would just prefer the full retention?

              Richard Paver: We have not done any detailed work on it. I would see the two things working together, because the mayoral supplementary precept is clearly across all businesses within the combined authority area. We have certainly noticed some schemes that with some pump-priming could free up land for development at relatively small cost—but somebody has to pay for that. If you could capture your business rates’ growth going forward within that area, as you can with enterprise zones, that would facilitate it, without necessarily needing the mayoral precept.

              Q214 David Mackintosh: Does anyone else have any views on north and south?

              Sharon Gregory: There could be some logic behind the argument that there could be a north-south divide, but it depends on a lot of things. It would depend a lot on the needs assessment and distribution methodology, and the impact of the northern powerhouse proposals and how successful that was in bringing regeneration.

              Speaking on behalf of my rural counties, you could make some different arguments around who is best able to benefit from 100% retention. For instance, I work for two rural shire counties, which have large swathes of farmland on which we cannot generate business rates. In the cities and towns that we have, there is a large proportion of small, niche, high-tech businesses, such as those in the biomedical field, which have very small floor space and very high GVA, but very low business rate income. It also depends on your capacity to grow in terms of space and workforce availability. For instance, in the large cities and towns in the areas that I work with, there is very little room for development through moving out into new areas, so we have to redevelop the areas that we have.

              In Cambridgeshire, and in Cambridge particularly, the limitations of affordable housing are dampening down the ability to generate business, and just today the local news in Northamptonshire reported that a third of manufacturing businesses in Northamptonshire are struggling to find suitably trained staff so that they can expand. So I think there are a lot of issues across the country.

              Joe Anderson: Clearly, where you have a large business rate base, that area is going to be at more of an advantage than those with a smaller base. I think that is clear. As I said, that is why—and I hope that the pilot will prove this—while we all want the opportunity to stimulate growth and entrepreneurialism, grow the local economy and create more business, it is not going to be one size fits all. There has to be an understanding of that. I hope the pilot scheme will be able to produce the evidence that shows that to be the case.

              Q215 David Mackintosh: Do you think any areas that are not in the pilots are at a disadvantage?

              Joe Anderson: No, I don’t think so. Because it is a pilot, what will happen is that the evidence will be there for the Government to react to, so I hope that the evidence-gathering from the pilot will be something that the Government will use, and will make changes accordingly.

              Richard Paver: The sums of money that we are talking about at the moment being retained locally are fairly small; for 2015-16 I think the current pilot will generate something like £5 million within Greater Manchester, which has a population of nearly 2.5 million people. So it is small but a movement in the right direction and clearly, as time goes on, you would hope that that is going to grow. But it comes back to some of the issues with the appeals—we could see the next revaluation wipe out the benefits of the pilot overnight, if we don’t get the treatment of appeals correct.

              Sharon Gregory: I would agree with Richard there. I work for a number of authorities, some of which are in a pilot, some of which are not. There are no great concerns that I am aware of, but we are keeping a watching brief on the scale of the benefit of the pilot and on how much is being drawn away from the central share as that is going to impact on any funding that we will receive going forward over the course of the pilot.

Some other things that we are keeping a look out for are whether the pilot authorities are better able to offer some incentives for businesses in their area and whether that would draw business away from our own areas. That is it really.

              Chair: Jim, you can go on to your own questions.

              Q216 Jim McMahon: A lot of the discussions have been about the negotiations and the relationship between combined authority areas and central Government but, obviously, to get over the line, you have to have local negotiations to get everybody to agree with the principle of coming together. Within Greater Manchester, different areas, such as Trafford and Stockport, have negotiated a different retention of growth. Could we just have a bit more detail about that?

              Richard Paver: The negotiations have concluded around the pooling arrangements, which is the 10 Greater Manchester authorities, and now Cheshire East and Cheshire West have joined in for the current year pooling. That is agreement that we have in place. During your time on the combined authority, we were discussing the sharing of the pilot proceeds, and we are still discussing those. The new pilot coming into being has drawn out, “Well, we need to sort out what that looks like before we go back to the sharing of it.”

              The general impression is that the majority of the proceeds, if not all, will go back to and operate at a GM level. There may be some local sharing, as there is in the pool, but the majority will accrue at a Greater Manchester level and be used for further investment. Again, in the scale of GM investment, this is relatively small. We have a £300 million housing fund, a £1 billion transport investment fund, so we are talking at the margin of combined authority resources, but I think that the majority will accrue at the city region level rather than at an individual district level.

              Q217 Jim McMahon: Is it not a slight conflict, though, if the direction of travel is for city regions and county regions to be self-financing, so the money you raise from council tax and business rates is all the money you will get, by and large? Is it not a problem if the wealthier areas with a stronger business rates base are negotiating ahead of time to retain more growth than areas with a weaker base, if that is going to be the sole funding for council services at a local level?

              Richard Paver: I think what we are discussing at the moment is the pilot proceeds. I agree wholeheartedly you. Come 100% retention and the complete resetting of the system, there will be pressures on any extra revenues generated to support the general growth in the population for those areas that are growing and particular costs that arise from being the centre of the growth—city centre increased costs in dealing with the workforce and the population that comes. But also, how do you share those revenues across the city region to help those who are not generating it? That will be part of the local work—not necessarily the work with CLG during the Parliament. Locally, we would have time to look at that for 2020 to 2021. At the moment, we are looking at marginal revenues and how those are used. I agree that, in the longer term, that is a big issue to resolve.

              Q218 Jim McMahon: Is that the same in the other two areas? Are the local negotiations taking place where different authorities negotiate a different retention of growth or is it one rule for everybody?

              Sharon Gregory: In Cambridgeshire, it is one rule for everybody.

              Joe Anderson: In the Liverpool city region, we are committed to looking at the pilot and how it works. Of course there are some challenges in terms of where business growth is being concentrated and how you distribute that. If we are talking about new growth and about how we create growth, that is a problem we should relish, rather than just let central Government take all the business rates and then passport it through to us in a grant.

              We have to stimulate growth and look at where business opportunities lie. For instance, if you look at the Liverpool city region, it should not just be based in Liverpool. We have to look at Sefton, Knowsley, St Helens, Halton and Wirral, where we can create new business and work together to actually achieve that. The more business we create, the more opportunities that creates. I think there is a pragmatic approach with the leaders in the Liverpool city region that understands that we can do a lot more collectively than we can do individually.

              Q219 Jim McMahon: At the moment, the Government will take the cost as more business rates relief. Is that different in different areas? Is there a concern, at a local level, that that pressure might be passed on to local authorities, where there is the choice of either taking away the small business rate relief, with the impact that would have on the viability of local businesses, or of finding the money elsewhere to cover the costs? Are those discussions taking place? Are you satisfied that the Government will fund that, or are you planning for local pressure down the line?

              Joe Anderson: It was disappointing that the decision and the statement on small business rates were made in the way they were, without any involvement or discussion, especially with those engaging in the pilot. Clearly we all want small businesses to take off and grow, and that is part of what we should be encouraging and helping, however there is no question but that that will have an impact on the financial state of not just Liverpool but the whole city region. It is disappointing but, nevertheless, we have got to get on with it. We have just got to accept that that is the decision that has been made, but it is disappointing that it was made in the way that it was.

              Q220 Jim McMahon: Have the Government given the Liverpool city region comfort that that will continue to be funded?

              Joe Anderson: Well, we have got that commitment that we will not be worse off by being part of the pilot. If I am honest I am not sure how, for instance, any small business rate loss will affect us and what that will mean, because a lot of the detail is yet to be agreed and negotiated.

              Richard Paver: Just to say, we obviously have faced that already with the extension of small business rates relief in 2015-16, and part of the negotiations with CLG is to make sure that that is adjusted for when we look at the outputs of the pilot, and that we are recompensed in full for that. The Budget costing document shows that flow of money through to 2021, so I am pretty reassured that that is going to happen. As the Mayor says, because of the fact that we can be no worse off under the pilot than we would be under the status quo—the status quo for us includes the operation of the pool and the 2015 pilot—I am pretty reassured we are not going to lose out as a result of that, certainly through to 2021.

              Sharon Gregory: I agree with what my fellow witnesses are saying. We do have some concerns, certainly at implementation of the full 100% scheme. There are particular concerns about how you capture the true cost of that as new small businesses come in and so on. There are concerns that it is going to be locked in at the start and we will have no way to measure the future impact.

              Q221 Jim McMahon: In terms of the period of the agreement that you have got, what is your view on the change from RPI to CPI? What financial impact is that going to have, and have the Government given you confidence that they will pay for that gap?

              Richard Paver: Again, the numbers published with the Budget show the recompense for that coming in in 2020-21, which is after the ending of the four-year pilot. So, on the face of it, it is an issue for the new, full system rather than the pilots. We have had a look across Greater Manchester and, in a year, we think it is equivalent to around £13 million less income. If you look at the standard differential between RPI and CPI, the impact will be about £13 million a year, but that is really something for 2021 and onwards. It is not going to affect the pilots.

              Sharon Gregory: For the billing authorities and the precept authorities in the Cambridgeshire county council area I have done a very basic calculation, and I estimate that in 2021 we are looking at a loss of about £4.5 million across those authorities. The county council would take about £800,000 of that. There are similar figures in Northamptonshire as well.

              Q222 Jim McMahon: Yes, I suppose if it has been built into the Budget and it has been published then the same will be true of all the pilot areas?

              Joe Anderson: Yes and, using the pilot, we will simply point out whether there are any discrepancies or differences. As far as I am concerned, the commitment we have got is that we will not be worse off, so I am comfortable with that.

              Q223 Chair: Have you given any thought to compensation beyond 2020? The Government said the section 31 grant will be used to compensate, in addition to your pilot arrangements, for any loss of small business rate income up to 2020. Have there been any conversations at all, or any thoughts that you have had, about what happens beyond 2020, or are you just focusing on the next four years for the time being?

              Richard Paver: We are focusing on the pilot. Beyond that, you are into the devolution of functions to authorities utilising the excess business rates across the system. One assumes that that would flow through into less business rates being generated and therefore, potentially, less devolution.

              As I mentioned earlier, one of the problems with the small business rates is that you can look them as small hereditaments—there are tens of thousands of those in Greater Manchester—but a lot of them are actually connected businesses. I use the example of Greggs shops, which probably have quite a small RV individually, but across the country it is enormous. I assume they will not get small business rates relief once you aggregate them up. The numbers are going to be quite difficult as to who is in what property. It is not that all small properties will be exempted; it will depend on who is in there. I think it is going to be a moving feast at the individual authority level. It will become a much bigger issue for the more rural authorities—the Cambridges of this world—where there are many more small businesses in small premises, than it will for some of the major urban areas, where it tends to be groups of people who have a range of premises.

              Q224 Jim McMahon: We are talking about the financial risk if that rate relief was taken away or devolved down with the pressure added to local authorities, but of course the opposite could be the case. It could be that at a local level a decision is made to have a more advantageous rate relief scheme, because although it does capture a number of businesses in an area, a lot of people in town centres and district centres would be above the threshold to attract the relief. As part of the regeneration of town centres, that might be something that is considered at a local level. Are there any discussions taking place at a local level in any of the three areas about more advantageous rate relief for small businesses?

              Richard Paver: We have not had any discussions. One of the factors with discretionary relief is that you get caught in the state aid rules, which we have certainly come across in the enterprise zone. It is a nationally funded local discretion and they are still subject to the state aid limit, so you are always going to be caught on the fact that it is only the very small end of the market, not even the medium-sized end of the market, that can benefit from reliefs.

              Joe Anderson: In fairness, a lot of this is not available to us to know yet. As I said, we are still at the very early stages. It is like the point about moving from RPI to CPI. Of course, we know that we’ll lose out by around £7 million, but we also know that during this period we’ll get a chance to prove that. That is what part of the pilot is about. We have to be, if you like, guided by Government in what we can do, whether it is the enterprise zones or there is other stimulus that we can provide, with state aid and issues like that. What are others that are not in the pilot able and not able to do? A lot of the discussion and detail has yet to be given to us and negotiated with us. It is very early days. Maybe we could come back halfway through and say exactly how it is working and what it is like, but at the moment it is, if you like, a case of suck it and see.

              Q225 Kevin Hollinrake: Mr Paver, you mentioned the difference between CPI and RPI—you are going to be £13 million worse off. Is that at a starting point in 2020? If there is a 1% difference between the two, that gap is going to grow, isn’t it?

              Richard Paver: Yes, that’s a single-year impact, so the second year it will be £26 million, then £40 million—it will compound up.

              Q226 Chair: And it is very difficult to see how the Government could compensate for that, isn’t it?

              Richard Paver: By the time you get there, the totality of business rates is in excess of the current public expenditure plan, so it is about the functions being devolved at that stage. If there is less money in the pot, one assumes there will be fewer functions to devolve to local authorities. I presume it will be sorted that way, but clearly there is a loss of national taxation through that decision. The Government’s number in the Budget policy costings for 2021 was £370 million, so that is £370 million, then £740 million, then £1,100 million—it is going to compound quite rapidly to big numbers at a national level.

              Chair: Thank you very much for giving evidence this afternoon. It is much appreciated.

Examination of Witnesses

Witnesses: Sir Edward Lister, Deputy Mayor, Policy and Planning, Greater London Authority, Guy Ware, Director for Finance, Performance and Procurement, London Councils, and Colin Stanbridge, Chief Executive, London Chamber of Commerce and Industry, gave evidence.

              Q227 Chair: Thank you very much for being on our second panel this afternoon. Could you start off, going down the table, by saying who you are and the organisation you represent?

              Colin Stanbridge: I am Colin Stanbridge; I am chief executive of the London Chamber of Commerce and Industry.

              Sir Edward Lister: I am Edward Lister; I am chief of staff to the Mayor and am also Deputy Mayor for Policy and Planning.

              Guy Ware: I am Guy Ware; I am director of finance, performance and procurement at London Councils.

              Q228 Bob Blackman: Thank you for coming. Obviously we have had written evidence about the operation of the 50% business rates from various organisations, and I think during the discussion we are going to go on to look at what 100% looks like and what the implications are. But first, whoever wants to start, could you give us your impressions of how the 50% business rate retention has worked in London?

              Sir Edward Lister: I’ll have a go. We are currently in the position where approximately half of the capital funding for Transport for London, about half of the London Fire Brigade and bits and pieces of the GLA are all funded through the business rates. That is all going very successfully; we have a commitment from the Chancellor in the Budget that he will move towards 100% funding for Transport for London. Very roughly, we get about £1.1 billion at the moment, and if we get the rest of the Transport for London capital grant and also the other bits and pieces, that is a similar sum of money that will flow to London. That is where we are; we are fairly pleased with it. Our biggest issue, of course, is the appeals mechanism and the amount of money we are having to put aside for appeals—but you are aware of that.

              Q229 Bob Blackman: Many of those appeals, of course, have come in during the period of the 50% drop.

              Sir Edward Lister: Basically, we currently have about £120 million for appeals, which is already locked up in provisions within our accounts. That will rise to about £250 million by this time next year and, if it continues at that rate, by about 2017 we will be having to set aside over £1 billion for the appeals. The bit that is obviously not working correctly is that the bulk of those appeals is really in three London boroughs: Westminster, City of London and Camden. Indeed, they are the bulk of the appeals for the whole country. It is a very slow process to try to get them resolved: hopefully the Enterprise Bill will speed it up, but, nevertheless, a lot of resources will need to be directed at central London if we are going to process all those appeals.

              Q230 Bob Blackman: I think I know the answer to this question, but—just for clarity, for other people—what is the implication of having to set aside that money in the accounts?

              Sir Edward Lister: I suppose, in its simplest form, it is money that we can’t spend. It is money that could be being directed towards regeneration schemes or towards projects but that cannot be directed anywhere and is having to sit in a bank account and await the outcome of the appeal structure.

              Q231 Bob Blackman: Could I just clarify something else? If the appeal structure goes in such a way that that money is not required, would that then lead to a windfall of extra available money? Or is it money that, if it goes the other way, will not be available?

              Sir Edward Lister: To a large extent, for example with things like the Transport for London capital grant, we have already taken it into account. If we do not get it—if I can put it that way—there are going to be capital projects that will have to be re-profiled, delayed or cancelled. That will be the net result if it does not work its way through the system. Obviously, we have done our own calculations as to how much of that we think will end up having to be repaid; but, for the bulk of it, we have assumed it has a purpose and we have targeted it accordingly.

              Guy Ware: Perhaps I could add something, if I may, Chair. As Sir Edward said, there has been a major issue around appeals, which I think we are all familiar with. But another question is “Has it worked as intended?”, in terms of the description on the tin of encouraging and promoting growth and providing a reward for local authorities in which economic growth happens. Again, the answer, I think, is not yet. At the moment, in the first two years of operation in the system within London, there have been some huge variations between boroughs. Overall there has been no net increase in the retained business rates across London, and that is partly because of the amount set aside for appeals, but it is partly because of the kind of purely random effects of how the baselines were drawn, and when they were introduced.

              There have been some very significant timing effects. If you are Newham, for example, and the Westfield shopping centre comes into rating immediately after the baseline is drawn, you have done relatively well out of this. There are other boroughs where significant developments have taken major ratepayers out of the list just as the system was introduced, and so even though that may be because there is going to be long-term redevelopment and longer-term growth, in the meantime they have suffered quite noticeable reductions. We did a bit of analysis at London Councils to look at whether there was any correlation between increase in economic activity, in terms of gross value added, and the rents retained by boroughs, and the answer, at the borough level, is no, there is no real correlation. At the system level, the whole of London, there is a reasonable correlation, but there is stuff that we need to sort out before we can really say that it is operating as an incentive.

              Q232Bob Blackman: It is probably not well known, of course, about the imbalance there is between tariff and top-up boroughs in London itself. The assumption is that all of London is some big business rates empire.

              Guy Ware: Cash cow, yes.

              Q233 Bob Blackman: Could you just clarify the impact of the top-up and tariff?

              Guy Ware: I could. The boroughs and the corporation are basically net neutral to within about £10 million, in terms of top-ups and tariffs, so overall London collects £6.6 billion-worth of business rates at the moment—50% retained: £3.3 billion. Of that, a net aggregate tariff for the capital as a whole, including the GLA, is about £350 million, so that is what flows out of London to the rest of the country, but, as I say, the boroughs themselves balance each other out. So despite the fact that Westminster and Camden are collecting more than most other authorities in the country combined, it is cancelled out with the other worries around London.

              Q234 Bob Blackman: Colin, you come from the business perspective.

              Colin Stanbridge: From the business perspective, I think you would be hard pressed to find many businesses that knew that this was happening. We are talking about 50% but I suspect not many businesses talk about 50%, especially when you take into consideration the confusion there has already been; you always hear council leaders say “We get the rap, because we collect it—and the Government spend it.” I think there is still a lot of confusion about the business rate, and there is a lot of worry, obviously, about business rate anyway, because of the lack of revaluation and the fear that in a few months’ time many businesses could be hit with a large hike in it; but when it comes down to knowledge among the businesses, or to businesses coming to us saying “I have seen my council much more reactive towards my plans for how I can get the borough to export more,” or whatever—absolutely zero. Nothing.

              Q235 Bob Blackman: I think we are going to explore some of those other areas. Guy, you mentioned the outflow of funding from London to elsewhere. Is it disproportionate?

              Guy Ware: Is it disproportionate? How would you judge that? I think it is far lower than most people assume, as I think was inherent in your previous question, and I think, if you look at the overall outflow of taxation from the capital to the rest of the country, looking at the taxes in the round, London contributes £34 billion in terms of the difference between the taxes collected in the capital and the amount of money spent on public services in the capital. So proportionately in the business rates there is probably less of a net flow-out than with other taxes.

              I think—we may get on to this later—there are implications that flow from there being a net aggregate tariff in terms of the package of services that can be devolved to London in future, to be funded from those rates, and the amount that flows out obviously reduces that. I think we as London Councils and the Mayor—London government collectively—would certainly want to see and work through a proposition where all of those rates were retained within the capital and used to fund a set of services here.

              Q236 Bob Blackman: You may have observed our previous witnesses. The Mayor of Liverpool, for example, made it clear that there was an imbalance in the Liverpool city region; I think he quoted £51 million. That has to be found from somewhere. Why shouldn’t it come from London?

              Guy Ware: It has to be found from somewhere, or the level of services that it is funding have to be adjusted accordingly. There is a trade-off to be made there. What the Singh commission—the independent commission on local government financing—found is that the level of disparity between authorities’ needs and resources could be broadly contained within regions. You can do it nationally, which is what the current system does, but you could equally well do it within regions. Whether you could do it in every single one of what used to be the nine administrative regions depends on the scale of the services to be transferred and the impact of the changes that were being discussed at the end of the last session, but there is no reason in principle why you could not negotiate and construct a set of devolution and funding deals that allowed the level of resources available by region to support the services that they were there to fund.

              Q237 Bob Blackman: Do you share that view?

              Sir Edward Lister: Just to add to that, we have got a number of bids out on the table, as indeed have other cities, for various services that we would like to see devolved to the city: for example, further education, the skills agenda and services like that, which could very easily soak up that £350 million if that is how people want to go.

              To us, there is a certain logic; it would mean that we were containing business rates within the city, and I think it would make it a little more sellable to people. There is no doubt about it: people are facing what is potentially a big hike in their business rates in the fairly near future. Are businesses getting something for it? At the moment, there is no correlation between what they get and the business rates that they pay, so it would be nice to try to bring some of that together. Things like skills are an obvious area. That would also provide even more pressure on skills to deliver the services that businesses want, so it would work much better as a system of checks and balances if you went down that road.

              At the moment, the big service in London is Transport for London. The capital grant is now being paid for by business rates. The GLA is not a very large organisation. The biggest chunk of money then is the police, which is virtually not part of it, except for tiny bits, and the fire service, which has now gone over to the Home Office. So one can see pressures going the other way. People might actually want some of these services not to be part of the business rates system in due course. So there is quite a bit of movement and fluidity in the system.

              Colin Stanbridge: I think that most people and businesses expect that London should subsidise the rest of the country; that goes without saying. The reason why we are and have been so in favour of fiscal devolution and the London Finance Commission proposals is that we think businesses need a new relationship with local government. It is hoped that what will happen if you have full devolution of the business rate, and if it is there to promote growth, is that a different relationship will develop between the businesses and their local councils, or the Mayor and the GLA.

              That is what we want to see. We want to see how those mechanisms can be put in place.               Businesses will never get the vote. We accept that, but we also expect, if there is 100% retention—hopefully that will be the start of other fiscal devolutions, along the lines that Tony’s commission came up with—that you will have a relationship with businesses and they will feel a part of it in being able to promote and come up with ideas and expertise that will provide that growth and find the money going forward. We have not seen that in the past. You get the feeling that if we were talking about council tax, the people deciding on council tax would have a different relationship because the people with whom they have the relationship are voters. Because businesses do not have a vote, you can say, “Oh, well, business can pay for it.”

              Q238 Jim McMahon: You do have a vote.

              Colin Stanbridge: Absolutely.

              Jim McMahon: Two votes.

              Colin Stanbridge: No. I am saying we would not expect a vote. I am saying that we would expect a better form of consultation because it is business rates after all and a different relationship with the authority.

              On the idea of retaining it all in London, I don’t think anyone would ever say that. As a former Liverpudlian I certainly wouldn’t say that, but I do think that unless you make sure that London works properly and the infrastructure is there, you will not have that money in the first place to be able to redistribute it to Liverpool or wherever else it is being redistributed to.

              Q239 Bob Blackman: Can I cut across you there? The key point is whether the amount of money going out of London on business rates is proportionate to the proposition and your members’ consent to the amount going out.

              Colin Stanbridge: I don’t think my members know about the amounts going out and it strikes me it is a small part of the real taxation that £34 billion is composed of. I think they see it in the round rather than in particulars.

              Q240Helen Hayes: We have received evidence from Westminster City Council that since the extension of permitted development rights to allow the conversion of office space to residential space without the need for planning consent, it lost over 1 million square feet of office space prior to introducing an article 4 direction to prevent the loss of further space in the West End. Can you comment, Sir Edward in particular, on how that extension of permitted development rights is having an impact on income from business rates across the city as a whole?

              Sir Edward Lister: I think at the moment we probably can’t. It is not clear what effect that is having. It is fair to say that the central activity zone of London has always been exempt from office-to-residential conversions. I hope you don’t mind me saying so, but Westminster’s policies of conversion need to be looked at as well as national policy. As far as London is concerned, the central activity zone, the City fringe and some of the other areas like Canary Wharf were always exempt, so we haven’t seen the kind of conversions that have taken place in outer London, where there has been a more pronounced effect, and I think that is probably where the problem largely lies. The counter-argument, of course, is that much of the buildings were old 1960s office blocks which nobody wanted anyway. We don’t get business rates if a building stands empty and many of the buildings were empty. The trouble is that we have used all that up now and there is none left, so that is the danger we face.

              Perhaps I could chuck in a number for people to hold in their minds. By 2025 we will need another half a million jobs in London and they will all need somewhere to go, whether an office, factory or whatever. As much as we need housing in London, we also need commercial and industrial premises.

              Q241 Helen Hayes: To what extent are you, as the GLA, monitoring those impacts and looking at them? As well as the issues that you have described in relation to the difference between inner London and outer London, in my constituency, which covers part of Lambeth and part of Southwark, which are inner London boroughs to the south, I can certainly think of examples of buildings that have been in active use as commercial buildings, but they are quite attractive and flexible building types so the owners have sought to take advantage of permitted development rights. I wonder about the extent to which that is an issue across London as a whole. The pressure for housing is obviously paramount and you are right to balance that with the need for jobs.

              Sir Edward Lister: We do a regular monitoring report—I do not have it to hand, but I can send it to you—which shows the rate at which we are getting conversions across London. We do have that statistical data. We have used those as evidence to assist boroughs with article 4 directions. We are not only doing article 4 directions in the CAZ—the boroughs do the article 4 but we provide them with a lot of the data to support that—we are also doing them in places like Park Royal, which is the largest industrial estate in Europe. That has an article 4 direction being processed on it at the moment. So we are doing it in all sorts of different areas to provide protection to commercial premises.

              Guy Ware: Again, I was going to make a point about outer London. It is quite widely spread, but it highlights part of the reason why we are arguing for a devolved system in the first place. What is going on, of course, is that at one level there is an interest in employment space, but a set of financial incentives are built in here that are not necessarily working together as they stand. If you have a building that is converted, you lose business rates, and in the new system you will lose even more business rates, but of course you gain council tax and, currently, the new homes bonus, which may or may not exist in the future. At the moment, those incentives are not necessarily coherent or working in the same direction, and we would want to be able to advocate a system where London can look at those incentives in the round, because the reality is that, inevitably, those jobs have to be somewhere, and those people have to live somewhere, and different bits of the capital are going to have different contributions to make in making an economy that can survive and continue to grow, and in which people who are given work here can afford to live here, and so on. It seems to me that that would be enhanced by an ability to control and influence the financial incentives that we give ourselves that affect the decision making on the use of a given building in any given part of the capital.

              Q242 Helen Hayes: To what extent do you think London will have to increase development in order to earn additional income from business rates retention? How does that square with the competing pressure for residential space?

              Sir Edward Lister: I am happy to have a go at the first bit of that question. Yes, London has to densify significantly. As we are growing at the rate of 70,000 people a year, that translates into just shy of 50,000 homes having to be built in the city each and every year. There is also the figure I gave you earlier about 500,000 people needing employment by 2025. When you have that taking place, it is saying very clearly that we have to have greater density of housing, particularly around transport nodes. You have to have more mixed-use developments in those areas, so it isn’t just residential or commercial; it is a bit of both. It means that we have to protect areas like the City and Canary Wharf, and that is going to lead to even larger office buildings having to be built in those areas to provide the jobs.

              All that translates, of course, into the rail infrastructure, which has to be there both to open up the areas of London in which we will have to build the homes—one of the reasons why the homes are not being built in those places at the moment is because people can’t get to them—and to get the people into the right locations for employment. That is why the City is championing, or has championed, Crossrail 1, which opens in 2018, and is championing Crossrail 2. We have other suggestions for additional rail lines, some of them paid for out of a business rate uplift—I am thinking of things like the Northern line, of which nearly £1 billion is being funded out of TIF. It will change the city, but hopefully the business rates and, indeed, the additional homes providing council tax, the new homes bonus and all the other things will enable us to do it.

              Colin Stanbridge: There will have to be densification if we are going to grow in the way that everyone predicts, and of course office space, factory space and work space are important to businesses. Interestingly, we did some work in our thought leadership campaign last year, London Tomorrow, and we polled Londoners as a whole, businesses and councillors. When we asked whether commercial office space is one of the top three barriers to London’s competitiveness, 42% of Londoners—the general public—said that it was, compared with 49% of businesses and 34% of councillors, so there is a disconnect somewhere in there.

              I will make one point about the change from office to residential. There is no doubt from our polling that businesses are increasingly worried about their ability to attract the right sort of staff. That is down to whether there is an affordable place for them to live, and there is no doubt that the next Mayor will have to do something about that. Eddie and Boris have done a lot to start out, but this is the start of the journey and we need to go further. So it is high on their agenda and that has to be seen in that context—whether it is a good or bad thing.

              However, I will also make the point that I know a number of our businesses that have sold their offices to small businesses, because they want to derive the value out of it so that they can reinvest in the business. I mean, it is a bit like a Londoner and a house, isn’t it? You’ve got all that money tied up; if you can extract it and get somewhere else to live, then you are probably thinking about doing it. Well, businesses are doing exactly the same. They are saying, “I have had this premises for a long time. They were quite cheap when I bought them, but now I see they are worth a lot of money. So, I can help my business grow by taking that out and going somewhere else.” Of course, you have to find the place to go somewhere else, but they are going further out in some cases. So the “yah boo sucks” of it are quite complex sometimes.

              Q243 Kevin Hollinrake: It was announced in the Budget that there would be piloting approaches to 100% business rates retention, and GLA was one of the organisations mentioned. How is that pilot going? Where are we with it?

              Sir Edward Lister: The current position is that the bulk of our money is Transport for London and roughly 50% of that is already coming through business rates. Hopefully, in the fairly near future 100% will come from that route. That is really important, because in an organisation like that, where the money is being spent on infrastructure predominantly, you need long-term funding, so that we do not suddenly have a cliff, as we have in 2020, when all the funding suddenly comes to an end. It means that we know that funding will roll on for many years to come, and therefore we can borrow and plan accordingly, and just go on for more projects, which we’ve got to have. However, we can lead from one project to the other and not have a cliff between them, whereby we suddenly have to demobilise staff and get rid of people. That is the biggest danger for us all the time. We just need that continuity.

              How is it going so far? Well, we are just at the start of the journey. I can’t say it is going great at the moment; as we touched on earlier, we have quite a lot of money tied up in business rate appeals. But we think the journey is the one that we really want to have and that journey will ultimately be for the good of London.

              Q244 Kevin Hollinrake: With the extra money raised, over and above what you are getting from TfL, how much of that will the GLA retain?

              Sir Edward Lister: It is relatively small sums of money. Currently, we get about £130 million on top of the TfL money, but if we get all of the rest of the RSG, which is roughly about another £130 million to £140 million, that would make us 100% funded through business rates and council tax.

              Q245 Kevin Hollinrake: We have obviously got the backdrop of the revaluation of business rates. How will that impact on all the other plans that you have got? You talked about appeals, but are there significant amounts of extra money likely to come in as a result of revaluation? I think there will be a 7.5% increase, supposedly.

              Sir Edward Lister: I don’t think any of us are completely sure how this will work its way through. On the one hand, we fully welcome—as indeed does everybody, I think—taking a large number of businesses out of the business rates system. That has got to be good, both in bureaucratic terms and for those businesses. But how that will be paid for in the longer term is a bit of an uncertainty, as is what that will actually do to our funding. And you take that uncertainty and add it to the continuing uncertainty over the appeals mechanism, and I think we are having to lock more and more money up to try to make allowances for that.

              Colin Stanbridge: I think you will see a large increase in appeals; if it is bad now, it will get a hell of a lot worse when there has been a revaluation. That is part of the argument about why you need to change that regime of revaluation, and there is a lot to be said for annual revaluation. The property market is very sophisticated in valuing properties, so surely we should be able to do that so it becomes annual. To my mind, therefore, one would hope that the change will be smaller and there will therefore be less desire to appeal. We have to have that root and branch change, because if you are faced with a very large hike, your first reaction will be, “How can I appeal against it?”

              Q246 Kevin Hollinrake: Has the relationship with the Treasury formed a key part of the pilot to move towards 100%? In other words, it can be up to you.

              Sir Edward Lister: We have obviously been lobbying very hard for this, as we have in various projects in London that have involved trying to capture the uplift in business rates to pay for some of the much-needed capital infrastructure. I touched earlier on the Northern line. That is a £1 billion scheme, paid for by a combination of the community infrastructure levy and business rate uplift, and it is creating 25,000 new jobs in the Battersea area. We have a similar scheme up in Cricklewood, in Barnet. It is supporting infrastructure with 7,000 new homes on the back of the Brent Cross shopping centre. We have something similar in Croydon, where Croydon Council are putting forward a proposal for nearly £150 million of road improvements, again on the back of commercial improvements.

              All this is about business rate uplift, so we are very much trying to capture some of that now and put it into the infrastructure. If we do not put the infrastructure in, none of those schemes work. We have a real chicken and egg situation. Do I think this is working with the Treasury? Yes, I do. They give us a fairly hard time, as you would expect, but are they willing to look at schemes like this? Are they willing to look at business rates in the round in London? Are they willing to look at it in a fairly adventurous way? I think the answer is yes.

              Guy Ware: Just picking up on that point, I think it is important that we look at this in the round. There were two significant announcements in the Budget paper. One was around the transport grants of £1 billion a year being funded in the very short term from April 2017. Beyond that, the other was a willingness to explore with London as a whole developing an approach to 100% retention. At that point, whether it comes early in London or at the same time as the rest of the country, roughly two thirds of local government services will be funded directly by business rates raised in the area, and roughly a third will be by council tax.

              Yes, there are really important infrastructure investment requirements that we can use a growth in business rates to fund, but those funds will also have another pull on them, which is day-to-day services. Part of the key issue here—we touched earlier on the package of responsibilities that can be transferred—that we will need to address and explore with Government is how we create a system that allows London or any other region to look at the inevitable trade-offs between investment to keep the place working and to improve its ability to grow and remain liveable, and funding for the day-to-day services for people being drawn into the city. They need their rubbish collected, their schools, their health and education and so on. There is a big package of reforms that we will need to look at in terms of how we manage those trade-offs and how we build a devolved system to make those priority decisions.

              Q247 Mary Robinson: As we heard, the Government said that as extra business rates revenue will be larger than the grants it will replace, councils must take on additional responsibilities. These have been referred to as checks and balances or trade-offs. Sir Edward, you talked about further education and the skills agenda. From the panel’s viewpoint, what additional responsibilities should London take on in return for the extra business rates revenue?

              Guy Ware: There are three criteria that we would want to look at.

The London councils—the leaders of the London boroughs—have a formal position, which is that the starting point for those discussions should be the services that local government—in this case, London—has already said it is interested in the devolution of. That includes things like education, skills, employment support and so on that are directly related to the business agenda, and also includes packages around, say, health and social care integration, which are things that we think we can make a better fist of managing in a devolved way.

              So there is that as the starting point—those things that we have said we want to run should be the things that we are given a chance to run. Within that there are, again, those that help to contribute to ongoing growth. TfL and capital grants have been mentioned a couple of times, and clearly, that sits within that. Working out how we crack the housing problem is going to be another.

              The third criterion is that there needs to be some reasonable correlation between the revenue-generating capacity that is being devolved and the future demand in the services that it is supposed to be funding. Clearly, we can’t be certain about either of those parts of the equation—that is a game of futurology—but we know that under existing rules, we can make estimates about how much business rates are likely to grow and about how much the costs of social care are likely to go up. If there is too big a gap between those two, even after allowing for a reasonable expectation that we make savings and efficiency gains all the time—if there is too great a gap between a specific service that we are being asked to take on and the sorts of funding that will fund it in future—that will create problems. Again, I would put the payment of disability benefits, for example, which has been floated, into that category—one where there is limited control at a local level and a potentially very high increase in demand that could easily outstrip the increases in business rates that would be required to pay for it.

              Q248 Mary Robinson: How do you see that negotiation taking place?

              Guy Ware: There are two parallel sets that will happen. The Department for Communities and Local Government and the Local Government Association are jointly initiating a set of implementation steering and working groups, the first one of which meets tomorrow morning. Through that process, they will examine precisely that question at a national level to say what kind of services could, or should, be fitted into the scheme. But as I have said before, I think there needs to be the ability to vary that by region, so we will need a parallel set of discussions with CLG and the Treasury on what could be realistic for London.

              Sir Edward Lister: I was just going to answer from the viewpoint of the Mayor’s office, because we look at it slightly differently to the boroughs because we have different services that we are concerned about. Our first priority was to try and give ourselves as much assurance as possible over our capital grants, which was predominantly the TfL money. The second one would always be the housing grant money, because we are also the HCA for London, and that is the second big area that we would like greater certainty over—and again, longevity of, so that we knew where we were with it. The big one after that is the skills agenda, which also chimes very well with business who also would like to see us much more involved with the skills agenda. That also involves working with the boroughs as well. These things are not either/or; some things are better done at a mayoral level, whereas other things are better done at a borough level. We would sort that out between us. So those are our priorities, and that is where we would like to see additional funding going.

              Colin Stanbridge: I would echo Sir Edward on education and skills. In all our polling of our members, it always comes in the top three of their concerns, along with transport and crime, but it does highlight the issue that we keep wanting to raise. I suspect your report is going to say that there is an awful lot that we don’t know about how this is going to work, because the Government have not told us. The thing that we want to know from local government is how they are going to make sure that if, for example, they have more control over education and skills that they are getting what business really wants, because there is no doubt that there is a big divide between the education world and business on what should be provided, and there are some very good arguments on both sides about that.

              What we are very keen to see is, if the business rates are going to be part of that—and we can see a very logical argument to say that yes, education and skills are crucial to growing the economy and growing the wealth of London—you had better be talking to business. You had better have a way of consulting with the businesses. I go back to the point—we are not asking for votes, but there had better be a better way, a more formal way, of getting the views of those people, who are actually going to be the end consumers of it, about what they need in the first place. I don’t see really much debate about that or much knowledge of that yet.

              Q249 Mary Robinson: What would you suggest would happen to make that—

              Colin Stanbridge: There are a number of models, which could be to do with referenda, or to do with consultation, or to do with getting a broad consensus of business. It is interesting that in the ability of elected mayors to be able to raise 2p, it goes to the LEP. Well I don’t know many people in London who know what the LEP is or who is on it. In fact, I had to ask my team to tell me the people—and we helped create it, in the sense that there was never going to be a London LEP and we lobbied the Mayor and said, “You’d better get in there because we are going to have all sorts of little LEPs and that will destroy what we have all been fighting for, which is a Mayor with real power.”

              It is all very easy for politicians and civil servants to say, “We have created these LEPs.” But there is no transparency in them, people don’t know what they are and we don’t know what their powers are. We need a big review of that and so maybe out of that we will be able to find some sort of mechanism that will work. We are never going to have a mechanism that means that business says, “Yeah, we’ll do this and we’ll get that out of it.” But at least we can move towards consulting with businesses.

              We have done survey work on the relationship between local businesses and councils and there is a huge distrust. They feel that—just as many local businesses feel about the police—it is all about the residents because the residents have votes, obviously. It is not about businesses. We try and say—we said earlier—that residents and businesses, especially in outer London, are the same people. But there are different functions and there have to be different ways of being able to consult with them.

              Q250Mary Robinson: Just looking at the responsibilities again—there is going to be a steering group beginning tomorrow, the process will begin—there was a bit of a crossover between the potential responsibilities that would be taken on by the Mayor and by the councils. How do you see these responsibilities being divided between the two—and the three, with the GLA?

              Sir Edward Lister: To a large extent, we have sort of agreed it between ourselves. Yes, health was named, and predominantly we see that very much as being a borough-led initiative. Maybe certain little bits of public health across the city are needed to be done at City Hall level, but it is predominantly borough-led. We see skills as being more City Hall-led because that works with the FE colleges and they don’t really follow borough boundaries in the same way, but hard to reach groups are better off done with by the boroughs, and so on. To a large extent, we have sorted this out among ourselves.

              Guy Ware: That is a reasonable summation. But also, going forward, if there is greater headroom—I need to come back to the quantum of that in a moment—and therefore the capacity to negotiate the transfer of responsibilities beyond those that we have already asked for, clearly we will need to repeat that process and agree between the Mayor and the boroughs who is best placed to deliver that service and the division of the spoils, if you like—the distribution of the business rate income that follows—will then need to meet and reflect that division of responsibilities, rather than determining a kind of arbitrary split and then having top-ups and tariffs between us, which we currently do.

              As I said, on the question of the quantum—this again goes back to my point about the need to look at this as a package for the Government as well as for London—there have been a number of things that have been floated that could be transferred, including attendance allowance and including public health funding, which are fairly sizeable chunks. If you take all of those things that have been mentioned, roll in the current grants that will still be in play in 2020—not just RSG, but the new homes bonus and the better care fund, the new one that has just been invented—and take off the amount of money that the Chancellor has just taken out of the pot that we talked about earlier, as a result of the Budget changes—if you add that lot up, you get to a deficit of £2.2 billion, according to our projections, so the shopping list could already have been exceeded, I think wholly unintentionally and without the Government realising that they may have already done that. It is really important that we get a chance—as I said, hopefully that process will start tomorrow—

              Q251 Chair: Could you set those figures out for us? It might be helpful if you could send us a little note on those figures, because I think they’re quite interesting.

              Guy Ware: Yes, certainly.

              Q252 Bob Blackman: Are those annual figures?

              Guy Ware: Yes. Very broadly—off the top of my head—there is projected in the Government’s Budget figures a £10.7 billion surplus in 2020, against which you could set, as I said, the new homes bonus, which is about £900 million, the better care fund, which is £1.5 billion, attendance allowance, which is £5 billion, and the public health grant, which is £3 billion and a bit. The TfL grant, which has already been agreed, is £1 billion, and then there’s an amount for the administration of housing benefit for pensioners, which is negligible in these terms; it’s about £60 million. If you add up all those numbers, you actually get to a negative figure.

              Chair: We look forward to that being set out in a helpful note.

              Q253 Mary Robinson: We have talked about London needing to work properly, and infrastructure is part of that. What are the benefits of acquiring the responsibility for funding TfL capital projects?

              Sir Edward Lister: The advantages?

              Mary Robinson: Yes.

              Sir Edward Lister: The primary advantage is the certainty of it. It is as simple as that. If we have that certainty, it enables us to plan long term. Any kind of infrastructure plan runs over many years—probably over a decade. We need to have that certainty to be able to plan and to commit resources well into the future, and that is what this does.

              Colin Stanbridge: We have long argued that—as the Chamber of Commerce, we obviously lobby on a number of issues, transport being perhaps the major issue. In the past, the position has always been, “Well, if the Mayor is on our side or the Mayor agrees with us, that’s great, but it doesn’t really matter, because the people we’re really lobbying are the Secretary of State and the Department for Transport.” Let’s be clear: this is going to change the whole relationship between TfL and its masters, or mistresses. When we have been talking to TfL about spending reviews and how we could help, during spending reviews, to make the case, the position has always been: “Make the case to Government.” We had a big poster campaign—some of you may remember it—a few years ago, talking about investment in London. Now, our firepower is going to be, quite rightly, on the Mayor and his or her officers, and that is a good thing; that is what we have been fighting for. There is a danger—we are all questioning what the lacunae are, and many questions will be asked about 100% retention and, hopefully, other fiscal devolution, but the direction of travel is exactly what we want. We want to lobby not central Government, but the Mayor, and I think that that will improve the quality of the decisions, because the decisions will become very, very important.

              Q254 Bob Blackman: I want to move on to what we are calling the infrastructure premium proposal. Obviously, at the moment, the Mayor has used a measure to fund Crossrail but that is the only measure that has been put in place. There is talk of a further 2% retention being available. Can we clarify, first, whether your understanding, Sir Edward, is that this would be in addition to the infrastructure levy to fund Crossrail, or would it replace that?

              Sir Edward Lister: Or would it extend it?

              Bob Blackman: Or extend it, yes.

              Sir Edward Lister: I’m afraid the answer is, we don’t know—to be blunt. We are currently raising about £220 million a year from that supplement. That is actually having to finance £4.1 billion of Crossrail 1 expenditure, which is about a third of Crossrail 1 expenditure. We are busy lobbying to move to Crossrail 2, but of course we are going to move to Crossrail 2 long before we have paid off Crossrail 1, and the Treasury is making it pretty clear that it expects at least 50% of Crossrail 2 to be funded by London by one means or another. So we need to revisit that particular supplement. We do not know whether that is going to be additional—if it was, that would be very helpful to us; if it wasn’t, then we will have to think of some other mechanisms.

              Q255 Bob Blackman: But “very helpful” would mean the current supplement continuing, then a further 2% supplement on the whole of business rates across London.

              Sir Edward Lister: Yes. I mean, we would need the current one to continue—we have always assumed that it would continue.

              Q256 Bob Blackman: For how long?

              Sir Edward Lister: I think—

              Colin Stanbridge: 2032.

              Sir Edward Lister: Yes, it is in the early 2030s before we are finished on that.

              Colin Stanbridge: It was 2038, and I remember that when we were last giving evidence—to the GLA—I was told that it was now 2032. I think business at some time, again, will want to have a say on that. Business understands—they are the first people to understand—that transport is vital. They want Crossrail 2, and 3, as much as anyone else, but one would hope that the Government will also look at those more innovative ways of funding; for example, the uplift of stamp duty along the line, which we know from Crossrail 1—we know that it has been huge and that Crossrail 2 will be the same. Is there a way of capturing that? Again, it is down to giving the Mayor and the officers more power to be able to do those sorts of deals, rather than just saying, “Oh, it’s all right, business will just pay for it. That’ll be okay, won’t it?”

              Sir Edward Lister: I am not arguing that. I fully accept that to pay—I mean, at the current moment, the Crossrail 2 bill will be circa £30 billion, roughly double what Crossrail 1 is. It is an even bigger scheme, so we don’t just need business rates; we are going to have to do what we started the journey on with Crossrail 1, of capturing the uplift in property values. We did it fairly crudely with a London-wide CIL. That worked quite well, but now we have to get a lot more sophisticated; we have to get an even bigger and more elaborate CIL arrangement—we really have to capture value, because we know that value does rocket near a new railway line. That is the value that we have got to have a share of, and a greater share than we have ever had before. That will be the whole Crossrail 2 negotiation with Treasury.

              Colin Stanbridge: That is partly the advantage of what we are all fighting. We tend to lose sight of the endgame, which is the fact that local politicians, local mayors, have a greater knowledge of what their voters will put up with or will want to happen. One hopes that that will be able to feed through into other mechanisms for raising the money, based on what businesses, people, residents and everyone else tell the Mayor. Then, if the Mayor does not do it properly, we get rid of the Mayor.

              Q257 Bob Blackman: But what is your reaction, in the business community, to potentially having a 2% levy on top of the existing 2% levy?

              Colin Stanbridge: We would have to look at the detail.

              Guy Ware: It is probably worth adding that the 2% proposal is a national proposal, and we have been invited to discuss a different deal for London. It is worth keeping the options alive that a more radical change might be agreed, which would look at providing the Mayor and the boroughs with access to resources that matched the kind of services and investment needs that—going back to what I was saying earlier—we should be responsible for. While I think there is a kind of minimal position of a 2% levy, which we have already had, and we cannot have anything else until 2030-something, is probably not an acceptable answer, from London’s point of view. I think we should also be setting an ambition slightly beyond what might have been presented so far.

              Colin Stanbridge: But we also would not want it on a vote of the LEP—to go back to my previous remarks. If we are going to have checks and balances, and this is going to be the check on it, then we do not think that the check is—it was not invented to do that and it has not been doing that. We will have to have a far more sophisticated system of getting the business voice.

              Q258 Bob Blackman: Moving to the multiplier to be applied, Guy, in London Councils’ submission, you suggested that councils should be able to adjust the multiplier upwards. Should it be set by each local authority in London? Should it be done by the Mayor? Or some sort of split between?

              Guy Ware: To be determined is the short answer. My personal view is that tax competition at the level of a borough is probably not going to be the way that we would want to see London work, but we certainly need to explore the possibilities of devolved governance arrangements for London that manages to balance both mayoral and borough needs in order to fund the things that, as I have said a number of times, we have agreed to take on to fund, whether they be infrastructure investment or services. Again, picking up Colin’s point, the more flexibility that was agreed within London, the greater the need for that accountability and its checks and balances, and arrangements that allow a realistic prospect of coming to decisions around that in a co-ordinated way between different parts of Government, and with the appropriate input from the business community.

              Q259 Bob Blackman: Some would say the council tax is set by the London boroughs, so why shouldn’t the multiplier business rates be set by each London borough?

              Guy Ware: I think it is realistic. It is a respectable proposition. If we look at whether we are using the tax in part as a tool to promote growth, then we perhaps need to bring in a degree of co-ordination, because otherwise you will potentially get conflicting incentives and conflicting attractions or demerits of particular parts of the capital that might distort investment in business decisions in ways that were not productive.

              Q260 Bob Blackman: Sir Edward, do you have a view from the Mayor’s perspective?

              Sir Edward Lister: Roughly, about 60% of the business rates would be driven by the boroughs and about 40% by the Mayor, so I think that if you were going to allow a degree of flexibility, then you would almost have to have the borough multiplier and a mayoral multiplier, which I think would probably be horribly complicated. That is the only point I would make. We need to work together on this. It is worth making the point that quite sophisticated mechanisms exist in London already between the boroughs and City Hall. There are ways in which these things are negotiated and we can get a common line together. The more we can achieve that, the better it is for London.

              Q261 Bob Blackman: Colin, what do your members think about the impact of multipliers set by different boroughs across London?

              Colin Stanbridge: Three boroughs really matter. The rest is very small. Once you’ve sorted those out, you’ve sorted it all. I don’t know whether we would have a pooling. We heard about a pooling in Greater Manchester. Whether that works and whether you just have a percentage, I don’t know. On what my members would be looking at, one of the interesting things is that if councils have the ability to reduce the business rate, are we going to see some competitive business rates around London? What would be the effect of competitive business rates? I think there would be a worry about that and what services councils, having sucked in businesses, would be able to provide. As Sir Edward said, there will have to be a consensus in some way. Westminster is £1.8 billion. It is huge. It is the GDP of a small country. So you’d better get Westminster on side first.

              Q262 Chair: Just coming back to the changes in the Budget, the Government committed to a 100% business rate retention. We are moving towards that. Then, suddenly, we get in the Budget significant changes. The Government have said they will compensate for the small business rate relief changes up to 2020 and then there will simply be fewer services devolved after 2020, but there is no mention of whether there will be any compensation for the CPI/RPI change. Presumably, local government will have to bear the consequences of that. Are you unhappy with the way that was done, or with the whole principle of sudden changes at the beginning of quite a complicated journey towards more devolution of business rates?              

              Sir Edward Lister: It is all unbelievably complicated, and none of this helps; it just makes it even more complicated. We are very supportive of the small business rate relief from a City Hall point of view, because it has real advantages to a lot of businesses, particularly those that are struggling. For us, that was quite an important move. There was also a relaxation in certain other ones—the ones between £12,000 and £15,000, which are more tapered. Those things were positive, but, as you say, we are not clear at the moment about what compensation we are going to get for that; nor are we clear about whether there is going to be any compensation for the RPI/CPI change.

              Guy Ware: There are three bits to this. There are the changes to the tax base up to the point when 100% retention comes in, arising from the small business reliefs, and, although it is not labelled as such, the numbers appear to suggest that there has been an increase in the local government DEL from 2017-18 that will fund the level of section 31 grant that will be needed to compensate local government collectively for that loss of business rates in the short term. We then get to implementation, at which point a lower quantum of services can be devolved to local government. Beyond that, I do not think there is any prospect whatever of the Government thinking that it is their job to compensate for a change between RPI and CPI indexation, and it simply becomes part of the negotiation about what may become affordable to local government in future, when that is the basis of its funding stream.

              On the basis of the forecast difference between the interest rates and extending that out, so these numbers are projections, £370 million has already been saved in the first year, and that rapidly increases. We estimate that over 10 years we would be raising £3.3 billion a year less than we would have been otherwise, and over 20 years—who knows what will happen to inflation rates, but on current projections—that would rise to over £9 billion a year. So, over 20 years, the cumulative loss to local government—or, looked at another way, the cumulative gain to businesses that are paying business rates—is £78 billion.

              Q263 Chair: Can I just come on to one final question? The Chancellor made those changes in the Budget and from 2020 local authorities are going to have an even greater reliance on business rates. Generally, people are supportive of that. But there is nothing, is there, to stop another Chancellor after 2020 making another change to the business rates system? Sir Edward, you rightly used the word “certainty”; what local government is welcoming with the proposed changes currently is that it will have greater certainty over its income. But if that income is still reliant on the Government deciding on the business rates system or the multipliers at any one time, the certainty really is not there, is it? You are only as certain as the next Budget statement by a Chancellor.

              Sir Edward Lister: I suppose my answer is that we are just a little bit more certain about business rates than we are about RSG or any of the other funding sources we have. We feel, at least, that we stand more of a fighting chance to see what is around the corner.

              Q264 Chair: I am pushing you a bit because in the end, if local government really wants devolution, shouldn’t it be looking to take control of the business rates system and multiplier, rather than just accepting the income that comes from it?

              Sir Edward Lister: That is right, but there has to be some checks. Indeed, I think it was picked up in previous reports that there have to be some checks and balances, so that we don’t go back to the problem we had in the 1980s, when business rates suddenly escalated way beyond council tax, or the equivalent of council tax—

              Q265 Chair: Sorry, but they didn’t. At that time, there were domestic and non-domestic rates and they were linked to each other.

              Sir Edward Lister: All I was trying to lead on to was that there needs to be a linkage between the two. The point I was leading on to was that you cannot put up one without the other. Provided one has that, that will also stop a lot of the fears of the business community .

              Colin Stanbridge: Had there been a linkage, I think it is fair to say that the business rate would have been a lot lower than it is now, hence my argument about, “Well, why is that?” “Because the voters”—

              Q266 Chair: So linking them together might not be a bad idea.

              Colin Stanbridge: I hope that there is a genuine, complete change in the business rates system, because I think it is a particularly stupid way of going about things based on something that says, “It doesn’t matter how well you are doing, you are going to pay the money, come what may.” That seems to me to be not necessarily the most sensible of systems.

              Guy Ware: I would echo the Chair’s comment. To my mind, it does emphasise the need for control in order to balance the risk that we are being asked to bear—indeed, that we are asking to bear, because this is not being foisted on local government; it is something that we have long argued for. To manage that risk, real control is necessary. As Colin has already said, and as has been set out in the London Finance Commission and elsewhere, in the longer term there needs to be a range of ways of raising revenue, so that there isn’t over-reliance on any one source.

              Chair: Thank you all very much for giving evidence this afternoon. That brings us to the end of our public proceedings.

              Oral evidence: Business Rates, HC 665                            21