§ 4.26 p.m.
§ Baroness Amos
I beg to move that the Grand Committee do report to the House that it has considered the Rates (Amendment) (Northern Ireland) Order 2004.
The draft order is part of a major programme of rating reform initiated by the former Northern Ireland Executive in 2000. It is a matter of regret that the Northern Ireland Assembly is not debating it. While efforts to restore devolution continue, we must proceed for two reasons. First, the need for reform is pressing. Secondly, the creation of a modern and fairer way of raising local revenue is in the best long-term interests of everyone in Northern Ireland.
This draft order provides for two key reforms of the non-domestic rating system in Northern Ireland. The first is the rating of vacant property. That measure is widely supported and will take effect from 1 April 2004. The rate to be paid by the person entitled to possession of the property will be half of the occupied rate, which is in line with the rest of the United Kingdom. The exemptions to that new rate will largely mirror those contained in the equivalent GB regulations in all but one respect; stand-alone warehouses will not be exempt from the vacant rate in Northern Ireland. That is because they are usually general purpose buildings that could be readily converted and put on the market for sale or letting to a range of buyers or tenants. The same cannot he said of industrial property, which, as in the rest of the UK, will not be subject to the vacant rate.
I should also draw the attention of noble Lords to the new completion notice system provided for by Article 5. That system is aimed at preventing developers from deliberately not completing new buildings in order to evade the vacant rate. Such a system has operated effectively in England and Wales for many years. In addition, the draft order also gives 335GC the Department of Finance and Personnel powers to serve notices and to enter land for information-gathering purposes. Those powers will help the department to levy the vacant rate effectively.
The second reform dealt with is the phased removal of industrial de-rating. That exemption is being removed because it is no longer an effective way of encouraging economic development and benefits only one section of the business community. All businesses use public services and infrastructure to create wealth and employment. Therefore, it is only fair that all businesses, including manufacturers, should contribute towards the cost of providing them. Rates based on the rental value of property are a long-established and widely accepted means of doing just that. Industrial de-rating was abolished in England and Wales in 1963 and phased out in Scotland by 1995 for similar reasons.
Manufacturers in Northern Ireland are not being asked to pay full rates immediately, given the potential detrimental impact that such an approach could have on them. Instead, there will be a prolonged phase-out period, starting on 1 April 2005. Only 15 per cent will be due on that date. The percentage will increase by the amount stipulated in Article 3, and full rates will not become due until 1 April 2011. That approach was adopted in the light of suggestions made to the Government during the consultation phase and of the outcomes of a thorough assessment of all the evidence relating to the potential impact.
The Government are committed to creating an environment in which all businesses in Northern Ireland—not just one particular sector—can increase their profits to meet all their costs and compete effectively, so that sustainable employment levels can be achieved. Action has also been taken to ensure that local business competitiveness will be regularly assessed and to address some of the other costs that businesses in Northern Ireland are concerned about, such as energy and insurance costs. The estimated benefits of recent announcements about a reduction in excess electricity inherited from privatization—some £30 million a year—stand in contrast to the costs of phasing out industrial de-rating which, in the first year, will be only an estimated £8 million.
It is also intended to make regulations under Article 8 of the draft order to provide for an exceptional hardship rate relief scheme for all businesses by 1 April 2005. The provision was inserted after the latest consultation exercise and the debate in another place in January and has been widely welcomed.
The reforms contained in the draft order are sensible, modernising measures that will help create a modern and fairer rating system in Northern Ireland. They will also bring about much-needed investment in public services and infrastructure in Northern Ireland and therefore enhance our prospects of creating the modern, dynamic economy that the Government and all businesses want. I commend the order to the Committee.
336GC Moved, That the Grand Committee do report to the House that it has considered the Rates (Amendment) (Northern Ireland) Order 2004.—(Baroness Amos.)
§ Lord Glentoran
I thank the noble Baroness the Lord President of the Council for explaining the order so clearly. I have a few comments.
I accept that some of the changes are sensible and are probably needed, but there is one general point that we must consider that does not apply to England and Scotland. Although, as I said, the Northern Ireland economy is strong, it is fragile. It is a small economy, and it is sensitive to all sorts of things. It is most sensitive to what happens across the border in the Republic of Ireland. I spent 30 years in industry in Northern Ireland working for Redland plc, a multinational, and looking to encourage inward investment in the construction industry manufacturing sector. Throughout that time, we were always competing with the Republic of Ireland and the tax benefits there, in particular. In those days, there were, I think, something like 20 or 30 years of tax-free benefits. As I understand it, the rate of corporation tax in the Republic today is 10 per cent, as opposed to 40 per cent in the United Kingdom. When one talks of putting extra costs on businesses, such matters become sensitive.
As for the rating of vacant non-domestic warehouses, can the noble Baroness explain further why the Government have chosen to do it in Northern Ireland, although they have not done it in the rest of the United Kingdom? It is a matter of particular concern for small businesses, and I would like to see clear reasons why Northern Ireland warehouses are different to warehouses in Scotland, Wales or England.
There are clear reasons why derelict and empty property has a negative impact on communities, not just on the business sector. I also wonder whether Her Majesty's Government have taken into account the possible social effect. I mentioned Harland & Wolff in debate last night, which must have acres of empty and disused buildings; I am not thinking of that, but I do not know what the cost of putting rating on to that acreage will be on the Olsen Group or whoever owns those buildings. However, it will be pretty negative and will encourage them to clear out quickly.
I am also thinking of village areas such as the lower Shankill and other parts of Falls, where there have been village communities in the past. Those of us who know the city well—I do not know Derry and Armagh quite as well, although I certainly know Portadown—know that village communities are trying to regenerate in such areas, but there are empty shops and little businesses. Until now, those have been de-rated, as I understand it. Someone will now have to start paying rates on them.
Will that lead to the bulldozers moving into lower Shankill and other areas and clearing the sites? Will it reduce their value for redevelopment to almost nil? If so, is that a good thing? Has the thinking been done on it? I admit that I have not gone into the detail of thinking it through. As a conservative type of person, I would hate to see lower Shankill and its character 337GC destroyed. It is one of the oldest parts of Belfast and, once upon a time, was the major thoroughfare into the city. I worry very much about that.
So far as industrial de-rating is concerned, I made a point earlier about the competitive costs of Northern Ireland business and industry in relation to the Republic, not to the mainland. There are on-costs. We have the highest energy costs in Europe. I heard the noble Baroness say that the Government propose to subsidise energy costs to the tune of £30 million, but I suspect—I hope she will tell me that I am wrong—that they have not yet had clearance from the EU. That matter will have to be cleared with the European Union before Northern Ireland can receive a government subsidy for its business and industrial energy.
If the EU puts its foot down and says to Her Majesty's Government, "We will not allow you to subsidise Northern Ireland industry's energy by £30 million", what then? The de-rating will be in place, so business will have had another serious tax imposed on it while not even having had the benefit of the subsidy about which the Government talk today. I am not at all happy about the phasing-out of industrial de-rating at this stage.
As I said, we have a vibrant economy at the moment, but a very fragile one. The policy was a useful tool when competing with the Republic. Zero rating on structures such as new buildings and factories has been of significant value to many people. It could be balanced against the 40 per cent corporation tax rate, versus the 10 per cent rate in the Republic. There are other issues as well, such as the increased transport costs of raw materials in and out, which also make it quite difficult for manufacturing industry to compete in Northern Ireland.
Fortunately, Northern Ireland has an extremely competent, effective and hard-working labour force. During my years in industry, it was really that which kept the industry going, and I am sure that it is today. However, small businesses and up-and-coming entrepreneurs do not need the phasing-out of industrial de-rating. At this stage, I do not agree on that issue.
§ Lord Smith of Clifton
We welcome the order. It is a tidying up and modernising order and is welcome for that reason. I particularly welcome its lengthy phasing-in. That is absolutely appropriate. It provides a great deal of lead time for industrialists and others to prepare for the future.
I am confident that the economy in Northern Ireland will go from strength to strength. The noble Lord, Lord Glentoran, mentioned some of the difficulties that business in Northern Ireland faces in terms of international competition and so on. That is very true, but Northern Ireland has some tremendous strengths. The noble Lord mentioned the stable and highly-qualified labour force which is the envy of the other three parts of the United Kingdom. We should not underestimate the degree of entrepreneurship and 338GC vitality that is to be seen which, since I first knew Northern Ireland, has brought about unimaginable changes. It is an extremely welcome development.
The Government have always exhibited great sensitivity to the changing factors in Northern Ireland. If, for example, the European Union did not allow an energy subsidy, I am confident that the Government would, quite rightly, adjust their policies to take account of that.
All in all, I agree with the order. I have one specific question, which I raised with officials yesterday. It concerns the relationship of agriculture to industry. The boundaries of those sectors are becoming increasingly blurred with the rise of agribusiness. I should be grateful if the Lord President could explain to me, once again, how industrial and commercial undertakings on agricultural land are to be rated. What formula will be used to ensure fairness between a business which is not located on agricultural land and a business which is?
§ Lord Laird
The draft Rates (Amendment) (Northern Ireland) Order 2004 is an important piece of legislation. However, I can offer it only my partial endorsement as, despite a full discussion of the order in Committee in the other place, the Government have not fully taken into consideration the effects that sweeping changes may have on industry in the Province.
My colleagues and I recognise that Northern Ireland's rating system is in need of reform and modernisation; thus we want to see the Government guaranteeing that this legislation will result in a fair rating system for all in Northern Ireland.
We welcome the rating of vacant non-domestic properties in Northern Ireland as it has worked well in Britain with no serious adverse effects. Far too many vacant properties run into disrepair and it takes only one or two dishevelled sites to make an area appear run down. This obviously has a knock-on effect for all those living in the area and certainly no-one would favour the adverse effects on our local community caused by property lying vacant or derelict indefinitely. It is to be hoped that the introduction of rating will provide an incentive for the owners of such properties to address the condition of their holdings.
While I very much welcome the introduction of a hardship relief scheme for all businesses, I would ask the Minister to elaborate on this point. When does she expect this relief scheme to come into force? How will a business qualify? What relief will it be entitled to and how will this be calculated? The Minister, Ian Pearson, said in Committee in the other place last week that the Government were still considering the principles of a small business relief scheme. Can the Minister tell us what stage their considerations have reached and whether such a scheme is likely to come into force in the near future? Moreover, community businesses should be considered for relief as well, not to mention the Orange Order and Ancient Order of Hibernians halls which, in effect, provide a focal point for local communities in rural areas.
339GC I turn now to the removal of industrial de-rating which, in our view, could have a seriously detrimental effect on many businesses throughout the Province. We must carefully consider the impact of de-rating on employment figures and on the future of industry as a whole in Northern Ireland. Responding to such concerns, the Government have claimed that this legislation will have no impact on employment. In that respect, our fear is that their calculations are based solely on a study by DTZ Pieda Consulting for the Department of Finance and Personnel, which suggested that the impact on profits that firms generally make would be no more than 2.7 per cent.
However, as has been pointed out to the Government on numerous occasions, other stakeholders argue that the impact would be much higher. For example, the CBI Northern Ireland has indicated that the impact of' rates could be between 10 and 15 per cent. According to the CBI, the agri-food, clothing, manufacturing, engineering and electronics sectors will be hard hit by those proposals.
If there was a clear disparity in those figures between 1 or 2 per cent, we would not be too worried. However, such a disparity of 10 or 15 per cent suggests that there is a serious discrepancy in the methodology used to attain these conflicting projections. It is extremely worrying that the CBI and manufacturing focus groups are firmly convinced that the impact on manufacturing profits will be much greater than 2.7 per cent.
The regulatory impact assessment concludes that there will be a net overall benefit from the proposals, largely due to the finance raised for use on essential infrastructure projects. However, according to the CBI, the RIA assessment is inadequate regarding the impact on the manufacturing sector—Northern Ireland's largest wealth-creating sector—which, over a period of years, will be faced with an additional cost of £50 million per annum.
Nor does the assessment account for the negative impact that the proposals will have on creating a more self-sustaining economy. With regard to the intention to phase out industrial de-rating, the CBI also suggests that the expected yield—estimated at between £55 million and £60 million—is overly optimistic and underestimates the impact that the introduction of rating will have on the competitiveness of the manufacturing sector and the viability of parts of it.
I am interested to know why the Government have chosen to ignore those findings and have pushed ahead with legislation in the face of such startling reports. Have the Government carried out further independent research that would suggest these stakeholders are wrong in their assessment? If so, can those findings be made available?
Another significant problem arising from this order relates to the significant cost and reliability issues relating to energy, transport, insurance and waste disposal which Northern Ireland already faces. The Government's proposals do not fully take that into consideration. Moreover, Northern Ireland's industries operate with lower average wages and higher energy and commodity 340GC costs than the rest of the UK. We also have the potential for increased water rates in the near future. The benefit of industrial de-rating has helped to offset those higher costs until now. The introduction of this policy will only add to costs, making marginal facilities unviable and reducing investment in new facilities.
More consideration must be given to how high costs can be offset and moves made to reduce other costs through a more holistic approach, as rates must not be considered in isolation. Reducing those other costs would encourage greater entrepreneurialism and, ultimately, would increase economic growth throughout Northern Ireland. I hope that the Minister has registered our continuing concerns. I look forward to her response.
§ 4.45 p.m.
§ Lord Maginnis of Drumglass
I shall speak briefly to this order, as I cannot understand the timing of these measures. We have already heard about Northern Ireland being over-administered. That is nowhere so great as at local government level. There is already a plan to review the whole of public administration and to reform local government in Northern Ireland. That appeared to me to be something that might have been expedited, rather than using the present system of local government to add to the taxation burdens of the business community in particular.
A huge danger of stopping the de-rating of vacant industrial premises would be that, whereas incremental redevelopment takes place in Northern Ireland at present because it is mainly made up of small businesses and involves comparatively small amounts of money, whole areas of derelict or almost-derelict land would be cleared. We will have huge, blighted areas in our market towns, where only bigger investors will be able to invest the large sum of money required to deal with, say, a one-acre or half-acre site.
The problem with the governance element of rating in previous years has been that rates have increased at a much higher rate than inflation. Rates of increase have approached, if not hit, double figures. That encourages a sort of profligacy in district councils. In Dungannon Borough Council, on which I sit, my party prevailed on our finance officer this year to reduce the rate. The finance officer presented figures this year in which the rate of increase had decreased from 7.5 per cent to 6.4 per cent. However, when those figures were presented to the full council, Sinn Fein, the largest party, supported surprisingly on this occasion by the SDLP, decided to reinstate the 0.8 per cent, with no justification whatever.
That issue perhaps falls outside the scope of' the order, but I raise it because the excuse given for retaining the higher figure was, "The bigger part of the rates element imposed by government takes no account of the needs of our society, so why should we constrain ourselves?". I hope that the local government auditor will look at that case. When he does, he will have to realise that what 341GC appears to be undue and perhaps precipitant action by government in this legislation is encouraging profligacy elsewhere.
§ Baroness Amos
I thank noble Lords for their comments. I should like to go through the points in order.
The noble Lord, Lord Glentoran, was concerned about the impact that the order might have on inward investment, particularly the relationship between Northern Ireland and the Republic. My understanding is that corporation tax is 12.5 per cent in the Republic.
I wish to repeat what I said in my opening remarks. We are fully committed to creating the right environment in which all businesses in Northern Ireland can compete successfully and grow. That is why a study was commissioned last year by PricewaterhouseCoopers, looking at all the operating costs faced by businesses in Northern Ireland. It concluded that, in overall terms, businesses in Northern Ireland did not have a cost disadvantage relative to Great Britain and the Republic of Ireland. That is because some costs are lower in Northern Ireland, while others are higher. Basically, they cancel each other out.
However, the report did identify some specific increasing costs such as energy and insurance. The noble Lord pressed me on the question of energy costs, which I shall come to in a moment. That is why we have already taken action to address these obstacles.
The PricewaterhouseCoopers report also recommended that further regular assessments of local business competitiveness should be undertaken. An undertaking to do so in the future at sectoral level has already been given.
On the specific issue of energy, a matter raised by the noble Lord, Lord Glentoran, and picked up by the noble Lord, Lord Smith of Clifton, we have announced proposals to remove from businesses some of the excess electricity costs in Northern Ireland inherited from privatisation. Work is ongoing on the scheme, subject to ensuring full compliance with EU state-aid rules—a point noted by the noble Lord, Lord Glentoran. We estimate that this scheme will reduce electricity costs to business by around £30 million a year. If we fail to secure EU approval for this, we shall seek to reduce energy costs in other ways such as opening up the market for competition. A strategy is being developed to address these issues. I hope that the noble Lord, Lord Glentoran, is reassured that we are not depending only on getting this through the European Union.
I turn to the issue of exemptions on vacant property rating raised by the noble Lord, Lord Glentoran. He asked particularly why warehouses are to be rated when they were exempt. We see no strong case for excluding warehouses from the rate. They are general purpose buildings that can be readily occupied by a range of businesses and are easy to let or sell. However, it is only stand-alone warehouses that are to be rated; 342GC that is, those with flexibility as regards use. A warehouse that is part of a qualifying industrial property will not be rated.
§ Lord Glentoran
My Lords, may I press the noble Baroness on one point? What is the comparison on the rating of warehouses between what is being proposed for Northern Ireland and that which obtains in England and Wales? I sought to make that point earlier. As I understand it, warehouses are rate-free in England and Wales and Her Majesty's Government propose to change the status for Northern Ireland only.
§ Baroness Amos
My Lords, the noble Lord, Lord Glentoran, is quite right. It is an exception in terms of the equivalent Great Britain regulations. It is being done because warehouses in Northern Ireland are usually general purpose buildings which can be readily converted and put on the market for sale or letting to a range of buyers or tenants. Warehouses are not subject to the vacant rate in the rest of the UK. We are proposing to rate them in Northern Ireland for the reasons that I have given.
To finish on that point, I should like to ensure that the noble Lord understands that manufacturing premises will not be liable for the vacant property rate. It will apply only to stand-alone warehouses. If I am able to give any further information on this point, I shall write to the noble Lord.
I understand that Scotland also does not operate a system of completion notices in relation to new buildings, although the legislation is in place to allow for it. So there are different operating methods within each of the countries.
On the issue of cost and competitiveness. Invest. Northern Ireland has developed a tailored and strategic approach designed to help companies to compete and grow. That approach is aimed at supporting a diverse range of businesses in both new hi-tech industries and the more traditional manufacturing sectors. Although only established in April 2002, Invest Northern Ireland has already had a significant impact on improving the competitiveness of the Northern Ireland economy. During its first year of operation, for example, it assisted more than 2,000 new businesses to start up, attracted 10 inward investment projects offering the prospect of 817 jobs, and it has helped businesses to develop and expand. We hope that the support that has been put in place will mean that the competitiveness of businesses will continue.
The noble Lord. Lord Glentoran, raised a point about the impact of the policy on the lower Shankill area A new targeting social need analysis has been carried out. The results show that the impact of introducing vacant rating was likely to be positive in terms of encouraging the occupation and use of non-domestic property. Given also that high concentrations of vacant properties tend to occur more in areas of high deprivation, the new targeting social need impact is likely to be positive overall. Although the impact on property owners specifically could not be gauged, we do not believe that someone who holds an unused property asset can be described as "deprived".
343GC The noble Lord, Lord Maginnis, raised the issue of the impact that the issue may have in deterring speculative and incremental development in Northern Ireland. It is considered that the introduction of vacant property rating will have a positive impact by providing an incentive to bring vacant property back into occupation and use. There may be a marginal impact in the short term in terms of speculative development in secondary areas, but it is expected that it will lead to an adjustment in rental values and acquisition costs in the medium to long term.
The noble Lord, Lord Glentoran, in general, was pressing as to why this reform is needed and the noble Lord, Lord Maginnis, specifically asked why now when there is an ongoing review. We believe that this will contribute towards delivering a fairer and modern rating system in Northern Ireland, the central aim of the review of rating policy launched by the Assembly in 2000. Public services confer benefits on businesses directly and indirectly, and it is only fair that the whole business community contributes to their funding and shares the burden of local taxation. It will also raise revenue to help fund significant investment in Northern Ireland's public services and infrastructure.
The noble Lord, Lord Smith, pressed me specifically on the issue of industrial undertakings on agricultural land and how we would measure the two. Agricultural land has always been exempt, along with industrial land. Provision exists within the 1977 rates order to apportion between different uses of the land. The department can therefore apportion between purely agricultural uses, which remain exempt, and industrial uses which will lose their exemption. Agricultural land includes farmland, meadows, pasture, land for poultry farming, orchards 344GC and so on. It also includes agribuildings. It is determined by the department or appeals to the court if there is any concern that the apportionment has been made wrongly.
The noble Lord, Lord Laird, pressed me on a number of issues. He was particularly concerned about the impact on jobs and on profit. A claim has been made that 30,000 jobs will be lost as a result of this policy. It is our view that the claim does not take account of the fact that rates are being phased-in over a prolonged period. As a result of the consultation and the concerns that have been expressed about this, firms will have more than eight years from when the policy was announced to prepare for paying full rates.
Rates will be only one element of the cost structure of firms. We do not think it credible to argue that there would be a loss of such a large number of otherwise sustainable jobs as a direct result of having to pay rates in seven years' time. There is no evidence to support that argument. Of course, any job losses would be a matter of great regret, but we have to accept that jobs are created and lost all the time for a variety of reasons. I must reiterate that, in our view, there is no evidence to support the argument that substantial numbers of jobs would be lost.
As to the different kinds of figures cited on the percentage of profits for which full rates would account, the figures range from 2.7 per cent to between 15 and 20 per cent. The Invest Northern Ireland study is likely to be the best available indication of profit impact and its figure is 8.5 per cent. Of course, that does not mean that the profit will fall by 8.5 per cent as a result of the phasing-out of industrial de-rating. The impact is likely to be somewhat less. It will depend on the circumstances of individual firms and on a range of other factors.
§ On Question, Motion agreed to.
§ The Grand Committee adjourned at seven minutes past five o'clock.