New Deal for Business Group: progress report and recommendations

5. Subgroup Three: Non-Domestic Rates

Overview

The consultative sub-group on Non-Domestic Rates (NDR) was established under the New Deal for Business Group to advise on further enhancements to the NDR system, following the implementation of the final recommendations of the independent Barclay Review of Non-Domestic Rates on 1 April 2023. The recommendations of the Barclay Review were aimed at delivering a system which better supports business growth and long-term investment, which increases fairness and transparency and improves ratepayers' experience.

Non-domestic rates (NDR) are a tax based on property which plays an important role in helping fund the range of public services that councils deliver, and in 2023-24 are forecast to raise over £3 billion.^[3]

Scottish Government sets NDR policy including tax rates and reliefs, and local authorities are responsible for the administration and collection of NDR, and can also offer local relief. NDR income is notionally pooled at a national Scottish level before being redistributed back to councils. As such, it is important that any proposals for significant change or reform to NDR be considered within the context of the partnership between Local Government and the Scottish Government, under the New Deal with Local Government. Scottish Assessors who are responsible for the valuation of non-domestic properties and are independent officials, albeit they work collectively through the Scottish Assessors Association (SAA), also have a vital role when considering any proposals.

The remit of the group was to consider and report to the New Deal for Business Group, and Scottish Ministers, on further enhancements to the operation and administration of the Non-Domestic Rates system.

This consultative sub-group considered the current operation and administration of the non-domestic rates system, with the objective of ensuring the best environment to do business and deliver a growing economy whilst supporting our communities, and also recognising the importance of non-domestic rates income in funding the delivery of local public services.

The group met on the following dates: 30 May, 6 June, 13 June and 20 June 2023.

With a large and diverse membership, these meetings facilitated wide ranging preliminary discussions, agreed the need for further work and consideration of the best configuration to take that forward.

Issues considered

At the first meeting the sub-group's members raised the main issues for business with the current operation and administration of the NDR system.

These issues were discussed at subsequent meetings to inform the short, medium and longer term recommendations set out below. This included the view from business representatives that the current NDR Valuation and Billing systems are:

• overly complex
• too inflexible to changing economic circumstances
• a barrier to potential sources of capital investment
• demonstrating inefficiency in the system/processes

Assessor representatives were of the opinion that their current status delivered a strong national view of NDR whilst having the capacity to deliver at a local level.

In the NDR system we currently have:

• legislation which is complex and multiple dating back to 1854
• over 15 different reliefs and 3 property rates
• a multi-layered system with 14 independent Assessors and 32 billing authorities

Progress since the Barclay Review 2017

Since the independent Barclay Review published its Report in 2017,^[4] the Scottish Government has implemented a range of key reforms and changes to deliver a system to better support business growth and investment, improve administration and increase fairness of the non-domestic rates system, including more frequent revaluations with a shorter gap between tone dates and revaluations. The sub-group's initial discussions recognised there may be ways in which the rates system can be improved further, to deliver a simpler system and building on the progress made establishing a three-year revaluation, which came into effect from 1 April 2023.

Assessor representatives also made the point that there has been significant change following the Barclay Review, the Non-Domestic Rates (Scotland) Act 2020 and subsequent secondary legislation which still have to be worked through and the impact assessed and that time is required before these changes can be evaluated and further structural change proposed. It was highlighted that the revaluation on 1 April 2023 is only the beginning of the first three-yearly revaluation cycle, and that it is being delivered alongside a new, untested, two-stage proposal and appeal process.

Moving forward in partnership

Members valued the open dialogue this sub-group provided and the opportunity to consider a range of both historic and current issues in respect of NDR.

The sub-group considered that having such a forum with the Minister for Community Wealth and Public Finance was a positive indication of a desire to reset the relationship with business, to listen to the views of business in relation to NDR policy and to explore how NDR can best support business growth, investment and competitiveness, while acknowledging the important role NDR income plays in funding public services.

Business representatives agreed that further reform is necessary to the NDR system to grow our economy, create jobs for all, and be a place to invest in, and that partnership working between the Scottish Government, the Scottish Assessors, Local Authorities and business was essential to achieve that.

The group recognised the critical role that public sector partners play in the delivery of high-quality public services throughout Scotland, which must be appropriately funded and resourced.

Some business representatives asserted they are seeking major transformational changes, not only in processes, but in a mindset and attitude where a common goal emanating success for our economy and citizens is worked towards. This will require change and investment to and in Government (local and national), the business community, and Assessors.

The early interaction in this subgroup has been generally constructive, recognising where improvements can be made, but also acknowledging that in some areas, this is not practically possible or desirable.

The group also recognised the opportunity going forward to align NDR with other areas of taxation work across Scottish Government including the Joint Working Group on Sources of Local Government Funding and Council Tax Reform as changes to the NDR system may have an impact on Local Government Funding.

While the focus of this sub-group was NDR, following the last meeting of the sub-group, Scottish Chambers of Commerce raised the proposal that consideration should be given to a one-off cost of doing business grant for retail, hospitality and leisure sectors (like the Retail, Hospitality and Leisure Business Grant Scheme administrated during the pandemic) in recognition of the disparity with England on retail, hospitality and leisure relief, and to help these sectors in Scotland.

Recommendations

Short-term recommendations (6 months)

1. Reflecting this is only the start of the process, dialogue and engagement will continue to consider progress on the recommendations, discuss any emerging issues and identify future potential areas of joint work with business on NDR. Meetings will be held as required. The next meeting of the sub-group will take place in September 2023 to agree a forward work programme and structure of future engagement.

2. NDR must feature among the considerations of the Tax Advisory Group as part of the Scottish Government's broader approach to engagement on tax policy, taking account of how the tax environment can best support economic growth, employment and competitiveness.

3. The points raised in the NDR sub-group, and forthcoming Tax Advisory Group, must be taken into consideration by Ministers when setting NDR and other fiscal policy at Budget 2024-25, and thereafter.

The sub-group noted the continued manifesto commitments around the Small Business Bonus Scheme and the Higher Property Rate. It also discussed calls for parity with England on Retail, Hospitality and Leisure relief, the request from businesses to avoid the introduction of ad hoc supplements or levies, and also the request from business representatives to reverse changes made to Material Change of Circumstance appeals. It noted the need for NDR to support business growth, investment and competitiveness, and raised a number of issues around NDR (poundage, supplements and reliefs).

4. Some business members of the group requested that Scottish Government give urgent consideration to extending the timetable for submitting a proposal challenging a valuation from 31 July to 30 September 2023. Other members of the group expressed concern that any changes to the deadline for proposals would introduce significant risks to the integrity of the system and the ability to deliver a three-yearly revaluation cycle with a two-stage appeal process. It was noted that the first ever draft revaluation roll was delivered in November 2022 and that draft Valuation Notices were issued to all proprietors, tenants and occupiers.

Medium-term recommendations (12 months)

5. The sub-group will explore further the role of NDR and reliefs in supporting and encouraging property improvements and investment, including the better promotion of existing reliefs and whether there should be further review or targeting of reliefs to better support these goals.

Business representatives asserted that, when property investors and developers are considering redevelopment of major properties in and around Scotland, they believe the application of the Valuation Framework in England is much more favourable than in Scotland. Scotland should want, and needs, to attract property investors into Scotland, not only to remain an attractive place for them to deploy their capital but also so they can deliver the modernised quality stock that occupiers will need to have.

6. The Scottish Government must work with Assessors and other stakeholders to identify what, if any, further improvements can be made to the transparency of valuations and the information provided in valuation notices.

The sub-group noted that continuous and efficient flow of accurate and complete information to Assessors is key to the success of shorter revaluation cycles. Consideration should also be given around the communication of messaging to business to reinforce that the provision of factual up-to-date information to the Assessors and Local Authorities is essential. The sub-group further noted that any proposed changes must be consulted on and could be implemented in advance of the next revaluation in 2026.

7. Scottish Assessors will continue to engage with sector representatives, where appropriate, on valuation methodologies and consider any evidence provided to support a case for change.

Business representatives called for the valuation issues brought up by the hospitality sector in the sub-group to be taken forward through a solution-focused work group involving sectors, assessors, local authorities and Scottish Government. In the sub-group, Scottish Assessors noted their willingness to have further evidence-based discussion on valuation methodologies including Practice Notes with sector representatives in advance of revaluations, whilst highlighting that disagreements on valuations should be taken forward through the statutory proposal and appeals process that exists to respond to such issues.

Long-term recommendations (18 months)

8. Recently implemented NDR reforms, such as changes to the thresholds for Small Business Bonus Scheme relief, must be kept under review to ensure that the NDR system effectively supports businesses and communities. The Scottish Government will undertake an initial review of the devolution of Empty Property Relief before the next revaluation in 2026, with agreed terms of reference set out in advance following engagement with relevant stakeholders.

Clear and timely communication as well as consultation, where appropriate, on future proposed changed to the NDR system is also important as businesses are required to navigate a varied policy landscape across Scotland and across the UK.

9. Scottish Government, Local Government and relevant stakeholders must jointly give further consideration to the digital administration of the NDR system. These, and wider discussions on NDR with local government, should take place under the auspices of the New Deal with Local Government taking account of the fact that NDR is a locally administered tax.

The sub-group discussed that in recent years local authority billing processes and systems had struggled to meet the growing tasks required of them to administer the NDR system. The processes and systems used by local authorities should support a reliable, effective, and efficient process for all.

10. Taking account of the importance of the recommendations above to deliver a stable, efficient, effective and fair system, business representatives felt that consideration should be given to moving towards annual revaluations or annual self-assessment. Assessor representatives were of the view that a period of stability was required to allow the Barclay Review recommendations that were implemented to be embedded within the current rating system before further alterations are considered.

Subgroup membership

• Chair: Tom Arthur MSP, Minister for Community Wealth and Public Finance
• Dr Liz Cameron, Scottish Chambers of Commerce (SCC) (NDBG lead)
• Marc Crothall, Scottish Tourism Alliance (STA)
• David Lonsdale, Scottish Retail Consortium (SRC)
• Stacey Dingwall, Federation of Small Businesses (FSB) Scotland
• Leon Thompson, UK Hospitality Scotland (UKH)
• Colin Wilkinson, Scottish Licence Trade Association (STLA)
• Paul Togneri, Scottish Beer & Pub Association (SPBA)
• Fiona Campbell, Association of Scotland's Self Caterers (ASSC)
• Stephen Montgomery, Scottish Hospitality Group (SHG)
• David Melhuish, Scottish Property Federation (SPF)
• Brian Rogan, CBRE
• Martin Clarkson, Gerald Eve
• Mirren Kelly, Convention of Scottish Local Authorities (COSLA)
• Jonathan Sharma, Convention of Scottish Local Authorities (COSLA)
• Les Robertson, Institute of Revenues, Rating and Valuation (IRRV)
• Alan Puckrin, Local Authority Directors of Finance
• Pete Wildman, Scottish Assessors Association (SAA)
• Heather Honeyman, Scottish Assessors Association (SAA)
• Ellen Leaver, Local Government and Analytical Services Division (SG Lead)
• Anouk Berthier, Local Government and Analytical Services Division