Official Report: Minutes of Evidence
Committee for Finance and Personnel, meeting on Wednesday, 9 December 2015
Members present for all or part of the proceedings:Mr D McKay (Chairperson)
Mr D Bradley (Deputy Chairperson)
Mr L Cree
Mr Gordon Lyons
Mr J McCallister
Mr I McCrea
Mr Gary Middleton
Mr M Ó Muilleoir
Witnesses:Mr Brian McClure, Department of Finance
Rates (Amendment) Bill: Department of Finance and Personnel
The Chairperson (Mr McKay): You are very welcome, Brian. Do you want to make an opening statement on where we are with this with regard to the evidence that was received last week?
Mr Brian McClure (Department of Finance and Personnel): Only to say that the Bill is still with the Office of the First Minister and deputy First Minister, so we cannot move on that until it is cleared. We are not sure of the reasons for this. Important as this issue is, I am sure that there are other important issues, so we just do not know the reason. If it is not cleared fairly soon, that may preclude its safe passage during this mandate.
The Chairperson (Mr McKay): The issue is not the primary legislation but the regulations. If the Bill goes through, there is nothing really contentious in it, so the devil will be in the detail. We had an interesting session with Hospitality Ulster last week. The majority of Committee members want to see something that will keep everybody happy, as far as that is possible in these situations.
I think that Hospitality Ulster was suggesting that, if bars in amateur sports clubs were rated in the same way as other businesses in hospitality, maybe that was a fair resolution, and they would then have no issue with 100% rate relief on the rest of a club. I am not across the detail of how these things are calculated and what the impact of that would be in pounds, shillings and pence. Perhaps you could give us a bit more detail.
Mr McClure: This is a specialist area, so I will do my best to talk you through the policy and valuation approach.
The Rates Order, being our governing rating legislation, does not dictate the method by which valuers are supposed to value different categories of property. All the Rates Order says is that you have to arrive at an annual rental value — the rent for which the property might in its actual state be reasonably expected to let from year to year at a fixed valuation date, whatever the date for the revaluation is. That is as far as the policy goes as written in the legislation. It is very unusual. I know of one instance, but, internationally, it is always the practice that that is left to valuers to decide. Certainly in the British Isles, the South and the rest of the UK, it is not stipulated in legislation the method of valuation that should be used in any particular circumstance, only that the end result has to be an annual rent.
The one example I know of where there is deviation from that is South Africa, where that is a product of the diverse nature of the built environment there. They allow some municipalities to decide a methodology for assessing properties. Aside from that, it is normal practice in legislation not to define the method of valuation, so that is left to the valuers. It is guided by the professional bodies — the Royal Institution of Chartered Surveyors, the Institute of Revenues, Rating and Valuation and the public bodies, be that the Scottish Assessors Association, the Valuation Office Agency or whatever — to decide the most appropriate method to apply in the circumstances. Generally, that is for the courts to ultimately decide. It is not laid out as a policy matter or in legislation.
I am not sure whether that addresses the issue that the Committee is concerned about as to whether there should be some policy intervention to put them all on the same basis of valuation. Is it?
The Chairperson (Mr McKay): I take it from what you say that valuers decide how businesses on a main street — pubs and clubs — are rated, and amateur sports clubs are dealt with differently.
Mr McClure: There is a different approach taken because they are different animals. One is open to the public for profit-making purposes, and the other derives its custom from members and a limited number of guests, so they are quite different.
I have valuation guidance notes that I can leave with the Committee. It is all you would ever want to know about the receipts and expenditure method of valuation for non-domestic rating and, similarly, the contractor's basis, which is the cost basis that is used for clubs.
Mr McClure: Yes. I will read from the one on receipts and expenditure. This is in the criteria for the application of this method. It says:
"Where the nature of the occupation of property is primarily concerned with achieving anticipated profit and the tenant's rental bid is therefore likely to be based upon the consideration of receipts and expenditure, then in the absence of reliable rental evidence, the receipts and expenditure method may be the most appropriate method of valuation to adopt."
"It is considered particularly appropriate to use the receipts and expenditure method where receipts are derived from some monopoly attached to the property. Monopoly value may be derived from law, eg by way of licence."
There are particular circumstances that apply to licensed premises, and, therefore, this is usually the most appropriate method. I say "usually"; this is guided by what gives you the best answer. If there was good enough rental evidence of what pubs let for in the market and that corresponded to the statutory definition that I read out, valuers would use that. It is because of the absence of any true rental market. Any rental deals that are struck in the licensed trade tend to be business arrangements or tie-ups with brewers or whatever. They are not on all fours with what a commercial lease would be.
Mr Ó Muilleoir: Help us with this; it is complex. The hospitality guys who were here last week said, "This is not to do with our rental value; it is to do with our turnover". You say that they use turnover and the licences to assess what the rental value might be.
Mr McClure: That is exactly it.
Mr Ó Muilleoir: They are right on one thing. They say that, if you run your business successfully, you will increase its rental value. That is not just as true if you have a shop on the Ormeau Road — fair play to you — and run it moderately well, because the rent will largely be the same for the next year. The rent stays the same. But if you set up a new pub in the middle of the Ormeau Road and run it really well and take in lots of business, when the rates guys arrive, they will say, "The rental value of this is going up considerably". That is what I would have thought.
Mr McClure: If you get a row of shops in a particularly successful trading situation, those rents will rise and that value will be picked up at the revaluation. There are similar principles applied. There are different ways of arriving at that outcome.
Mr Ó Muilleoir: There is a key question that we are trying to answer. Mr Wells said last week that they are not different animals. If a community facility or sports facility has turnover of £800,000 a year, it moves away from being a local social hub or whatever. He is saying that only a very small number of clubs may fall into that category, but there may be a situation where perhaps not everyone is treated the same in terms of being community amateur sports clubs. I see a difference between a local GAA club in a small town or village that has a bar and a large operation for a large club that runs wedding functions and so on. I do not know if there is some compromise there as we go forward.
Mr McClure: It is a dilemma that we face. The de facto situation is that they are in competition, but, in a legal sense, maybe they should not be so much in competition. Back in the day, when I used to go to the local rugby club, the police sergeant would come round, check the register and go into the back bar and have a wee whiskey. That was done once a fortnight or whatever. There was regulation, but that is beyond my policy competent area. The de facto situation leads to competition between those clubs and the licensed trade. However, the legal standing is different, and we need to be careful with what we do in policy terms so that we do not get too ahead of ourselves on that issue.
It is an issue that we are more than happy to look at as part of the wider review of the business rates system.
I have no doubt that Pubs of Ulster will put a compelling case for change in the way that pubs are treated. The current situation is that, in policy terms, we do not dictate how particular types of property are valued. The only policy is that it is an annual rent at a fixed point in time, and everything should be valued with that in mind. That means that some types of property are valued in one way and other types in another. As a consequence, licensed premises pay pretty hefty rates bills, as you will have heard from that evidence, compared with clubs.
Mr Ó Muilleoir: I am also going to declare that I had dinner with Colin Neill last night, so maybe I am reverberating from the pressure that he was exerting. Can we get the timeline clear? If the Executive clear the legislation and it goes to the House, are we saying that we will have the power to make those two amendments to the rates legislation — one around store fronts and dressing them and one around community sports and amateur clubs? Once that legislation goes through does it become law, or does the Minister have the power to do it?
Mr McClure: This is an enabling power to allow a scheme to be set out in regulations, so subordinate legislation will follow this legislation. That will be informed by the consultation that we will undertake in the new year.
Mr McClure: If we get clearance — this is obviously subject to the Speaker — we could have the First Stage on 18 January, Second Stage on 25 January, Consideration Stage on 1 February, Further Consideration Stage on 8 February, Final Stage on 9 February and Royal Assent — well, that is a couple of weeks later.
Mr Ó Muilleoir: Not that I am interested in elections, but is it possible that we could have the subordinate legislation before the May election? That seems unlikely.
Mr McClure: It seems unlikely. It would have been possible had we been able to secure Executive clearance. We did this in tandem with our consideration of accelerated passage and used our best endeavours to get that. Had we got that when we wanted it, we could have achieved that by 1 April.
The Chairperson (Mr McKay): I want to tease out one of Máirtín's points. There is a view that some amateur sports clubs are being punished because they have a bar or may be punished under the proposals. If you have a small town or village and a small bar in a club that has a minuscule turnover compared with the likes of golf clubs and examples that Jim flagged up last week, is there a possibility that a threshold could be introduced? Could the 100% rate relief going to clubs without bars be extended to clubs that do not really make a killing with the bar but at the same time address that issue of unfair competition with bigger clubs?
Mr McClure: Technically, that could be done, but we are bringing forward the Minister's preferred option, which is to grant 100% relief to community amateur sports clubs that are not licensed. That would allow temporary licences but not a permanent licence.
Mr McClure: That is the preferred approach on which we will consult. No doubt during that process other ideas will come forward, but we are taking forward the Minister's preferences.
The Chairperson (Mr McKay): In theory, clubs with permanent licences could be split into two tiers, for example, so that one tier could avail itself of the 100% relief and the other tier that makes a much higher turnover on their bar would not be entitled.
Mr McClure: In theory, you can legislate for practically everything. It is an issue of proportionality, unforeseen effects and cost for Land and Property Services (LPS) to administer a relief that runs into a few thousand pounds. If they have to go to a lot of administrative effort to differentiate between one type of bar in a clubhouse and another type of bar in a clubhouse, that is not a simple thing to do. It would cost several hundred pounds to assess every case, so there is an issue of proportionate cost associated with it. The rating system is a very simple taxation system. We need to be careful that we do not over-engineer it, because you will end up spending almost as much in administrative costs as you would get from revenue-raising.
Mr McCallister: Brian, I am sorry for missing the start of this. The point that the Chair is getting at is that, if we were to take the Minister's preferred option, rugby clubs would be the ones that would lose out the most. From memory, I think that 46 of them are licensed premises, but most would not have a big turnover. Is there no way that you could measure it quite easily on turnover, as the Chair is probably suggesting? Could audited accounts not be used to check if they come in under a certain threshold? Would that not be quite simple to do?
Mr McClure: Clubs are assessed on a particular basis, which is a cost basis, and pubs are assessed on receipts and expenditure. They are different animals. One is open to the public with the purpose of deriving a profit, and that lends itself to the receipts and expenditure method. The other is a club that draws its custom from its members and occasional guests. That is the legal position. The de facto position may well be quite different. We heard evidence about what happens in the cricket club in Downpatrick: I do not know whether that was overstating it, but the de facto position is different from the legal position.
As I explained before, we do not set out the method of valuation in the legislation; we just set out what the end result is to be, which is an estimate of annual rent. Licensed premises use the receipts and expenditure method in the absence of reliable rental evidence. Clubs are valued on a cost basis. That has been the approach that has been taken for many years.
Mr Ó Muilleoir: What does that mean? What is a cost assessment? I understand receipts and expenses, but what is a cost assessment?
Mr McClure: It is the contactor's basis of valuation. Really, it is what it would cost to build a replacement clubhouse and grounds, and a factor is then applied to convert it to a rateable value. That is set out in legislation; it is the decapitalisation rate. The Committee may recall the technical change that we made prior to the revaluation. A cost estimate is made, and allowances are made for obsolescence, surplus and whatever. I can leave you with the guidance notes on it; they are quite complex.
Mr McClure: In essence, you do a cost estimate, make allowances for depreciation and then apply a conversion factor to convert it to a rateable value. Typically, that leads to much lower values per square foot.
When Colin Neill gave evidence, he suggested that, per square foot, licensed premises pay maybe five times what the licensed part of a club pays. I would not disagree with that. When the issue was debated in 2011, I did a bit of analysis and looked at a selection of typical pubs and typical clubs. I worked it out, and it was in that range. Either four times or five times more is paid by licensed premises. That would not surprise the Committee, given the figures that the proprietor of Horatio Todd's mentioned the other day.
Mr Cree: That fits in nicely Brian. If you take the actual area — I am thinking of amateur sports clubs — you will have a physical area that could be construed as a bar, but you would have other rooms that may be used for occasional functions or an extension of the bar itself. They may also include the likes of changing rooms. How would you see that working out in practice?
Mr McClure: That is what happens in the existing 80% scheme under which sport and recreation relief operates. I happen to know this, as I used to do this many years ago.
Mr McClure: I remember measuring up Limavady cricket club for that purpose. You would simply get out a tape measure — it is probably laser meters these days — and measure the bar and any part of the property that is used as a social facility. The legislation allows things like car parks, toilets and stores to be considered as areas used for the prescribed recreation.
Mr McClure: The barrel store could be associated with the bar downstairs, but you could also have lockers or kit in there, so that would still count as recreational property. In essence, it is the function room, the bar and the lounge area that would be measured and apportioned.
Mr Cree: If you had a small bar, for example, and a large function room beside it that was occasionally used for tea dances or something, would that be part of the bar?
Mr McClure: That would be part of the bar, because the law says that — I am trying to think of the exact wording in the legislation — it needs to be:
"used solely for the purposes of a prescribed recreation".
That is quite clear. If there is any other use of that part of the premises, that is counted as the social side of things and would not, therefore, attract the relief. The exercise is quite straightforward.
Mr Cree: There is scope for, shall we call it, flexibility in this, from the point of view of the bar operator.
Mr McClure: Do you mean in the current scheme?
Mr McClure: It is a fairly factual exercise to go in and measure up a bar, a lounge and a seating area associated with the bar. That can be done.
Mr Cree: It is the "associated with the bar" bit that I am really challenging. What if you were told, "This isn't part of the bar. We just use it for occasional meetings or whatever", but, on the other hand, there are umpteen parties, waiter service and all the rest of it in that same area?
Mr McClure: The strict application of the law is that, if a lounge area is used for any purpose apart from the sport, it does not get the relief.
Mr I McCrea: You said in your opening comments that the Bill had not got through OFMDFM. Will there be a consultation process? What is the next stage?
Mr McClure: Yes, we would like to undertake an eight-week consultation. We will talk to the Northern Ireland Sports Forum and the Federation of Clubs; I have already had conversations with them. We will also talk to the Golf Course Owners Association, Hospitality Ulster and other business interests. We will also talk to other Departments because they have an interest. DOE has an interest in the working of the derating grant, which could be affected by this. The Department of Justice has an interest because treatment under criminal damage legislation could also be affected. We will also talk to Land and Property Services, which would have the task of administering any scheme. That would involve an eight-week targeted consultation.
Mr McClure: The next stage is that, in the light of that, the Minister will decide the final policy and put that forward in regulations for the Assembly to consider. The regulations will be decided by affirmative resolution, so there will be a debate. We will consult on the basis of the Minister's preferred way forward, which is to put community amateur sports clubs on the same footing as community halls.
Mr I McCrea: That is not to say that the final outcome might not change, depending on the consultation response.
Mr McClure: The final outcome could be different. The scope of the enabling power is quite wide. I do not think, however, that it would allow you to do some of the things that we have been talking about in relation to valuation methodology, because you would have to reconstruct major parts of the Rates Order to allow that to happen.
That would be a difficulty if we were to do that. In terms of flexibility over relief, the enabling power is pretty wide, but, if we wanted to tamper with the valuation treatment of clubs versus licensed premises, that is a much more fundamental issue. As I say, it would probably require a reconstruction of major parts of the long-established Rates Order, which is major piece of work. That is not to say that that could not happen post the review of rating policy, but it is not something that you can rush into.
Mr I McCrea: There is no intention to give the power to councils to offset the other 20%. Someone suggested that it happens in England.
Mr McClure: It is a proposal. One of the difficulties in Northern Ireland is that we have two taxes off the same valuation list: we have a regional rate and a district rate. We would need to safeguard the regional rate element, and there would probably need to be other safeguards because that would be a significant change in the rating system. At the moment, there are few or no discretions associated with rates.
Mr McClure: We are consulting on that at the moment.
Mr McClure: It is primary and would be done under the Local Government Act (Northern Ireland) 2014. Section 47 allows discretion over reliefs. Remember, however, that, in England, all receipts from business rates go to local authorities, and local authorities bill and collect. The circumstances are far different. That is not to say that we could not look at it. As part of the review of rating policy, we are looking at whether certain discretions could be given to local government, provided we safeguard regional rate revenue.
Mr McClure: Yes, that is right.
Mr McClure: It would be a further £1·8 million. The response has been drafted, but it has not come through to you yet. However, I can tell you it verbally.
Mr McClure: Yes, I think so, but I had better check. Yes, it is on top of that.
Mr McClure: On the business rates review?
Mr McClure: It is going well. At the moment, I am in meetings-and-seminars mode. Yesterday, I was at the Northern Ireland Council for Voluntary Action (NICVA) in Duncairn Gardens for the afternoon, talking through many of the issues, particularly in relation to charitable exemptions and charity shops. I have met the Federation of Small Businesses, the Northern Ireland Independent Retail Trade Association and Hospitality Ulster for informal cups of coffee and a chat. This Friday, I will address a Northern Ireland Local Government Association event in Oxford Island to help to inform local government. That process will continue and will crank up until 25 January, which is the closing date. Nobody ever responds in writing to a consultation until near the end — quite often, it is after the end — but there is a lot of interest.
The Chairperson (Mr McKay): I am thinking about the consideration that the final 20% for clubs with bars goes to the local council. You are looking at the options. If councils were to receive the power through regulations, could they, under this legislation, conceivably set the criteria for what would qualify and what would not?
Say that they wanted to set one or two tiers. You have the examples of certain golf clubs. A council may say, "This golf club is making hundreds of thousands of pounds of turnover. That does not fit what we are looking for, so we would like to differentiate". Could they have the power to do that?
Mr McClure: If Ministers decide that that is what they want to do, you can easily change the legislation to allow it to happen. What I would say from a DFP point of view is that, whatever arrangements are in place, we want there to be proper safeguards. Managing risk in relation to state aid and the protection of regional rate revenues are our issues. If Ministers wanted to do that, it could be done; however, it would require a change to the primary legislation.
Mr McClure: They would have to meet the cost of it, yes.