COMMITTEE FOR FINANCE AND PERSONNEL
OFFICIAL REPORT
(Hansard)
Review of Domestic Rating
10 October 2007
Members present for all or part of the proceedings:
Mr Mitchel McLaughlin (Chairperson)
Mr Mervyn Storey (Deputy Chairperson)
Mr Roy Beggs
Dr Stephen Farry
Mr Simon Hamilton
Mr Fra McCann
Ms Jennifer McCann
Mr Adrian McQuillan
Mr Declan O’Loan
Witnesses:
Mr John Simpson ) Economist
The Chairperson (Mr McLaughlin):
I respectfully remind members, witnesses and those in the public gallery that because the session is being covered by Hansard, mobile phones must be switched off as they interfere with the recording equipment. To put them on silent is not sufficient.
I want to thank Mr John Simpson, who has not only agreed at short notice to attend the meeting, but has also prepared a useful paper, which members will find in their packs. Mr Simpson, you are very welcome. Everyone knows who you are at this stage. I invite you to speak on your paper. Afterwards, members may respond to the issues that you have raised.
Mr John Simpson (Economist):
Thank you, Chairman. At last week’s meeting, I was sitting behind a senior civil servant who was explaining the proposals. Today, he has done me the honour of sitting behind me. I feel as though, if I speak out of turn, there may be a sudden movement behind me.
The Chairperson:
I will try to give you early warning of any movement behind you.
Mr J Simpson:
I have examined the options that have been put to the Committee as possible areas for discussion. I appreciate that they come in three categories and that the most immediately significant are those in strand 1A. Since the Committee’s advice, and strand 1A’s acceptability or otherwise, to the Ministers will be critically important during the next couple of months as the administrative arrangements for any changes are made, I find it helpful for myself to think about what principles I would apply, given that people have suggested several options.
The first is negative; I have avoided turning a discussion on variations in domestic rates into a form of debate about social merit on issues that lie outside the question of how to raise enough finance under a uniform and generally accepted rating system. I find myself back at the statement that rates, as they are now organised — indeed, as they were organised under the old system, but much more clearly under the new system — are a form of property tax. The main constraint that should be applied to a property tax is whether it is being applied as reasonably as can be humanly devised, so that it relates to ability to pay. In an ideal world — although, I do not know what would make it ideal — ownership of property of a certain value would indicate the ability to pay a certain value. However, life is not like that.
There is no equation that brings the two together.
However, I question, with some respect, the notion that rates are the hybrid form of taxation. The word “hybrid” enters into the discussions when it is argued that people pay rates in order to pay for their services. In fact, there is little relationship between the rates bill and services to the individual or the individual household. If a property tax were turned into a payment for services, it would cease to be a property tax. A much more complex and difficult formula would have to be devised. The link between rates and services are, at best, indirect. Each individual may make more or less use of certain services, so it is hard to trace the impact of that and how much property tax they should pay. That is a subjective opinion and I respect the different views of others on the matter.
The second point on the options that are offered is that any changes that the Committee recommends should be revenue neutral. I am not sure whether that is stated anywhere, but I presume that it is implicit. Neither the Department nor the Minister would appreciate the Committee putting forward a compelling argument that its total revenue from rates should be 20% lower than it was last year. The options should be revenue neutral so that if money is taken from one place, it will be put back in another place. That other place may be that everyone, on average, pays a bit more. In each case, where change is suggested, there must mentally be the impression that an offsetting calculation has been made somewhere else.
Staying away from any personal preferences, which might have influenced some of the answers, I considered the Committee’s strand 1A changes. I have presented you with a piece of paper that is longer than I thought it would be when I started on it on Saturday afternoon. I will not tell you when I finished it.
As you know, the decision to put a maximum cap on property value of over £500,000 was made at the last minute last year. The reasoning for that was that Ministers did not want an excessively large rate bill for people that owned a major property valued above £500,000. The present cap should be retained because £500,000 is the value of a property three times that of the overall average property in Northern Ireland. If the cap were reduced to below three times the average property price, it would reduce the spread, change the impact and make the system a bit more regressive. I use the words “regressive” and “progressive” in the tax sense of the word, rather than in the words’ emotional sense. I recommend to the Committee that the present cap should be retained.
There is no good argument for excluding vacant domestic property from rating. One possible argument for its exclusion is that, when people change where they live, they do not want to pay rates twice — once on the property that they are leaving, and once on the property that they are going to — if it takes some time for the market to clear one property off the books. That is not seen as fair, based on their ability to pay. Therefore, I suggest that that there should be a time between the property falling vacant and it becoming rateable. A discretionary decision should be made on the length of that time. I thought of six months as an initial period, before the charges would weigh in and I ask the Committee to consider whether the charges should weigh in at 50% of the total.
The third area is that of changes to the current rate relief scheme. The scheme is a method of ensuring that the people on low incomes can cope with the ability to pay.
The changes to the rate relief scheme should help those who have incomes that are just high enough to be outside the band, and are ineligible for housing benefit. The taper provisions are a useful method of getting a reduction in rates for those low-income households, and I have no difficulty in seeing them maintained because they indirectly reflect an inability to pay.
All of us are inclined to say that a pensioner household should be treated differently. Pensioner households are just as capable of being affluent as they are of needing extra income. Therefore, simply because someone is a pensioner does not necessarily make them eligible for consideration for rate relief. As the Committee will see from my paper, I suggest that the maximum allowance, for savings that enter the means test for low incomes, is raised. The Government’s paper, the Lyons Review, suggested that the figure should be £50,000.
The next issue is education relief, which I have shortened to rates relief for students in my notes, but the two amount to the same thing. The Committee will know that that is not the most popular provision in the present system. Certainly, I hear more people comment on it than on other provisions, partly because they misunderstand the theory — which is that it should be administered through the landlord, and therefore exemptions have to be made — and partly because there is not that much sympathy for students. If an administrative system is devised that makes students liable to pay domestic rates for properties where they are tenants for a short period, the proportion of bad debt and non-traced debt will be very high. Therefore, it is best to leave education relief alone. As it has been in operation for a year and begun to settle it down, possibly we should test it for another year.
The deferred payment scheme for pensioners is, socially, a very acceptable idea, which will very rarely be used. The scheme is on the statute books, or the equivalent, and should be left alone.
The present discount for early-single payment of the annual charge should be retained as it offsets the interest earned on getting money in advance.
The existing transitional relief scheme — where there was a two-thirds remission off the increase in charges — is being re-profiled to a one-third remission from next April. That scheme was designed to phase in people whose rate bills were going to change sharply. That adjustment is over a three-year period, which, it could be argued, is fairly quick. If water charges were being implemented on 1 April next year — I am sure that the Committee has not expressed a strong view on that, although some of its members may have individually — then there might have been a case for phasing them in over a longer period. If, as I understand, water charges do not commence on 1 April 2008, the steps that have already been ordained should be kept in place so we can get where we want to. If we are involved in these extra charges, we might wish to say that the system is now there for personal benefit.
Looking at strand 1B, the graduated-tax system can be argued for from both ends of the spectrum. People who are paying higher rates may advocate a graduated system so that when a property is worth more, the rate decreases. For low-income households, on the other end of the spectrum, start on a low rate and let it go up as the property becomes more valuable.
I suspect that there is some equity in the argument, but this is not yet an option on which we are ready to make a firm decision.
As to the single person discount, in paragraph 19, my last sentence is:
“There seems little justification for this concept.”
What is the equation that this makes? Does a single person have a lesser or a greater ability to pay than a couple? As someone living alone, I am frequently told that I have more ability to pay. It is not an argument that I appreciate. A person’s single status has no bearing on their ability to pay.
The next possibility is that of a single pensioner discount, discussed in my paragraph 20. I am more sympathetic to that and I wonder whether the Committee might consider a system with such a provision. However, the single pensioner household should be the unit, rather than a single pensioner. After all, rates are paid on a household. If two pensioners are living together in a household, does it mean that they have greater ability to pay than a single pensioner household? I suggest, tentatively, that that might be the case where they have inherited property. There might be a case for phasing down the rates bill for pensioner households where there are no other adult earners. That is important. If a pensioner lives with an adult family, and they are earning, that alters the nature of the household.
Automatic pension discount is covered by paragraph 20.
The disabled person’s allowance, considered in my paragraph 22, was introduced because the property might be more expensive to provide and might command a better market value at a later stage. I do not accept the second part of that argument. I have seen few cases where that might happen. On the other hand, there is a logic to making some sort of allowance where someone has incurred extra expenditure and there is disability. I looked at the responses to the consultative paper and I see the argument clearly. However, the difficulty lies in deciding where the line should be drawn. Would any one of us like to have to set the rules for the issue of the blue pass? Where would you draw the line — especially if it were not physical disability? Degree of incapacity arises. I suspect that extension of this allowance base would require some consideration of what qualification should be applied; of what persons we would deem to be disabled. It sounds as though I am being unsympathetic; but this is a difficult area. If I broke my ankle — touch wood — and it was to be six months before I could walk again, should I then qualify as a disabled person? I do not think so. It is not an easy issue; though emotionally, the appropriate response is clear.
I turn to the issue of a circuit-breaker. I understand why people might want to put a cap on rates as a proportion of a person’s income. However, until we have some evidence that there are unusual circumstances, I do not think there is any immediate case for a circuit-breaker. Until that evidence emerges, I do not know what figure we could suggest for a circuit-breaker.
As to the issue of a discount for farmers, I draw the Committee’s attention to the argument that has been made in the consultation. I accept what has been said by some of the farming interests, that a building used as a farmhouse is not of the same market value as an ordinary non-farming dwelling. A discounted figure might well be appropriate. The planners argue that that is already reflected in the capital value. I am not sure. Those members who have experience of rural areas will tell me whether or not that is fair comment, coming from the people who have issued planning permission for various farm houses.
I am not sympathetic to a discount for owner-occupiers. I do not know what the difference is between an owner-occupier and a non-owner-occupier. Paragraph 25 introduces, in some of the consultative responses, the question of second homes. I do not have a formula, other than if anyone has a second home they should pay full rates on it. Some people who have a second home which is a holiday home will argue that they should only pay rates for the period during which they are in residence. That suggests that they are paying for services, rather than paying a property tax.
I have no sympathy with the notion that a holiday home should have a reduction in rates. If I could have a watertight definition of a holiday home, I might even be prepared to suggest how to put a premium on it, in order to deter multiple ownership of houses in a society that does not have enough houses.
Rates credits would be linked to climate change and green policies. I do not think that we have enough evidence as to how we might do that and the way that it should be done. The Assembly will soon have to talk about a climate change law. If the Assembly can find a way to word that legislation, and to do it in a way that the difference between devolution and UK policy is clear, then it might well be worth considering. However, my answer is that it is pending — come back to it another day.
In relation to strand 2, I am against the banding of capital values as in the English system. Our system is much fairer: we do not get people in the middle of a band who would otherwise be at either the bottom or the top, and those bands are quite wide. Our system, by taking the capital value straight, and charging rates on it, is fairer: it takes us into the problem we started with about whether there should be a maximum cap: it opens that door. Banding is a useful piece of evolution, but we did not end up with the English system.
A local income tax is an option that merits further study. I do not know whether any political parties are espousing that option.
Dr Farry:
I am brave enough.
Mr J Simpson:
However, the point arises that if we get to a position where we need to supplement local revenue, and rates are considered to be or are subjecting too high, then the possibility of a local income tax to supplement or replace the regional rate is a mathematical possibility. I would forget about a local income tax to replace district council rates: it would be too difficult. However, if you want to substitute one source of revenue for another, the equivalent regional rate from the local income tax — or part of it — might be on the agenda for further study. That also answers the question of income tax varying powers, because whether it is local income tax instead of, or whether it is with a few pence one way of the other, it would come from that study.
It is interesting that road charging should be brought into the discussion of changing rateable value. Nevertheless, I suspect that we are all instinctively looking for ways in which to reduce congestion. For example, the present planning policy in Belfast is simply to try to reduce access for cars by denying planning permission for new car parks. All sorts of people tell me that if they had planning permission they could build car parks and they could pay off the capital handsomely. However, the planning provision stops them from building car parks. That is not very logical, and it is not charging according to what the market would like to happen.
There is an interesting planning issue. Retailers in the city centre who want to provide free parking are being told by the planners that it cannot be done. They would prefer that the retailers did not have free parking so that the customers would have to come into the city by bus. However, the answer to that would be out-of-town shopping centres. We have all heard the debates about the shopping centres at Sprucefield, Antrim and Holywood Exchange. For a city that does not have peripheral shopping centres, Belfast is not doing badly. I do not know the situation in the north-west, although I think that there are one or two shopping centres there as well.
The Chairperson:
They certainly shape up.
Mr J Simpson:
The next issue is green taxes. If a green tax were to simply tax waste and rubbish collection, then we could all work out whether we were being asked to pay a tax to have our rubbish collected. Would there by any incentive to reduce the amount of rubbish that went through the official system? The fly-tipping syndrome would be a major problem. Could it be policed?
Waste disposal costs will be significant. Most of you are in local government and will be aware of that. As I have suggested at paragraph 31 of my discussion paper, further work should be done on exploring other practical options.
The Chairperson was present at a meeting at which the secretary of the land value taxation campaign made his interesting case about land value taxation. It is a radically different approach and will have some effect on the property market. The campaign group’s concept is worth studying, and to save boring the Committee even further by commenting on it, members may access, on the Internet, an interesting paper that the secretary has produced in response to the consultation.
With regard to derelict land taxation, land that has become derelict should be rated at, at least, the capital value of the site. We must accept that and build in an incentive to prevent derelict land lying idle. There is another issue around what happens to land values when planning permission is granted and the owner decides to hold the land — I think that that is known as land banking. Is it sensible to suggest that any land on which planning permission has been granted but which is not developed within one year, for example, should be rated as if the planning permission had been implemented? There is the route to unpopularity.
The Chairperson:
You might be right. I appreciate your full response, Mr Simpson, especially since you were given such short notice.
Dr Farry:
Thank you, Mr Simpson, for your presentation, and I apologise for being late. My first question relates to the overall trends in tax policy. You, rightly, said at the beginning of your presentation that levied taxes are put into a separate pot, and that they are not directly related to a particular service, use or delivery. Is there a trend, first, towards some hypothecation of taxes, and secondly, towards green taxes — which are very much on the political agenda in Great Britain, if not here — so that a household’s taxes will be linked to its consumption rather than all individuals or households being taxed the same, regardless of their consumption.
Mr J Simpson:
The Government do not usually like hypothecation of taxes because it reduces their freedom to deal with all their revenue and to match the demands on that revenue. Over the years, members will have heard suggestions of hypothecation of money paid for using roads to go back into building roads, and there have also been occasional arguments that hypothecated taxes should be used to run the Health Service. Governments have always resisted that, and the Opposition has never said otherwise, because it reduces discretionary decision making. That does not take away from Dr Farry’s second point about taxation being imposed to achieve policy results. For instance, owners of cars with high carbon emissions have to pay a high tax, rather than all cars being taxed the same. The argument that the taxation vehicle licences on cars should be phased across the scale of their emissions is saying to consumers, “you want to have a car that burns a lot of carbon, so you will pay for it”. The rest of us will trade down so that we will not have to pay the higher car tax. We will see more of that.
Yesterday, a paper was produced alongside the Chancellor’s pre-budget speech on the next steps for implementing climate change. It is clear that the Government are talking about increasing regulation, legislation and charging, and those three measures point towards environmental changes. The Assembly will have to consider the delegated or devolved aspects of those measures.
Dr Farry:
My second question relates to the local income tax model. I am conscious that there is speculation that the Executive review into water charges is proposing to shift that burden on to the rates.
The debate over rating reform has been fairly quiet compared to that on the controversial water charges, although, paradoxically, water charging will raise less money than the regional rate. If a shift takes place, there will be concern about the ability to pay. The issue of local income tax will become more topical and relevant, and the Assembly will need to discuss it.
The Alliance Party is making a case for local income tax, but it is trying to differentiate between replacing both the regional rate and district rate — a line that you paper seemed to follow also.
I am concerned that the debate has been framed around the argument that local income tax will be bureaucratically difficult to implement, because there are so many district councils. However, there will be much fewer bureaucratic difficulties in replacing only the regional rate with a single rate for all of Northern Ireland. What other impediments or difficulties do you see for implementing such a policy across Northern Ireland?
Mr J Simpson:
If Government could manage to charge a variation in income tax across all tax payers in Northern Ireland, when employees get their pay slips at the end of the month there would be a box that details the percentage of Northern Ireland levy, or whatever it would be called. That ought to be straightforward. However, there are difficulties. For example, the Inland Revenue would have to agree to deal with the self-employed as a special category — they could not simply use the same formula as that for computerised pay packets.
As it would be an income tax, I presume that the Assembly would have to consider the complications arising from unearned income. That is not a huge problem in itself, but equity might cause major problems. For example, would people be able to shift their unearned income, so that they appeared to earn it in Birkenhead instead of Bellarena? I presume that the citizens of Bellarena would fall into that category.
Dr Farry:
There are international examples. In the United States, different states have a local income tax to supplement the federal income tax. Presumably they have mechanisms to prevent money being shifted from one state to another in an effort to avoid tax?
Mr J Simpson:
I cannot answer that question. However, if a person works in location A, he or she will be pinned down. The United States also impose sales tax on goods crossing state boundaries, which we would find difficult to deal with also.
Mr O’Loan:
The paper is admirable for its clarity, and there is little in it that I would disagree with. It will be very useful to the Committee. I want to ask two questions. First, it has already been said that water charging will have to be factored into the debate. If I am allowed to refer to it, I hear that the Hillyard report —
The Chairperson:
Do you mean that water charging or water reform must be factored in? I am just clarifying what the SDLP is saying.
[Laughter]
Mr O’Loan:
One hears that the Hillyard report might make some reference to charging for water as part of the over all rating system and hypothecating it. Is John extending the argument against hypothecating that revenue?
Secondly, John said that a deferred payment scheme for pensioners should continue as it is, and I would like clarification on that. I thought that there was legislation to allow such a system to exist, but there is not.
Mr J Simpson:
You need to talk to the Department of Finance and Personnel about that.
Mr O’Loan:
We will do that, if we get a chance.
Mr J Simpson:
The Assembly has critical decisions to make on water charges at the top, middle and bottom. I am not suggesting that water should be privatised — I am not even hinting at that — but is it a trading entity that ought to have built-in incentives, so that it provides water at economic charges and raises revenue in some way to match that? Also, how much capital should it have? It is easier to envisage water as a trading entity, even publicly owned, on the same basis as other utilities. Would we ever have suggested that electricity should not have been a trading entity, whether it was state owned or privatised? It is capable of the normal commercial practice of trading. Then there is the matter of where the revenue comes from. I understand that it almost looks as though we are saying that that will be hypothecated. I would have suggested keeping away from the central Government pot, as it can trade in its own existence, as a nationalised industry.
The Committee for Finance and Personnel and other Committees will deal with the question of whether we already pay for water through rates and taxation, but mainly rates, because the taxation rate is the same as across the pond. The answer is that we pay for water partly from revenue that we raise ourselves, for example, through rates, and partly from the degree to which we do not raise all the revenue that we need for all the services that we want. Therefore, it is possible to argue that some of the current payment for water comes from Westminster providing subvention to Northern Ireland. Civil servants who are dealing with those issues run into difficulties, because the Barnett formula makes no allowance for water. In England, water is not the responsibility of central Government. Therefore, as the years go by, if we tend to use some of the funding that comes to us under the block grant to fund water, we will actually reduce our ability to maintain other services. Mr O’Loan’s question raises fundamental issues, and there is no easy answer.
Mr Beggs:
The discussion paper is very useful. It is clear and provides practical outcomes as to why some issues would — or would not — work. However, with regard to rating vacant domestic property, you suggested there should be a six-month holiday and a six-month ramping period, shall we say. Why did you suggest the free period of six months? There could be a danger that holiday-home owners could simply declare that their holiday homes were vacant for six months, which would, therefore, get round the second home issue. Do you accept that there is an issue to be dealt with there?
Mr J Simpson:
If I were to go out today and buy a holiday home and leave it vacant until next spring, I would not pay any rates until I went to live in it for a fortnight next easter. That is a good question, so how do we get round that?
Mr Beggs:
Why should that rate-free period last as long as six months?
Mr J Simpson:
Six months is an arbitrary figure. If someone is buying and selling a house, six months is a long time for an overlap, but I was allowing for hardship cases. The logic of your argument is to simply make that period six days, but it is about compromise. I suspect that if a home was bought and left vacant for some time to exploit the legislation, it would be difficult to get round that. Some policing of statements of intent would have to be in place. Occasionally, some revenue would be lost.
The Chairperson:
I can imagine estate agents offering six months free rates as part of their packages.
Mr J Simpson:
You can just imagine that.
Mr Beggs:
My second question relates to the taxation of derelict land. I see advantages, in that it will stop land banking and encourage redevelopment, but are there any negative aspects, and why has it not been introduced?
Mr J Simpson:
The negative aspect is that developers will not like it.
Mr Beggs:
They might actually develop or sell the land.
Mr J Simpson:
If land with planning permission was rated on the assumption that it would be developed in accordance with that permission within a year, developers would still buy the land but would not apply for planning permission. They would pretend that it was their intention to go into intensive farming. That is human nature.
Mr Beggs:
Should some form of taxation be imposed in zoned areas that are part of an area plan? Sizable areas in my constituency were zoned for housing more than 20 years ago; however, it is only now that planning applications are being submitted. Consequently, a lack of houses has resulted in a distortion of the housing market. Is there an argument for taxing land that is included in an area plan, even though it may not have planning permission?
Mr J Simpson:
One suggestion is that, as soon as land is zoned, it is deemed to have planning permission for residential development. However, the zoning order would have to specify a specific use, although, I believe that commercial or residential use is specified when land is zoned.
Interestingly, when an area plan is currently being developed, many land owners attempt to have their land included in that area. If the local authority were then to suggest that, from the following 1 April, that land would be rated in accordance with having planning permission for 1000 houses, there would be a problem with equity.
Mr Beggs:
Finally, do you accept that there is a cultural difficulty with pensioner-rates discounts and exemptions? Some pensioner households are fearful of applying for other benefits, believing that, once a rates discount has granted, those other benefits may be reclaimed. Perhaps, an automatic system would be preferable to one that is means-tested.
Mr J Simpson:
I agree with Mr Beggs. If a phased non-means-tested rates-discount scheme for pensioner households were to be introduced, as described in paragraph 20 of my discussion paper, its age qualification requirement would result in the ages of householders being registered, which would, in turn, negate that reluctance to apply.
Mr Beggs:
Should a system not be capable of recognising that the payment of a pension indicates the residence of a pensioner; therefore, minimising paperwork?
Mr J Simpson:
Yes, the people who run the social security system, which pays old-age pensions, could, if authorised, inform the valuations office of pensioners in specific areas. However, one should bear in mind that social security offices would not necessarily know if adult offspring were living with their pensioner parents.
Mr McQuillan:
Thank you. Mr Simpson’s paper was interesting, written in plain English and easily understood, which is important for such a subject.
I have questions on two issues, which are similar to those highlighted by Roy Beggs. I am sure that members are fed up hearing me harp on about the second-home issue; however it is important to my constituents. Even paying full rates on a second home is not enough. People in places such as Portballintrae want something that will deter the purchase of second homes, and having to pay full rates would not do that.
Secondly, on the issue of land banking and a land-value tax, sites are sometimes sold for four or five times their normal value — even without being developed. There are areas in every village in Northern Ireland that are eyesores because properties have been knocked down, or are falling down.
A similar situation exists in Portstewart, where developers obtained planning permission as long as 10 years ago, began building and then left the site unfinished. The planners cannot touch them, nor can the council. That situation must change, and some sort of tax might be the answer.
Mr J Simpson:
There has been a move towards treating a property as having been developed even if has not been completed. I know about one of the sites in Portstewart to which Mr McQuillan referred. There is a problem there, and the sort of changes that have been mentioned might help. What was your first point, Mr McQuillan?
Mr McQuillan:
It was about paying full rates on a second home.
Mr J Simpson:
I do not know how to solve the problem of second homes. Do we want a social policy that would deter people from buying second homes? I shall not embarrass them, Chairperson, but there may be some members at the table who have a second home.
Mr Hamilton:
Or three.
Mr J Simpson:
Does that mean that we believe that owners of second homes are being antisocial? As long as the housing market allows freedom to purchase — provided the buyer has the means to pay and does not take out an excessive loan that bankrupts the local building society when he is unable to pay — I cannot, for the moment, think of a better method of deterring the purchase of second homes. In Portballintrae, perhaps, the introduction of a weekly £100 community charge would protect those second homes that are lying empty.
Mr McQuillan:
If that was workable I would be on for that.
Mr J Simpson:
Would you have permission? [Laughter.]
Mr Hamilton:
Mr Simpson’s discussion paper touches on the issue of ability to pay. A local income tax, which, on the face of it, might seem to be a simple solution to the problem that rates bills do not take account of ability to pay, also fails to address the situation faced by young working families or wealthy pensioners sitting on a large amount of equity with unearned income going somewhere else. Capital value has been introduced as a method of rates assessment, and the pay argument is related to that. What are Mr Simpson’s views on capital values as a method for establishing rates levels? Is there any merit in that? I note that in paragraph 7 of his paper Mr Simpson mentions the outdated net asset value (NAV) system.
Mr J Simpson:
In simple terms, the switch to capital values is in place. It should not be very different to the old NAV system, because rates, if they are assessed in an up-to-date market, should correlate strongly with capital value. The reason why they did not correlate was that the NAV system had become outdated. It was not because it was bad in principle; it was just not up-to-date. Secondly, NAV was invented in an era when the majority of houses were rented. Today in Northern Ireland, 70 of our properties are owner-occupied. I read, to my surprise, the other day, that the rate of owner-occupation in Northern Ireland is higher than that of any comparable region in the United Kingdom.
We are stuck, therefore, with capital values. We do not want another evaluation under another system now, unless you have a plan for making a radical difference. Later on, when more evidence is available on climate change, we may be able to talk about how to adjust capital value for the degree to which a property is environmentally-friendly. The Members of the Assembly will legislate on the environmental requirements of properties in the next few years, and then we will have to take those adjustments into account.
The Chairperson:
Mr Simpson, you only briefly referred to the circuit-breaker mechanism in paragraph 23 of your discussion paper. Did you consider that to be a more effective response to the issues? There were various sub-categories, such as disabled people’s allowances, and single-pensioner allowances. You did say that there was insufficient data.
Mr J Simpson:
I would hope that those who were responsible for organising the family household survey, or whatever it is now called, would build questions into the next series of surveys on the levels of rates that householders are paying, so that they could be compared to declarations of income.
I do not think that any of us have a clear idea of how the average rates bill compares to income. The average would not be so important, but, going by the average, I do not think that any of us have a clear idea of the distribution. How many households have a rateable bill that costs a disproportionately high percentage of their income? I do not think that any of us can know that, even when we allow for the fact that households claiming housing benefit will not be included. We need evidence, but it has not been collected yet.
The Chairperson:
I referred to that approach because, from this remove at least, it seems to offer a less bureaucratic and complicated means of reflecting the matter.
Mr J Simpson:
Far be it from me to point out difficulties where you see simplicity, but can you imagine if we said that rates would not constitute more than 3% of income? The question would then become how income is defined. People would ask whether they could deduct from their income hire-purchase charges or mortgage payments. It is by no means easy to have a single rule. It is not a matter of taking the rates bill and annual income and putting one figure over the other to get a calculation.
However, I appreciate your sentiment. That is why I would like the family household survey to begin to give us evidence in the next year or so, so that next time the Committee carries out this exercise, somebody can point out that there are a small number of cases with which there is a particular difficulty that had not been spotted.
Mr McLaughlin:
Thank you, Mr Simpson; that was very helpful. The Committee will obviously pay close attention to the information that you gave us as part of its ongoing deliberations.
Mr J Simpson:
I thank the Committee for the invitation.
The Chairperson:
John, I want to make one last point before you leave. In its discussion, the Committee may wish to follow up on some issues. If it is acceptable, and does not overburden you, we may write to you seeking further assistance.
Mr J Simpson:
Please do.
The Chairperson:
Thank you.
Do members have any initial responses to John’s presentation in the context of the Committee’s wider work on the report? Perhaps, as with all these matters, we need to take a little time for reflection.
Dr Farry:
I want to stress that local income tax is a viable option that is worthy of further consideration. In essence, we are discussing it as an alternative to the regional rate. I certainly accept — and the Alliance Party made this point in its submission — that the hurdles that would be experienced in trying to replace the district rate would be just too immense. In practice, most of the focus is on the regional rate, because that is where the main balance of payments accrues. There was a clear message that that option is worth further discussion. Clearly, Mr Simpson did not endorse that option — he did not endorse any option — but it certainly should be on the agenda.
Mr Storey:
It should be clarified that those comments are party political rather than reflective of the collective response of the Committee.
Dr Farry:
As a single member, Mervyn, I could not possibly speak on behalf of all 11 Committee members.
The Chairperson:
In fairness, we have agreed as a methodology that if a Member expresses a particular interest in keeping a topic on the table, we will do so. Clearly, we are reaching the point whereby we will have to reduce the list of issues to include only those on which we can reach agreement. Stephen, at this point, though, your position is secure.
[Laughter.]
Mr Elliott:
If not his argument.
Mr Beggs:
We would, of course, have to take a balanced view in any such investigation.
The Chairperson:
I hope that you are not suggesting that the Committee would be anything other than balanced in its views.
Mr Beggs:
We would have to check the implications of such a move on the Northern Ireland economy, and how it would encourage people to work.
Mr Hamilton:
We would have to focus on definition of income, and so on.
The Chairperson:
Without pushing that proposal too far up the pipeline, can we agree that it is a consideration?
[Laughter.]
The Chairperson:
We now move to the evidence session on the domestic rating review. I remind members, witnesses and those in the public gallery that Hansard is covering the session. Therefore, please switch off mobile phones, as opposed to putting them on silent, because they interfere with the recording.
At last week’s meeting, DFP was asked to provide more detailed information on the options that the Committee has kept on the table for consideration. The Department has provided a brief update, which is included in the members’ pack. DFP officials will be joined by researchers from the University of Ulster, who will update the Committee on their work on land value taxation and the rating of vacant domestic property.
Last week, the Committee considered a paper entitled ‘Domestic Rate reform in Northern Ireland: a critical review of policy options’. The paper favoured a discrete value system rather than a banded system. Two of its three co-authors are here today and are prepared to answer any questions that may arise.
I welcome Brian McClure, head of the rating division in DFP and his colleague Alison McCaffrey and Dr Jasmine Lim and Peadar Davis from the University of Ulster’s school of built environment.
Mr Brian McClure (Department of Finance and Personnel):
Thank you for the opportunity to update the Committee on what we have been doing and to talk about our work on vacant property and land value taxation. If there is time, we will also try to sweep up some of the issues that were discussed this morning. On more than one occasion, John Simpson said that the Department may have a view on certain matters, and I hope that we can help the Committee with those.
Over the last few days, the Department has been extremely busy. We are now at an advanced stage of our analysis. We have not yet received a set of statistics from the Northern Ireland Housing Executive on the take-up of the relief scheme and rate rebate, but we expect to receive them today or tomorrow. We also await some further analysis from the Department for Social Development (DSD), based on the family resources survey, on take-up generally and circuit-breakers. As John Simpson mentioned, the evidence on circuit-breakers has not been gathered. We can use the family resources survey to provide some rudimentary, but, I hope, helpful, analysis to the Committee and Minister on the potential effectiveness of circuit-breakers. As previously indicated, all analysis will be provided to the Committee, and will be sent to the Minister this week.
The leader of the university’s team is Dr Billy McCluskey. Had he not been out of the country, he would have been here this morning, and he sends his apologies. Two of his team, Dr Jasmine Lim and Peadar Davis, are here to answer questions.
They have carried out two pieces of research, the first of which is on the rating of vacant homes. They provided the Department with a first-phase report on Friday 5 October 2007, which we have examined and refined. We gave a copy to the Minister yesterday and will provide a copy to the Committee in the next couple of days. Perhaps Dr Lim and Mr Davis will be able to go through some of the main findings with the Committee this morning.
Their first-phase report is on the number of vacant homes, where they are, of what type, and so forth. The second phase of their analysis, on which they will work in conjunction with bodies such as the Housing Executive, will examine why those vacancies occur. That is important, because the Department, Committee, and Minister must understand whether there is a need for the policy and, if so, what form it should take.
In other words, should there be exemptions, various allowances, and so on? The second leg of the work is, therefore, an important phase. The first leg is also important, because it tells us the properties’ location, age, characteristics, and so on.
The university has just completed a report on land value taxation, of which I took delivery just yesterday. It has already gone to the Minister. The report is a literature review that draws upon international experience of land value taxation using existing research and practical examples of its use throughout the world. Dr Lim and Mr Davis will be able to answer questions on that. The Department will also provide the Committee with the report within the next couple of days.
The Department continues to have an open mind about land value taxation. Rating policy division and various other commentators consider it to be a conceptually sound taxation system. However, there are certain practical difficulties associated with it. I hope that the evidence provided by my university colleagues will draw out some of those difficulties, of which I will mention three. First, it raises the prospect of the rating of agricultural land. Secondly, a taxation system that is based on the highest and best use of available land — in other words its potential use, not necessarily its existing use — raises the issue of the preservation of local character. Some exclusions may be needed so that the character of towns and cities is preserved.
Thirdly, an important issue with regard to Northern Ireland is the current problem with the clarity of the planning system and, in particular, the status of various area plans throughout the country. Clarity of planning is needed for a land-valuation taxation system to work effectively, so that the system is defendable.
Those are some of the issues that the university has brought out in its report through examining systems in other countries. We will try to answer questions on that. I will pass over to Mr Davis and Dr Lim. Does the Committee want them to give a brief summary of the report first, or do members simply want to ask questions?
The Chairperson:
Some introductory comments would help the members to focus on the issues.
Mr Peadar Davis ( University of Ulster):
I will start with the study into vacant domestic property. The university received data from rating policy division and Land and Property Services (LPS) on around 50,500 properties. We were able to clean up that figure slightly and take out some of the anomalous data, and we were left with a total sample of just over 48,000 properties that were identified as vacant. We were then able to analyse those properties on the basis of location and whether they were originally privately or publicly built, and so on. We were then able to identify the level of vacancy in each of the district council areas, for example.
There are some caveats related to the data. First, we do not have information at present on the condition of the properties that are vacant. They have not been individually inspected. Among them will be a full range of properties that are completely derelict and unfit for occupation, through to properties that are merely vacant at present but are capable of occupation. The information was taken at a fixed point in time. Therefore, it is effectively a snapshot. Because there is a dynamic property market, it is difficult to say with any great certainty, as time goes on, whether those properties are still vacant and what sort of condition they are in. The other issue is that the data must be regularly updated otherwise it will become out of date as properties change.
Another substantial caveat is the availability to public bodies, who are owners, alongside other landlords, to take advantage of the landlord’s discount. That gives a discount to the landlord but removes the ability to claim vacancy. As a result, there is a possibility that public-sector property is under-represented by our figures, although we are not 100% sure of that.
Mr McClure;
Those are properties owned by the Northern Ireland Housing Executive, which pays a global sum for its properties but does not claim vacancies on them. Therefore, they do not necessarily show up on the LPS data, and that is an important consideration.
Mr Davis:
Currently, rates are paid on those properties so it is perhaps correct not to include them when considering the contribution that those properties make to the finances. They are not considered as vacant for rating purposes. The figures take the current cap of £500,000 into account but do not consider any rebate scheme for the initial six-month period that was covered earlier.
One of the main aspects of our data is that approximately 85% of the properties were privately built dwellings, with the remainder being publicly built. We think that that is one of the reasons that the public sector is under-represented, because we would have expected a higher degree overall of vacancy in that sector.
Mr McClure:
Is it worthwhile mentioning the geographical spread of some of the vacant properties? For example, Belfast has the highest number of vacant properties.
Mr Davis:
Yes, as you might expect, approximately one fifth of all the vacant properties that are listed are in Belfast. That is around 10,000 properties. Overall, there are between 48,000 and 50,000 vacant properties that we are aware of.
The Chairperson:
Is public-housing stock a significant component of that?
Mr Davis:
Currently, public housing accounts for between 14% and 15% of vacant properties, which is why we feel that perhaps our figures under-represent vacancy. However, our figures do not under-represent vacancy in terms of contribution to rating. If all the vacant properties were captured, the extras would not provide more rate revenue, because they are already paying rates.
As you might expect, older properties, due to dereliction, for example, make up a substantial proportion of vacant properties — 31% of vacant properties were built pre-1919. A substantial proportion of vacant properties, nearly 16%, are apartments. Traditionally, it is always difficult to ascertain whether apartments are vacant or not. There is an increased difficulty of inspection and enforcement to check whether they are vacant. It is more difficult to gain access to apartment buildings than to gain access to terraced streets. The level of vacancies among apartments may be higher than our figures suggest.
Mr McClure:
It is worth letting the Committee know that a high number of those are in Belfast. There are 2,925 vacant apartments in Belfast, which is a huge number. Some of those may not have been caught up by the vacancy process but, even if they have not, that provides a lot of justification for a taxation measure, given the high numbers involved.
Mr Davis:
As you might imagine, there is a high level of vacancy among new-build apartments that have been sold to investors.
Mr McClure:
A recent phenomenon in the housing market is, instead of buy to let, buy to forget. People buy properties, let them lie empty and get the capital gain from them. Is it fair that they do not make a contribution to local taxation? Many would argue that that is not fair.
Mr Davis:
Vacant properties are more likely to catch fire, or attract arson attacks, than those that are occupied. Where there are many vacant properties there can, potentially, be other types of problems that can result in a cost to the public purse.
Rather than looking at the geographical location of vacant properties, we considered their location with regard to deprivation levels. We did not separate the data by district council. We examined all of Northern Ireland’s 582 wards, individually, and attributed them to deciles of deprivation. Therefore, 10 subgroups were created, ranging from the low numbers which indicate the least deprived areas, to the high numbers which indicate the most deprived areas. It was interesting to find that clear patterns emerged from the research.
When we looked at the number of vacant properties according to deprivation, it was obvious that the more deprivation experienced in the ward, the higher the level of vacancy. There was a clear pattern. In the least deprived wards, there were almost 4,000 vacant properties. In the most deprived decile of wards, there were nearly 6,500 vacant properties. There is a clear and consistent pattern of increasing property vacancy, as deprivation increases.
However, when we examine the total capital value of the properties, despite the fact that there are more vacant properties in the more deprived wards, it is clear that they are of lower value. By contrast, when we look at the total capital value by deprivation decile, the total capital value of vacant properties is substantially higher in the least deprived areas. Therefore, there are less vacant properties in the least deprived wards, but they are mostly of higher value.
Mr McClure:
We have talked about the location of those properties, and what sort of properties they are. In relation to potential revenue from that measure — based on using all the caveats that Peadar has mentioned on the overall figures — if a 50% rate liability were employed, which is what applies under the council tax, the maximum potential revenue for that would be approximately £15 million.
However, that figure does not allow for any exclusions. It does not allow for the six-month initial exemption period, or for any type of initial exemption period. That is something that must be considered and was discussed earlier with John Simpson in relation to something that is part of the ebb and flow of buying and selling property. You would want to make sure that you allowed an initial exemption period. Therefore, that figure of £15 million would have to be cut back, significantly. That is the sort of scale that we are talking about if we were to apply a similar level of rate to that which applies under the council tax in GB.
The Chairperson:
Are you applying the administrative costs associated with that as well?
Mr McClure:
No, that is only in relation to potential revenue. I will try to provide the Committee with a figure. Three or four years ago, we did some estimates on the likely figure.
The Chairperson:
Would that be the net potential benefit?
Mr McClure:
That would be the gross potential benefit. Obviously, the administrative costs would have to be subtracted from that figure. If the Committee wishes, I will try to provide it with some sort of figure. That is a very pertinent question because it relates to the efficiency of the tax. That is one of the reasons why the direct rule Ministers decided not to introduce it. There was a fairly high administrative cost when compared to the potential revenues.
Mr Davis:
Particularly, if you imagine that in the more deprived areas, where there are more of those properties and they are of lower value, it is a case of diminishing returns. The collection efforts start to run into difficulties because the actual yield per property reduces quite significantly. Those are properties where there will be more costs associated with getting the money back. In the wealthier areas, where there are fewer, higher-value properties, you might find that to be a reasonably good source of additional income. However, you might easily waste that income chasing after lower-value properties in the more deprived areas. One issue is that while we suspect that those properties are vacant, we may not know who the owners are or how easy it would be to track them down. For example, it would help if LPS had a robust address list of all owners, but that may not be the case.
Mr McClure:
At the last Committee meeting, Mr Beggs pressed me on why that could not be introduced next April. It is not about the legislation, but about the issue of LPS being able to draw up a comprehensive list of property owners so that it knows where to send the bills.
The Chairperson:
That is a capacity that is developing. At this time we do not have that information.
Mr MClure:
Currently, LPS does not hold that information, but if that is a policy measure that the Assembly wishes to take forward, LPS will have to build up that capacity very quickly.
Mr McCann:
Recently, the issue of vacant properties has been hotly debated, in relation to bringing some of them back into the housing stock. One of the answers that we received to questions recently was that many of the empty properties are disused farm buildings and houses in rural areas. Is it possible to tell if those buildings are being used as second homes, an issue that Adrian has raised many times?
Mr McClure:
The second phase of the university’s work will be to find out the causes of vacancies. Researchers will not be able to cite individual households because of the numbers involved, but they will conduct a ward-level analysis to see where the vacant-property hotspots are, and whether there is any correlation with levels of unfitness, second homes, or other existing data, so that we can try to draw some conclusions about the various causes.
Mr Davis:
It is worth noting that second homes should be rated.
Mr McClure:
As discussed earlier, the rules behind the rating of second homes state that if there is an intention to return to the property, that is considered to be rateable occupation. If a property is occupied in July and August, but left empty for the rest of the year, it should be rated for the full year at the full rate. Those are the long-established rules under the rating system, so there should not be any question of holiday homes being classed as vacant for the periods that they are not occupied. The intention of the ratepayer to return to the property is sufficient to incur liability for the full year.
Mr Davis:
The properties would have to be completely unfurnished.
Mr McClure:
Yes. All furniture would have to be removed.
Mr Davis:
Checking through the window to see if the property was ready for immediate occupation would be enough to remove the property from the vacant list.
Mr McClure:
One other issue that may be of interest to the Committee is the outcome of the review into affordable housing by Sir John Semple, which is that the Department for Social Development has engaged the Northern Ireland Housing Executive to undertake a study into empty homes. That is at an earlier stage than we are at. It will complement the work that the university is doing, but I am not sure that it will fit into the timescales. I will keep a watching brief on developments in that area.
The Chairperson:
Does Dr Lim have any comments to offer at this stage?
Dr Jasmine Lim ( University of Ulster):
Generally, findings indicate that nearly 30% of the vacant properties are pre-nineteenth century properties, and it will be a major issue to find out exactly whether a property is suitable for occupation, and whether it falls within the definition of beneficial occupation. That is one of the key factors in the second phase of our research.
The Chairperson:
What percentage of the overall audit would be represented by buildings of that vintage?
Mr Davis:
It is around 30%. Mr McClure will correct me if I am wrong, but even if rating for vacant properties were introduced, if a property were not capable of beneficial occupation, — for example, if it did not have a roof, or was not wind-tight and watertight — then it would be rateable, but it would be valued as having zero capital value.
Mr McClure:
I hope that answers Mr McCann’s question about derelict farm houses. Such buildings should not be on the valuation list anyway. Some are, but only because they have not been removed from the list. Any still on the valuation list will be removed if they are not wind-tight and watertight.
Mr Davis:
There may well be replacement dwellings under the planning system, which means that the derelict buildings cannot legally be brought into use without planning permission.
Mr F McCann:
That brings to mind something that probably happened in the South. If buildings which are not wind-tight and watertight are exempt, you will probably find that most allegedly empty dwellings without roofs are actually perfectly habitable and being lived in. That needs to be taken into consideration. That was one way that taxation was dodged.
Mr Davis:
If the property is in a poor state, and all you are talking about is letting the pigeons get in a bit more easily by taking a few slates off, that is permissible. However, where a building is capable of beneficial occupation, then no-one will destroy the interior of the building and lower its value to avoid a tax that is not onerous. If the tax were high enough, people would consider destroying the building’s fabric to evade the tax; however, it would have to be a high level of taxation before people would do that.
Mr McClure:
It is a valid point. If the decision is taken to proceed with this, that must be taken into account in the detail of the regulations.
Mr McQuillan:
There must be joined-up working on the rules, especially those that apply in rural areas. In many cases, where a farmer or owner tries to replace or repair a property, the Planning Service prohibits him from doing so. The two Departments must work closely together to move the whole thing forward.
Mr Davis:
Preservation of vernacular architecture in rural areas is an issue. People are, to an extent, being incentivised to demolish old historical buildings, if it facilitates the building of a replacement dwelling. In other cases, they have built the replacement dwelling, and they cannot beneficially use the original property.
The Chairperson:
Let us move the discussion along.
Mr McClure:
Jasmine and Peadar will talk about their work on land value taxation.
The Chairperson:
Adrian was taking you in that direction anyway.
Mr Davis:
As Brian mentioned earlier, this study has largely been a literature review of what happens elsewhere and the reasons for that. We found that there are few instances of pure land value taxation; land and property value taxation is much more common, and, in that, the land may be taxed at a different rate to the improvements.
We found that the countries that utilised a pure land tax brought it in when they had large land masses that were not heavily developed. It was a major taxation resource for countries such as New Zealand, Australia and America. In their developmental phase, taxing the value of land — as opposed to taxing the improvements — was a sensible option. A pure land tax is also used in some developing countries, where the value of improvements is potentially low by comparison to the value of the land. A lot of the improvements may be illegal dwellings and could not be brought into the taxation regime anyway.
Our findings, however, suggest that although land value taxation brings many benefits, most of those benefits are captured by a land and buildings taxation, which has a broader tax base. In a developed country such as Northern Ireland, the improvements and buildings on the land are a substantial component of the value. A land and buildings taxation facilitates the charging of a lower tax rate, and it is better linked to ability to pay than taxation of the pure land element.
We drew on experience from elsewhere and also the results of the Lyons Review and the Barker Report. Both of those consider land value taxation, and they highlight the major problems that we have also identified.
The major problems are that clarity is required in the planning regulations and the planning regime. A major barrier is, in the United Kingdom context, that even when up to date plans are in place, planning permission or the ability to develop is not granted. Just because an area is zoned for a residential development, it does not mean that planning permission will be granted; it simply means that it is more likely to be granted if the application is in line with, not only the plan, but all the other policies. Therefore, even when up to date plans are in place, it does not necessarily mean that you can immediately attribute the value to that land.
The planning system, certainly in Northern Ireland, does not even have those up to date, clear plans. There has been a review and a legal challenge to the zonings that have been put in place. Therefore, from a planning perspective, there is no clear direction on that issue.
The value of the land is going to be fundamentally affected by the availability of planning permission. The planning system does not necessarily state the kind of density of development that can take place, even where land has been zoned. It does not mention issues such as the level of affordable housing that needs to be built into the scheme. The planning system can be open to a lot of interpretation, lots of additional planning guidance, and so on, some of which is statutory and some of which is not.
That can, therefore, result in a situation that when you come to value the land, it will be difficult to calculate how much that land is actually worth. It depends effectively on the scheme that could be put on it, as Brian said, under the concept of highest and best use.
Mr McClure:
This was something that came home to me at a meeting this week in Coleraine with the balanced communities review group. A lot of the discussion was about the judicial review of the northern area plan and the Magherafelt area plan, and what effect that had. While those plans are effectively in limbo, and there is this uncertainty around the planning system that currently exists in Northern Ireland, it is hard to think how a land valuation taxation system that values potential use could ever be introduced. Therefore, that is one major difficulty.
Mr Davis:
The Lyons Review and the Barker Report considered those issues, and they seemed to suggest a similar kind of idea that, although a pure land value taxation system has its advantages, the majority of them can be captured using a capital value improved system as we have here. The main direction where a bit more of the value may be captured is — as has been mentioned today — where underdeveloped or undeveloped land exists.
That led to the planning-gain supplements that it was intended to introduce on the mainland, and which was effectively dropped yesterday as it was extremely difficult and created a lot of objections from the development community, and so on. Therefore, even that specific element — where the development of land that could be proceeded with is being encouraged — has proved to be politically, practically and technically difficult to do on the mainland.
There are a variety of issues — for example, the lack of a comprehensive register of land holdings that would need to be drawn up before it could be implemented. The concept is that, at times, it may be beneficial to develop land more intensively. There may be a city-centre scheme that is being used as a surface car park, and is awaiting the right time for the developer to develop that property. Highest and best use under that kind of system suggests that that would be valued as a development site, not as a car park. That seems beneficial in that it would advance the developments.
The Chairperson:
The presentation that the Committee received, which was organised by Peter Robinson, had an example of a site that had been bombed during the Second World War. It is currently worth an absolute fortune, but nothing other than the surfacing of it has taken place since the Second World War.
Mr McClure:
The first part of the University of Ulster’s work was a literature review on the subject of land value taxation as an alternative to the rating system. The second part is perhaps a supplementary measure in relation to vacant or underused land. They hope to undertake a pilot study in the greater Belfast area that looks at the impact of a vacant land taxation system: what sort of land areas are involved, what the main considerations are, the likely impact of such a system, and what sort of revenue it could raise. That will begin very soon, and there are meetings already set up with various public landowners.
Mr Davis:
It is obvious what sort of issues will initially arise. The difficulty is that there is no central point where we can get a comprehensive list of development sites, even in the greater Belfast area. Instead, we have to go through a variety of different entities in the private and public sector, to draw up a list. For example, we are receiving evidence from the private sector, which might put the value of land in a central area of Belfast at anything up to £23 million an acre, which is a huge expectation considering that the building potential is not known; if the planning regulations provide clarity then, depending on what scheme is allowed on the site, that figure could go down to £4 million an acre. There are practical considerations. If there is a building on the site that can be valued, then we could make a theoretical separation of the site value and building value and apply differential rates, as is done in Philadelphia. However, when a site has no building on it, we have to look at highest and best use and speculate as to what the value might be.
Mr McClure:
If that is something that the Committee and the Minister favour, then where there is a will, there is a way. The Department feels that there is considerable merit in a land-value taxation system that targets underused and underdeveloped land.
The Chairperson:
Is there a current predisposition for vacant-land tax to be a supplementary, as opposed to an alternative, system?
Mr McClure:
A land-valuation taxation system would be an alternative to the current rating system because it would rate all land regardless of whether it was used. In contrast, if the Department adopted a taxation system that only looked at vacant land, it would not be able to raise anywhere near the same amount of revenue, or come anywhere close to that. Therefore, it would be a supplementary measure, and one based on considerations such as housing affordability, freeing up land for economic development, in addition to revenue raising. As this issue develops, we would have to involve other Departments, but it would be broader than a simple revenue-raising measure.
Mr F McCann:
Would that set a rate right across the board, or would there be different designations?
Mr McClure:
That would depend on the type of land being rated. Would it be land that had planning permission? Would it be land that was zoned for particular planning permission? Would it be land that was ripe for development? Not all land in areas zoned for development is ripe for development, so there is an issue of whether that should be brought into taxation. Those issues have to be attended to. If such a measure found favour in the Assembly, then where there is a will, there is a way. There are examples that the Department can draw upon. The Lyons Review gave a positive recommendation on the measure, although they have not been moved ahead with that in GB. However, Northern Ireland does not have to follow what happens in GB.
Mr Hamilton:
A comprehensive and accurate list of land ownership is absolutely essential. I, and probably all Assembly Members, in constituency work find it difficult to get people to take ownership of land when you are just asking for it to be cleaned up or tidied. If there is a rates bill for such land there will be some people running a million miles away. That is a key element. Just to clarify, would agricultural land be included?
Mr McClure:
In most instances where land-valuation taxation applies agricultural land would be included in the tax base.
Mr Hamilton:
Is there any discount or relief to allow for the variation in size and value of agricultural land?
Mr McClure:
Normally, jurisdictions that have a land-valuation taxation system apply a differential rate, so agricultural land would be rated at a particular rate and industrial land would be rated at a particular rate.
Dr Lim:
We found that special consideration has to be given to land devoted to agricultural use, and it is normally applied to the valuation process where the values are based on the existing use, which is agricultural use rather than highest and best use.
Mr McClure:
Effectively, agricultural land would be capped at its existing use.
Mr Davis:
On the issue of land banking, a lot of those sites are agricultural land on the urban fringe, just inside and just outside the development limit. If you brought in a land-value taxation system that gave preferential treatment to agricultural land and capped it at its existing use value, you would not, in fact, incentivise bringing that forward at all. Consider the price difference for a farmer with an acre of agricultural land at £10,000 an acre, as opposed to perhaps £4·5 million an acre as a site for residential use. If land value taxation is to be brought in, you will have to think about how to tax the agricultural land, but if you want to incentivise the development, you need to move away from that.
Mr McClure:
It is part of the equation; it comes with the package. The experience elsewhere is that virtually every jurisdiction taxes agricultural land to some extent.
Mr McQuillan:
There is a difference between farmers working the land as agricultural land and having perhaps 14 sites passed for planning approval on the land. That should be taxed at a higher rate than agricultural land. Care also needs to be taken with land that has been zoned, because I have farmers telling me of zoned land that has no chance of being built on because it is too near to their homes. We should be trying to get the land that has planning permission released and built upon — in other words, to force the developer’s hand.
Mr Davis:
Planning permission is not always applied for on land that is zoned for residential, so developers can always do back deals on payments if planning permission is subsequently gained. That is something that can always be got round by perhaps cutting the footings on part of the development site to keep the planning permission valid, so that is not a panacea for bringing development on. It may result in people holding back on submitting planning applications, and selling options on the land rather than just selling the land with the benefit of planning permission.
Mr McQuillan:
When the land got planning permission, it would become more valuable.
Mr McClure:
What we are saying is that the development community can be quite canny about that, and there are ways and means round it.
The Chairperson:
You would have to apply a considerable amount of incentive for them to follow through.
Mr Davis:
They have time horizons of maybe 15 to 20 years and will be buying some of the most valuable land held in land banks, which will not be in the plans at all. It will be five to 10 years before that comes into the urban development limit.
Dr Farry:
I want to look at the land value taxation from the urban perspective. In Belfast, presumably, you are looking at vacant land. In the city centre there are no real rules about how tall buildings can be. How would the system cope with assessing the land? In a city-centre location the buildings can go up and up and the higher they go the more value that adds to the property but the value of the land stays the same.
Dr Lim:
One underlying issue on land value taxation is the highest and best use. However when you look at the highest and best use you must ask whether it is legally permissible and financially viable to develop the scheme. Density will be a key issue. You need to consider how many storeys should be built. Developers will want to maximise the value.
Dr Farry:
That is a very subjective judgement for people to make. Presumably, parkland in an urban setting is zoned as open space and would be protected accordingly. On 1 October the Assembly debated a motion on strategic planning policy, which addressed the issue of back-garden development. At the moment back gardens in urban settings are zoned as brownfield. Therefore, I presume that land value taxation, with regard to maximum best use, would encourage owners to build as much as possible in back gardens.
Mr Davis:
The practical approach would be to look at that on a case-by-case basis. Ordinarily, the highest and best use of a house can be taken to be its existing use. For example, if there were a street of houses with slightly larger than usual back gardens, which could, theoretically, be grouped together to make a development site, then, ordinarily, the interpretation would be that the highest and best use was the existing usage as a single-family-occupancy dwelling. If a developer bought several of those gardens and it started to look like a development site, or if it were a vacant site next door to those properties, then it would be highest and best use, such as apartments.
Mr McClure:
As I understand the question, it relates to “back gardening”, which is to do with infill sites, where somebody has an abnormally large side or back garden where another dwelling could be built. That would be rated at the higher amount and the site’s potential would be reflected in its assessment, which is not the case under the existing rating system.
Dr Farry:
That would be a problem in a number of areas. Is the base of taxpayers potentially larger, narrower or the same under land value taxation as it would for a property-based taxation system?
Mr McClure:
I will let the university give its views. However, my view is that there would be a narrower tax base as it is an ownership-based taxation system, whereas we have an occupation-based taxation system.
Mr Davis:
It depends on the area. Take London, for example. Vast tracts of it are owned by a small number of individuals, and everyone else is on long leases. It depends on how you define the ownership in terms of who is responsible for paying the bill. However, I would say that it would almost certainly be narrower. There would be fewer owners than occupiers.
Dr Farry:
On the whole issue of democratic accountability, the more people who contribute to the tax system, the more positive and beneficial it is to society.
Mr McClure:
That is a valid point.
Mr O’Loan:
The potential for taxing or rating agricultural land would cause incredible consternation, and I am very concerned about that proposition. People would accept the basic idea of taxing derelict land, or land with immense development potential. I understand a lot of the difficulties that have been presented today about valuation and the timing at which it would be appropriate.
Gardens were mentioned, and it sounds good in principle to say that they could be taxed. However, until a planning application has been made you cannot test whether a garden has a value only as a garden or whether it suddenly has a dramatically enhanced value as a building site. However, to go back to agricultural land, the suggestion of rating it would cause incredible consternation in the agricultural community. It is certainly not just a technical detail.
Mr McClure:
I made that comment in relation to the broad application of a land valuation taxation as an alternative to the rating system, which would inevitably lead to agricultural land being rated. I do not think that there is any intention of bringing agricultural land within the remit of that tax. And, to save the headlines in the ‘News Letter’ and ‘The Irish News’ tomorrow, I should say that there is no intention to include people’s gardens in such a tax. It would only be for derelict or vacant town sites, usually of the brownfield variety.
Mr O’Loan:
The signals that the Department sends out are important. Are we talking about potential adjustments to, or tweaking of, the existing rating system, that may include some elements of land, and if so, what are they? Or are we having an interesting theoretical discussion about shifting the whole basis of our rating system to a landed property tax that for technical reasons, our experts tell us, would include agricultural land?
Mr McClure:
We are talking conceptually about either alternatives or supplements, rather than the introduction of something to the existing rating system. The options are either an alternative, which would be a broad, land-valuation taxation system, or a supplement, such as taxing vacant land in cities and towns, which may be done for other reasons as well as raising revenue.
The Chairperson:
We should constantly remind ourselves that we are talking about a review. The Committee will get down to consideration of the proposals, subsequently. Are there any other issues that you want to raise, Brian?
Mr McClure:
There are a few points from earlier that I would like to pick up. John Simpson was asked by either by Mr O’Loan or Mr Beggs if there is an early payment discount scheme, or a deferred payment discount scheme. There may be some confusion of the two. There is an early payment discount scheme of which a number of ratepayers take advantage. That scheme includes a 4% discount if you pay upfront by a particular date. Currently, a deferred payment scheme does not exist, but there is legislation to introduce it.
There was some discussion about pensioner discounts, data-sharing and whether LPS could get information from the Social Security Agency. Last week, I attended an interesting conference given by the Information Commissioner’s Office in Northern Ireland, at which that issue was raised. The Department of Finance and Personnel hopes to be able to improve data-sharing so that we can target reliefs. We may not be able to apply those automatically, but if we know that there is a likelihood that a large number of people in a particular household or street may be eligible for reliefs, we will be able to use that information in targeting campaigns to ensure that people get the discounts, allowances and rebates to which they are entitled. That work will be ongoing.
The Chairperson:
In your introductory remarks you referred to a point covered during John Simpson’s session about the percentage of household income.
Mr McClure:
That was in relation to the issue of circuit-breakers. We had hoped to have information this week from the DSD to give us an indication of the practical outcome of having a circuit-breaker system. As I mentioned at the last Committee meeting, circuit-breaker measures are important in other jurisdictions to help those who are least able to pay. In Northern Ireland, there is rate rebate available through the housing benefit system, so 20% of households in Northern Ireland do not pay rates, and those people are entitled to a 100% rebate. If the system that limits the rate bill payable as a percentage of income is applied on top of that, they do not dovetail well, and that has the potential to affect Northern Ireland’s overall income through the housing benefit budget. Therefore, there are issues related to that. I will be happy to go into that in more detail in next week’s meeting when we will have the analysis of circuit-breakers to show the Committee.
There was a lot of discussion about local income tax. In Scotland there is a perfect example of further work. The Scots are going to introduce local income tax, which they hope to achieve by 2010. The new SNP Scottish Government have declared their intention to do that. If we are not asked to do our own analysis, we certainly have a live example of the introduction of local income tax from a country within the UK.
The Chairperson:
When the Scottish Parliament was given its devolved powers, why was its tax-varying power limited to the basic rate of income tax? What was the rationale for that?
Mr McClure:
Those are the powers applied under the Scotland Act 1998. If the Scottish Parliament wants to exercise powers different to that, it will have to get the consent of the Westminster Parliament to do so. I believe that the SNP’s proposals for a regional income tax will require a further amendment to the Scotland Act 1998.
The Chairperson:
Do you know why the power was limited to the basic rate of income tax, in the first instance?
Mr McClure:
No, I am not sure why that happened.
The Chairperson:
Alison, have you any words of wisdom?
Ms Alison McCaffrey (Department of Finance and Personnel):
I have nothing really to add to Brian’s comments, other than to say that it is important to remember what the public said about vacant rating and land value taxation, which we discussed earlier. The Committee has the report on that. Vacant rating was clearly a popular measure, as was land value taxation, from the point of view of unused and derelict land. It is important to remember that.
The Chairperson:
Do members have any other comments? Brian, thank you very much for your assistance. No doubt, we will have further work to do. The brief that you have given to the university is particularly valuable, and I think that both strands of the research will be very pertinent to the outcomes of the exercise. Well done.
Mr McClure:
I intend to provide copies of the university’s work-in-progress report. We want to be as helpful as possible to the Committee, but I am also mindful that we would be handing over work that is not yet complete. I wonder if there is some way in which this work could be kept for the Committee’s use only. Is that possible?
The Chairperson:
I am sure that it is possible, and I understand the need to protect the integrity of the project. The Committee is working within a very tight time frame, and we may end up with information overload, if, for example, preliminary papers are followed up almost immediately by the final report. Let us give some consideration to this matter.
Mr McClure:
I do not think that that will be the case with the work on the rating of vacant houses. Phase one of that work is nearly complete, but the second phase, which looks at the causes of vacancy, will take a few weeks. Similarly, phase one of the work on land value taxation is virtually complete, and we can provide the Committee with a copy of that shortly. However, phase two is some weeks away from delivery. It looks at the issue of derelict and underused land and the pilot exercise in the greater Belfast area.
The Chairperson:
We will keep in touch to let you know how that work can be incorporated in the Committee’s work programme. Thank you very much.