Local Government, Housing and Planning Committee

Meeting date: Tuesday, March 7, 2023

Official Report 814KB pdf

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Subordinate Legislation

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Non-Domestic Rates (Miscellaneous Anti-Avoidance Measures) (Scotland) Regulations 2023 [Draft]

Agenda item 3 is evidence on draft regulations from Tom Arthur, the Minister for Public Finance, Planning and Community Wealth. Mr Arthur is joined by Scottish Government officials James Messis, who is the policy team leader, and Stephen Rees, who is a solicitor in the legal directorate. I welcome you all to the meeting and invite the minister to make an opening statement.

Good afternoon. The draft instrument under consideration is quite technical, but simply put, its intention is to assist councils from 1 April 2023 in tackling known non-domestic rates avoidance arrangements.

The measures that are set out in the regulations are unique in the UK. Tax avoidance in non-domestic rates takes place when a ratepayer seeks to reduce or avoid the liability on their property through activity that, although permissible within the existing legal framework, is not in keeping with the spirit of non-domestic rates law.

In 2017, the independent Barclay review of non-domestic rates recommended that a general anti-avoidance rule be created to make it harder for loopholes to be exploited. Subsequently, the Non-Domestic Rates (Scotland) Act 2020 provided powers that enable Scottish ministers to make regulations

“with a view to preventing or minimising advantages arising from non-domestic rates avoidance arrangements that are artificial”.

The relevant terms are defined in the 2020 act.

We committed to utilising those powers, including in the programme for government 2021-22 and the Bute house agreement. The draft regulations that are before the committee deliver on those commitments. They aim to strike the right balance between empowering councils to tackle rates avoidance and allowing property owners and occupiers to engage in business practices that are carried out for a reason other than simply tax avoidance.

The first target of the regulations is the artificial use of insolvency, particular leasing arrangements and shell companies. Within prescribed circumstances, councils will be able to make the owners, rather than the occupiers, of non-domestic properties liable for the payment of rates. In those circumstances, non-domestic rates relief awarded to the property would cease.

The regulations have a number of built-in safeguards to protect legitimate operators. First, the triggers for the transfer of rates liability are not actionable unless it is a non-domestic rates advantage, such as an outstanding non-domestic rates liability. Further, the circumstances in which a council may transfer the rates liability from the occupier to the owner of the property are carefully defined and include tenancies that are not on a commercial basis, insolvency in conjunction with other artificial indicators, and specific characteristics and behaviours of the occupier.

Councils must notify the property owner of any intention to transfer the rates liability to them and must provide an opportunity for the owner to make representations before a final determination is made. Only if there has been a similar offence within the past five years can there be a retroactive transfer of liability from the start of a given artificial lease agreement.

The second target of the draft regulations is rates avoidance through a reduction in rateable value by making deliberate physical changes to the state of a property solely for the purpose of reducing the rates liability. That can include intentional property destruction. The conditions for the use of the relevant power are set out in the regulations and are necessary to support the devolution to councils of the responsibility for empty property relief.

As is the case with the other provisions in the regulations, it is not intended to target legitimate enterprise. In all instances in which the council questions the appropriateness of any arrangement, the owner will have the opportunity to demonstrate its commercial rationale.

The draft regulations were subject to consultation with industry experts and practitioners, including assessors and local authorities, through the Institute of Revenues Rating and Revaluation. I thank everyone who engaged with Government officials on that.

Tax avoidance reduces public revenues and is unfair to the majority of ratepayers, who do not engage in such practices. The presence of avoidance behaviours can also undermine public confidence in the non-domestic rates system and lead to reduced rates of compliance. It is not just appropriate but necessary that we bring forward regulations to tackle tax avoidance where we can and ensure greater fairness and transparency in the non-domestic rates system. As such, the regulations support the principles of the Scottish Government’s “Framework for Tax” and align with the strategic objectives that the framework contains.

I hope that members agree with me and will support the draft instrument.

Thank you for your opening statement, minister.

Can you provide any indication of the scale of non-domestic rates income that is currently being lost as a result of the avoidance measures that are covered by the regulations? Can you indicate the number of cases that are expected to be dealt with under the regulations?

I ask James Messis to provide background on that.

There is limited data on the number of avoidance practices that are being engaged in. We have examples of individual cases as well as anecdotal evidence, but, across Scotland, we just do not have the data, I am afraid.

Is there any risk that the regulations might result in the incorrect classification of genuine situations as avoidance? For example, let us suppose that a tenancy agreement was signed and the occupier genuinely became insolvent after that. How would the owner be able to demonstrate that that was not an avoidance mechanism?

Sufficient flexibility is built into the regulations so that the local authority, as the effective tax authority, can engage with owners, and there is an opportunity for owners to engage following a local authority’s giving of a notice. I ask James Messis to expand on that slightly.

It is also worth pointing out that, in the circumstances of insolvency, which Willie Coffey raised, there are safeguards in the regulations. A notable safeguard is that, as well as insolvency being entered into within 12 months of the lease being signed, the non-domestic property must continue to be occupied and used commercially. Another is for the property to continue to be in receipt of non-domestic rates relief—that it is continuing to receive an advantage.

However, as the minister has set out, there is a process for an individual who has received a notice to provide evidence that their arrangement is not for the purposes of an artificial advantage.

Good afternoon, minister. Is the dispute mechanism in the regulations sufficiently robust? In addition, if an owner, occupier or tenant challenges the local authority’s decision on the rates bill but the decision is not overturned, what further course of action is open to them if they are still dissatisfied with the decision?

I think that the dispute mechanism is robust and that it provides sufficient flexibility. It is also important to recognise the impact on ratepayers. Avoidance measures are fundamentally unfair and disadvantage people who engage in legitimate practice.

I ask James Messis to address your specific points about the dispute mechanism and what recourse there is in the event that an occupier disagrees with a local authority.

12:45  

When an individual first receives a notice, they will have 28 days to reply to it, setting out why they do not think that their arrangement provides an artificial advantage. Subsequently, the local authority will have a further 28 days to respond, consider the information and evidence and provide a final notice. When an individual disagrees with the final determination, they can apply for an internal review within the local authority. If they disagree with the determination of the internal review, they can pursue that through the courts by judicial review.

What is the scale of the administrative burden that is expected to be faced by local authorities in implementing the regulations? Will local authorities have the resources to undertake action under the regulations?

Local authorities are responsible for the administration. More generally—it is not specific to this matter—resource has been provided to local government in recent financial settlements for the reforms that have been implemented due to the Barclay review.

James, do you have anything to add?

The intention of the regulations is to protect revenue. Local authorities have been asking for that. Further, the instances of avoidance are not so prevalent that they would potentially create an administrative burden.

Thank you for that clarification.

I thank the minister and his officials for their evidence.

Item 4 is consideration of the motion on the instrument. I invite the minister to move motion S6M-07676.

Motion moved,

That the Local Government, Housing and Planning Committee recommends that the Non-Domestic Rates (Miscellaneous Anti-Avoidance Measures) (Scotland) Regulations 2023 [draft] be approved.—[Tom Arthur]

Motion agreed to.

The committee will publish a report setting out its recommendations on the instrument in the coming days.

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Council Tax (Discounts) (Scotland) Amendment Order 2023 (SSI 2023/25)

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Non-Domestic Rating (Valuation of Sites of Reverse Vending Machines) (Scotland) Regulations 2023 (SSI 2023/26)

The next item on our agenda is consideration of two negative instruments. There is no requirement for the committee to make any recommendations on negative instruments.?As there are no comments from members, are we agreed that the committee does not wish to make any recommendations in relation to the instruments?

Members indicated agreement.

That concludes the public part of the meeting. We move into private session.

12:48 Meeting continued in private until 12:50.