Ministers Statement on the Outcomes of the Domestic Rating Review

I am making an announcement today about the outcome of the Executive’s Review of the domestic rating system that was introduced in April under Direct Rule and fulfils the commitment I made to the Assembly in June when publishing the Terms of Reference for the Review.

Today’s announcement, taken together with other recent announcements on, the draft Budget, will furtrher demonstrate our commitment to making a real difference for householders in Northern Ireland.  

We must remember that what really matters to people is the level of rates that they have to pay, so any changes that we make need to have that proviso: Annual rate increases must be kept to a minimum otherwise the whole system becomes discredited.

I set about the task even before taking office by ensuring, along with others, that the link with the Reinvestment and Reform Initiative was broken in advance of restoration. That link was ill conceived and simply created the conditions in which there was no incentive to save money and higher rates became an end in itself.

Let’s not forget that the regional rate went up by 62% over the past 5 years, under the previous Administration. My recent announcement on the draft Budget to freeze the domestic regional rate over the Comprehensive Spending Review period confirms my intentions in that regard. That regional rates freeze and this further package of reliefs are in addition to the commitment that we have given that householders will see the benefit of the contribution they already make to the cost of water through their rates – an average of £160 per rates bill.

Against that background I present these proposals to Assembly today.

It is only 195 days since I commissioned the Review. In that short time, we have covered a lot of ground, generated much debate and consulted broadly ultimately we have had to make difficult choices.

I am confident that the package of proposals that  intend to announce today is a balanced one that will lead to a more acceptable system and a better distribution of the rating burden amongt householders in Northern Ireland.

However, I cannot pretend that it has been an easy task, particularly given the timetable to which we were working – a timetable driven by the desire to make changes in time for next year’s bills. No one expected that it would be straightforward, as will be found with any review that seeks to satisfy competing interests.

In addition, the process has confirmed that we have to be realistic and recognise that if we had been starting from square one, things might have been very different.

Radical change now will only lead to a different set of winners and losers although I would be the first to recognise the limitations of any property tax system, I believe that with the right checks and balances, the current system based on capital values, can be made fairer.

Getting the right checks and balances is, therefore, what I have focused on, and is what I believe we have achieved through the package of proposals that I am presenting to the Assembly today.

Before I outline the proposals, I record my gratitude to the 119 individuals and organisations that responded during the 12 week consultation period which ended on 31 August 2007. Their informative and considered responses have undoubtedly helped to shape the outcomes of the Review and I have made it my business to ensure that the key messages conveyed through the process have been addressed.

The Committee for Finance and Personnel also made a massive contribution to the process. Its thorough and efficient approach was critical to the Review timetable remaining on track and I am particularly grateful to the Chairman and Members for giving me advance sight of their report for that purpose. I am even more pleased to report that the Committee’s contribution can be clearly seen in the outcome of the Review, with many of our recommendations aligning.

I will turn now to the proposals: members will recall from my earlier statements that the Review was to be taken forward in two strands in line with the Terms of Reference.

Strand 1 involved a thorough examination of the options for change that could be delivered within the scope of the existing primary legislation in time for next year’s rates bills. Under that strand, we also looked at ways in which that legislation could be changed to further improve the system in the medium term.

Strand 2 concentrated on longer term options for raising revenue through local taxation, either as alternatives or supplements to the domestic rating system.

That approach has led to the preparation of a number of proposals which are presented to the Assembly as a cohesive package. In my view, they complement one another well, providing the right balance between protecting those most affected by the previous reforms and those most in need (namely our pensioners) and also attending to wider policy objectives.

In summary, the package includes:

The key changes for next year will be the introduction of a single pensioner discount set at 20% for ratepayers aged 70 and over and living alone, and the proposed increase in the savings limit applied under the low income rate relief scheme from £16,000 to £50,000 for pensioners.

Those are targeted measures and I believe that they will have an immediate and positive impact for a relatively modest cost. That cost will be borne by the regional rate, rather than other ratepayers. Both can also be provided for through subordinate legislation, subject of course to the approval of the Assembly.

The increase in the current savings limit is to ensure that pensioners who have saved for their retirement do not find themselves ineligible for rate relief it is in line with the ‘first step’ recommendations of the Lyons report, and also reflects the considerable support for such a change during the consultation process. The measure is also supported by the Committee for Finance and Personnel.

In addition to that and the extra reliefs for pensioners that were secured during the St Andrews negotiations, I want to address the difficulties facing single pensioners in particular, those which are  as a result of the reforms that were introduced under Direct Rule. The responses that were received during the consultation - many of which were from single pensioners - seem to support that.

Analysis that has been undertaken with the help of experts from the Department for Social Development, has highlighted as a major shortcoming the low take-up of existing reliefs among that group.

That is why I am also proposing the introduction of a lone pensioner discount for April 2008 for those who are over 70 years of age.

However I am not in favour of extending that discount to all single householders such a widespread discount would be difficult to justify on grounds of cost, need and vulnerability to fraud.

Last week, there was much talk in the media about a single person discount and claims that by not harmonising with arrangements that apply under the council tax system in Great Britain, Northern Ireland is being unfairly treated.

It is important that people fully understand that a discount given to any group, whether deserving or not must, in the long run, be paid for through other ratepayers paying more. The cost of a discount for single person households would be of the order of magnitude of £30 million a year.  

It is difficult to argue that single person households represent a vulnerable group that requires such a level of support. Indeed, I pose the question, of whether it would be right for young families struggling with large mortgages to be required to pay a supplement in order to pay for people who are affluent but living alone?

I have two further points about the proposal for a single-pensioner discount. In its report, the Committee for Finance and Personnel supported the introduction of such a discount for people over 75 years of age. However, on the basis that it would have a much greater impact, particularly in assisting with the major issue of take-up levels, my view is that the age threshold should be 70. I will continue to review whether even lower age thresholds might be justified in the future.

Currently, the evidence shows that people who have recently retired from employment are in a better position to pay their rates bill and to avail of rate rebates or low-income relief. According to the family resources survey, the average weekly income of recently-retired single pensioners is 30% higher than that of single pensioners as a whole. That survey also shows that the average income of single female pensioners — who make up the vast majority of single pensioners — aged 70 to 74 is approximately 28% lower than for those aged 60 to 64, and 15% lower than for those aged 75 to 79.

I propose that the discount level be set at 20%. That, in conjunction with the other proposed support measures such as the increased savings limit, will provide an adequate level of support. The discount will be applied after other reliefs — including transitional relief — have been awarded, in order that the target group will effectively get, and clearly see, the benefit of a 20% reduction in their bills.

Before moving on to the proposals for April 2009 and beyond, I will deal with the important issue of the low take-up levels of reliefs in Northern Ireland. As the report of the Lyons Inquiry into local government in England shows, that issue is not unique to Northern Ireland. However, urgent action is clearly required here, particularly in the owner-occupied sector, where the take-up rate for those who are eligible for the new lower-income rate-relief scheme is estimated to be 42%. As I said, pensioners, in particular, are not taking up that relief. A review of good practice in benefit take-up levels elsewhere has highlighted a number of broad actions that might be taken in order to improve rates-relief take-up levels in Northern Ireland. The Committee has recommended that those actions should be vigorously pursued. In light of that, and as a matter of urgency, I propose to commission a study, led by the voluntary and community sector, to identify actions that might be taken to support Government awareness and take-up strategies next year.

The possibility of new legislation giving increased data-sharing powers to relevant agencies will also be examined as a matter of urgency.

That will be subject to the completion of a privacy impact assessment to protect the interests of our citizens and to ensure that the data is safeguarded.

As well as the proposals for next year, I am pleased to present several further proposals to the Assembly that will take slightly longer to implement but will provide further checks and balances to ensure that the overall system is as fair as possible.

Staying on the theme of pensioners, the first proposal is for the introduction of a voluntary deferment scheme for homeowning pensioners. Essentially, it will involve rolling up rate payments at a concessionary rate of interest until the sale of the house and then securing the debt by creating a charge on the property. Such schemes are not uncommon in other jurisdictions. Although take-up is usually very low because of inheritance considerations, such a scheme can suit better-off pensioners who are beyond the income limits of the lower income relief scheme.

Such a scheme would require subordinate legislation to be passed, which could be achieved by April 2008, subject to the Assembly’s approval. However, complex administrative arrangements must be developed before it could be fully implemented, and further consultation on the detailed mechanisms would be desirable. Therefore, April 2009 has been set as the earliest date for the introduction of a deferment scheme.

Looking more widely, another successful outcome of the St Andrews negotiations last year was the introduction of a maximum cap set on properties with a capital value of £500,000 or more. It is clear that that move has helped to allay some of the public’s fear about the excessive impact of the new system. However, is the cap set at the right level? My view is that it is not, and I am attracted to the idea of setting it at the lower level of £400,000. Although the number of households that would directly benefit from such a move would be fairly low — about 5,000 in total — it would bring the highest bills under the rating system here into line with the average bills in the highest band of the council-tax system. That is a fairer comparator than the absolute highest council-tax bill, which provided the rationale behind the initial cap level.

I shall consult further on the issue, as I am keen to take account of developments on water charging and, in particular, what cap, if any, will be proposed there. Bearing that in mind, I propose to reduce the cap in April 2009, with final confirmation of its level to be made following consultation.

So far, I have dealt with some of the necessary checks that the rating system must have if it is to be fair, but what about the balances?

A popular measure during the consultation exercise, and with the Committee for Finance and Personnel, was the rating of vacant domestic property — not least because of the potential net revenue gain it could yield. Taking account of exemptions, and assuming that the DFP agency responsible for rate collection — Land and Property Services —— is fully equipped and resourced to implement the policy, the revenue gain could be in the region of £15 million to £20 million per annum.However, the policy is more than a device for raising revenue; it could assist with wider policy objectives, such as housing affordability. That was the subject of the recent Semple Report, which is being taken forward by the Department for Social Development. Given its clear benefits, I propose to introduce the rating of vacant domestic property at a rate of 100% at the earliest possible opportunity, which will most likely be April 2009.

That date will give us time to consider the outcomes of the work being undertaken by the University of Ulster, the Northern Ireland Housing Executive (NIHE) and the Department for Social Development’s working group on housing affordability. It will also allow us to further assess and consult on the issue before taking decisions on items such as exemptions or exempt periods that might need to be applied.

The review of domestic rating reform also looked at the longer term and considered options as alternatives or supplements to the current rating system. One option that should be carefully considered is the taxing of derelict or vacant land. That would be a complementary measure to the taxing of vacant houses. The idea proved popular during the consultation exercise, and the Committee for Finance and Personnel has recommended that it be given serious consideration.

Although the measure could bring in much-needed additional revenue to help fund public services, it could also help to satisfy other wider policy considerations, such as ensuring that there is sufficient supply of development land available. Thus it would assist two policy aims: that of providing affordable housing and that of stimulating economic growth.

In announcing our intention to examine that in greater detail, I emphasise that today is merely a first step. We need to consider carefully the positive and negative effects that such a taxation measure could have. A delicate balance has to be drawn to ensure that it frees up land for development by providing a disincentive to holding it back, but at the same time does not cause such an imposition on developers that it affects the viability of urban development.

Before we can make any decisions about including the measure in legislation, we will have to examine the matter in greater detail and consult with those likely to be affected by such a measure. Therefore, in proceeding with the proposal, I will be working closely with other Departments, particularly the Department for Social Development and, given its role in planning, the Department of the Environment. Depending on the outcome of those considerations, the introduction of a tax on derelict land may simply be an extension of the existing non-domestic rating system, or it may be a new local tax, in which case, it may require changes to the Northern Ireland Act 1998.

Some of the responses to the consultation considered that local taxation should be used in a positive way by serving as an incentive to act in a more environmentally responsible manner. That aligns with my Department’s wider commitment to promote sustainable development. Therefore, I wholeheartedly support that aspiration, provided, of course, that it can be delivered in a cost-effective way.

Having considered the matter in light of the consultation responses and the Committee’s report, I intend to proceed with the option of providing rate rebates that offer the potential to improve the energy efficiency of our housing stock. I am proposing two measures.

First, I want to provide a rate rebate to existing homes that make energy-efficiency improvements, such as cavity-wall and loft insulation. Similar schemes already operate in some local authorities in England, part-funded by schemes set up and supported by the energy generators there. That proposal was submitted during the consultation by the World Wide Fund for Nature, and my officials, along with DETI and other stakeholders, are examining it in some detail.

Secondly, I am proposing an initial rate exemption for the first purchase of new homes that are zero-carbon-rated. However, there are some issues of definition, funding and alignment with other initiatives that have to be worked through regarding those matters. Therefore, I intend to ask my Department, working with the Committee for Finance and Personnel, other Departments such as DETI, and stakeholders such as NIE, to draw up detailed proposals with a view to introducing new primary legislation to be implemented in April 2009.

The review also critically examined some of the new relief schemes that were introduced in April this year. One of those was the rate-relief scheme for people in full-time education and training. That scheme attracted much criticism during the consultation process. Many of the respondents thought that the benefit of the relief was going into the pockets of landlords rather than students. Others questioned the effectiveness of the relief, and a number questioned whether that particular group should be a priority for the provision of rate relief.

The review also considered the number of applications that have been received so far this year for that relief, which is fewer than 500. That, in itself, draws into question the effectiveness of the policy. Therefore, I am minded to revoke the scheme, providing we can reasonably protect those who have already applied. However, before doing so, an evaluation of the policy and consultation with key stakeholders on the outcome of that evaluation are necessary.

So far, I have described what I want to do, provided I get the consent of the Assembly. I will now outline some of the longer-term options that I propose not to pursue, including banding. Although the system of individual capital values has the merit of being easier to understand than banding, I can see advantages to Northern Ireland’s having a system such as the council tax. It is restrained in that those at the top end pay no more than three times as much as those at the bottom end. That makes it more like a charge for services than the rates.

Notwithstanding the increasing sensitivities regarding council tax in GB — which I believe has more to do with overloading the system — we could design our own version. However, I recognise that we are not starting from square one. Another fundamental change in the way that local revenues are distributed among householders in Northern Ireland would not only cause more confusion and upheaval, but create a new set of winners and losers.

Winners tend to stay quiet; losers do the opposite. The political consequences of changing the order of things again should not be underestimated. That in itself is not a reason to show a faint heart — those who know me cannot accuse me of that. However, I cannot ignore the fact that no significant support for banding emerged from the consultation exercise, witnesses to the Committee for Finance and Personnel, or Committee members themselves. I will not, therefore, take that option forward, but I have agreed to provide the Committee with an update of the analysis of banding that was undertaken when direct rule Ministers decided to proceed with individual capital values.

Another major matter that I propose not to take forward is that of a local income tax. That was favoured by many ratepayers who responded to the consultation, although the majority of organisations were against it. It has attractions, in that it offers the prospect of aligning liability more closely with ability to pay. The public perception is understandable, therefore, and it mirrors — and is mirrored — in England, where, during the Lyons Review, the overwhelming majority of those who were surveyed thought that they would be much better off if subject to a local income tax, rather than the existing council tax.

However, the reality is somewhat different. It is estimated that a local income tax would cost income-tax payers in Northern Ireland a further 7p in the pound, if we were to raise the same amount of money as is accrued through domestic rates. That is also a tax on work, and therefore it is not in keeping with the Executive’s priority of economic growth. There are serious concerns about the ability and willingness of HM Revenue and Customs to support the introduction and administration of such a scheme.

That said, I do not think that we must close the door on it entirely: we can learn lessons from elsewhere, and particularly from Scotland. The Scottish Government have recently decided to abolish council tax and replace it with a local income tax. I understand that that is to be the subject of a public consultation in the coming months. As Scotland proceeds at pace with a local income tax, it is my view, shared by the Committee for Finance and Personnel, that it may be best to maintain a watching brief on developments there for the time being, rather than commission further work of our own on that matter.

Another issue that was examined during the review was that of circuit-breakers, which is the curious title given to relief schemes found in some parts of North America, whereby a limit is placed on the percentage of income that defined groups — pensioners, or ex-service personnel, etc — are required to pay in property tax. At first sight, that seems an attractive option. However, several factors effectively rule it out as a realistic option for consideration in the Northern Ireland context. Research shows that, where circuit-breakers exist, there tends not to be the safety nets of other reliefs for the poorest households, such as those that exist in Northern Ireland through the UK-funded housing benefit system.

Introducing circuit-breakers here would, therefore, cause major complications in working alongside housing benefit and, potentially, could shift the funding of the support of vulnerable groups from annually managed expenditure to the departmental expenditure limit. Introducing a circuit-breaker system would also be administratively complex, given the need to gather detailed information on the income of all ratepaying households. It will also be vulnerable to fraud. I, therefore, propose not to pursue that option further.

I shall now say more about the developments, on which I touched earlier, in respect of water charges. On 15 May 2007, I told the Assembly that I agreed with the Chairperson of the Committee for Finance and Personnel that it is important that rating reform be viewed in the context of how the Executive intend to address the funding of water in Northern Ireland.

Since then, the Independent Water Review Panel has published its first report. The panel recommended that a single bill be issued to households, with rates and water charges separately identified. The Executive have agreed that that proposal should be examined by both the Department for Regional Development and the Department of Finance and Personnel, working together to determine whether and how that might be done. That is now happening. At this stage, there are no conclusions to report to the Assembly.

However, I am anxious that the rating reforms that I have announced today are not jeopardised either by the substantial work on IT systems or possible legislative changes that may be required to provide a single bill for water and rates. Many difficult issues must be addressed, not least the fact that the panel is still working on recommendations for a new affordability tariff scheme, the outcome of which could have a major bearing on the ease with which a single bill can be delivered.

As I said earlier, I have signalled that people will not be asked to pay twice for water and that there will be an off-setting arrangement with the domestic rates; work on that is proceeding. I will provide the Assembly with further information on that proposal as soon as possible, after the Minister for Regional Development and I report to the ministerial subgroup and the Executive in the new year.

Next steps include the publication of a paper later this week that will set out the findings of the rating review in detail, including the options considered and those that were not recommended. Some immediate actions must be progressed over the coming months in order to implement the proposals: first, in order to advance the recommendations on single-pensioner discount, I will need to engage in a targeted consultation exercise that takes on board the views of all interested parties before introducing subordinate legislation for April 2008. At the same time, I will progress subordinate legislation to raise the savings limit for pensioners to £50,000 from April 2008. After that, I will begin work on pre-legislative tasks such as the integrated impact assessments and the consultation that is required to introduce the proposals for the rating of vacant domestic property, the proposed deferment scheme for pensioners, an agreed revision to the maximum capital value, and any legislation that is required on rate relief for those in full-time education and training.

At the same time, I will engage in preparatory work associated with the primary legislation required to introduce the new rate rebate for energy efficiency and zero carbon housing. Work will also be required on the legislative implications of the longer-term changes such as derelict land taxation and improved data sharing to facilitate relief take-up. That will require considerable research and discussion with some of my ministerial colleagues.

I have outlined cohesive measures to improve the rating system in Northern Ireland to help those most adversely affected or most in need and also to assist in fulfilling broader policy aims.

I have learnt through the review that reform of the rating system does not operate in isolation. Every new concession has a cost, either to other ratepayers or to the public purse. This is devolved taxation, and shortfalls are not made up from Government subventions. We must, therefore, adopt a measured and proportionate approach to changing the system through targeting support where it is required.

I shall, therefore, keep those measures under review. Raising more money from rating empty homes and derelict land could allow us to enhance some reliefs further; for instance extending the scope of the single-pensioner discount.

No matter what we do, reform cannot possibly satisfy everyone, and we should not try to do that by over-engineering the system — that could have unforeseen consequences.

It should be remembered that the rating system’s influence can be wide in other important policy areas such housing affordability, sustainable development and water reform.

As I said at the outset, what really matters is what people are asked to pay. Today’s proposals will benefit many ratepayers and, taken together with the Budget proposals, will offer many households much needed relief.

Much remains to be done to see the process through to its conclusion, but in making the changes, we are returning the faith that people demonstrated by sending us here. I commend the measures to the Assembly.