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LGA - New powers needed to help councils tackle huge business rate debts

Millions of pounds in unpaid business rates are having to be written off by cash-strapped councils due to a loophole in licensing and business laws being exploited, the Local Government Association said this week

The LGA said some councils individually face business rate debts of nearly £1.5 million, while others have been forced to write off unrecoverable sums of around £300,000 owed by licensed premises including pubs, clubs and off-licences.

It is calling for new powers to allow town halls to suspend the licences of businesses which wilfully or persistently fail to pay their business rates. Licences would only be reinstated when the debt has begun to be paid off.

Under current licensing laws, councils cannot refuse or suspend a premises licence for outstanding business rate debts.

The problem is being exacerbated by the legal practice of companies going bankrupt, only for a second so-called "phoenix company" to start up overnight with the same directors – but without any obligation to pay their old company's debts.

The LGA, which represents more than 370 councils in England and Wales, is also calling for an urgent change in the law to stop debts being written off so easily and these phoenix companies created.

Council leaders say new licensing powers would also help councils manage business rates more effectively when this is devolved to local government by 2020.

Councils, who are already struggling to protect local services following budget reductions, are faced with millions of pounds of unrecoverable business rate debts run up by licensed premises, with some being forced to write off large sums. For example:

  • Newcastle City Council is facing £1.47 million in business rate debts accrued by licensed premises, accumulated over several years
  • West Suffolk (Forest Heath District and St Edmundsbury councils) has had to write off almost £300,000 in business rates owed by licensed premises. One nightclub alone owes £97,000
  • South Norfolk Council is owed about £190,000 in business rates accrued by licensed premises, of which £115,000 is attributed to one business

Cllr Simon Blackburn, the LGA's Licensing spokesman, said:

"Councils know that it is a tough business environment out there and are willing to work with businesses struggling to pay their way, but some businesses, including council-licensed pubs, clubs and off-licences are deliberately avoiding paying their rates, knowing they can continue to operate without fear of being stripped of their licence.

"Councils are already struggling to fund vital services amid funding pressures and business rates debt means they are being deprived of large sums of money to be spent on key services, such as roads, schools and caring for the elderly, as well as supporting local business economies.

"It must be particularly galling for law-abiding businesses who pay their rates on time but see competitors go bankrupt owing hundreds of thousands of pounds, only to legally reopen under the same directors scot-free.

"This is clearly unacceptable but councils are powerless to stop vast sums of unrecoverable money from building up or take action if a business closes and reopens under a different name.

"The Government should close the phoenix company loophole by making it a legal requirement for directors of bankrupt companies who start up a new business to pay their old company's business rate debts.

"Giving council powers to refuse or suspend a premises licence at an earlier stage of the debt recovery process would be a simple way to tackle this problem and protect local services."

CASE STUDIES

Newcastle City Council

Seven per cent of the council's licensed premises have outstanding business rates accounts which total £1.47 million. This figure comprises £785,124 (reminder), £82,491 (final notice) and £611,161 (summons).

Forest Heath and St Edmundsbury (West Suffolk) councils

In the past few years the councils have written off a combined amount of almost £300,000 in business rates from a few individuals who have been licence holders for several premises across West Suffolk. One nightclub currently owes £97,000. The debts have been written off following business liquidations or bankruptcies where the business model has allowed the company to continue accumulating a very high sum of business rates whilst the councils go through the debt recovery process.

Business rates collection by councils

A typical council process for business rates collection:

  • Information on rateable value and different reliefs available is generally included with every opening bill
  • All available methods of payment are detailed on the bill
  • Longer instalments can be arranged upon request
  • An overdue payment will receive a reminder notice
  • A second default will result in a Final Notice – this means the customer has lost their right to instalments and the whole year's balance has become due.
  • If the balance is not paid, a summons to the Magistrates court will be issued. The summons includes a ‘special arrangement' form for the ratepayer to complete if they wish to set up a payment arrangement.
  • If the arrangement is defaulted, the case will be passed to Enforcement Agents (EAs) for collection
  • In the event of EAs being unsuccessful, options include making an individual bankrupt/winding up a company or applying to the County Court for a charging order to be placed on the premises.

However, this process is not rigid, and if a business was experiencing difficulty and contacted their council for help, the council would assist if considered reasonable. Councils would take into account previous payment history and could suspend recovery action for a short time. For example, councils can check all the reminders/final notices/summonses before they are issued, so a Final Notice is not issued if the business was usually a good payer and had brought their account up to date.

Notes

  • Under current licensing laws, as long as licensees meet four statutory objectives – the prevention of crime and disorder, public safety, the prevention of public nuisance, and the protection of children from harm – and pay their annual licence fee, councils have to grant them a licence.
  • A phoenix company is a new company that derives its assets and directors from an old company – usually one which has been put into liquidation or administration. The assets of the old company are bought by its directors during administration, and then transferred into ownership of the new phoenix company so that the business can resume operating under a new corporate entity with a clean slate. The directors are not held personally liable for the old company's debts providing there has been no misfeasance or wrongful trading.
  • A premises Licence (England and Wales) cost between £100 and £1,905, depending on the rateable value of the property.

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