House of Commons - Communities and Local Government Committee

Select Committee on Communities and Local Government Committee Seventh Report

2 Supplementary business rate

17. Businesses, as occupiers of properties, have long made a significant contribution through local rates and levies to the provision of services for the communities in which they are situated. In real terms that contribution has remained constant since the business rate was 'nationalised' in 1990-91 but in proportional terms it has decreased from 29 per cent of local government revenue to around 20 per cent in 2006-07.[8] The changes in the proportions of spending financed by council tax and business rate payers is reflected in changes in the tax rates: since 1993-94 Band D council tax has risen by 132.2 per cent whereas the effective NNDR, after adjusting for the effects of revaluation, has risen by only 41.3 per cent.

18. Some have called for this trend to be reversed and for business to make a greater proportional contribution to local resources. East Sussex County Council, for instance, told the Lyons inquiry that "the current arrangements for the increase in business rates […] should have been more in line with the Government's own planned increases in council tax, thereby sharing the proceeds and burden of growth".[9] Analysis presented to our predecessor committee by the New Policy Institute suggested that had the business rate gone up in line with council tax since 1990, as it would have done under previous arrangements, council tax rises for domestic ratepayers in the period would have been reduced by as much as a third.[10] Similarly, Local Government Association calculations have shown that if business contributed the same proportion of local government revenue as it did even in 1997-98, annual council tax bills could now be lower by some £250 per household.[11]

19. Yet adjusting the balance of the burden of taxation between householders and business, or indeed the balance of funding between central and local sources, is not an end in itself. Our concern is to provide a funding foundation which positions and enables local government to do its job, spreads fairly the burden of taxation between tax payers and ensures the provision of good-quality services and robust regulation which match the needs of local residents and businesses.

20. Alongside discussion of the decline in proportion of local government expenditure met by the business rate we must set two other facts. Non-domestic rates remain a significant tax for business. The NNDR is expected to have raised £18.4 billion in England in 2006-07. Sir Michael cites research suggesting that for most businesses, the NNDR accounts for around three per cent of turnover.[12] We were also urged, by the CBI and others, to consider the proposals for an SBR in the context of the overall burden of taxation upon business.[13]

Lyons's proposal for a supplementary business rate

21. Although in principle Sir Michael was sympathetic to those who favoured re-localisation of the business rate, he concluded that it would be technically difficult and that the time was not right for "such a substantial change".[14] He nevertheless argued that local communities "need more power to choose to raise new local revenues to invest in themselves" and that "Businesses have identified a need to invest more in the infrastructure needed to support future growth […] and an appetite for greater engagement with local authorities on economic development, including a willingness to discuss how the revenues for investment might be found".[15] His solution to this dilemma was to propose, among other measures, a locally determined supplementary business rate (SBR) as "the most sensible way forward."[16] Enabling local authorities to levy locally determined marginal supplements to the NNDR, he argued, would provide some flexibility, albeit limited, to raise additional revenues while having a limited impact only on business.[17] Four key principles underlie Lyons's proposal for an SBR:

The supplement should be:

Local, both in the decision to levy a supplement and in the decisions about how it is to be spent;
Additional, with any new revenues available to spend on new infrastructure or projects rather than taken into account in central government grant allocations;
Transparent, so that business and other local taxpayers understand how much money is being raised and what it is being spent on; and
Agreed with the local community, with the local business community having a strong voice in the final decision on whether there should be a supplement, and the purpose to which the proceeds are put.[18]

In its March 2007 Budget report the Government gave a broad but cautious welcome to the proposals, stating that "a local supplement has the potential to support local economic development" but noted that certain protections and safeguards would be required.[19] It undertook to give Sir Michael's proposals further consideration¯a process which it confirmed as underway its review of sub-national economic development and regeneration, published in July 2007. [20]

The case for SBR

22. SBR potentially offers a number of benefits to local government, to the business community and to the council tax payer. Sir Michael indicated that SBR was "intended to contribute to greater flexibility for local communities—residents, businesses and their representatives—to invest in themselves and in the future".[21] Investment of SBR revenue in projects which support economic development and thereby build up local rateable values of commercial and industrial property and broaden the business tax base in an area would in the long term spread the local taxation burden among a larger group of council tax and ratepayers, potentially reducing the liability of each individually and at the same time creating a more favourable business environment.

23. Several of our witnesses regretted the "disengagement" between local businesses and local authorities which had occurred following the introduction of the NNDR and argued that an SBR presented an opportunity to start to redress this.[22] Canterbury City Council told us that an SBR could ensure that "the wider businesses community becomes more engaged with the well-being of the area".[23] Simon Wiles, Director of Resources for City of York Council, told us that an SBR "would draw the whole of the business in the City together."[24]

24. Three primary arguments in favour of SBR emerge from these considerations. It offers the potential for:

genuinely additional revenue for investment in local projects and services which may increase the local tax base in the long term but which would otherwise be unfunded;
a means of facilitating stronger relationships between the local business and local government communities, in particular engaging business more closely in mutually beneficial local regeneration and economic development, and
greater flexibility for local authorities, allowing them to move towards adopting a stronger role in place-shaping and identity-building through tailoring both the revenue raising and investment sides of any SBR to local circumstances and local needs more closely than central government could ever do.

Each of these is individually persuasive but in combination they become a powerfully compelling case supporting the principle of an SBR.

The case against

25. Rather than demurring from these broad objectives, those who argued against the proposal tended to do so on the grounds either that an SBR was unlikely to achieve them or that practical difficulties in implementation would render the proposal unworkable or prohibitively inefficient, and often both. Kent County Council, for instance, argued strongly that an SBR would perhaps be counter-productive in terms of fostering good relations and was certainly too modest a measure to affect the degree of fundamental change required and that broader, more radical thinking was necessary to empower local authorities to work with their business communities to foster regeneration and economic growth effectively. It told us the debate should be about

how non-domestic rating currently works and how that should be reformed, rebalanced and modernised as a cohesive whole. This should not simply be a question of how local government is funded, but how economic development and regeneration is best served through a dynamic relationship with business […] the rationale for a top up supplementary rate is limited.[25]

Others focused on more practical considerations, identifying difficulties in making an SBR work effectively.

Making SBR work

26. Sir Michael concluded that if an SBR was to work effectively "both local authorities and local businesses will need to work hard to establish constructive and effective relationships, and to build trust and mutual understanding and respect".[26] Although this position was not contested by our witnesses several voiced disquiet over the practicalities of achieving sufficient confidence within the business community.

27. Many businesses are concerned that SBR could be seen by local authorities as a means of meeting current expenditure commitments rather than investing in genuinely additional projects and schemes specifically linked to economic development. The Federation of Small Businesses, for example, said it had "concerns that [SBR] could be used as an easy way to raise extra revenue for local authorities".[27] Given existing pressures on local authority budgets, which many local authorities vividly demonstrated during the course of our inquiry, such a reaction is understandable.[28] Indeed, in 2001 the Government, following consultation, rejected earlier proposals allowing marginal local changes to the NNDR on the grounds that it had become "clear from many of the local authority responses that the supplementary rate was seen primarily as a means of raising revenue".[29] Nevertheless these concerns could be mitigated by a requirement that all revenues will be spent only for purposes stipulated in the initial proposal to levy an SBR, thus allowing businesses and local authorities to establish at the outset mutually agreeable purposes. We recommend a statutory requirement be imposed that SBR revenues are ring-fenced. The purposes to which SBR revenues can be applied should be restricted by statute to those specific projects and schemes deemed by the local authority and the business community to benefit the local business environment and identified in the initial proposals for the levy.

28. Sir Michael rehearsed two further specific concerns commonly voiced by the business community. First, he noted those "about the implications […] of greater local discretion over tax rates".[30] These were reflected in some of our evidence too. Comprehensive performance assessments results however show that overall local government performance continues to improve. As Rt hon. Hazel Blears, Secretary of State for Communities and Local Government, said in a speech earlier this month, the most recent results of the Audit Commission's assessments of local government show "outstanding results" and "nearly four in five [councils] were rated in the top two categories. And these improvements have also helped councils realise some £3bn of efficiency gains, meaning much better value for the taxpayer".[31] Greater local discretion over local taxation need not be seen as a threat as much as an opportunity to increase local accountability and distinctiveness.

29. Secondly some are concerned that variable business rates would lead to additional complexity and therefore impose an additional burden upon business.[32] The majority of businesses, however, operate from a single property and therefore would need to understand only one SBR. Billing authorities (district or unitary councils) would continue to calculate liability for businesses. We do not believe that any on-going additional burden would be significant for most businesses.

30. The CBI told us that its members benefited from the "the certainty that the UBR provides".[33] Similarly the Rating Surveyors' Association told us: "Of increasing importance over the last few years […] has been the linkage of the UBR to the Retail Price Index […] This has brought certainty, stability and predictability".[34] We are not deaf to businesses' desire for certainty. It is a valuable commodity for business and the UBR has provided that for the last 15 years. But that certainty has arisen from the RPI cap rather than from the fact that the rate has been set at a national level: were it not for the statutory cap, central Government would be as free to vary the business rate and to do so to a greater extent than any local authority could have done under the former local arrangements where any increase in the business rate would have involved a similar increase for domestic ratepayers. SBRs, if introduced as we suggest with the rate stipulated by the appropriate local authority at the outset and lasting for a fixed period, offer much the same degree of certainty. Dermot Finch, Director of the Centre for Cities, argued that an SBR also provides additional certainty albeit of a different kind: "certainty to business […] that revenues are not being frittered away on a range of different projects" but invested to "help the local economy and […] help generally uplift the quality and the productivity of the local economy".[35] Certainty of this sort has value too.

31. Several witnesses questioned whether SBR, either on its own or as part of a combined package of measures, would achieve the desired relationship between business and local government. Key to resolving this issue will be the mechanisms employed to secure business agreement to specific SBR proposals.

A 'STRONG VOICE' FOR BUSINESS: CONSULTATION OR BALLOT?

32. We heard a number of arguments in favour of a mandatory ballot among the business community to secure agreement on levying an SBR in particular areas and on spending priorities for the revenue generated. A similar process, known as 'dual key' voting has been employed successfully in the establishment of Business Improvement Districts (BIDs), in which proposals for a local levy on businesses proceed only if the majority of the business community, in terms of both number and rateable value, is in favour.[36] Indeed, the experience with BIDs has demonstrated that the requirement for a ballot has done much to alleviate businesses' concerns over the concept of making an additional contribution to the provision of specific local services. The CBI told us that "Business feedback on BIDs has been very largely positive because they feel they have had a say in the process. Even where they had voted against a particular proposal which subsequently went ahead (because a majority was in favour), they were supportive because of the role they had played".[37] Similarly, among British Chambers of Commerce members "the governance model offered by […] BIDs is the preferred option": it insisted that "businesses must have a vote".[38]

33. We agree that a ballot would ensure that no SBR was implemented without adequate business confidence and recognise that in some circumstances it may be appropriate. Nevertheless, an SBR is only a marginal variation on a well established, well understood and broadly accepted tax and we can see no compelling reason why it should become the only tax in the UK upon which a specific ballot of those expected to pay is required. As Sir Michael noted "it would not be consistent with the accountability arrangements for other taxes, including council tax and other, national, business taxes".[39] Nor is business united in demanding a ballot on every occasion. The Federation of Small Businesses, while broadly opposed to SBR in principle argued that, should it be introduced, "there must be meaningful consultation with all businesses" and that "designated projects should have the backing and support of the business community" but it stopped short of calling for a ballot in every instance.[40]

34. There are also practical considerations. Where widespread consensus can be secured through consultation, which may be the case in respect of modest proposals in particular, the costs and complexities of holding a ballot may be unjustified. Established forums for partnership working between businesses and local authorities, such as Local Strategic Partnerships, may represent one avenue by which such consensus could be reached. Ballots to renew a mandate for an existing SBR may be superfluous in the face of general support for continuation, even for those SBR levies which were approved by ballot before being introduced.

35. Local businesses' acceptance of levy proposals and spending plans, secured through a ballot or demonstrated through consensus-building consultation, should be achieved before any SBR is imposed. Sir Michael Lyons's recommendation was that there should be no requirement for a ballot on SBR proposals within the affected business community. We agree. Local Authorities should, however, remain free to hold a ballot when local or specific circumstances warrant.

VALUE FOR MONEY

36. The British Chambers of Commerce told us that there was "a persistent issue about value for money from the NNDR. Businesses do not receive good quality basic services from the rates that they currently pay".[41] The Institute of Value Management went further, suggesting improving value for money should come before changes in funding arrangements.[42] For some local authorities, where the amount they collect in business rates is, because of the effects of equalisation, greater than the amount they receive from central government, issues regarding perceptions of value for money may be particularly acute. Dartford District Council explained its difficulty thus:

The council collects a huge amount of business rates and the area receives very little of it back […] Dartford actually collected £63 million in business rates last year but the only amount that came back via the district, the county, the police and fire, was £20 million. £40 million of it has gone elsewhere […] it would be impossible […] to ask businesses to pay any more when two-thirds at least is going to other parts of the country.[43]

37. As the Centre for Cities argued, however, SBR is a means of increasing local autonomy and local accountability and "criticisms of the existing systems, flawed though they may be, should not stand in the way of taking this first incremental step".[44] Moreover, support from the business community, whether secured through a ballot or through consultation, would be the foundation stone for any local proposal to levy an SBR. Few businesses would be likely to support levying an SBR in their area unless satisfied that the revenue would be deployed effectively. SBRs, then, could become an avenue for local businesses to pressure a local authority to improve its performance in terms of value for money: those who do not perform well in terms of value for money are unlikely to secure the required support from business to levy an SBR in the first place.

38. If we are genuinely to empower local government, to follow the course of devolution and community leadership, we have to accept the corollary: that nationally imposed policies and practices will rarely be appropriate and that local authorities, in developing policies and solutions finely tuned to local circumstances and local aspirations, will follow different paths.

WILL IT WORK EVERYWHERE?

39. In densely urbanised areas, administered by unitary authorities, where the business tax base is high and where there are frequently many businesses occupying properties with significant rateable values among whom to share the burden, and where a consensus on priorities for investment is more likely to emerge easily, the appealing prospect of generating significant investment funds for local priorities can easily outweigh any theoretical disadvantages or practical difficulties associated with an SBR. SBR is likely to affect different areas in different ways, depending on local economic conditions, geographical characteristics and political structures. Local authorities covering predominantly less developed areas may find that, because of comparatively low business tax bases, the advantages to be gained from even the most judicious investment of any revenue generated by an SBR may not justify the combination of additional administrative costs for the public sector and an additional demand upon the resources of local businesses involved. Centre for Cities, which is in principle supportive of the SBR proposal, told us that it was "definitely more suited to urban areas […] It is admittedly less useful for towns with a small basis, with rural areas for example […] we have to be very clear that SBR will have a differential impact. It is more suited to some areas than others.[45] We agree but we do not see this as a compelling argument against the introduction of SBR powers for all local authorities. Allowing, encouraging even, distinctive approaches among local authorities, enabling them to adopt policies and practices which are closely tailored to local circumstances necessarily involves diversity. As Dermot Finch, Director of the Centre for Cities said, differences are "part and parcel of the whole devolution agenda".[46] The facility to levy a supplementary business rate is most attractive for unitary authorities covering urbanised metropolitan areas. We are concerned that other areas, particularly less urbanised and rural parts of the country, would not be able to benefit or not to the same degree. We encourage Ministers to consider and bring forward alternative measures alongside a supplementary business rate to allow local authorities and local business communities seeking additional funds for local investment to choose a means which is suitable for their specific local circumstances.

SBR IN TWO-TIER AREAS

40. Although he noted that "in theory a supplement could be levied at any tier of local government", Sir Michael proposed in the interests of transparency and efficiency that "only upper tier authorities should levy supplements" and that "in two-tier areas, those proposals should be the subject of discussion and agreement between the county and the district councils".[47] For our witnesses, this proved one of the most controversial aspects, with many questioning the wisdom of denying second-tier authorities the right to initiate an SBR. Kent County Council set out firmly the difficulties that would be inherent in securing agreement between the upper tier authority and the 12 district authorities within its area. These include confusion over distribution of revenue among districts and between districts and the county council; the potential for additional bureaucracy which may be involved in having numerous different processes for securing business agreement and the inherent risk of some districts agreeing to a county-wide levy when others did not.[48] Lynda McMullan, Director of Finance at Kent County Council, explained that while an SBR would be collected by district councils (as the collection authorities for NNDR), much of the demand for expenditure could be at county level and that, as a result, two-tier areas could expect "a lot of, in the nicest possible way, very thrusting debate about what those priorities will be".[49] Mr Brooks, of Dartford District Council, thought SBR was "just an unnecessary complication" in two-tier areas.[50]

41. In contrast a number of witnesses argued that an SBR should be levied district by district rather than subject to county-wide agreement. Predictably, second-tier councils featured strongly among this group but a similar call was made by others including the Rating Surveyors' Association which said that being levied by upper-tier authorities would make an SBR a "crude tool and unlikely to receive support."[51]

42. We recognise the additional difficulties and complexities that may be involved in securing agreement to levy a county-wide SBR in two-tier areas. We recommend that upper-tier authorities should be empowered to propose an SBR in co-operation with second-tier authorities in their area. We also recommend that second-tier authorities have the power to propose an SBR, either individually or jointly with neighbouring districts; and that specific arrangements should be determined by the local authorities involved in conjunction with the local business community, case by case.

LONDON

43. London, itself a two-tier area but with unique governance arrangements, makes a significant contribution to the national economy. The Mayor of London told us that "London is successful and growing, challenging New York as the world's leading international financial centre. The performance and specialisations of London complement those of the rest of the UK, both in terms of industry and people: when the UK grows, so does London and vice versa".[52] It added that on conservative estimates in 2004-05 London contributed between £1 and £8 billion to national coffers through taxation over and above public expenditure in London. London's importance within the national economy undermines the need to ensure than any new tax burdens are not unduly onerous upon businesses.

44. In London responsibility for most local government functions lies with the 32 boroughs and the Corporation of London but various strategic powers and functions, including planning and transport, rest with the Greater London Authority. Sir Michael argued that:

[I]t is important that the respective roles and voice of the Mayor and the boroughs are reflected in the approach taken, but that approach must facilitate city-wide action on infrastructure issues and acknowledge the wide variations in the size of the tax base between different parts of the city. The places where infrastructure is required may well not match the pattern of revenue raising.[53]

As a result, he proposed what he termed a "more flexible and collaborative" SBR arrangement in which a single, London-wide rate would be set through agreement between the Greater London Authority and the boroughs and in consultation with the business community.[54]

45. Sir Michael said he was concerned to maintain simplicity and that only upper tier authorities, such as the GLA, should have powers to levy supplements. Sir Michael argued:

I have reservations about giving supplementary powers to a large number of authorities, given the business community's concerns about complexity. There is an opportunity, however, to marry a concern for simplicity with an encouragement to collaborative decision-making and the coalition building that is essential to effective place-shaping. I propose that only upper tier authorities should levy supplements. In two-tier areas, those proposals should be the subject of discussion and agreement between the county and the district councils, with a joint plan for the use of the revenues raised to meet the overall needs of the area. This reduces the number of possible different rates to 150, providing a less complex system for businesses, and acknowledges the interest of all levels of elected local government in the revenues raised through the use of the supplementary power.[55]

The Mayor of London agreed with Sir Michael that only the upper tier local authority should set the rate, and that therefore in the case of London, only the Mayor would set the SBR. The Mayor also pointed out that a single London-wide SBR would allow the capital to address strategic investment priorities in a transparent manner that would be straightforward to implement. The Mayor also argued that:

The Mayor agrees with Sir Michael Lyons that only the upper tier authority should set the rate and that in London therefore only the Mayor should set a supplementary business rate. Boroughs should not set separate supplementary rates as well. He agrees with Sir Michael Lyons that having potentially an additional 33 business rates in London would be confusing for businesses. Instead, boroughs should still be able, as they can now, to propose [business improvement districts] to tackle local issues, supported where necessary by additional business rate levies. [56]

Equalisation

46. A further advantage of Sir Michael Lyons suggestion of a single SBR for London is its equalising effect, to ensure that investment is made available where it is most needed. Sir Michael identified through his inquiry concerns about large differentials in tax raising capacity between areas. He wrote:

The power to levy a supplement will not be equally valuable in all areas and the revenues that individual areas could raise would vary substantially […] This raises the concern that it might appear unfair to other parts of the country that these areas could raise substantially greater revenues, and in the past (for example in the Government's consultation on supplementary rates in 1998) it has been proposed that special arrangements should apply to these areas.[57]

Sir Michael believes that one way of mitigating these concerns would be through a single London SBR. He pointed out that:

In addition, comparing the revenues from a supplement on a per head of population basis shows that most of the authorities with very large tax bases per head are in London, where the differences should be dealt with through the joint approach between the GLA and the boroughs suggested above.[58]

The Mayor of London agreed that a single SBR would have an important equalising effect.[59] The Mayor argued:

The size of the business tax base across the London boroughs varies enormously and does not necessarily correlate to the places where infrastructure is required. Areas such as Westminster and the City of London have some of the most expensive business properties in the world, while areas of more deprived outer London boroughs such as Waltham Forest, Lewisham and Redbridge have some of the lowest tax bases in the country. A London-wide SBR will ensure equalisation across the capital, as Sir Michael Lyons recognises.[60]

47. There are two main concerns regarding this proposal. The first is that, by making an SBR London-wide only, there would be no room for more localised action by individual boroughs or groups of boroughs. Unsurprisingly, Councillor Merrick Cockell, Chairman of London Councils, said: "obviously we would not be supportive of a regional-only scheme" and advocated discretion for boroughs to initiate an SBR in their areas.[61] He argued that for many small businesses major infrastructure schemes, such as Crossrail, which is a prime candidate for support under a London-wide SBR, were

just a line on a map and will not have any direct bearing for them. They want to see value literally on their doorstep. If they are going to pay more they will want to see better policing […] perhaps better cleansing of public areas, the sort of things that will attract people not only to come and visit that area and spend their money but will also attract employees.[62]

48. Councillor Cockell called for "a balance between local, immediate, visible benefit and […] the grand schemes for London".[63] London First, a business membership organisation which includes over 300 of the capital's major businesses, also favoured enabling boroughs to initiate an SBR, believing that this would help to strengthen the link between rates payments and local services.[64] London Councils made a similar argument.[65]

49. Equally unsurprisingly, the Greater London Authority, which believes firmly that Crossrail should be the first beneficiary of any SBR in London, told us that it was "quite clear that there should be a London-wide rate only", offering two reasons in support: first, that there was a backlog of underinvestment in infrastructure which a London-wide SBR could address and in doing so assist the whole of London's economy; and secondly that a profusion of different SBR rates, which might arise if each borough initiated its own supplement, could be confusing for businesses. It pointed out that "London's economy is one that is very interconnected and highly concentrated".[66] For example, 61 per cent of people live in a different borough from the one in which they work and 30 per cent of London's workforce is concentrated in just 2 per cent of its geographical area (the West End, City and Isle of Dogs).[67]

50. Our second concern regarding Sir Michael's proposals for London centres on the practicality of securing agreement among 32 boroughs, the Corporation of London and the Greater London Authority. London First argued that "it would be very difficult to achieve agreement […] collectively on a programme to be funded in this way […] There would be a high risk of failure to agree anything. If the authorities did succeed in reaching agreement, it would be likely to be based on a stronger emphasis on satisfying their respective aspirations than meeting the concerns of the business community."[68] Both London Councils and the Greater London Authority however appeared confident that agreement could be reached, citing recent examples of healthy co-operation between the boroughs and the Mayor as a firm foundation on which to base future negotiations on supplementary business rates.[69] Nevertheless, concerns about the feasibility of securing agreement on a London-wide basis reinforce arguments in favour of greater local discretion.

51. Moreover it seems perverse in the extreme to enable upper-tier authorities across the country—including Rutland with its population of 37,000 and capacity to raise a few hundred thousand pounds annually from a 1 pence levy—to initiate an SBR but to deny similar flexibility to London boroughs such as the City of Westminster, with its population approaching quarter of a million and the capacity to raise almost £25 million on the same terms.[70] London boroughs and the businesses in their areas have as much to gain from strengthening the relationship between business and local government and working together to promote economic development as any other local authority. At the same time, we recognise the potential for strategic, London-wide efforts to support London businesses.

52. We agree with Sir Michael Lyons that special arrangements for London are justified on the grounds of its unique governance arrangements and economic circumstances. We do not agree that powers to levy an SBR should rest with the Greater London Authority only. We recommend that the Greater London Authority should have the power to initiate a London-wide supplementary business rate which could only be blocked by a two-thirds majority of London local authorities. In addition individual London boroughs and the Corporation of London should be able to initiate a supplementary business rate either individually or in co-operation with other boroughs.

CAPPING THE SBR RATE?

53. Sir Michael contemplated rates between 1 and 4 pence in the pound, which would equate to NNDR supplements of between 2.5 and 10 per cent approximately. He suggested that central government should set the maximum rate which could be used arguing that this would offer business some reassurance that an SBR could not become an increasing burden. Provided that, as we recommend, adequate measures are put in place to ensure that an SBR is levied by consent, this precaution seems unnecessarily draconian. It would be rare for a local authority to seek, and for the business community to accept, an SBR involving more than a marginal variation to the NNDR but where those circumstances do come together we see no reason why it should not be allowed. Reassurance for the business community is an important consideration in securing acceptance for SBR in principle as well as in practice but this could be as easily achieved by balloting, perhaps on the 'dual key' basis employed in BID establishment, any proposals to vary the NNDR by more than 10 per cent—the highest rate adopted by a BID—without the compromise to local discretion that a statutory cap would represent. We recommend that the SBR rate should not be capped by central government but determined locally and that where SBR proposals contemplate a local variation, upwards or downwards, of more than 10 per cent, a ballot of the business community should be the norm.

Exemptions and discounts

54. Those calling for a nationally imposed cap upon the rate at which an SBR could be levied would seem to have overlooked a significant barrier to more than marginal variations which is already inherent in the proposal. Local authorities are themselves business rate payers. The total rateable value of public sector properties has been estimated at £4.1 billion as of 1 April 2006, representing some 10 per cent of the gross value of non-domestic properties.[71] Some of our witnesses pointed out that the local authority was in some instances among the largest NNDR contributors in an area. Local authorities' liability for SBR, since it could not be met by the revenue generated, would in the absence of efficiency savings have to be met either from revenue from central government—which is increasingly ring-fenced and therefore unavailable for discretionary expenditure—or from council tax. That local authorities' SBR contributions are likely to draw upon council tax receipts, where increases are politically sensitive and the subject of much scrutiny, will be a significant and useful deterrent to more than marginal variations to the NNDR, ensuring a level of public scrutiny commensurate with the proposed rate levy. Local authorities should not be able to exempt or discount the liability of public sector buildings for a supplementary business rate.

55. The Federation of Small Businesses points out that small businesses already pay three times as much in business rate, as a proportion of turnover, as larger companies do.[72] The Government has already introduced a relief for small business against NNDR liability—the Small Business Rate Relief (SBRR). The question therefore arises of whether exemptions and discounts for small businesses would be appropriate within any SBR. Nationally, the smallest 90 per cent of businesses account for only a little over 30 per cent of rateable value. Sir Michael therefore argued that "a discount or exemption for smaller businesses would not in most places substantially reduce the yield from a supplement" and suggested that central government "may wish to protect the smallest businesses through setting a threshold below which small businesses do not pay a supplement", although he favoured a degree of local flexibility.[73] The Head of Corporate Finance at Hambleton District Council told us that if those businesses with a rateable value below £15,000 were exempted from SBR, 80 per cent of business in the area would be relieved of liability but expected revenue would fall by only 26 per cent. This was considered "acceptable" as a means of protecting small businesses.[74] Several other witnesses favoured a relief for small businesses on the basis of rateable value or eligibility for SBRR.[75]

56. Despite a risk that discounts or exemption for small businesses "might well be considered unfair by larger businesses" because they would "effectively have to subsidise smaller businesses", the CBI accepted "the case for a threshold to prevent small businesses being unduly burdened by a new levy". Nevertheless it pointed out that rateable value is not always a good measure of company size and that average rateable values can vary significantly across the country.[76] SIGOMA argued similarly: "different local areas are also structured very differently, with more or less reliance on smaller businesses as a proportion of the wider local economy. In many former industrial areas, the demise of heavy industry has meant the loss of larger businesses and the more recent growth of many different, often smaller, enterprises."[77] Such considerations led several of our witnesses to argue for unfettered local discretion over exemptions and discounts.[78] While national government has no choice other than to use crude measures to determine eligibility the combined local expert knowledge of the business community and the local authority provides an opportunity for SBR reliefs more finely attuned to the purposes of the supplement and to local economic conditions. We therefore recommend that any decisions on exemptions and discounts, other than in relation to the public sector's liability, are made at local rather than national level.

SBR and Business Improvement Districts

57. Business Improvement Districts (BIDs) are partnerships between local authorities and local business which provide additional services or improvements to specified areas funded in whole or in part by a levy upon businesses in that area made in addition the NNDR. All non-domestic ratepayers in the area vote on a BID proposal under the dual-key system described earlier. Introduced by the Local Government Act 2003, the first pilot BIDs were established, with support from the then Office of the Deputy Prime Minister, in 2005. There are now 45 BIDs in operation across the UK, with one having already been the subject of a successful renewal ballot.[79] To date BID levies have ranged from 1 to 4 pence supplements to the business rate. There are similarities in both design and purpose between BIDs and Sir Michael's conception for supplementary business rates. There are also clear differences between the two initiatives: BIDs operate across much smaller geographic areas than those to which an SBR might be applied; BIDs cannot be established without the clear consent, expressed through a ballot, of a majority of the business community affected, and BID management is business-led.

58. A number of our witnesses were concerned about the impact of supplementary businesses rates on existing BIDs and on the potential to establish more. Sue Ashley, Town Centres and BIDs Manager at Warwickshire County Council, for instance, told us that it would become impossible to secure local businesses commitment to an BID if the prospect of an SBR was also "looming". In the context of Warwickshire alone, she added "SBR introduction could potentially mean a loss of some £7 million BID income in the next three years".[80] Dr Julie Grail of British BIDs explained that such was the degree of price sensitivity, among small and medium-sized businesses in particular, that BIDs would be "hugely threatened" by supplementary business rates. [81]

59. There is a risk that the introduction of an SBR in an area where a BID already exists might discourage business ratepayers from continuing to support the BID. In theory, a business ratepayer might end up paying two supplements to the NNDR of up to 4 pence in the pound each (equivalent in total to an additional levy of some 20 per cent on top of the NNDR)—one for the BID and one for the SBR. The consensus among our witnesses was that those BIDs which had been established had proved, in the words of the Greater London Authority, "popular and effective".[82] We would not wish to see existing BIDs discouraged or undermined by the introduction of a local SBR. We therefore recommend that where a supplementary business rate is introduced in an area which includes an existing business improvement district there should be an off-set for BID contributors against their supplementary business rate liability.

60. The position would be different where an SBR had been established before a BID proposal came forward. At this point local businesses could decide whether they wished to contribute to a BID and/or a SBR. Local authorities too will wish to consider which model is most appropriate for their locality. If there is any risk of perverse incentives as the result of BIDs and SBRs operating side by side or in overlapping areas, the Government may wish to consider arrangements to mitigate them.

SBR and the Local Authority Business Growth Incentive

61. Some of our witnesses advocated the retention and extension of the Local Authority Business Growth Incentive (LABGI) either as an alternative to or to sit alongside supplementary business rates.[83] The Chief Economic Development Officers' Society told us that "even if a supplementary business rate is introduced" it believes that "an improved and strengthened LABGI should be retained as an important incentive to local authorities to support the promotion and improvement of their local economies".[84] LABGI was first announced by the Chancellor of the Exchequer in the 2002 Pre-budget report and came into operation in 2005. It is intended to give local authorities an incentive to encourage economic growth in their areas by allowing them to retain a proportion of any increase in business rate revenues above a specified level. LAGBI was predicted to be worth up to £1 billion to local authorities over a three-year period and the extra resources generated are entirely additional for the local authority. No business pays more under the scheme than it would have done in its absence.

62. Initially criticised for its complexity—one of our witnesses referred to it as a "great idea mucked up by civil servants" while another argued that it was "fine in theory but […] hopelessly flawed in practice"—changes announced in September 2006 removed some complications but also imposed an upper limit of £400 million on LABGI grants for 2006.[85] Some of these simplifications where subsequently overturned by Judicial Reviews brought by Corby and Selby Borough Councils. The sums generated by LAGBI are useful but not large in the context of local government finance—a total of £127 million in the first year and £316 million in 2006, although the Government expects this figure to rise rapidly.[86] Moreover, it is difficult to predict in advance how much any individual local authority will receive so local authorities could not sensibly rely on the proceeds of LAGBI to finance major projects.[87] Some of our witnesses were critical of the scheme on the grounds that while the additional revenue arose directly from business growth, there was no requirement to use the proceeds for investment in further economic development.[88] The Government is expected to announce further reform of LAGBI shortly.[89]

63. There are real benefits to be gained from providing a direct financial incentive to local authorities to promote economic development. This aspect of the Local Authority Business Growth Incentive is in principle attractive but is not a substitute for the more sophisticated approach to economic development which the SBR proposals represent. The unpredictability and the low level of additional revenue generated by the Local Government Business Growth Incentive make it an unsuitable alternative.

Longer-term consequences

64. Sir Michael's proposals for reforming local government finance include local discretion for marginal variations to the business rate; measures, including a re-branding, to increase take up of council tax benefit; and the reform or removal of certain reliefs, particularly in respect of empty properties. However sensible such reforms may be—and however welcome the Government's swift enactment of the latter—even in combination they are no more than incremental, evolutionary changes, falling far short of the radical rebalancing of power sought by several of our witnesses and many of Sir Michael's. We understand, indeed we support, this more cautious approach. Given the long history of radical but ineffective proposals for reform in the past, such an approach is not timid but pragmatic. Nevertheless, we agree that more is needed if local authorities are to become the leaders of vibrant communities and the engines of local economic development. The recent Green Paper, The Governance of Britain, contemplates "enabling local communities to take decisions about how to use local funds" and ensuring "that local priorities are being met" and promises exploration of possibilities for allowing local residents to apply for devolved and delegated budgets.[90] Similarly, the Rt hon. Hazel Blears said in her first major speech following her recent appointment as Secretary of State for Communities and Local Government: "Devolving power from Whitehall to the town hall, and from the town hall to local communities is not just the right thing to do. It's the most effective way to build places where people are proud to live, work and raise their family. It's the surest way to make public services meet people's needs. And it's the only way we can meet some of today's biggest challenges—from climate change, to community cohesion."[91] Increasing business engagement with local authority revenue, expenditure and activity should go hand in hand with such developments. The Government should consider implementation of Sir Michael's recommendations on local government revenue not as the last word but the beginning of a development process of financial devolution. Its response to the Lyons report should set out how and when the next steps might be taken.

65. Research shows that when in the 1980s the business rate was suspended for properties in Enterprise Zones, rental values rose to offset the tax relief: in effect property became more valuable as a result of a lower tax liability. Given a causal link between tax liability, rents and property value, it is arguable that rental values and consequently over time rateable values may fall if SBRs are introduced at anything other than a nominal level, albeit with a time delay as business property is re-valued only once every five years and occupiers often have multi-year tenancy agreements with landlords. The statutory RPI cap on NNDR increases means that one potential consequence of a long-term decline in rateable values is a reduction in NNDR revenue. Businesses would pay less to central Government, central Government would have less NNDR money to re-distribute to local authorities, and so a greater proportion of the burden of local authority expenditure may fall to be met from general taxation.

66. SBR is designed to increase economic activity and stimulate economic growth. As Sir Michael explains:

The objective behind introducing greater local flexibility is to enable authorities to invest in infrastructure and other activities, which enhance local quality of life and the distinctiveness of places, and support economic development and growth. Where spending is targeted well on such areas it should support an expansion in the number and success of businesses and the value of the properties in an areas, offsetting the negative impact of the supplement.[92]

Under current NNDR arrangements, there is little incentive in terms of additional direct revenue for local authorities to work towards increasing the business tax base. The introduction of an SBR would provide such an financial incentive as local business growth would result in an increase in local revenues. Nevertheless, it is important than the taxpayer is also protected from any perverse consequences of desirable economic development. We recommend that the Government monitor the long-term impact of supplementary business rates on the rateable values of business properties.

Revenue investment

67. Sir Michael indicated that revenue raised by SBR should be used to support projects and measures agreed by the local business community and aimed at promoting economic development. Some have interpreted this broadly, envisaging schemes similar to those supported by existing BIDs (the Rugby BID, for instance, provides a range of local services including CCTV security and street cleaning) or by the Corporation of the City of London, which provides additional security and police through its uniquely held power to vary the NNDR locally.[93] Sue Ashley, Town Centres and BIDs Manager for Warwickshire County Council, told us that local businesses see these projects "as being a priority for their own trading environment", projects that are "really going to make a difference to their turnover and footfall".[94] Mr Wiles told us of the City of York's desire to improve the business environment through diverse means such as additional park and ride services, or a new tourist information centre: "there is a whole variety of things which would boost local business, particularly in the city centre".[95]

68. Many however have interpreted Sir Michael's intention more narrowly, envisaging that SBR revenue would be used only to support infrastructure, or even transport infrastructure exclusively. Others, such as the Federation of Small Businesses, argue that such a restriction should apply even if it was not the original intention.[96] The British Chambers of Commerce stated that "businesses would only consider an SBR for investment in transport infrastructure".[97] A recent report from the Centre for Cities, City Leadership, and its on-going work on city transport both frame SBR in the context of transport infrastructure and in its evidence to us, the Centre noted that support for SBR was strongest in those centres where there were clearly defined infrastructure needs.[98] In its February 2007 report, Loosening the Leash, the All-Party Urban Development Group, backed an SBR "as part of a wider tool-kit for local authorities to invest in transport infrastructure".[99]

69. Even in major urban centres, levying a supplement at the maximum rate envisaged in the Lyons report, four pence, may not generate sufficient revenue to finance major infrastructure projects. Leeds Chamber of Commerce and Industry estimated that at this rate, additional annual revenue in Leeds would be £27 million, permitting borrowing over 25 years to the tune of £300 million, significantly less than, for instance, the estimated costs of between £500 million and £1 billion of the Leeds Supertram.[100] An SBR could nevertheless make a significant contribution to large-scale projects. In Leeds the City Council is keen to support "infrastructure investment linked to economic regeneration" through projects such as the regeneration in the Aire Valley Employment Area and the development of Leeds and Bradford Airport. It told us that while the revenue raised from SBR would be unlikely to satisfy investment needs, "it could be a significant element of a larger and more complex funding package."[101]

70. In some areas the questions over investment priorities may turn less on whether SBR can support major infrastructure projects than on whether other projects may be more appropriate and more effective in improving the business environment. In larger, disparate, and more economically and geographically differentiated areas, it may not be easy to identify single major infrastructure improvements that would benefit the whole business community directly. Even in respect of London, Councillor Cockell, the Chairman of London Councils, warned against a succession of "grand schemes", inviting consideration of smaller-scale, perhaps borough-wide rather than London-wide, schemes.[102]

71. Many, particularly local authorities and businesses, are united in believing investment in infrastructure and transport infrastructure in particular is a priority. There is potential for SBR to contribute towards, even if not to support in entirety, a range of infrastructure improvements. The experience with BIDs however has demonstrated that smaller-scale projects can also make a significant difference to the business environment. We recommend that local authorities and local businesses should be free to determine jointly their own investment priorities.

72. Although he argued that individual SBR proposals should include a clear timetable, Sir Michael did not favour a universal time limit. We agree. While a clear timetable is an important element in providing certainty and predictability for the local authority as well as the business community, investment, in infrastructure projects in particular, may need to be financed over a number of years—it is not unusual for major infrastructure projects to take 25 to 30 years—and perhaps more than originally expected. Sir Michael suggests that extending the duration of an SBR beyond original intentions should require renewed approval from local ratepayers. This however raises the possibility of an SBR which finances a long-running capital project being approved at the outset but being withdrawn before the project is completed. In these circumstances and under current arrangements there would be little option other than for the council tax payer to meet the costs of completion. This is unacceptable. In the case of major infrastructure projects, where SBR revenue is likely to form only part of an overall package of funding, the feasibility of an SBR with a fixed duration will need to be considered against the stability of other funding streams. We recommend that SBR proposals include a clear timetable pegged to project milestones rather than absolute time periods where this is more appropriate. The timetable should include safeguards for both ratepayers and council tax payers against project overruns and, in the case of council tax payers, against any long-term financing costs arising from SBR projects.

8 Lyons report, para 8.8 Back

9 Lyons report, para 8.21 Back

10 ODPM Committee: Housing, Planning, Local Government and the Regions, Ninth Report of Session 2003-04, Local Government Revenue, HC 402-III, Q 39 Back

11 Memorandum from Canterbury City Council, SBR 11, para 1 Back

12 Lyons report, para 8.10 Back

13 Memorandum from the Confederation of British Industry, SBR 42, para 4 Back

14 Lyons report, para 8.38 Back

15 Lyons report, para 8.26 Back

16 Lyons report, para 8.41 Back

17 Lyons report, para 8.40 Back

18 Lyons report, para 8.45 Back

19 Budget 2007: Building Britain's long-term future: Prosperity and fairness for families (hereafter, Budget report, 2007), para 3.138 Back