Memorandum by The Chartered Institute
of Public Finance and Administration (CIPFA) (SBR 25)
CIPFA is one of the leading professional accountancy
bodies in the UK and the only one which specialises in the public
services. It is responsible for the education and training of
professional accountants and for their regulation through the
setting and monitoring of professional standards. Uniquely among
the professional accountancy bodies in the UK, CIPFA has responsibility
for setting accounting standards for a significant part of the
economy, namely local government. CIPFA's members work (often
at the most senior level) in public service bodies, in the national
audit agencies and major accountancy firms. They are respected
throughout for their high technical and ethical standards, and
professional integrity. CIPFA also provides a range of high quality
advisory, information, and training and consultancy services to
public service organisations. As such, CIPFA is the leading independent
commentator on managing and accounting for public money.
CIPFA makes the following points regarding specific
areas of interest highlighted by the Committee on launching this
enquiry:
Regarding the rationale for introduction
of a supplementary business rate, CIPFA believes that the
detailed work of the Lyons Inquiry, which consulted widely and
at length, deserves serious attention being given to its findings,
including this proposal concerning permission for local authorities
to levy a supplementary business rate.
CIPFA sees the following points from its submissions
to the Lyons Inquiry as relevant to supporting the case for a
supplementary business rate, to be permitted as an option for
local authorities to exercise:
"A significant increase in the proportion
of expenditure that is raised locally would assist in the revitalisation
of local democracy and its strategic role"
"a change in the balance of funding towards
local resourcing and the non-hypothecation of funds would assist
in the management of pressures on local services"
"CIPFA has consistently argued for the
return of non-domestic rates from being a national tax to a local
tax ... It would enhance and underscore the inter-relationships
between local authorities and their local businesses. Further,
if this change is politically acceptable, it would be technically
the simplest way to shift the balance of funding significantly."
"We also recommend that the consequences
and fairness of the policy of pegging business rates to inflation
should be re-examined. It has resulted, over time, in a lower
proportion of local expenditure being funded by business, which
in turn has put greater pressure on government grant and the council
tax."
"We would also suggest that in terms
of fairness of business taxation, taxation should be seen in the
round. We are mindful of reports that for big business corporation
tax can be difficult to assess and collect due to the potential
to `move profits around' between countries. Property tends not
to shift between countries in the same way."
CIPFA's views in this debate follow up the Institute's
earlier 2005 publication on the Policy Change Agenda and Local
Services, which addressed arguments on the balance of funding
shifting to greater local tax-raising, and the principle of subsidiarity.
Regarding accountability and approval mechanisms
for the introduction of a supplementary business rate at a local
level—the role of business and the wider community, if
offered as an option to local authorities to introduce (or not
to introduce) a supplementary business rate, the introduction
of such a rate could learn from the experience of the greater
autonomy for local government in taxation matters available to
authorities in the USA for example, which impressed delegates
from CIPFA's Local Government Policy Panel who took part in an
exchange programme with their peers from the USA and Canada in
2006. Whilst it is not possible to simply transplant different
countries' taxation system cultures into the UK local government
system, the existence of greater local authority taxation independence
in successful economies such as the USA can at least illustrate
that supplementary local rates in and of themselves are
not automatically negative. Learning from other countries' experiences
in this type of local taxation may help to allay the initial opposition
to a supplementary business rate which business organizations
may be expected to raise. We also note that the City of London
Corporation already enjoys the power to levy a supplementary business
rate.
Regarding consideration of implementation
issues, including the impact on local authority tax bills and
decision-making in two-tier local authority areas, the work
by Rita Hale & Associates Ltd with CIPFA for the 2004 Discussion
Paper The Relocalisation of the Non-Domestic Rate considered
earlier research undertaken for central government. Overall it
is considered that appropriate steps would be able to allay initial
fears of a local authority's business community over the implementation
of a "new", or rather "returning to greater local
control", business rate.
Regarding the appropriate scale of the supplement,
and the threshold for payments and whether small businesses
should be required to pay, these aspects of the inquiry address
an important part of the debate, namely the desirability of leaving
to local authorities the final decisions as to whether to levy
a supplementary business rate, and if so, from what threshold
to require businesses to pay (and whether to thus exempt smaller
businesses). The reason such decisions are best taken locally
is that authorities' elected members, with advice from their officers
and their ability to "take the temperature"" of
the likely positive (or detrimental) impact on their areas' businesses,
weighed up against the likely benefits of increased revenue for
the services they provide to their businesses and residents, are
the people best placed to make these judgments—and councillors
are also of course the people who are rightly accountable through
the community's assessment of whether such a rate helps, or hinders,
their lives overall.
The preparation by a local authority of proposals
for its own supplementary business rate would also be an opportunity
for elected members, officers and local business people to debate
how the funds raised could best be used. End use of revenue raised
could of course include funding improvements in local services
which would benefit businesses and their employees. Such local
debate would be a means to practice what the CBI president Martin
Broughton argued for at the Confederation's annual dinner in May,
when speaking of the ability of a new partnership between the
public and private sector to help accelerate the pace of innovation,
a speech in which he also called attention to under-investment
in public infrastructure vital to private businesses, including
road and other transport links. CIPFA supports such a culture
of open debate between the local public and private sectors, as
expressed by the Institute's chief executive Steve Freer in Public
Finance (18-24 May 2007) when describing the business rate
as the most obvious and attractive candidate for a national tax
which could be localized, "not least because it offers the
opportunity to create a really effective accountability relationship
between local authorities and their business communities".
Similarly, the Institute's assistant director
of local government and finance, Maureen Wellen, has pointed to
better transport infrastructure as an area which could benefit
from funding raised through the business rate (The MJ Finance,
19 April 2007). Equally importantly, the fact that the prudential
code developed by CIPFA linked to the 2003 Local Government Act
enables flexibility for additional local taxation to be used to
fund local spending schemes from revenue, or to support long-term
borrowing for capital expenditure, makes a supplementary business
rate a potentially very adaptable means to enable local service
improvements for businesses and residents.
Therefore CIPFA believes that the scale of the
supplement and threshold for payments, and thus the decision on
whether small businesses should be required to pay, are matters
best left for local authorities themselves to decide. The dangers
of centrally-set thresholds or parameters for such matters include
the risk of national government setting these at some form of
"average" level, only to find that the diversity of
economic and business environments across the country mean that
in practice, some authorities which may judge a supplementary
business rate to be beneficial and practicable for their area,
could fall foul of centrally-set scales/thresholds (or definitions
of "small business" by say turnover, staff numbers or
income) which do not reflect the particularities of the local
economy. For example, an authority with many highly profitable
but small-scale high-tech companies could fall foul of some measurements
of the scale of businesses liable to pay a supplementary business
rate.
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