Memorandum by the Department for Communities
and Local Government (SBR 30)
1. The Government welcomes the opportunity
to submit a memorandum to the Committee on the important and complex
subject of a supplementary business rate. The timing of the Committee's
inquiry is particularly welcome at a time when the Government
begins its own detailed consideration of the issues in the light
of Sir Michael Lyons' report. There will be a range of views and
interests which need to be considered carefully. The Committee's
findings and report will be an important contribution to the development
of proposals in this area.
BACKGROUND
2. The Government agrees with Sir Michael
that business rates are a successful and stable property tax and
that there is no case at this time for changing the current RPI
cap on the national level of business rates. The Government therefore
intends to maintain the business rates system broadly as now,
whilst accepting Sir Michael's case for improving some aspects
of the regime: in particular the Government is, subject to Parliament,
changing the way in which rates apply to empty properties and
will be reviewing exemptions and reliefs more generally, as well
as examining the case for a form of local supplementary rates.
3. Currently local authorities, apart from
the Corporation of London, have no powers to raise supplementary
rates, although businesses may under the business improvement
district (BID) scheme vote to pay a levy on business rates for
up to five years to fund defined activities such as increased
security measures. Detail on BIDs is at Annex A. Sir Michael has
proposed new powers for local authorities to raise a local supplementary
business rate, allowing them to choose to raise new revenues to
invest locally.
4. The Government is keen for there to be
a debate with stakeholders on the pros and cons of a local supplement,
looking at the possible objectives and design of such a supplement.
It recognises that the issues raised by a local supplement and
its potential impact on different sectors and interests are many
and varied. The Government has made clear that a supplement would
need to be subject to credible accountability to rate payers and
real protection for any businesses—particularly small and
medium enterprises—that might be disproportionately affected.
The Government will hold discussions with key stakeholders on
what the best options for a local supplement may be, before bringing
forward proposals.
5. Against that background, this memorandum
sets out some of the issues relevant to considering the specific
questions raised by the Committee along with some additional issues
that will need to be thought through in working up policy options.
6. In addition to thorough consideration
of the issues with stakeholders, policy options for local supplements
will need to be developed in the context of a range of Government
policies to which they have the potential to contribute and with
which they need to be consistent. As well as the framework for
strong and prosperous communities set out in the recent Local
Government White Paper, these policies include the current Review
of sub-national economic development and regeneration which is
focusing amongst other areas for potential reform on strengthening
local authority incentives and decision making powers to improve
economic outcomes, and on strengthening the interface between
the public and private sectors to maximise the effectiveness of
investment. The review is also looking at developing mechanisms
to drive sub-regional collaboration across functional economic
areas, including city regions, building on the Local Government
White Paper. The Government's policy to encourage business engagement
in local governance (eg through Local Strategic Partnerships and
leadership of Local Enterprise Growth Initiative boards) to ensure
that it is informed by business needs and improved by the expertise
and perspectives that businesses bring is also relevant.
THE RATIONALE
FOR INTRODUCTION
OF A
SUPPLEMENTARY BUSINESS
RATE
7. Sir Michael saw a need for communities
to have more power to choose to invest in themselves and pointed
to an appetite amongst businesses for greater engagement with
local authorities on economic development issues. A local supplement
has the potential to address projects and services for which existing
funding is not available. Some commentators have argued that to
ensure the support of business taxpayers they would expect any
supplement to be hypothecated specifically to initiatives of direct
benefit to business. Sir Michael himself, while he emphasised
the need for the business community to have confidence that a
local supplement was in their interests, did not favour ring-fencing
it for certain kinds of projects. Either way, however, a supplement
could be on a larger scale and over a longer term than BIDs, which
tend to be tightly focussed on specific, local measures or activities,
and can last for up to five years before a renewal ballot is required.
ACCOUNTABILITY AND
APPROVAL MECHANISMS
FOR THE
INTRODUCTION OF
A SUPPLEMENTARY
BUSINESS RATE
AT A
LOCAL LEVEL—THE
ROLE OF
BUSINESS AND
THE WIDER
COMMUNITY
8. Both accountability to the local community
and accountability to business ratepayers would need to be secured.
Increasing taxation on business has the potential to have either
a detrimental or a beneficial effect on a community, so a scheme
needs to take account of the impact across the community.
9. As Sir Michael Lyons says, trust and
transparency are important in securing accountability. The two
main options he identifies for delivering accountability to business
are a vote or a statutory consultation process, which he on balance
favours.
10. The Government will consider the evidence
and stakeholders' views on the question of accountability and
how best to secure it. Options should also keep complexity and
bureaucracy to a minimum.
CONSIDERATION OF
IMPLEMENTATION ISSUES,
INCLUDING THE
IMPACT ON
LOCAL AUTHORITIES
TAX BILL
AND DECISION-MAKING
IN TWO-TIER
LOCAL AUTHORITY
AREAS
11. The impact on tax bills would clearly
depend directly on the scale of a supplement. A four pence supplement
would for example increase business rates bills by around 10%.
TWO-TIER
AREAS, LONDON
AND THE
FUTURE OF
BIDS
12. Business rates functions rest with district
councils, unitary authorities, metropolitan borough councils and
London boroughs. Sir Michael Lyons discusses in his report the
question of which types of authority should have the power to
raise a supplement. He sees as perhaps the key factor businesses'
preference for stability and predictability and suggests keeping
the number of different supplements to a minimum for simplicity
and to minimise administrative burdens—though the latter
will affect only businesses with branches in two or more authorities'
areas.
13. In line with this thinking, his basic
proposition is that outside London upper tier authorities should
levy the supplement. He suggests that this should be on the basis
of discussion and agreement between the county and relevant districts
and that there should be a joint plan for using the proceeds to
meet the overall needs of the area. For London, he suggests a
single city-wide levy set through agreement between the GLA and
the boroughs with a joint plan for city-wide targeting of the
investment of the proceeds.
14. Authorities coming together to set a
single supplementary rate to fund agreed investment raises some
important issues. Suitable financial accountability would be critical.
This might require a statutory joint basis, as each authority's
fiduciary duty and accountability would be to its own community.
There are also the questions of how to deal with an authority
who decided to opt out of a joint arrangement at any point and
of likely support from business or communities in one area for
investment in another. Of course county councils and the Mayor
and GLA in London already exist and could provide a statutory
basis for a supplement at that level if that was considered appropriate.
15. Sir Michael recommends that the local
authority role in BID schemes should continue to rest with district
councils, unitary authorities and metropolitan and London borough
councils. He does not, however, discuss what the implications
of a new supplementary rate might be for BIDs. In particular there
is the question of likely business attitudes to two supplements
on their rates bills.
OTHER ISSUES
16. One important issue not discussed by
Sir Michael in his report is the implications of supplementary
rates for the central list. [20]The
central list raises two main issues in the context of supplementary
business rates. By definition, it would not be possible to levy
a "local" supplement on central list rate payers. It
would doubtless be seen as unfair by other rate payers if they
were in effect "exempt" from any supplement, which in
turn raises the question of how the level of any "central"
supplement should be determined and what should happen to the
proceeds. The second issue is that of movements between the central
and local lists which could have a major effect on individual
local authorities' tax bases and hence the revenue they could
raise through a supplement of a given level.
THE IMPACT
OF A
SUPPLEMENTARY BUSINESS
RATE ON
EQUALISATION
17. The Government recognises that the size
of authorities' tax bases and hence the potential revenue that
could be raised through a supplementary rate vary considerably.
Sir Michael's report illustrates a spread amongst unitary authorities
from Westminster City Council at one end of the scale to Rutland
County Council at the other. Sir Michael Lyons recommends against
applying special arrangements to high tax base authorities on
the grounds that this would undermine the incentive effect and
local flexibility—though of course the arrangements he proposes
for two tier areas and London could potentially entail some degree
of equalisation within those areas. The Government recognises
that this is another question on which there will be a wide spread
of opinion.
THE APPROPRIATE
SCALE OF
THE SUPPLEMENT
18. Sir Michael Lyons notes that some BIDs,
for which there is no statutorily prescribed limit on the amount
of the levy, have levied supplements as high as four pence. He
also notes that a one pence supplement across England would raise
around £400 million each year (assuming rateable values are
not affected), with considerable variation between authorities
depending on their taxbase. As well as the amount per year, there
is also the question of the duration of a supplement. For BIDs,
a levy can continue for up to five years, but a further ballot
is then required. Sir Michael raises the question of whether there
is a link between fostering confidence amongst business and keeping
supplements small, at least initially. He also wonders whether
higher supplements might warrant different accountability mechanisms.
19. A number of factors are relevant to
considering the appropriate scale of a supplement. These include:
— What is required to make a substantive
difference to an authority's area? This depends to some extent
on the timescale of the project or activity in which the proceeds
would be invested.
— At what level could a supplement
be considered as an unreasonable burden on businesses, including
in the context of the overall level of business taxation and risks
to competitiveness; what would be "affordable"?
— Who is best placed to decide what
is "appropriate" and should there be a centrally imposed
upper limit (something Sir Michael favours), or reserve power
to set a limit?
THE THRESHOLD
FOR PAYMENTS
AND WHETHER
SMALL BUSINESSES
SHOULD BE
REQUIRED TO
PAY
20. Sir Michael asks whether there should
be a threshold below which small businesses do not pay the supplement.
He points to small business rate relief and the decision by some
BIDs to calibrate their levies to business size as relevant to
this issue. There is also the more general question of whether,
unlike in the case of BID levies, business rates reliefs should
apply to supplements and if so whether this should be centrally
determined or a matter for local discretion—the approach
Sir Michael prefers. Authorities could be expected to welcome
any discretion, but it may be unpopular with some sectors of business
as it would increase complexity and reduce certainty.
21. There are arguments on both sides on
this issue, given that business rates are often a higher percentage
of turnover for small as opposed to other businesses. A threshold
below which small businesses do not pay the supplement would of
course be more generous to small businesses than the small business
rate relief scheme which at most provides a 50% discount on the
rates bill. Small business rate relief is explicitly funded by
a "supplement" on the rates bill of businesses not in
receipt of the relief. As Sir Michael notes, an exemption for
small businesses may be seen as unfair by larger businesses who
would in effect have to fund it.
22. It will also be important to consider
whether there should be flexibility as well, or instead, to levy
a supplementary rate differentially according to different types
of businesses.
23. The state aids implications of any exemptions
or reliefs will need to be considered.
CONCLUSION
24. It is clear that there are a number
of factors and interests to be balanced in developing policy options
for local supplements. The Government believes that there can
be no one consensus answer to the questions raised by the Committee—all
depends very much on different sectors' perspectives. The Government
will want to analyse the evidence put forward and the Committee's
report very carefully as it takes work in this area forward.
Annex A
BUSINESS IMPROVEMENT DISTRICTS (BIDs)
A BID is a partnership between a local authority
and the local business community to develop projects and services
in a defined area that will benefit the trading environment.
There is no limit on what may be provided under
a BID. Improvements may include extra safety or security measures,
cleansing and environmental measures or improved promotion of
the area.
BIDS are funded by businesses through an additional
levy on the non-domestic rates bill. The levy is collected by
the billing authority and held in a separate BIDs Revenue Account
where it is ring-fenced and can only be used for the BID.
Businesses decide on the amount of the levy
and vote in a ballot on whether the scheme should go ahead. A
BID cannot proceed without being approved in the ballot. A successful
vote is one that has a simple majority in both votes cast and
rateable value of votes cast.
All businesses defined within the BID area are
liable for the BID levy following a successful ballot. The size
and calculation of the BID levy varies widely between BIDs.
42 BID ballots have now been successful since
the enabling legislation came into force in September 2004. A
total of 12 have been unsuccessful, although six of these relate
to unsuccessful first and second ballots in Maidstone, Runnymede
and Southport. One BID (the Heart of London Alliance) has been
approved for a second term. The unsuccessful Liverpool City Central
BID was successful at the second ballot. Proposals for around
another 15 BIDs are being developed.
Research
While the legislative framework was being developed,
some key stakeholders led by the British Property Federation,
and supported by the Association of Town Centre Managers, wanted
property owners included in the mandatory BID levy and therefore
the vote. Ministers at the time decided against this option because
the BIDs regime is based on the national non-domestic rating system
which imposes liability for rates on occupiers. A fundamental
shift of policy would be required to make property owners (landlords)
liable for a new tax, ie the BID levy.
However, Ministers agreed to commission research
to investigate the role of property owners in the development
and implementation of BIDs. The report on Part I of the study
was published last year and Part II is due shortly. The research
is due to be finalised by the end of 2008.
Separate research published in January 2007
examined the development and implementation of BIDs in England.
The study indicated that the number of established BIDs would
continue to grow for the foreseeable future, and that they were
unlikely to move beyond relatively focussed programmes of activity
with modest budgets.
20 Some properties are not confined to one billing
authority area (eg the railway network, telecom networks, gas
networks, electricity networks etc). Where a value for connected
properties can only properly be ascribed by reference to the whole
network, then these properties are usually shown en bloc as one
property on the central rating list. The Secretary of State is
the billing authority for the central rating list, and therefore
collects the rates and submits it to the pool. The central rating
list accounts for approximately £1 bn in revenue each year. Back
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