Memorandum by The Special Interest Group
of Municipal Authorities (SIGOMA) (SBR 37)
1. SIGOMA
1.1 SIGOMA, the Special Interest Group of
Municipal Authorities, is a network of 45 local authorities representing
large towns and cities in the northern, midland and south coast
regions of England. SIGOMAs work is led by locally elected members
supported by a group of council finance directors and informed
by a network of local government finance practitioners in each
of our member authorities.
2. SUMMARY
2.1 The proposal to establish a supplementary
business rate comes at a very challenging time for the wider local
government funding system, with the Government unwilling to address
long term issues like council tax revaluation and council tax
bands, as well as damping changes to the distribution of mainstream
funding so that resources are poorly targeted.
2.2 There is some merit in the proposal,
but we are concerned that a supplementary business rate could
be used to by-pass these structural problems and fill holes in
council budgets, rather than invest in growth.
2.3 For local authorities to be able to
manage this situation properly, we would like to see supplementary
business rates accompanied by parallel reforms to:
— Ensure that mainstream funding systems
operate more efficiently, in particularly damping arrangements
are removed in key areas like social services.
— The LABGI scheme is reformed and
placed on a longer term footing so that it acts as an incentive
to areas with a lower business tax base.
— There are clear controls in place
to stop areas with a very large business tax base from subsidising
council tax bills.
2.4 Without these changes, the proposals
will be seriously compromised—for example, SIGOMA areas
would have to set a 2.2 pence supplementary business rate just
to make up for the funding shortfall of £227 million that
we now lose through social services damping.
3. CONTEXT
3.1 The proposal to establish a supplementary
business rate with some form of discretion for local authorities
comes at a very challenging time for the wider local government
funding system and this proposal needs to be understood in this
larger context.
3.2 SIGOMA has supported Sir Michael Lyons'
Inquiry into the roles and funding of local government since its
inception, and welcomed the final report published in March this
year. However, we have been disappointed with the Government's
response to many of the key proposals in the report, specifically
on the reform of local government funding. In particularly, the
Government's immediate response to Lyons, in the Budget report,
stated that it:
— will not remove council tax capping
powers over local authorities and continue to cap if necessary,
undermining the relationship between local and central government
as well as the discretion and accountability of local councils;
— remains committed to not implementing
revaluation for council tax in the lifetime of this parliament,
meaning that council tax levels are based on information more
than 17 years out of date and do not reflect the current patterns
of property values across the country; and
— does not see it as feasible to change
the banding structure of council tax, in the absence of wider
revaluation, meaning that council tax burden continues to fall
unfairly upon less wealthy households.
3.3 In addition, SIGOMA is also working
with the DCLG to illustrate the impacts of the Government's decision
to damp changes to mainstream local government funding formulae,
specifically for social services. This damping regime means that
mainstream resources are not being targeted effectively or fairly
to the areas that need them. For social services alone, it means
that SIGOMA local authorities lost around £250 million of
grant in 2006-07 and are currently under-funded by £227 million
for 2007-08.
3.4 Based upon these ongoing and systemic
weaknesses in the local government finance system, one response
from the local government sector may be to reject any marginal
changes until the Government has moved to make the overall system
operate more effectively and fairly. However, there is clearly
some merit in the proposal for a supplementary business rate and
we feel that it could be introduced successfully if the Government
also moved to address the current weaknesses in the wider local
government funding system.
3.5 In line with this approach, the following
sections address the questions raised by the DCLG Committee so
that the supplementary business rate may be made to work in SIGOMA
areas.
4. RATIONALE
FOR THE
INTRODUCTION OF
A SUPPLEMENTARY
BUSINESS RATE
4.1 SIGOMA supports the general analysis
presented in the Lyons report and the justification it provides
for establishing a new supplementary business rate set by local
authorities within some form of national framework. In particular,
we feel that the proposal for a supplementary business rate is
pertinent when:
— Local authorities already have some,
albeit limited, discretion on local business contributions with
the powers to establish a Business Improvement District (BID)
and to grant relief from business rates to charities and for hardship.
— Business rates have been falling
as a proportion of local government spending, from about 29% in
1996 to 20% today, placing a greater burden on council tax payers.
— There is greater understanding of
the need for local authorities to lead local economic development
through strategic investment in new infrastructure, redevelopment
and local services to nurture growth.
— The Corporation of London already
has the power to raise a supplement on business rates, in consultation
with local businesses, which it has used to generate resources
to invest in its own priorities such as additional security.
4.2 BIDs have limitations. They are generally
shorter term and limited to individual projects or sub areas within
an authority, so greater discretion is needed to provide additional
funding on a wider scale. A supplementary business rate would
help provide this. There is also a general belief that businesses
would be prepared to pay a fair price for additional quality and
efficient services and so contribute to a supplementary rate.
The success of BIDs in many areas has illustrated this.
4.3 However, given the failings of the current
local government funding system (set out above) and the Government's
inability to address these, we are concerned about introducing
a supplementary business rate at the current time. In particularly,
we feel that the supplementary business rate may be interpreted
by some Government departments and local authorities as a way
of by-passing the structural problems with the wider funding system,
enabling some councils to raise money to deal with the funding
challenges that these problems cause. The use of the supplementary
business rate to make up for the failings of the wider funding
system would undermine the principle of equalisation that is at
the heart of local government funding as well as the relationship
between local councils and their business partners, diluting the
potential impact on economic development and regeneration that
they are designed to address.
4.4 As such, we recommend below that weaknesses
in mainstream funding needs to be addressed alongside any new
supplementary business rate, as well as some measures to ensure
that the supplementary rate is not used to cross-subsidise council
tax.
5. ACCOUNTABILITY
AND APPROVAL
MECHANISMS FOR
THE INTRODUCTION
OF A
SUPPLEMENTARY BUSINESS
RATE AT
A LOCAL
LEVEL—THE
ROLE OF
BUSINESS IN
THE WIDER
COMMUNITY
5.1 The introduction of a supplementary
rate would place a duty on local authorities to make transparent,
accountable and widely supported decisions to vary their local
business rate. At the local level, the development of local strategic
partnerships in all major towns and cities over the last six to
seven years has made it possible for councils to take a stronger
community leadership role and make difficult decisions in this
way. LSPs are the most suitable forum in which the proposal for
a supplementary business rate could be discussed and developed,
and are also a good mechanism for holding local councils to account
over the way that the supplementary business rate is implemented
and monies are used.
5.2 One of the key challenges at the local
level will be for local councils and LSPs to show leadership on
these issues, setting out a clear case for the use of a supplementary
business rate as well as communicating how it will be used and
the impact that it is having. There may also be some cases where
local partners choose to ring-fence the proceeds from the supplementary
rate for particular projects, to create greater confidence and
ensure accountability. However, local authorities need to have
the discretion to make this decision locally and determine how
the proceeds can best be utilised. The importance of local government
services to business success and economic growth is well understood
in LSPs and will be the basis for making the case for a supplementary
rate.
6. CONSIDERATION
OF IMPLEMENTATION
ISSUES, INCLUDING
THE IMPACT
ON LOCAL
AUTHORITY TAX
BILLS
6.1 The ability to raise, and determine
the level of, a rate will depend on the economic stability of
the area. Raising and collecting a supplementary rate will create
additional administrative expenses such as in staffing, technology,
changes to current software systems and general collection costs.
This could have an impact on the viability of raising an additional
charge and, given the very different tax bases in different local
authority areas, suggests that the rate will need to be carefully
set in each local area (see below).
6.2 As the Lyons report argues, ultimately
the levying of supplementary rates could be borne by property
owners in the shape of lower rental from their properties. Over
time, lower rental values will affect the Rateable Values of property
in an area and reduced property values will then impact on the
potential for LABGI (Local Authority Business Growth Incentive
Scheme) gains in a local area.
6.3 It is also important to note that business
rates are a more significant tax on business property than comparable
taxes in most other European countries. Increases to the level
of business rates needs to relate to the wider tax burden on businesses
and the Treasury will be required to assure business leaders that
that supplementary business rates at the local level are offset
by other tax burdens at the national level.
6.4 Overall, it will be important for all
revenues from a supplementary rate to be retained locally in order
to provide an incentive and enough local business support to raise
the charge.
7. THE IMPACT
OF A
SUPPLEMENTARY BUSINESS
RATE ON
EQUALISATION
7.1 SIGOMA has always argued that equalisation
is a core principle for the wider local government funding system.
The National Non Domestic Rates pooling arrangements provide for
rates to be equalised through centrally distributed grants. However,
a supplementary business rate needs to be seen as a quite separate
element of the system, the main aim of which is to provide an
incentive to local authorities to support and invest in economic
growth, as well as provide some of the finance to be able to do
this. As such, our understanding of the proposal is that it will
not contribute to equalisation and the national pooling system.
7.2 In this case, it is important to understand
the very different potential to implement a supplementary business
rate in different local areas. Given the disparities between local
and regional economies across the country, there is clearly a
much greater potential for the supplementary business rate to
be significant in larger cities, which have a much larger tax
base of local business, as well as in the south east and eastern
regions where economic growth has been stronger. [22]The
table below illustrates this by showing the rateable values across
a number of different local authorities and the additional funding
gained from a 1 pence rise in the multiplier.
| Selected top tier
authority areas
| Total RV 2005*
£million
| Extra £million
from 1p
supplement**
| Extra £million
from 4p
supplement**
|
| Rotherham | 152 | 1.52
| 6.08 |
| Derby | 179 | 1.79
| 7.16 |
| LB of Bromley | 195 | 1.95
| 7.82 |
| Newcastle | 309 | 3.09
| 12.38 |
| Kensington & Chelsea | 502
| 5.02 | 20.07 |
| Leeds | 774 | 7.74
| 30.98 |
| Birmingham | 948 | 9.48
| 37.91 |
| Westminster | 2,641 | 26.41
| 105.64 |
| * taken from VOA rating lists for 2005 www.voa.gov.uk
| |
| ** calculated on RV without any adjustments for reliefs
| |
7.3 Given this reality, there is a potential mis-match
between areas that can raise a significant amount of funding from
the supplementary business rate and areas that need the investment
in infrastructure to strengthen the local economy. This is a point
made by London Councils for the London region, but is also applicable
to the wider national economy.
7.4 For local authorities to be able to manage this situation
effectively, we would argue strongly that the implementation of
a supplementary business rate needs to be accompanied by a three
parallel reforms to local government finance:
— Firstly, a more serious effort from the Government
to ensure that the mainstream local government funding system
operates more efficiently and is fit for purpose. Equalisation
is a key aim of the system and so undermined when the system fails
to operate effectively. For example, this means removing the current
damping applied to key local service areas like social services
so that the system is allowed to operate effectively, as well
as a proper timetable for revaluing domestic properties for council
tax so that councils have an up to date and fair base for raising
local revenue.
— Secondly, greater thought is given to how areas
without a large business tax base, or with less robust local economies,
can be incentivised and rewarded for successful economic growth.
This may be by placing the current LAGBI scheme on a longer term
footing and ensuring that it is more transparent so local authorities
have greater confidence in its operation.
— Thirdly, with the potential to raise such large
sums in some local areas, there must be clear controls in place
to ensure that these are not used to subsidise council tax rates.
Although the agreement with business partners on a supplementary
rate at the local level will militate against council tax subsidies,
there is also a point of principal that has to be guarded against.
8. THE APPROPRIATE
SCALE OF
THE SUPPLEMENT
8.1 There will be a need to strike a balance between
providing sufficient flexibility to enable local authorities to
make a real difference to local investment, and ensure that tax
rates remain within acceptable limits at the macro economic scale.
Current annual rate increases, through use of the PRI cap, provide
stability which is essential for businesses in their financial
planning. The scale of a supplementary rate should provide similar
predictability to ensure businesses do not experience large unplanned
increases.
8.2 It is estimated that a one pence supplement across
England would raise something over £400 million each year,
assuming no impact from the higher tax rate on rateable values.
A levy based on penny supplements would provide a uniform increase
which would provide businesses with some degree of predictability.
However, our calculations in the table above show the very different
amounts of money that different local areas will be able to raise
from a 1 penny increase. As such, we would support the introduction
of an upper limit for the business rate supplement of around 4
pence, within which individual councils are left to set their
local rate, which would be shaped by the strength of the local
economy and the types of projects that would be funded.
8.3 Finally we also need to understand the context of
these proposals and the wider government finance system. As noted
above, SIGOMA areas currently see some £227 million of social
services funding being lost by damping. We calculate that a supplementary
business rate of around 2.2p will be required in SIGOMA areas
as a whole just to make up for this shortfall in the current financial
year. Clearly this type of budgetary problems in SIGOMA areas
is a barrier to wider spending on economic growth and infrastructure.
This underlines the need for supplementary rates to be introduced
in parallel with reforms to the mainstream system.
9. THE THRESHOLD
FOR PAYMENTS
AND WHETHER
SMALL BUSINESSES
SHOULD PAY
9.1 The question as to whether small businesses should
receive any discount or exemption from a business rates supplement
requires serious consideration to ensure that the benefits presented
by the recent changes to charges are not lost, but that the system
remains as simple and transparent as possible.
9.2 Small business relief has provided a valuable contribution
to reducing the rates burden on small businesses. Levying a supplementary
rate would proportionally impact more on smaller businesses than
larger businesses. Figures suggest that the smallest 90 per cent
of properties only represent a little over 30% of rateable value,
so a discount or exemption for smaller businesses would not in
most places substantially reduce the yield from a supplement.
9.3 However, larger businesses may consider this unfair
as they would effectively have to subsidise smaller businesses.
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.
9.4 As such, we would like to see individual local authorities
deciding whether or not to apply a threshold for small businesses,
based upon their knowledge of the local economy and its make up.
This would also consider the need to keep any supplementary rate
simple and clearly understandable for local partners.
22
See SIGOMA Profile for analysis of disparities between SIGOMA
areas and other regions. Back
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