Memorandum by the Confederation of British
Industry (CBI) (SBR 42)
1. The CBI is the UK's leading business
organisation, speaking for some 240,000 businesses that together
employ around a third of the private sector workforce. Member
companies which influence all policy positions include: 80 of
the FTSE 100, some 200,000 small and medium-sized firms; more
than 20,000 manufacturers and over 150 sectoral associations.
No other UK organization represents as many major employers, small
and medium-sized firms or companies in the manufacturing or service
sectors.
THE RATIONALE
FOR INTRODUCTION
OF A
SUPPLEMENTARY BUSINESS
RATE
2. The CBI welcomed Sir Michael Lyons' vision
of "place-shaping" and believes that councils should
be more instrumental in supporting local economic development,
for example through greater investment in local infrastructure.
The report also recognised the importance of having a competitive
local business tax regime and concluded that this was best delivered,
as presently, via the uniform business rate.
3. The Lyons Report makes an important case
for local authorities to have greater flexibility—a theme
which the CBI supports. We also acknowledge that one way to achieve
this flexibility would be through the power to levy a supplementary
business rate. Sir Michael also notes that there would need to
be limitations on such new powers in order to get business buy-in
and greater trust in the relationship between businesses and councils.
The CBI is clear that the most important safeguard on this power
would be a business vote on whether each local proposal was acceptable
to the businesses that would be affected by it.
4. While investment in local economic development
projects, particularly transport infrastructure, is needed the
CBI would urge Government not to consider this recommendation
in isolation. The CBI is concerned that the overall corporate
tax burden remains too high. The Chancellor's decision to lower
the rate of corporation tax at the last Budget was a step in the
right direction but much of this reduction was offset by other
adjustments to the business tax regime. An increase in business
rates through a new levy would be a further concern particularly
alongside the proposed changes to business rates for empty property.
The CBI therefore would urge Government to reduce the overall
balance of businesses taxes before legislating for a supplementary
business rate.
ACCOUNTABILITY AND
APPROVAL MECHANISMS
FOR THE
INTRODUCTION OF
A SUPPLEMENTARY
BUSINESS RATE
AT A
LOCAL LEVEL—THE
ROLE OF
BUSINESS AND
THE WIDER
COMMUNITY
5. Should councils be given the power to
introduce a levy on the business rate its success would rest on
genuine accountability and rigorous approval mechanisms. Sir Michael
Lyons presented two options (voting and consultation) as approval
mechanisms, opting for statutory consultation in his final recommendations
to Government. However the CBI is clear that businesses must have
a vote for the idea to be acceptable.
6. The Lyons Report emphasises the importance
of building up trust between businesses and local authorities
and the CBI shares Sir Michael's desire for this to happen. Sir
Michael argues that the power to levy a supplementary business
rate, if used to fund projects which were genuinely intended to
drive the local economy, is one way in which this trust could
be built up. However, this can only be achieved if businesses
feel that they genuinely are able to influence the decision-making
process. In CBI's view, consultation simply would not provide
sufficient mandate for councils to levy a supplementary business
rate nor would it demonstrate that affected businesses supported
the proposed project. This could only be achieved through a vote.
7. One of the arguments put forward against
the idea of a vote is that businesses would use it simply to block
any proposal being promoted by local authorities. However, CBI
does not believe this would be the case. Businesses asked to vote
on a particular development project will make their judgement
based on an assessment of the potential benefits set against the
additional costs to them through the SBR. If the economic case
for the project is strong enough, the vote will be positive. Indeed,
experience with existing BIDs schemes is that this is exactly
the way in which it works. Business feedback on BIDs has been
very positive largely 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.
8. As Sir Michael recognises, unless the
approval mechanisms for a SBR are right there is a danger that
this power could see the relationship between businesses and councils
deteriorate rather than improve. Since publication of the Lyons
report, CBI has consulted with approximately 600 companies on
10 regional councils across England. Whilst there was an appreciation
of some of the difficulties associated with a proposed vote, the
overwhelming majority felt that anything less than a vote simply
would be unacceptable.
9. Since a business vote would be so key
to the principle of a supplementary rate CBI members have given
some thought to the potential details of a voting mechanism with
the conclusion that:
— Voting should be weighted according
to rateable value.
— Members should have an opportunity
to vote on the specific project plan rather than just the principle
of a levy.
— There should be safeguards on re-voting
so that if a vote failed it would be significantly amended before
it is voted on again.
— The exact voting mechanisms should
be spelt out in legislation so as to ensure continuity across
all council areas.
10. The principle of voting to agree a business
rate levy has already been established through the Business Improvement
District (BID) model. The CBI therefore strongly recommends that
the Government conducts a full review of Business Improvement
Districts (BIDs) before taking this recommendation further. Useful
lessons could be learnt from the business and local government
experiences of BIDs particularly in terms of voting mechanisms
and administration.
11. Management of projects that were approved
by the business community, via a positive vote, would need to
be both transparent and accountable in order to give confidence
that projects would be delivered efficiently and effectively.
The exact mechanisms would need to be considered carefully but
as a principle the CBI would advocate significant business involvement
in the running of specific projects eg business representation
on any management boards.
CONSIDERATION OF
IMPLEMENTATION ISSUES,
INCLUDING THE
IMPACT ON
LOCAL AUTHORITY
TAX BILLS
AND DECISION-MAKING
IN TWO-TIER
LOCAL AUTHORITY
AREAS
12. If the recommendation to allow supplementary
business rates is taken forward business confidence would rely
on transparent decision-making, genuine accountability and efficient
delivery. These factors would be vital whether the projects were
in unitary or two-tier local authority areas. It is worth noting
that businesses could be wary of agreeing to a supplement in a
two-tier authority if the administration costs were noticeably
higher than under a unitary authority.
13. Clearly where potential projects had
implications for two or more local authorities, perhaps at the
level of city-region, and where regional authorities needed to
be involved, implementation is likely to be more complex. It would
therefore be important for Government to be clear, if taking forward
this recommendation, whether the purpose was to fund local or
regional projects and shape the proposals, including approval
and accountability mechanisms, accordingly.
THE IMPACT
OF A
SUPPLEMENTARY BUSINESS
RATE ON
EQUALISATION
14. The case against the relocalisation
of business rates was accepted in part because of the difficulties
of equalisation: the differences in business rate revenue between
councils would outweigh any increased incentive for councils to
boost local businesses.
15. If revenue from supplementary rates
was redistributed by central Government through the equalisation
mechanism in the same way that standard business rates are shared
out there would be a danger that the power was seen as an increase
in business rates through the back door rather than a specific
levy to fund local projects. The CBI therefore agrees with Lyons
that revenue from any supplementary business rates should be retained
locally—not redistributed—to avoid undermining the
purpose of the proposed supplement.
16. In recognition of the greater flexibility
this would give some councils over others (ie those with more
businesses and therefore potentially higher revenue from a supplement)
it would continue to be important for the Government to invest
in those areas that had fewer businesses and therefore a lesser
capacity to generate revenue through a supplement. Councils and
central government would also need to consider the risk that a
supplement could deter incoming businesses, particularly in regeneration
areas.
THE APPROPRIATE
SCALE OF
THE SUPPLEMENT
17. The CBI agrees with Lyons that revenue
from any supplementary rate must be entirely additional to existing
local government funding and used exclusively on specific projects
that were agreed with the relevant business community. The CBI
recognises that in the future it would be increasingly difficult
to know whether economic development projects would have been
provided without a business supplement and therefore whether the
supplement was truly `additional'. In order to avoid this scepticism
it would be vital for all tiers of government to demonstrate that
spending on economic development projects had at least kept pace
with current investment.
18. Sir Michael Lyons recognised that businesses
need certainty and predictability of their business rate liability
and therefore recommended the idea of an upper limit or cap on
supplementary business rates. The CBI agrees that a centrally-set
cap must be implemented if businesses are to have confidence in
councils to use this power effectively and efficiently. Where
BIDs already exist the cap must include this revenue and the onus
should be on councils to demonstrate the future benefits for businesses
to offset the initial cost.
19. At the lower end of the range proposed
by Sir Michael Lyons the experience of BIDs shows that for certain
additional services businesses can be willing to pay a levy of
0.5-1%. At the other extreme the 4 pence supplement (effectively
almost 10% increase on business rate bills) implemented in the
Rugby BID is atypical and far higher than the vast majority of
businesses would be willing to pay. The CBI therefore would urge
Government not to use this example as a marker for the scale of
supplementary rates.
20. Once further detail is known about the
purpose of a supplement an appropriate cap should be set at the
lower end of the range proposed in the Lyons Report in order to
get the buy-in of the business community. It would then be the
duty of councils to propose a levy which was acceptable to the
local business community both in terms of scale and duration and
appropriate for the scale of the project.
21. The CBI also believes that all parties
who benefit from the project should share the cost. Where those
parties include non-business rate payers councils should demonstrate
how the cost burden is being shared fairly.
THE THRESHOLD
FOR PAYMENTS
AND WHETHER
SMALL BUSINESSES
SHOULD BE
REQUIRED TO
PAY
22. The CBI accepts the case for a threshold
to prevent small businesses being unduly burdened by a new levy.
However it should be noted that such measures can be distortionary
and misleading since rateable value is not necessarily a good
measure of ability to pay. A supplementary rate would represent
an additional tax burden for all affected businesses.
23. Any such small business threshold would
need to be carefully considered by Government taking into account
differences in rateable values across the country as well as the
need to provide all affected businesses with certainty and predictability
of their business rate liability. Clearly only businesses that
crossed the threshold would be eligible to vote on the proposals.
TIMESCALES
24. In terms of providing businesses with
greater assurance about the parameters of a supplementary levy
the CBI would advocate a centrally-set time limit on the duration
of a supplement. This would have the advantage of giving greater
certainty to businesses so that they could plan for the additional
cost. It would also provide greater assurance about the efficiency
and effectiveness of delivery since the project would have to
be delivered within that timescale.
25. As with the proposed rate cap it would
be within the power of local authorities to set out in any proposals
the appropriate duration of a supplement for a specific project
which could be lower than the national limit.
26. In terms of providing assurance that
a supplementary rate would not represent relocalisation through
the back door Government should also consider introducing a "freeze"
time to be implemented at the end of one project and before a
new project could be proposed.
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