Memorandum from The Mayor's Office—Greater
London Authority (SBR 45)
SUMMARY
This paper sets out the Mayor of London's consideration
of the supplementary business rate proposals put forward by Sir
Michael Lyon's recent inquiry into local government. The Mayor
supports a single supplementary business rate in London. This
should be set by the Mayor of London in consultation with boroughs,
businesses and the wider community, and should be applied to strategic
infrastructure investment that will support the capital's long-term
economic growth. Crossrail is the immediate prime candidate to
be funded in part by a supplementary business rate. The size of
the supplementary business rate, the thresholds to be applied
and any exemptions or reliefs would need to be determined in due
course and following consultation with businesses in London.
INTRODUCTION
1. 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. [26]However,
London's growth has put exceptional pressure on London's infrastructure
and these demands will only increase. The ability of London to
retain its position as a leading world city in an increasingly
competitive and global economy over the next 20 years will depend
on its ability to continue to provide a location for internationally
competitive firms, most notably in the financial and business
sectors. London needs to find ways of funding the infrastructure
the city needs now and in the future in order to meet the challenges
of a growing economy and in order to sustain and develop London's
status as a world city.
RATIONAL FOR
A SUPPLEMENTARY
BUSINESS RATE
2. Against this background, the Mayor welcomes
the Government's proposal to introduce a power to set and collect
a local supplement on the business rate collected in an area.
The Mayor agrees that such a power is needed to provide local
government the ability to raise revenues for new investments that
are required by business. This is important in London where employment
is forecast to grow by a further 450,000 jobs by 2016 and where
London's population is projected to grow by over one million over
the next two decades—continual investment over a long time
period will be necessary to support that growth.
3. Although the supplementary business rate
(SBR) would be a limited tax, it would make a significant contribution
to the economy in London, having both policy and fiscal advantages,
by providing a secure revenue stream to finance prudential borrowing
using existing powers provided for by Local Government Act 2003.
A LONDON-WIDE
SBR
4. The Mayor agrees with the Lyons Inquiry
that there be a single supplementary business rate for London.
He also agrees that the rate should be used to support long-term
infrastructure improvements. The Mayor should set this SBR in
the same way that the national business rate is set by government.
we HeHe A single rate will enable the capital to address strategic
investment priorities facing London's businesses as a whole. A
single rate would be transparent to all businesses in London and
would be straightforward to implement.
5. The Mayor strongly believes that he should
set the SBR following consultation with the 33 London local authorities
as well as London business. He does not believe that it is practicable
that he should reach agreement with all 33 local authorities in
London. He is the directly elected Mayor whose responsibility
is to make strategic decisions for the improvement of the whole
capital rather than single boroughs. Having to provide specific
benefits for 33 local authorities would be impractical, would
not be transparent to all Londoners, would risk short-termism
and agreement may be impossible to reach in any case. It is therefore
much more appropriate for the Mayor to consult on his strategic
proposals with London's local authorities as part of determining
the supplementary business rate.
6. 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 BIDs to tackle local issues, supported where necessary
by additional business rate levies.
7. Furthermore, the decision-making arrangements
for making investments for economic development must reflect actual
patterns of economic activity. Business activity within London
is both extremely inter-connected and highly concentrated. For
example, 61% of people live in a different borough from the one
in which they work and 30% of London's workforce is concentrated
in just 2% of its geographical area (the West End, City and Isle
of Dogs). A London wide SBR is therefore more appropriate than
separate supplements for all 33 local authorities.
EQUALISATION
8. 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. [27]
9. As London generates additional wealth
for the UK already, there is no need for further "equalisation"
between London and the rest of the UK with regard to a supplementary
business rate. On conservative assumptions, London's net contribution
to the national purse (ie taxes generated less public expenditure
received) is estimated to have been between £1billion and
£8 billion in 2004-05[28]
and may have been between £6 billion and £20 billion.
[29]
10. In practice, further equalisation between
London and the UK would create additional complexity, would not
be transparent to London rate-payers, and would go against the
local flexibility that the supplementary rate is supposed to give.
[30]
SIZE AND
THRESHOLDS
11. The size of the supplement, the length
of its application, and the arrangements for applying reliefs
and thresholds should depend on the nature of the investments
to be made, the expected beneficiaries and, as Lyons recommends,
should be determined following consultation with business. The
greatest flexibility possible should be granted under legislation
to the local authority, in this case the GLA in consultation with
the boroughs and businesses, to determine the size, period, thresholds
and any reliefs with regard to the supplementary business rate.
12. It is predominantly large-scale business
that will benefit from the significant infrastructure projects
that the SBR will be invested in. Although the single SBR should
apply across all of Greater London, there should be some consideration
about differentiating the size of business that should pay the
levy and setting thresholds for its payment.
13. The chart in Appendix 1 illustrates
how much might be collected in London given various combinations
of thresholds and sizes. The maps in Appendix 2 illustrate how
the three different thresholds in Appendix 1 affect the geography
of businesses that would be liable for the SBR.
PRACTICABLE ARRANGEMENTS
FOR LONDON
An outline of the proposed process
14. For London we suggest the method for
determining the SBR builds as far as possible on existing processes.
Further more detailed consideration will be required to build
an appropriate process but the following outlines our proposed
approach.
15. The process to set the SBR would be
similar to that for determining the GLA's Capital Spending Plan
and Borrowing Limits. The Mayor would make a draft proposal for
an SBR, setting out the purposes for which the revenue collected
would be raised and showing how this would support investment
in line with his various strategies. He would then consult formally
with London's local authorities, representatives of businesses
and the others referred to in the GLA Act, and would take a decision
based on his assessment of the representations made.
16. It is important to recall the intention
of the original GLA Act, which is to provide the Mayor with strong
executive powers, within the prescribed and limited strategic
areas of his remit, so that London can benefit from clear and
highly accountable strategic decision-making.
How consultation should take place with business
and the wider community
17. Businesses and local authorities have
a mutual interest in successful and prosperous places. Lyons stresses
the importance of building trust between local authorities and
the business community, stating that the decision making process
for a London-wide SBR should be a "debate on investment rather
than a debate on taxation". Lyons also suggests that although
it is not desirable for powers over the SBR to rest with the London
boroughs it is important to involve the London boroughs in the
proposals for a London-wide SBR. To this end Lyons sets out two
options to ensure that business and the wider community are involved
in decisions to have a supplement and decisions about where it
should be spent.
18. We strongly agree with Lyon's emphasis
on decisions being taken based on debate and consensus, where
possible, on investment priorities, rather than a narrow focus
on rates of taxation. The accountability and approval mechanisms
for an SBR should follow this approach. In London, the legislation
establishing the GLA requires consultation with local authorities,
voluntary bodies, organisations representing different religious,
ethnic, racial and national groups and bodies representing the
interests of persons carrying on business in Greater London, before
the GLA uses its general powers. The Mayor is subject to similar
requirements in preparing his statutory strategies. The best approach
would be to build upon these arrangements, especially as the priorities
for use of any SBR would be set out in the Mayor's strategies
(particularly those on Spatial Development, Transport and Economic
Development).
19. It follows that a voting system would
be wholly inappropriate for the SBR. Raising revenue through a
London-wide SBR for large infrastructure projects is very different
from the local BID schemes that have previously utilised a voting
mechanism. The Mayor has a democratic mandate, and use of SBR
resources are likely to form an important part of his or her policies
and strategies. A ballot would not be conducive to the kind of
debate Lyons favours—it would inevitably focus on short-term
issues (particularly as any SBR would be paid by occupiers and
not landowners, who tend to take a longer-term view), and would
merely provide a forum to re-fight mayoral elections. Ballots
would also be prohibitively expensive to organise and hold, particularly
if they had to be repeated on an annual basis. They would also
add complexity and bureaucracy to infrastructure projects, which
are likely to be financed by more than one funding stream. In
addition to this, unsuccessful SBR proposals would pose a burden
on council tax payers, and this would be more likely if a voting
system was used. Finally, it is worth bearing in mind that businesses
do not currently have a vote for the national non-domestic rate,
for which democratic accountability is through ministers and Parliament.
20. We agree with Lyons' favoured alternative,
a statutory consultation process. This should set out to stakeholders
a clear economic case of the likely impact of a proposed project,
linked with clearly articulated regional priorities. The GLA Act
1999, best value and other legislation impose considerable statutory
responsibilities on the GLA and the functional bodies in relation
to consultation as explained above. Meeting those obligations
is a key priority and the GLA has a well-developed consultation
process as exemplified through statutory consultation on the Mayors'
strategies and the budget.
21. We propose that the consultation on
the introduction of SBR and how it is spent is built into the
established budget consultation process. Arrangements would therefore
be transparent providing businesses and London boroughs with a
visible link to local expenditure, demonstrating how they will
get a return on their investment. The business community will
need to have confidence that the introduction and use of powers
to raise an SBR is in their interests.
CROSSRAIL
22. Crossrail is the prime example of an
infrastructure project that could be part funded through an SBR.
It is a strategic project which will bring enormous economic benefits
to the whole of London, directly and indirectly, and beyond. Crossrail's
route includes 8 of the top 10 boroughs with the fastest forecast
absolute growth in jobs between 2003-26. Crossrail will also generate
additional national tax revenues of at least £12bn. Transport
for London (TfL) has calculated that Crossrail will provide 40%
of the extra rail capacity London needs by 2015. It will significantly
reduce congestion on all the lines in central London, benefiting
commuters from all London boroughs.
23. The SBR would capture part of the financial
benefits that accrue to beneficiaries of Crossrail, particularly
large-scale business, as the agglomeration effects produced by
such infrastructure will have direct and indirect positive impacts
on business in London. [31]The
range of net agglomeration benefits have been valued between £37
billion to £68bn (present value) to UK GDP over 60 years.
The Government has indicated that there should be a substantial
contribution from London businesses to help pay for Crossrail,
combined with funds from the Department for Transport, Network
Rail, Transport for London and the Public Works Loan Board. Using
a SBR to provide some of the funding would reduce the burden on
national taxpayers, who will still benefit from Crossrail (not
least through its uplift to national Exchequer revenues), but
not so directly.
24. As Crossrail is a large-scale project
whose primary benefit will accrue to large businesses, consideration
would be given to applying thresholds so that small businesses
would not pay the SBR.
25. 31 borough leaders, and the Corporation
of London and all London Assembly members have signed up to the
"Campaign for Crossrail", which was launched by the
Mayor on 6 June 2006. Campaign supporters include London First,
the CBI and the London Chamber of Commerce as well as many leading
companies and other organisations in London and the UK, including
20% of the FTSE 100.
IMPLICATIONS FOR
BUSINESS IMPROVEMENT
DISTRICTS
26. One aspect not addressed by the Lyons'
review which will require further consideration by the Government
is the implications of a new supplementary business rate for existing
and future potential business improvement districts (BIDs).
27. There are 15 BIDs in London, ranging
from the New West End Company (covering Oxford, Regent and Bond
streets) to London Riverside (covering an industrial estate in
Havering). BIDs are funded through a levy paid by occupiers in
a particular area.
28. The Mayor is supportive of BIDs, which
provide a valuable means for businesses to play a part in the
management of commercial areas, coordinating additional services
like cleansing or security, enabling better marketing and closer
working with statutory authorities and providing a means of influencing
the long term strategic direction of their areas.
29. Conceptually, BIDs and a supplementary
business rate should contribute to different investments. If both
provide net benefits over time, then both investments should be
made. In practice, BIDs clearly do not currently contribute to
funding Crossrail and the Mayor would not propose that a supplementary
business rate be used to contribute to goods and services traditionally
provided by BIDs.
30. Nevertheless, there is a concern among
business that being part of a BID and also having to contribute
to a supplementary business rate would be unduly onerous. The
Mayor is therefore considering means of reconciling the objectives
of supporting BIDs, while also funding infrastructure needed by
the capital as a whole. One possibility currently under examination
is amending the BID legislation to enable landowners to be brought
within the formal framework of business improvement districts.
The Mayor has announced his support for such a change. In Scotland,
BIDs have the discretion to include landowners, and to raise a
levy from them (in England, only occupiers can be formal BID members,
although in some cases landowners take part—and pay—on
a voluntary basis). This would provide a broader funding base
for BIDs. Again, there are a number of potential practical difficulties—identifying
owners of land is not always straightforward, but the London BIDs
Group—coordinated by the London Development Agency—is
currently examining these questions.
LANDOWNERS AND
BUSINESS RATE
PAYERS
31. As Lyons recognises, "in the medium
to long term almost all of the impact [of the supplementary business
rate] will fall on landlords in terms of lower rents. This means
that, all other things being equal, [a supplementary business
rate] will lead to a fall in property values to reflect the reduced
value of future rental streams, and that a reduction in rates
will lead to a rise in property values". (paragraph 8.20).
Furthermore, as Lyons recommends and the GLA supports, if revaluations
also take place more regularly, any adverse impact of a supplementary
business rate on a particular sector (such as retail, which requires
more extensive property by its very nature) should more quickly
be taken into account in the revaluation of future rental streams.
[32]
OTHER IMPLICATIONS
32. Implementing a supplementary business
rate will take time. This must not be used as an excuse to delay
Crossrail and other vital infrastructure improvements both in
London and elsewhere and the Government must provide the necessary
bridging finance required, both because the infrastructural demands
of a growing city are now becoming critical and delays to their
implementation carry a significant cost to the economy, and as
an incentive for central Government to introduce the new powers
expeditiously. It is crucial that construction on Crossrail begins
in 2008 to allow Crossrail to open in the middle of the next decade
and to prevent the risk that future office developments be refused
planning permission because of insufficient transport capacity.
APPENDIX 1
TOTAL VALUE COLLECTED PER ANNUM
Supplementary Business Rates Collected
APPENDIX 2
MAPS
26 See "Our London, Our Future-Planning for London's
Growth II" (Mayor of London, November 2005) and "The
Case for London-London's Loss is No one's Gain" (Mayor of
London, March 2004). Back
27
"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". (Lyons Inquiry into Local
Government, Final Report, paragraph 8.67). Back
28
London's Place in the UK Economy, London School of Economics and
Political Science for the Corporation of London (September 2002
and 2003). Back
29
London's Place in the Economy, 2006-07, Oxford Economic Forecasting
(November 2006). Back
30
"Given that this supplement is designed to enable greater
local flexibility where there is local support, it would arguably
be perverse to apply an equalisation or limitation scheme to it."
(Lyons, paragraph 8.67). Back
31
Agglomeration enables: better access to a large workforce; more
competing and complementary businesses and institutions; the availability
of intermediate goods; access to large specialised client base;
and the potential for informal contacts and knowledge sharing. Back
32
"Economic theory suggests that the person who really ends
up paying the tax is not necessarily the same as the person who
hands over the money initially. In the case of property taxes,
we would expect the owner to bear the final burden, because he
or she will receive lower rents where taxes and other occupation
costs are higher ... The available empirical evidence on business
rates supports the theory and suggests that it is landlords who
bear the cost (or receive the benefit) of changes in rates."
(Lyons, paragraphs 8.19 and 8.20). Back
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