Select Committee on Communities and Local Government Committee Written Evidence


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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