Memorandum by Kent County Council (SBR
47)
RATIONALE
Regrettably, Kent County Council feels that
the Communities and Local Government Committee, has sought consultation
on the wrong overarching question. It is recognised that the Committee
is guided in its questioning by the findings of the Lyons Inquiry
into Local Government. Whilst the Inquiry concluded the time was
not right to make a major change to the system of business rates
it did not rule out the possibility of change at a future date
(para 8.38, Lyons Inquiry into Local Government). The Committee
did therefore have an opportunity to call for a wider debate and
Kent County Council regrets that this opportunity was not taken.
In essence rather than consulting upon a supplementary
business rate the consultation should have been about how non
domestic rating currently works and how that should be reformed,
rebalanced and modernised as a cohesive whole. This should not
simply be a question of how Local Government is funded, but how
economic development and regeneration is best served through a
dynamic relationship with business at an appropriate level.
The rationale for a top up supplementary rate
is limited. The Lyons Inquiry does not offer that much evidence
to support its introduction other than as a staging post towards
developing relationships and trust between local authorities and
businesses. Explicitly the Inquiry recognises that a supplementary
business rate would "provide local authorities with a more
limited flexibility to raise revenues for new investment, but
it would also have a more limited impact on businesses".
It infers that the proposal is acceptable because it could be
perceived as a marginal change.
This is not Kent County Council's view. For
a relatively marginal gain in funding, longer term relationships
with business could be compromised, thereby impacting upon longer
term economic development and regeneration partnerships. While
the Lyons Inquiry noted that mutual trust between business and
Local Government had to be improved before a fundamental review
of business rates could be considered, it could be argued that
this "compromise" proposal could instead seriously undermine
it. Businesses, no more than individuals, do not typically like
voting for paying for more tax. Getting a practical consensus
of what additional monies there may be or what they should be
spent on is likely to be difficult and could lead quickly to a
"stalemate".
We believe there is a readily available alternative
solution to a supplementary business rate by modifying and expanding
upon the existing Local Authority Business Growth Incentive Scheme
(LABGI). This would envisage an approach which does not need to
see a supplementary rate levied but which, with price as a constant,
retains all of the volume change in the business rate base locally.
The LABGI scheme is now part way through its
final year of a three year funding arrangement and government
has indicated that its future will be determined as part of the
Comprehensive Spending Review 2007. This existing mechanism provides
an element of supplementary top up to local funding by allowing
local authorities to retain a share of the increased local business
rate base, rather than by levying a top up to the business rate.
This mechanistic formula has unfortunately had
a patchy record to date. The first year grant determination had
to be recalculated three times. The second year grant determination
was meant to be based on total local business rate growth with
the abolition of a ceiling on individual reward per authority
and the abolition of the 70% scaling factor in the calculation
(which results in a proportion of the local increase being retained
centrally). In the end, government determined that whilst it could
abolish the ceiling it could not yet abolish the scaling factor.
To set that decision in context, the cost to Kent County Council
of government determining to retain the scaling factor was £1.2
million less LABGI grant than it would otherwise have received
for 2006-07. This retrospective reworking of some of the principles
of the scheme has been equally unfortunate.
The LABGI scheme does also create a system of
"haves" and "have nots" with its differential
growth targets based on historic trends in business growth, exacerbated
by focusing reward calculations at a district level. If an area
has had relatively high past growth because of special circumstances
but then sees a slowing in onward growth it is penalised in the
future and receives no LABGI grant. Two examples of special circumstances
spring easily to mind in Kent:
— Ashford Borough council receives
no LABGI grant despite being a designated high growth area.
— Dartford Borough Council receives
no LABGI grant because its past historic growth includes the building
of the Bluewater shopping centre and it is effectively penalised
for having had the shopping centre built too early, in terms of
how the LABGI reward model works, with little prospect of ever
replicating past historic growth unless there was another Bluewater.
Clearly this makes no sense, particularly when
these are designated growth areas in desperate need of funding
for infrastructure.
As a minimum Kent County Council would contend
that this reform would see:
— The local retention of all additional
business rates raised locally after an agreed date.
— By the continued abolition of the
ceiling on reward.
— The abolition of the scaling factor
which currently holds back 30% of the local growth centrally.
— Assurance given to business that
annual increases in business rates would continue to be limited
by existing inflation factors.
— LABGI grant to be paid through the
new Local Area Agreement funding mechanism:
— Which would, in turn, enable resource
to be targeted (not ringfenced) to economic development and regeneration
priorities.
Alongside this, it is acknowledged that relationships
need to be progressed upon mutual understanding and common goals.
The business community and the County Council both have common
goals of promoting and achieving economic development and regeneration,
albeit for differing reasons. We of course have a statutory role
to play in economic development and regeneration to continue to
make Kent a great place to work and live and an attractive inward
investment destination of choice. Business has the role to play
in actually delivering the economic growth and opportunities for
all, working within the economic conditions we help to create.
Kent County Council believes that the best way to achieve the
most conducive environment, whilst retaining local flavour, expertise
and knowledge, is at the strategic authority level working closely
with District colleagues through a revised Local Area Agreement.
In the remainder of this document, not withstanding
that overarching objection to the logic of introducing a supplementary
business rate, there are practical impediments and constraints
to progressing a top up scheme and as requested Kent County Council
would wish to comment on these.
APPROVAL MECHANISM
There is an existing statutory duty on local
authorities to consult both business rate payers and council tax
payers. In both cases the emphasis is on consultation, not decision
taking or approval by those classes of payee. It is clearly right
that there should be consultation but it must be emphasised there
are logistical and financial costs even in undertaking this type
of consultation.
The decision on the overall level of council
spending and how it is funded locally is a decision for elected
members. Clearly business ratepayers do not have a direct business
vote over the elected member and in that sense do not have the
same power to hold the elected directly to account at the ballot
box. There is a real danger, however, in looking to introduce
a formal approval mechanism for a top up levy that this will result
in at best increased cost of consultation and approval and at
worst stagnation and inability to get supplementary rates voted
through. Businesses and organisations, no more than individuals,
do not typically like voting for paying for more tax. Getting
a practical consensus of what additional monies there may be and
what they should be spent on is likely to be difficult.
We do not think there is such a risk with our
alternative proposal on a revised version of the LABGI scheme.
Nevertheless, the real issue is about how to engage
the business community with the wider regeneration and economic
development policies across Kent. We start in Kent from a position
of some strength given our close relationship with business through
the Kent Partnership. We clearly acknowledge, however, that this
is an area we wish to develop in the future.
PRACTICAL ISSUES
IN TWO
TIER AREAS
Introduction of a top up scheme in two tier
areas such as KCC is likely to be even more problematical. Non
domestic rates are collected by districts, paid over to the national
pool and then to a greater or lesser extent rebated back via formula
grant to all authorities.
If a district council were to propose a supplementary
levy would the county council get a proportionate automatic share
of the levy?
Would the county have to do its own consultation?
Should there be a single consultation for a
single levy across the whole of a county area (presuming that
agreement could be reached by all councils in advance—the
preferred solution in two tier areas from the final report of
the Lyons Inquiry)?
If a county council were to propose a supplementary
levy across the whole of its area but then had to go to say 12
separate approval mechanisms at district level (there are 12 district
councils in Kent) there is an inbuilt added degree of bureaucracy
and cost. Within Kent that could mean 12 district level votes,
12 district level votes on the county supplementary rate (or perhaps
one separate county wide vote), one for the unitary authority
in Medway, then 12 districts and one unitary vote for the potential
police levy and the same for the fire authority . There is also
an inherent risk that if an approval mechanism is required that
some district areas may vote for and some against and that may
make it administratively difficult to ensure the additional money
raised is only spent in areas that have voted for and are paying
the supplementary levy.
By way of example, suppose the County Council
wished to undertake activity to further publicise and make available
specialist information, advice and support to companies that may
want to locate to Kent or who are already in Kent (beyond that
core work that it already does in this area) in pursuit of its
regeneration and economic development policies. This is put out
to vote by business rate payers. If half the district areas voted
for it, and half against, the County would be left to promote
and publicise a campaign that would be relocate to odd parts of
Kent, rather than a cohesive whole. Or a refusal of support and
advice if a company which was within Kent came from a district
area that had voted "no" to avoid cross subsidisation
from areas that had voted "yes". Or more bizarrely still
perhaps a refusal to give help and advice to a company from outside
Kent that was thinking of relocating to Kent because it was proposing
to go the "wrong part" (in the sense that it would be
locating in a district area that had voted no to a supplementary
rate). That would hardly look like a sensible strategic approach
to take for prospective users of the service, existing residents
and business in Kent, taxpayers or members.
That would seem to rule out the option of approval
at a sub-county level and potentially lead to the need for separate
approvals for tax collecting and tax precepting bodies, unless
all partner bodies could agree a single shared delivery plan and
supplementary business rate proposal in advance.
The alternative proposal of a revised LABGI
scheme, with funding managed through the new Local Area Agreement,
would be comparatively straight-forward. Any additional monies
would need to be "earned" through an increase in business,
with the local bodies deciding how this be aligned to priorities.
SIZE OF
THE SUPPLEMENT
If there were to be a supplementary rate, the
size of the supplement needs to be sufficiently meaningful to
make it worthwhile levying. A 1p levy (2.25% increase in current
multiplier of 44.4p) across Kent for example would raise an additional
£11 million for districts, unitary, fire, police and county
combined Set against a combined service expenditure budget of
approximately £2.7 billion that is worth just 0.4% of additional
spending.
The alternative LABGI proposal would see benefits
in line with local development and regeneration. This would provide
an improved incentive for investment in such objectives at a local
level.
EQUALISATION
Whatever proposals are considered, quite simply
there must be no impact on the equalisation of resources between
authorities. This would corrupt any incentive and cloud decision-making.
SMALL BUSINESSES
If a supplementary business rate were levied
then in principle small business should probably, for equity reasons,
be expected to pay the supplementary rate. There should not be
any minimum threshold for payment. If the supplementary rate were
to be collected separately then there would be clear argument
for not collecting de minimis amounts as the administrative burden
of collecting may outweigh the additional revenue received. Given
that all businesses are already billed for business rates there
seems no impediment to ensuring that the supplementary rate levied,
however small the change in the overall bill, is reflected in
the business rate bill issued.
It is noted that small business already enjoys
some relief through the small business rate multiplier in the
national scheme. Having said this, small businesses can find the
existing non domestic rate a disproportionate burden on their
costs and in that case a supplementary rate is likely to be equally
disproportionate and consequently disastrous for the encouragement
of SMEs.
On balance, therefore, it is probably right
for the responsible authority in each area to set the policy with
regard to whether small businesses pay or not having due regard
to its own overarching economic development and regeneration strategy,
rather than to having this prescribed on a national basis.
CONCLUSION
In conclusion, Kent County Council cannot support
the supplementary business rate proposal. This is because of the
range of difficulties set out in this paper. Should a more fundamental
review of Local Government funding be inappropriate at this time,
instead a revised LABGI scheme should be considered. The main
characteristics of such a scheme are set out in this paper and
it is believed that this will provide a good way forward that
will facilitate economic development and regeneration working
with key partners.
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