100 per cent retention of business rates: issues for consideration Contents


1.On 5 October 2015, at the Conservative Party Conference, the Chancellor of the Exchequer announced a ‘devolution revolution’: a commitment to allow local government collectively to retain 100 per cent of business rate revenue by the end of this Parliament and, to match the resulting additional local tax revenues, for it to take on “new responsibilities”.1 As a consequence, Revenue Support Grant, the main central government grant for local authorities, is to be phased out.

2.In our report, Devolution: the next five years and beyond,2 we described the reforms as a move in the right direction; being just one aspect of the range of fiscal powers that we would like to see devolved to local authorities and which we believe are essential to genuine devolution. This change has been called for by a number of influential organisations over the years3 and by our predecessor committee,4 but always as part of a package of other fiscal powers. At the moment, it is unclear whether these are seen by the Government as isolated reforms or a first step towards wider fiscal devolution. We very much hope it is the latter.

3.The reforms are, nevertheless, transformative and create a real opportunity for local government; in retaining 100 per cent of business rate revenue, councils will have a direct and strong incentive to promote local growth and economic development. The Chairman of the Local Government Association, Lord Porter, said that it was “great news for councils” and showed that the Government had listened to local government.5

4.At the same time, however, 100 per cent retention may well lead to further divergence in authorities’ spending power. The New Local Government Network described the reforms as likely to exacerbate the “‘winner takes all’ approach to urban growth, in which a relatively small number of agglomerations take the lion’s share of economic development and its accompanying wealth”.6 Instead of seeing 100 per cent retention as an opportunity, many of the authorities that we heard from feared how they would fare and stressed the need for equalisation and fairness in the reformed system.

5.We share their concerns, which are supported by our own analysis in chapter five, and also note the context of unprecedented pressure on local authority budgets in which the reforms are taking place. Complicating matters further, unless fully compensated for, separate measures announced in the Budget 2016 will limit authorities’ revenue and their incentives to encourage growth in small businesses,7 in a way that seems to run counter to the aims of 100 per cent retention. Furthermore, the new responsibilities will have to be carefully chosen and calibrated to ensure that they remain proportionate to the additional revenue generated and are suited to local authorities’ devolution ambitions.

6.Redistribution between authorities more and less able to generate revenue will clearly be a crucial aspect of the reformed system, and the challenge for the Government and the sector is to structure the redistribution mechanism in such a way that preserves strong incentives for authorities to promote growth and success. However, to ensure its funding over the longer-term, we would like to see local government awarded greater control over a wider range of more comprehensive fiscal powers, including greater control over council tax, the ability for councils to vary business rates and the other property taxes referred to by our predecessors in their report on fiscal devolution.8 This is critical for councils to be able to meet the continually increasing demands for services, such as social care, in the future.

Our inquiry

7.The proposed changes are significant. We therefore decided to undertake an inquiry so that the Government’s proposals could be discussed and scrutinised. We were also keen to hear from local government about which new responsibilities they would be prepared to take on in return for the expected increase in their business rate revenue. We were disappointed that the Department for Communities and Local Government did not make a written submission to the inquiry, and then told us in May 2016, six months after the launch of the inquiry, that Ministers were not in a position to give oral evidence before the autumn, after a consultation had concluded. This would have created a lengthy hiatus in the inquiry and, by this stage, we had already held four evidence sessions and received around sixty written submissions.

8.We have, therefore, decided to draw together our findings so far in an interim report. The Government said that there would be “a period of extensive engagement with councils and their representatives” in the months before the consultation,9 and we intend our report to feed into this, raising issues and questions to be covered in the consultation and addressed by the Government before the reforms are implemented. We hope that our work will be an important step in scrutinising the Department’s proposals, influencing the consultation taking place this summer, aiding the deliberations of the Local Government Association Business Rates Retention Steering Group10 and informing the public sector and stakeholders more widely. In addition, where we had evidence of a pressing issue, we have made specific recommendations. Once the consultation is complete, we will invite the Department again to give evidence and intend, after this, to consolidate our conclusions and recommendations in a final report.

9.We are grateful to all those who gave us written and oral evidence. Particular thanks are due to our specialist advisers, Professor Alan Harding of the University of Liverpool and Professor Tony Travers of the London School of Economics.11


Business rates reforms: 1990–2015

10.A short summary of the changes to business rates since the 1990s is a useful background against which to assess the proposed reforms. Business rates were taken out of local authority control in 199012 and replaced by the national non-domestic rate (although they continued to be referred to as ‘business rates’). The Government set the rate, known as the ‘multiplier’, and councils collected the revenue, with the overall England-wide yield of business rates pooled and redistributed to councils based on an annual needs assessment (Revenue Support Grant).

11.For decades, councils had no incentive to build up tax revenues by supporting their local economy: any authority that saw an increase in business rate revenue would not receive a corresponding increase in funding. However, in 2005, the Local Authority Business Growth Incentives (LAGBI) scheme gave local authorities financial incentives to develop the local tax base by rewarding qualifying business growth with a non-ringfenced grant from central government. This scheme operated in 2005–06 and 2007–08. In 2009–10 it was re-introduced in a simpler and more predictable form. In 2013–14, the Government allowed councils to retain 50 per cent of their business rates (the Business Rates Retention Scheme) with a corresponding reduction in Revenue Support Grant.13 To take account of differences in councils’ business rate revenues, the Government created a mechanism to redistribute revenue from authorities with relatively large yields to authorities with relatively small yields. The Business Rates Retention Scheme is currently in operation.

1Chancellor unveils ‘devolution revolution’”, HM Treasury press release, 5 October 2015

2 Communities and Local Government Committee, First Report of Session 2015-16, Devolution: the next five years and beyond, HC 369

3 These include the London Finance Commission, the City Growth Commission and the Independent Commission on Local Government Finance (which was jointly established by the Local Government Association and the Chartered Institute for Public Finance and Accountancy).

4 Communities and Local Government Committee, First Report of Session 2014-15, Devolution in England: the case for local government, HC 503

5 Local Government Association, LGA responds to Chancellor’s business rates announcement, 5 October 2015

6 New Local Government Network (BUR22)

7 HM Treasury, Budget 2016, March 2016, p46

8 Communities and Local Government Committee, First Report of Session 2014-15, Devolution in England: the case for local government, HC 503

10 For further details, see www.local.gov.uk/business-rates

11 Tony Travers declared the following interests: Occasional fees for speaking engagements, work on commissions and consultancy. Alan Harding declared the following interests: I have verbally been offered the job of Chief Economist to the Greater Manchester Combined Authority and have accepted in principle, subject to contract. I am due to start the new role in January and remain in my current academic post until then (now in post).

12 1989 in Scotland

13 DCLG, ‘Business rates retention’, accessed 26 May 2016

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9 June 2016