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

5The reformed system: 100 per cent retention dissected

Long-term challenges

39.We believe that the reform is a real opportunity for local government, but one which the evidence shows creates challenges, both short- and long-term, that need to be addressed. This section discusses some of the long-term challenges.

Ending Revenue Support Grant

40.On 5 October 2015, the Chancellor made a commitment to phase out Revenue Support Grant (RSG).78 As explained in chapter three, this is the general grant currently paid from the ‘central share’ of business rate revenue to supplement local authority revenue.79 Since 2010–11, the Government has been implementing reductions to local government funding by reducing RSG. Sheffield City Region said “the combination of annual budget setting requirements, unprecedented cuts and annual settlement announcements ensure that business rates may prove to be less volatile than the existing grant regime”.80 However, this view was not widely held. Andy Hall, Business Rates Assurance Manager at Boston Borough Council, said that business rates are “volatile on a daily basis, unlike RSG”.81 Birmingham City Council said:

It should be recognised that the Government may need to allocate further resources into the system to reflect demographic changes which have increased at a faster rate than business rates income nationally. 82

41.David Phillips, Senior Research Economist at the Institute for Fiscal Studies, also thought that authorities experiencing high increases in demand for services might need to have “a system of grant funding as a backstop”.83 Simon Parker, the Director of the New Local Government Network, said that grant funding was “inevitable” and that:

You get to 2020 and you look at where local government funding will be by then. Councils are going to be pretty threadbare places, and the business rate and council tax will not meet the full range of local need. The idea that we have permanently said goodbye to central grants is not credible. One way or another, it will come back in. It will have to.84

Newark and Sherwood District Council asked “What happens with sudden changes in need (such as the influx of migrants in Kent, or flooding), a mechanism needs to be in place to deal with this—would central government still provide funds or would this be part of the 100 per cent retention?”.85 They went on to suggest that authorities could put in place “a mechanism of set asides […] for such events”. Sean Nolan, Senior Local Government Advisor at CIPFA, was sceptical that separate funding would be forthcoming from the Government: “They will say, “Sector, we want you to come up with a solution yourself””.86 We also note that the Government has made clear that local government will be required to take on new responsibilities in return for additional funding.

Issues for consideration:

Business rate revenue versus need

42.Sean Nolan of CIPFA assessed councils’ likely reaction to the reforms:

If you are a resourced council, you have a higher tax base and you are looking forward to the prospects of growth, you generally welcome the idea of retention. If you are a high-need council, despite your efforts—it may be to do with history and geography—you may be a bit fretful with the prospect of 100 per cent business rate retention because you are nervous about the amount of money you will be able to retain and grow.87

The evidence we received confirmed this: for example, Birmingham City Council said that, based on their current funding levels, they would not be able to provide the services their residents required.88 Essex County Council foresaw a “potentially toxic combination of growing complex demand and rapidly shrinking revenue” due to the fact that, by 2020, they will have significantly more people aged over 85 than comparable areas.89 They were “concerned that the Government expects business rates to fund demand-led services despite the fact that demographic growth will likely far outstrip growth in business rates over a given period”.90 We analysed the relationship between population growth and business rate revenue. The graph below, which plots their modelled figures for budget growth from business rates in 2015 against population growth and population growth in the over-65s, quite clearly shows that there is little or no correlation.

Figure 2: Gain/loss as a share of budget in year 6 of retention

43.Authorities wanted reassurance that equalisation and redistribution would feature in the reformed system,91 even though the Government had already indicated that this would be the case.92 Dennis Napier, Assistant Head of Financial Resources at Sunderland City Council, said:

One of the asks we have is to ensure that there is fairness in distribution of business rates and that they take into account need to spend, because those with a low tax base, like Sunderland, would suffer disproportionately. 93

The economic and financial context in which the changes are taking place compounds authorities’ concerns: as one of our witnesses pointed out, the reforms are being introduced “at a time when local government finance is under immense pressure”.94

Issues for consideration:

Divergence in revenue

44.In order to understand what the impact of the reforms on councils’ budgets might be, we looked at what would have happened had councils retained 100 per cent of their business rates in the past. By looking at how business rates have changed in each authority over the last six years and comparing the change to the authority’s budget, we were able to see what the effect of 100 per cent retention might have been in 2015–16, if it had started in 2010.

Figure 3: Gain/loss in 2015 as a share of budget, if 100 per cent retention had started in 2010, without levies and safety net

The graph above shows that, in some cases, the divergence in revenue could be substantial. 58 per cent of authorities would have seen a variation of no more than five per cent of their net revenue budget, either up or down, if a 100 per cent retention period had run from 2010 to 2015, without levies and safety net. However, a significant minority of authorities would have gained or lost very large amounts of money. The effect ranges from a loss of 27 per cent of the budget in Harlow, to a gain of 80 per cent of the budget in Bassetlaw. In the current system, the levy and safety net reduce this kind of variation, but the Government has not yet confirmed whether they will form part of the reformed system. Under 100 per cent retention, mechanisms to reduce divergence in resources between authorities, such as top ups and tariffs and the safety net will be even more necessary and significant and ensure the delivery of key public services.

Issues for consideration:

Setting up the system

45.The evidence on the current system revealed a number of short-term issues which need to be taken into account in the design and set up of the new system.

Needs assessment

46.In the current system, top ups and tariffs effectively redistribute business rate revenue between authorities; the amounts of which were calculated at the outset, based on the Revenue Support Grant previously received, remaining fixed until the reset in 2020. The needs assessment is therefore critical to councils which, understandably, want the introduction of 100 per cent retention to be accompanied by a reassessment of needs.95 Sharon Gregory, Group Accountant for Cambridgeshire and Northamptonshire County Councils, said that, as it stands, “the needs assessment formula, which is the fundamental basis for the business rates system, does not keep pace with growth of local authorities”.96 She wanted “more relevant and timely data used within any distribution mechanism, with less ministerial judgment and more empirical data, and smoothing of cliff edges” and “a less complicated and more transparent system”.97

47.During the inquiry, the Secretary of State made a commitment to revising the underlying assessment of needs and to “go back to the drawing board to look at the needs and resources available to each county”.98 This is welcome, as long as the task is tackled in collaboration with local government and with input from an independent body. We endorse the recommendation of our predecessor committee that the process be “informed by the advice of an independent body, with responsibility for the assessment of needs and resources and the determination of apportionment between local authorities”.99 We also intend to contribute to this work ourselves in due course, including commissioning research. In the meantime, the Government should set out the timescales for this work and state whether the revised needs assessment will be used to set up the new system in 2020. It will also need to explain how and when the inevitable changes in resources distribution will be brought into effect.

Issues for consideration:

Top ups and tariffs

48.The Spending Review and Autumn Statement in November 2015 confirmed that top ups and tariffs would be retained in the reformed system.100 The evidence we received supported this decision: Sean Nolan of CIPFA said it would seem “logical”101 to retain top ups and tariffs, and David Magor, Chief Executive of the Institute of Revenues Rating and Valuation, said that they “work surprisingly well”102 and did not therefore feel they should change. We agree, believing that it is sensible to continue with a tried and tested mechanism and help maintain stability.

49.However, top ups and tariffs may need to be adjusted to suit the demands of the reformed system. The Industrial Communities Alliance said that phasing out Revenue Support Grant means “the system of top ups and tariffs takes on paramount importance” and, if not structured appropriately, it would “seriously and systematically disadvantage local authorities in England’s older industrial areas”.103 Paul Dransfield, Strategic Director for Major Programmes at Birmingham City Council, said that he would like the top up to “relate more to need” and suggested assessing it against need “as opposed to it just being a figure that is calculated”.104 The County Councils Network said that “the top up system […] must adequately reflect the role played by the county council in two tier areas”.105

Issues for consideration:

Regional redistribution

50.‘Regional’ or ‘subnational’ redistribution, whereby redistribution takes place across a group of authorities rather than nationally, was a popular proposal106 and one which fits in with the context of combined authorities and devolution deals. Essex County Council said that redistribution should “reflect economic linkages across local authority boundaries”107 and Newark and Sherwood District Council said it should take place across a “minimum number of authorities”.108 In their interim report, the Independent Commission on Local Government Finance said that regional redistribution would be “more transparent” and would “encourage strategic working between authorities”.109 They suggested it could work in the following way:

First, there would be equalisation within a unit such as a combined authority, for example Greater Manchester. There would then be equalisation between areas. There is less disparity in wealth between the different parts of the country than is often assumed. On the 2018–19 projections, self-sufficiency would require 247 councils to ’top up‘ 106 councils. Most of this could be managed through transfers between councils in the same area.110

51.We are less certain. The heatmap below shows, for 2015–16, the local tax (council tax and 100 per cent of business rates) surplus and deficit as a percentage of net revenue expenditure across the nine English regions.

Figure 4: Local tax surplus/deficit as % of net revenue expenditure (2015/16)

The regions shaded in green overall collect more in council tax and business rates than they spend and the regions shaded in red, which predominate, spend more overall than they collect in council tax and business rates. Although regional redistribution may well take place over a smaller geographical area, we think this map raises questions about whether a regionalised distribution system would work.

Issues for consideration:

The share of business rates in two-tier authorities

52.David Phillips of the Institute for Fiscal Studies suggested that the shares of business rate revenue retained by districts and counties in two-tier areas might need consideration.111 He said that the current split requires “big flows [of money] between districts and counties” to ensure counties do not lose out.112 We heard that the current shares do not properly reflect the distribution of responsibilities.113 Sharon Gregory from Cambridgeshire and Northamptonshire County Councils, said:

The split in two-tier areas is not appropriate and does not reflect the distribution of responsibility for authorities in two-tier areas. County councils pay a vital role in delivering growth. The growth could not happen without the infrastructure that we provide. We also incur the vast majority of the ongoing costs of that growth, particularly social care. We would like to see that addressed as a matter of urgency, to have a better split within the two-tier areas to represent where the true costs lie within each tier.114

LGSS, which provides shared services for the same councils, said that the fact that county councils receive only a small proportion of business rate revenue diminished their incentives to encourage growth.115

53.District councils, unsurprisingly, disagreed. Andy Hall of Boston Borough Council said:

If we are talking about the growth in business rates and how that should be split up, from Boston, our starting point is that 100 per cent should be retained by the district council. After all, the district council expenditure is much more likely to be closely linked geographically to the businesses that are contributing to that increased rate yield.116

He went on to suggest that an individual approach based on an authority’s needs would be preferable to a single percentage split across the country.

Issues for consideration:

Running and managing the new system, and achieving growth

54.Evidence on the current system also revealed a number of existing issues which will have to be taken into account in the design and set up of the new system.

Risk and volatility

55.The evidence highlighted the volatility of revenue from business rates. The District Councils Network explained why this was the case:

Typically a tax base is made up of a large number of payees contributing a sum which does not range too widely. The business rates tax base is the exact opposite. A few very large payees can account for a massively disproportionate part of the tax take.

To illustrate this point a district tagged “the most typical town in England” has more than one-third of its business rates income paid by less than 0.5 per cent of its taxpayers.117

56.Various factors, including business closures, appeals and changes to the health of the local and national economy, can cause reductions in business rate revenue. Sharon Gregory said that Cambridgeshire and Northamptonshire County Councils “have some very big businesses that represent a large proportion of the business rates base, and there are significant risks around those businesses leaving or failing”.118 Cannock Chase Council submitted evidence to us on learning that one of their major businesses, Rugeley Power Station, which represents nearly nine per cent of their business rates, will close later this year.119 David Phillips of the Institute for Fiscal Studies pointed out the further risk that eventually the space vacated by closing businesses “becomes redundant and is demolished” and therefore lost as a potential source of revenue.120 He believed that business rates expose local authorities in terms of risk to “the long-term process of economic and structural change”.121 Newark and Sherwood District Council pointed out the risk for authorities of the economy moving into recession:

If businesses collapse, this is a double whammy for authorities and for central government. Income drops—from both business rates and corporation tax; the benefits bill increases. Where will the extra money come from?122

57.Authorities also identified changes in Government policy as a source of risk. Sheffield City Region called on the Government to consider “the impact of national ratings policy decisions on local business rates and, therefore, local finances”.123 The examples they gave included the mandatory charitable rate relief offered to academies and, if their court case is successful, NHS Trusts, and the reduction in rateable value of GP surgeries (see also paragraph 76).124

The safety net and levies

58.At present, the safety net protects councils from disproportionate losses of business rate revenue. The Government has not yet said whether it will feature in the reformed system. The City of London Corporation said that, although it was unlikely to need such protection, the safety net should be retained in case authorities “suffer significant falls in their rating income as a result of events outside their control”.125 Witnesses were often critical of the way in which the safety net operated. Stockton-on-Tees Borough Council said:

The safety net is set too low, with local authorities being required to accommodate very significant reductions in income before triggering [it]. Based on the current system Stockton would need to lose approximately £5 million in one year before [it] is activated.126

Similarly, Dennis Napier of Sunderland City Council said that his council would have to incur “quite a significant drop in business rates” to fall within the safety net.127 Cannock Chase Council had a different concern: they said that if they had not achieved growth, they would have fallen within the safety net after the closure of Rugeley Power Station worth nearly 9 per cent of their business rates. They described having been “penalised for achieving the required growth”.128

59.At the time of the Chancellor’s announcement, it was reported that the levy would be abolished.129 This has not yet been confirmed by the Government. If this is the case, the Government needs to consider how the safety net, or the mechanism that replaces it, will be funded. The money could be found from within the system, as is currently the case with levies, or be funded by central government. However, the Government has made it clear that local government will be required to take on new responsibilities in return for additional funding. Sean Nolan of CIPFA suggested that the alternative was that local government itself would have to:

Put pots in place—i.e., that suspiciously looks, walks and talks like a levy and it looks, talks and walks like a safety net but it may just be called something else. Without it, I do not see how you could have stability in the system which is 100 per cent devolved retention of business rates.130

Earlier on in the session, he suggested local authorities would “have to self-insure […] By insure, I mean just putting money on a deposit and having it there to help”.131

60.To cope with potential falls in business rate revenue, Birmingham City Council said there was “a strong case for local authorities increasing their reserves in order to build greater resilience into their finances”.132 We appreciate that, in the case where the risks in the tax base are being passed fully to local government, this may be necessary.

Issues for consideration:


61.At a reset133 local authorities’ needs will be reassessed and their funding adjusted accordingly. It will therefore be a significant event. The time between resets, which in the current system is ten years, is also important. The period needs to be long enough for authorities to gain from the growth in their rate revenue, thereby strengthening growth incentives, but not so long that authorities experiencing changes in their funding needs lose out. Sean Nolan of CIPFA described the situation in the following way:

You do need that incentive. If people thought you were going to reset it every four years, in local authority terms, from my days there, that is quite a short time frame. That really would get in the way of your enthusiasm. Equally, if you are on the front end of major population changes, and we can allude to those, or you are on the front end of major economic shocks […] you are going to feel massively vulnerable.134

62.The financial benefits of growth are lost when the system is reset and this was thought to act as a disincentive to develop in the run up to a reset. Andy Hall of Boston Borough Council said it could “drive some quite strange behaviours” and that “If […] something big was coming along close to a reset period, we would not necessarily want to see that go through”.135 Dennis Napier of Sunderland City Council also said that “there is this false economy that, if you have something in year nine, you might delay that as a tactical issue”.136 However, Cllr Claire Kober, the Chair of the Local Government Association’s Resources Panel and Leader of the London Borough of Haringey, thought this was a “marginal issue”, saying “most of us work in longer planning cycles”.137

63.When asked about the length of the reset period, most witnesses said it was slightly too long.138 To counteract any impact on growth incentives, Andy Hall suggested a “rolling reset period, whereby growth is guaranteed to the authority for ten years, whether it was in year one, two, eight or nine”.139 He continued: “There could be a methodology for tracking that growth, so that something that came along in year nine was not lost after the reset period in year ten, so we got it for another eight or nine years”.140 Dennis Napier of Sunderland City Council suggested a mini reset when revaluations are carried out141 and Paul Dransfield of Birmingham City Council suggested an “intelligent reset” that was not based purely on growth and “takes account of leaving people with that incentive to grow”.142

64.The other consideration to be taken into account was highlighted by Sheffield City Region which said that, in determining the reset period, the Government must balance incentives with “establishing a strong redistributive foundation to the business rate model”.143 The County Councils Network also emphasised the needs and redistribution element and called for a regular, rolling reset:

There should be some form of mechanism which guards against too much divergence in budgets over time, and which ensures continuing reappraisal of need. That could for example be achieved through a regular reset. We would argue that unlike the current system this should be moved to a rolling basis so that there are no perverse incentives or step-changes in rates.144

Issues for consideration:


65.The current system is affected by business property revaluations, normally undertaken every five years by the Valuation Office Agency. The revaluation is based on rental values two years before the revaluation. The most recent valuation came into effect in April 2010. In 2012, the Government announced that the revaluation due in 2015 would be delayed until 2017, in order to “protect local firms and local shops from sharp changes in business rates bills at a time when we want to ensure the economy is growing”.145

66.In the 2016 Budget, the Government said it will “aim to introduce more frequent business rate revaluations (at least every three years)”146 and a consultation paper outlining options for this has since been published.147 The Centre for Cities said that the current five-yearly revaluations “create major shocks to the business rates system for both local government as a revenue stream, and for businesses as ratepayers”.148 They continued:

[It] also means that businesses are paying rates based on out of-date valuations, which penalises businesses in struggling economies and subsidises businesses in thriving economies. In areas where economic growth has been relatively strong since the recession (and rents have risen), businesses are paying less than they should, based on outdated valuations. By the same logic, in places that have seen rents decrease in the past five years, businesses are paying more than they should.149

67.The evidence we received from the business sector as a whole supported more frequent revaluations.150 The manufacturing sector, however, preferred long revaluation periods to enable them to plan and invest with greater certainty.151 The evidence from local government was mixed. The Local Government Association was concerned that more frequent revaluations could result in a large number of appeals and therefore increased volatility and uncertainty152 and Sheffield City Region was also cautious, wanting to “understand whether [it] would reduce the volume of appeals, and consequently the risks to local government finances”.153 In contrast, Andy Hall of Boston Borough Council and Sharon Gregory of Cambridgeshire and Northamptonshire County Councils thought that more frequent revaluations would, over time, spread out the impact of appeals,154 and the Institute of Revenues Rating and Valuation said that this would help to achieve “sustainability and fairness”.155

Issues for consideration:

Limits to growth

68.Under the new system, the ability of authorities to generate and sustain growth will be crucial. However, some authorities were not confident in their abilities to do this. Andy Hall of Boston Borough Council said:

I do not think that local authorities are in a position to drive the growth in the way that you might think from how the announcement has been framed. If we are going to get the growth, we are going to get it. Some areas will not be able to attract that growth. They do not have the infrastructure in place. Perhaps regionally there will be growth, but there will be pockets of deprivation.156

69.For some authorities, certain area characteristics, which were unlikely to change, limited their business rate revenue. Boston Borough Council said that, because their dominant industries were agriculture and horticulture, which are exempt from rates, growth would not lead to an increase in business rate revenue.157 “To remove any inequities”, LGSS called for a review of businesses and properties not currently liable for business rates, giving the examples of religious buildings, farm buildings, farmland and railways.158 Dennis Napier of Sunderland City Council said that manufacturing businesses which predominate in his authority attracted lower business rates than retail and that:

Where we can grow the business—and I might add that the growth of manufacturing businesses is in line with Government policy—we are not seeing the benefit of that growth in our area, because of the makeup of our business rates structure.159

He also said that deprivation and competition from other commercial centres nearby, such as Newcastle and Gateshead, limited Sunderland’s growth. He illustrated his authority’s predicament in the following way:

Sunderland can raise £90 million in business rates. The amount per head of population is £324.72. Newcastle can generate £153 million worth of business rates. That is £531 per head, which is the third highest in the country. Gateshead, which has a much lower population than Sunderland, can generate £95 million worth of income, at £476.11 per head. There are not only regional variations; there are also local variations within that system. That is what makes things so difficult with the new system.160

70.A further limit on the amount of rates local government could collect was introduced during the inquiry: the 2016 Budget announced changes to Small Business Rates Relief from April 2017 to exempt all properties under £12,000 from paying business rates.161 We will consider this in further detail at paragraphs 79 to 82.

Issues for consideration:

Generating growth

71.Growth resulting from improvements to existing buildings is in practice largely removed in the revaluation process and redistributed, and therefore not retained locally. The current system operates in such a way that growth in business rates can only be generated by constructing new buildings or increasing net floor space. David Phillips of the Institute for Fiscal Studies said “The main thing with this system is that it is about attracting new development […] because that is the only revenue [local authorities] get to keep”.162 R3 Intelligence, which has undertaken research on the impact of this, said:

Since the announcements there has been a great deal of furore in relation to rich and poor locations and the relative ability to exploit [the Scheme]. Yet, we argue that this ability is not only defined by a location’s relative wealth, although this is important, it is also determined by the ability to generate new floor space construction in order to expand local business rate portfolios. This ability is in large part fuelled by the availability of development land and the financial conditions that determine viable economic development.163

72.Depending on the extent to which areas possessed these characteristics, R3 Intelligence categorised them as “premium”, “stranded” or “redundant”. Contrary to what might be expected, in their assessment, Westminster was a “stranded location”. The evidence we heard from Cllr Tim Mitchell, Cabinet Member for Finance and Corporate Services at Westminster City Council, supported this:

The new arrangements give an incentive for floor space growth, but self-evidently in a city centre environment there is very limited floor space growth. We argue that there should be an incentive for rateable value growth which we […] would particularly benefit from.164

According to R3 Intelligence, “redundant” locations are characterised by their “depressed rental values and low levels of occupier demand” and are “typically situated in the North and Midlands”.165

73.The Centre for Cities identified another drawback to linking business rates to growth in floor space, saying that it “rewards space-hungry, often edge or out of town development which can be to the detriment of town and city centres”.166 The New Local Government Network said it “incentivises large developments in low wage sectors, such as retail” rather than those which “occupy less floor space but create higher wage jobs and contribute to a dynamic and resilient local economy”.167

74.The Centre for Cities also pointed out that the current approach does not reward authorities for supporting “business and public investment, and economic growth, which does not increase net rateable floor space”.168 In other words, because local authorities do not benefit directly from growth resulting from improvements to existing buildings, they have little incentive to improve the local area.

Issues for consideration:

The tax base

75.The evidence has revealed various factors which decrease the tax base and weaken incentives and we suggest consideration is given to how their impact can be reduced.

The impact of Government decisions

76.Sheffield City Region said that the Government “must consider the implications of national policy decisions on fully localised business rates as the financial implications of such decisions and level of risk likely to be carried by local authorities is significant”.169 Academisation170 was one such decision which they described as having “profound implications” for local finances and had led in Sheffield to a loss in income of £13.4 million since 2006.171 David Magor of the Institute of Revenues Rating and Valuation said that the decision was made “without any thought to the impact on local government finances”.172 The revaluation of GP surgeries and, if made, the award of mandatory charitable relief to NHS Trusts were given as further examples.173

Plant and machinery

77.Currently, plant and machinery are subject to business rates. EEF, which represents manufacturers, said that this was “a disincentive for businesses to invest”.174 Although removing plant and machinery from business rates would reduce revenue, David Phillips of the Institute for Fiscal Studies thought that this could, on balance, be beneficial:

Maybe one way to get more growth would be to remove some plant and machinery from the business rates. That will encourage growth. Of course, you are losing some revenue. If you need to, you can make that up by having a slightly higher tax on earning properties. There would be a trade-off there: you are making some people worse off to make others better off, but that would be better for growth.175

Online businesses

78.There has been a recent increase in online businesses which, occupying premises with low rateable value or being home-based, pay low business rates in proportion to their turnover. Sean Nolan of CIPFA said that this was generating value that was “not easily caught by the current system”.176 Authorities frequently expressed concern that they were losing out on revenue from such businesses. LGSS gave the following example:

An example is a sole trader based in Northampton who is a website designer and development consultant. He qualifies for full small business rate relief as he only occupies a small office within a business centre. He pays no business rates as a result. This person has a significantly higher turnover than a number of vehicle repair workshops in the town who pay in excess of £10,000 per annum to their billing authority.177

The Institute of Revenues Rating and Valuation suggested that the problem should be dealt with by a “transaction tax […] operated by the retailer themselves as part of the selling process”.178

Issues for consideration:

Small Business Rate Relief and the move to the Consumer Price Index

79.In the 2016 Budget, the Chancellor announced that the Government had “decided to cut the burden on ratepayers in England by £6.7 billion over the next five years, cutting business rates for all properties and ensuring that the smallest businesses pay no rates at all”.179 The following permanent changes to Small Business Rate Relief (SBRR) will be introduced as of 1 April 2017: properties with a rateable value of £12,000 or less will attract 100 per cent rates relief; properties with rateable values of £12,000 tapering to £15,000 will attract tapered relief; and properties with a rateable value between £15,000 and £51,000 will be subject to the small business multiplier. However, the Government also said that local government would be compensated for the loss of income resulting from these measures and that the impact would be considered as part of the summer consultation. In addition, the Government announced that, from 2020–21, the multiplier would be uprated by the Consumer Price Index (CPI), which is on average lower than the current Retail Prices Index (RPI) rate.180

80.As the announcements were made during our inquiry, we were able to ask authorities what they thought of them. The Mayor of Liverpool, Joe Anderson, was pessimistic about the impact the extension of SBRR would have on the financial state of the city region.181 In contrast, Sir Edward Lister, Deputy Mayor of London, said that the Greater London Authority (GLA) was “very supportive” of the move as it had “real advantages to a lot of businesses, particularly those that were struggling”.182 Richard Paver, the Treasurer of Greater Manchester Combined Authority, said that authorities had already faced an extension of SBRR in 2015–16183 and that he thought that it would be a bigger issue for rural authorities with more small businesses than major urban authorities, like his own.184 He did, however, raise the question of whether connected businesses would attract SBBR, saying:

I use the example of Greggs shops, which probably have quite a small [rateable value] individually, but across the country it is enormous. I assume they will not get small business rates relief once you aggregate them up. It is not that all small properties will be exempted; it will depend on who is in there. It will become a moving feast at the individual authority level.185

81.Witnesses were concerned about the move to CPI. Richard Paver of the Greater Manchester Combined Authority drew our attention to the fact that the figure given by the Treasury for the difference between income generated by the multiplier linked to CPI, rather than RPI, was for a single year: “The Government’s number in the Budget policy costings for 2021 was £370 million, so that is £370 million, then £740 million, then £1100 million—it is going to compound quite rapidly to big numbers at a national level”.186 Guy Ware, Director of Finance at London Councils, estimated that:

Over 10 years we would be raising £3.3 billion a year less than we would have been otherwise, and over 20 years—who knows what will happen to inflation rates, but on current projections—that would rise to over £9 billion a year. So, over 20 years, the cumulative loss to local government—or, looked at another way, the cumulative gain to businesses that are paying business rates—is £78 billion.187

82.Despite the Government’s commitment to compensate local government for the measures announced in the Budget, witnesses were uncertain that compensation would be forthcoming. Previously, the Government has compensated authorities for changes to SBRR via a ‘section 31’ grant. Sir Edward Lister said that he was “not clear” about the compensation for the changes to SBRR and whether “there is going to be any compensation for the RPI/CPI change”.188 Richard Paver of the Greater Manchester Combined Authority said he assumed that, to make up for the difference, fewer functions would be devolved to local government.189 Guy Ware of London Councils said:

There are three bits to this. There are the changes to the tax base up to the point when 100 per cent retention comes in, arising from the small business reliefs, and, although it is not labelled as such, the numbers appear to suggest that there has been an increase in the local government DEL from 2017–18 that will fund the level of section 31 grant that will be needed to compensate local government collectively for that loss of business rates in the short term. We then get to implementation, at which point a lower quantum of services can be devolved to local government. Beyond that, I do not think there is any prospect whatever of the Government thinking that it is their job to compensate for a change between RPI and CPI indexation, and it simply becomes part of the negotiation about what may become affordable to local government in future, when that is the basis of its funding stream.190

Issues for consideration:

Other issues

The central list

83.The central list is made up of large network style properties, such as gas, water, electricity, railways and telecommunications. Business rate revenue collected from central list properties is retained by the Government. Witnesses criticised the list’s lack of transparency. There were frequent calls for the revenue from the central list to be distributed among authorities191 or used to fund the safety net192 or compensate authorities for the costs of appeals.193 Several councils said that “the accounting is opaque”194 and London Councils said that the basis for including properties on the central list was “unclear”.195 David Magor of the Institute of Revenues Rating and Valuation (IRRV) said:

The central list is a mystery; no one knows what the central list is spent on. Is it the Chancellor’s central pot? The central list should be distributed to local government because it is part of rate income. There is no logical reason why the central list should continue in its present form.196

84.LGSS said that that properties on the central list should revert to local authority control. To support their argument, they gave the example of railway stations, which authorities had often funded and developed, resulting in better buildings and increased passenger numbers, but from which they gained no direct benefit as the property was on the central list.197 Furthermore, SIGOMA said that authorities felt threatened by possible transfers of properties to the central list and the resulting decrease in their business rate revenue.198 The IRRV said that such transfers had resulted in “substantial reductions” in income for some authorities which had resulted in “critical financial chaos”.199

Empty property rates

85.Owners of empty property are liable to pay full business rates, subject to any other reliefs they might be entitled to, from three months after the date on which the property became empty. R3 Intelligence said that empty property rates distorted authorities’ growth incentives as “they were not awarded with any additional income from attracting new businesses into vacant premises”.200 They suggested that empty property rates should be abolished or, alternatively, local authorities should be given the power to alter them. Dr Kevin Muldoon-Smith, Associate Lecturer and Researcher at Northumbria University, set out both sides of the argument:

I believe that the level of empty property rates should be reduced and then it is a local authority’s best interest to fill those empty properties with businesses for economic growth. […] the problem is that, if you get rid of that maximum empty property rate value, it puts local authorities at risk in a recession when businesses go out of business.201

David Phillips of the Institute for Fiscal Studies pointed out that empty property rates protect councils from landlords who keep properties empty on purpose in the hope that they will be able to find a tenant willing to pay a higher rent.202

Community benefit agreements

86.Sedgemoor District Council sought clarification as to how its community benefit agreement, which permits it to retain 100 per cent of business rate revenue in return for supporting the development of Hinkley Point C, would be affected by the move to 100 per cent retention.203 They said that under 100 per cent retention:

The Government will not be able to honour its commitment to recognise the unique role of communities hosting new nuclear development by allowing councils to retain a greater share of their business rates. In summary, it would not be fulfilling its 2013 announcement.204

Enterprise Zones

87.Authorities did not know how the business rate revenue generated in Enterprise Zones would be treated under 100 per cent retention. Birmingham City Council pointed out that revenue from the zones had been dedicated to repaying borrowing costs and was, therefore, not available for local government services.205 They sought confirmation that, under 100 per cent retention, Enterprise Zones and similar schemes, in which business rate revenue has been earmarked for use elsewhere, would be “fully taken into account at individual local authority levels, with top ups and tariffs adjusted accordingly”.206

Issues for consideration:

78Chancellor unveils ‘devolution revolution’”, HM Treasury press release, 5 October 2015

79 This does not necessarily mean that all central grant funding to local authorities will cease. Local authorities receive many different grants alongside Revenue Support Grant: for instance, the Better Care Fund and the public health grant (though these are much smaller in total than Revenue Support Grant).

80 Sheffield City Region (BUR23) para 16

81 Q53

82 Birmingham City Council (BUR27) para 3.4.4

83 Q12

84 Q12

85 Newark and Sherwood District Council (BUR38) para 3

86 Q157

87 Q122

88 Birmingham City Council (BUR27) para 2.3

89 Essex County Council (BUR19) para 9

90 Essex County Council (BUR19) para 10

91 See, for example, Sheffield City Region (BUR23) paras 21-23; Birmingham City Council (BUR27) para 2.3; Essex County Council (BUR19) para 23; Greater London Authority (BUR43); Greater Manchester Combined Authority (BUR55); Stockton-on-Tees Borough Council (BUR51)

92 HC Deb, 12 October 2015, col 221WS [Commons written ministerial statement]

93 Q51

94 Q122

95 See, for example, Greater Manchester Combined Authority (BUR55); Knowsley Council (BUR37) para 2(c); Sheffield City Region (BUR23) para 26 and County Councils Network (BUR60) para 15.

96 Q94

97 Q97

98 HC Deb, 12 October 2015, col 221WS [Commons written ministerial statement]

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

100 HM Treasury, Spending Review and Autumn Statement, November 2015, p58

101 Q132

102 Q132

103 Industrial Communities Alliance (BUR49)

104 Q97

105 County Councils Network (BUR60), para 16

106 See, for example, Local Government Association (BUR14) para 7.2; New Local Government Network (BUR22) para 5

107 Essex County Council (BUR19) para 24

108 Newark and Sherwood District Council (BUR38) para 4

109 Independent Commission on Local Government Finance, Public money, local choices (October 2014), p19

110 Independent Commission on Local Government Finance, Public money, local choices (October 2014), p18

111 Q3

112 Q3

113 Districts and counties respectively receive 80 and 20 per cent of the local share of business rates.

114 Q95. See also County Councils Network (BUR60) para 24

115 LGSS (BUR11) para 1

116 Q58

117 District Councils Network (BUR18), para 3

118 Q91

119 Cannock Chase Council (BUR61)

120 Q10

121 Q10

122 Newark and Sherwood District Council (BUR38) para 3

123 Sheffield City Region (BUR23) para 40

124 Sheffield City Region (BUR23) para 41

125 City of London Corporation (BUR57) para 11

126 Stockton-on-Tees Borough Council (BUR51)

127 Q58

128 Cannock Chase Council (BUR61)

130 Q133

131 Q126

132 Birmingham City Council (BUR27) para 3.4.4

133 Due in 2020 under the current system.

134 Q135

135 Q69

136 Q70

137 Q108

138 See Q69 [David Finch]; Q70 [Dennis Napier]; Q137 [Sean Nolan]; Q139 [David Magor, Andrew Hetherton]

139 Q69

140 Q69

141 Q70

142 Q107

143 Sheffield City Region (BUR23) para 36

144 County Councils Network (BUR60) para 21

145 HC Deb, 12 November 2012, col 3WS [Commons written ministerial statement]

146 HM Treasury, Budget 2016, March 2016, p46

148 Centre for Cities (BUR24) para 3

149 Centre for Cities (BUR24) para 3

150 See, for example, the British Chambers of Commerce (BUR35); the Booksellers Association (BUR04) para 3.14; British Retail Consortium (BUR20); Federation of Small Businesses (BUR56) para 30

151 Q183

152 Local Government Association (BUR14) para 5.1.3

153 Sheffield City Region (BUR23) para 39

154 Q64 [Andy Hall]; Q206 [Sharon Gregory]

155 Institute of Revenues Rating and Valuation (BUR47) para 40

156 Q53

157 Boston Borough Council (BUR13) para 17

158 LGSS (BUR11) para 3

159 Q54

160 Q56

161 HM Treasury, Budget 2016, March 2016, p46

162 Q39

163 R3 Intelligence (BUR01) para 3.1

164 Q97

165 R3 Intelligence (BUR01) para 3.5

166 Centre for Cities (BUR24) para 3

167 New Local Government Network (BUR22) para 3

168 Centre for Cities (BUR24) para 3

169 Sheffield City Region (BUR23) para 42

170 Academies, unlike state schools, attract mandatory charitable rate relief.

171 Sheffield City Region (BUR23) para 41. See also LGSS (BUR11) para 3

172 Q123

173 Sheffield City Region (BUR23) para 41

174 EEF (BUR53) para 24

175 Q45

176 Q141

177 LGSS (BUR11) para 3. See also David Finch at Q54

178 IRRV (BUR47) para 45

179 HM Treasury, Budget 2016 (March 2016), p46

180 HM Treasury, Budget 2016 (March 2016), p46

181 Q219

182 Q262

183 Q220

184 Q223

185 Q223

186 Q226

187 Q262

188 Q262

189 226

190 Q262

191 See, for example, Andy Hall at Q85, Sharon Gregory at Q111, Newark and Sherwood District Council (BUR38) para 2; IRRV (BUR47) para 48

192 London Councils (BUR07) para 22

193 Q63 [Andy Hall]

194 Knowsley (BUR37); Sigoma (BUR32) para 5; Stockton-on-Tees (BUR51) para 16-17

195 London Councils (BUR07) para 22

196 Q125

197 LGSS (BUR11) para 3

198 SIGOMA (BUR32) para 5

199 IRRV (BUR47) para 48

200 R3 Intelligence (BUR01) para 2.1

201 Q37

202 Q39

203 Sedgemoor District Council (BUR59)

204 Sedgemoor District Council (BUR59)

205 Birmingham City Council (BUR27) para 3.7.2

206 Birmingham City Council (BUR27) para 3.7.3

© Parliamentary copyright 2015

9 June 2016