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

6Other changes to tax levels

88.Alongside 100 per cent retention of business rates, the Chancellor announced powers that would enable local authorities to reduce business rates and enable mayoral combined authorities, with the support of local businesses, to add a premium to rates to pay for new infrastructure (the ‘infrastructure premium’).

The infrastructure premium

89.The Treasury press release accompanying the Chancellor’s announcement in October 2015 outlined how the infrastructure premium would operate:

Directly elected mayors—once they have support of local business leaders through a majority vote of the business members of the Local Enterprise Partnership—will be able to add a premium to business rates to pay for new infrastructure. This power will be limited by a cap, likely to be set at 2p on the rate.207

Simon Parker, Director of the New Local Government Network, supported the proposal: the directly elected mayor was democratically elected and the Local Enterprise Partnership (LEP) provided a “check and balance”.208 However, the rest of the evidence revealed very little support for the proposal from either local government or the business sector, with the exception, unsurprisingly, of combined authorities and authorities within combined authorities.209 There were two broad areas of concern: the involvement of the LEP in the process and the fact that the power would only be available to combined authorities with a directly elected mayor. Although the New Local Government Network made the additional point that limiting the use of the power to infrastructure projects was restrictive and “it should be for local discretion to determine what investment would make the biggest contribution to growth”.210

Involving Local Enterprise Partnerships

90.For a range of reasons, LEPs were near-universally thought to be ill-suited to the role being envisaged for them. Essex County Council said that their LEP covers too large an area to be able to make effective local decisions and it had “insufficient political mandate” to take such decisions.211 Sharon Gregory of Cambridgeshire and Northamptonshire County Councils said that Northamptonshire currently had two LEPs,212 which would have obvious practical implications for the operation of the premium. In addition, we heard that, in London, the LEP was not a prominent body.213 The business sector was concerned that some LEPs were not representative of the full range of businesses, particularly retail.214 The British Chambers of Commerce outlined various other concerns:

LEPs are not appropriate vehicles for scrutinising proposals to raise local business taxes: LEPs remain young, with low business recognition; they can cover wide areas that are not always consistent with the boundaries of historic billing authorities; and the leaders of billing authorities make up most of the ex-officio posts on LEP boards. Such a compromised process could never have credibility in the eyes of business.215

91.We also heard that LEPs were under-resourced,216 that businesses themselves were not set up to engage with them,217 that there was currently no clear process for holding LEP members to account for their decisions,218 and that they were a “select group of people with vested interests”.219 It should be noted, however, that we did not receive evidence from LEPs, which might have provided a different view.

92.The British Retail Consortium said that “a more robust method of determining a supplement […] would be to use a business ballot allowing impacted businesses a vote”.220 To make the process more accountable, EEF suggested that, if concerned, businesses should be able to “call in” the directly elected mayor’s decision and request a referendum.221 Colin Stanbridge, the Chief Executive of the London Chamber of Commerce, and the GLA,222 suggested that a review of LEPs was needed. Mr Stanbridge said:

It is all very easy for politicians and civil servants to say, “We have created these LEPs.” But there is no transparency in them, people don’t know what they are and we don’t know what their powers are. We need a big review of that and so maybe out of that we will be able to find some sort of mechanism that will work.223

Issues for consideration:

The requirement for a directly elected mayor

93.The other cause of concern was that authorities without a directly elected mayor would not benefit from the infrastructure premium.224 The Chief Economic Development Officers Society (CEDOS) said:

In the move to 100 per cent business retention, it is essential for all areas, as far as possible, to have a level policy playing field on which to drive economic growth. In our view, the intention that only areas with elected city-wide mayors will be able to add a premium to business rates to pay for new infrastructure, is fundamentally at odds with this. We believe this power should be available to all areas with the provision that a majority of all businesses should agree, which we think is a reasonable one.225

Furthermore, Cornwall Council, with which the Government previously agreed a devolution deal without the need to elect a mayor, said that it would be at a disadvantage which needed to be addressed.226

Issues for consideration:

Business Improvement Districts and the Business Rate Supplement

94.Currently, the Business Improvement District (BID) mechanism enables a levy to be added to business rates in a given area, following a ballot of the businesses concerned, to fund improvements to the public sphere. A separate scheme, the Business Rates Supplement (BRS), allows local authorities to increase the multiplier by up to 2p in the pound to pay for economic development projects, subject to majority support in a referendum of local business rate-payers (this must be a majority both in number and in rateable value).227

95.R3 Intelligence said that the infrastructure premium was similar to a BID, and that it was preferable to use the existing “tried and tested” and “more democratic” method of raising additional funding.228 However, Simon Parker of the New Local Government Network pointed out that, compared to what was envisaged by the infrastructure premium, a BID covered a much smaller area and “would not give you anything like the amount of money you would need to build a new bridge or a motorway”.229

96.David Phillips of the Institute for Fiscal Studies questioned whether BIDs, the BRS and the infrastructure premium would operate concurrently and David Napier of Sunderland City Council speculated that we could see a “triple system of taxation”.230 In addition, our London witnesses wanted clarification as to whether the infrastructure premium would be available in addition to the London BRS,231 which is being used to fund Crossrail.

Issues for consideration:

Abolition of the uniform business rate

97.The Government announced that it would abolish the uniform business rate,232 and would allow local authorities “to cut business rates to boost enterprise and economic activity in their areas”.233 Significantly, the Government did not say that councils will have the power to raise rates. This proposal did not attract a great deal of support. Andy Hall of Boston Borough Council said that his authority would prefer to help businesses in a more targeted way with discretionary rate relief and local discount schemes.234 Dr Kevin Muldoon-Smith of Northumbria University thought that very few authorities would be able to reduce rates as “they already have their backs against the wall. They are already losing money”.235 The British Chambers of Commerce was also sceptical that authorities would reduce rates, pointing out that they already had the ability to do so via discretionary relief powers but very few had done so far.236 In contrast, Gateshead Council suggested that poorer authorities would be forced to use the power to lower rates to attract and retain businesses, despite having “the least capacity to absorb reductions in business rates”.237

98.Although the Government has said that the power would be available to individual local authorities, we note the point made by Dr Muldoon-Smith that, in fact, “functional economic areas and property market dynamics” are more relevant.238 Simon Parker of the New Local Government Network illustrated the point with the following example:

The idea of all 10 Greater Manchester districts each setting their own business rate seems not to be a brilliant idea, economically and administratively. On the other hand, the idea of Greater Manchester as a whole having control over its business rate strikes me as making lots of sense. It is a unit with which business can identify.239

Inter-authority competition

99.At the time the announcement was made, there was speculation that the abolition of the uniform business rate could lead to inter-authority competition and a “race to the bottom”240 with councils undercutting neighbouring authorities’ rates to attract businesses to their area. A number of local authorities were concerned that they would lose out in this situation.241 However, Essex County Council made the point that factors other than business rates, such as infrastructure, local skills levels and location, determine whether or not a business is attracted to an area.242 David Phillips of the Institute for Fiscal Studies suggested that, in the short term, businesses were unlikely to move due to the practical difficulties of doing so, but that it could happen over the longer term.243 However, coupled with the fact that authorities had so far made little use of discretionary powers to reduce rates, he concluded that “maybe whilst there is a risk of a race to the bottom, it is not that great a risk”.244

Varying the multiplier

100.Instead, councils frequently called for the freedom to raise or lower the multiplier as they saw fit,245 as did other representatives of the sector, including the Local Government Association,246 the District Councils Network247 and the County Councils Network (CCN).248 Our predecessor committee recommended that authorities should be able to “set the business rate multiplier to meet local circumstances” on the basis that this would help to stimulate local economic growth, as long as any rise in rates was limited to the increase in the average council tax in the devolved area.249 The CCN suggested that such a power should be implemented at county level, following agreement with district councils, thus avoiding competition between them.250 The Greater London Authority favoured granting directly elected mayors the ability to vary the multiplier.251

101.The business sector, however, took a different view. For example, the British Retail Consortium wanted the multiplier to be capped and then lowered252 and the Federation of Small Businesses wanted it to be fixed.253 Also, EEF said that manufacturers were concerned that giving local authorities the flexibility to vary the multiplier would undermine the “stability and predictability” of the system and manufacturers’ ability to plan their investments.254

102.A popular alternative proposal was that authorities should be able to vary the multiplier depending on business type. The New Local Government Network said that the Government should consider giving councils the freedom to “vary the rate to encourage more targeted sector development according to local growth plans”.255 London Councils argued for “reducing rates for those types of business a local authority most wishes to attract”,256 and R3 Intelligence went further and suggested that authorities should be able to adjust taxation for “different types of property, businesses and locations”.257

Issues for consideration:

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

208 Q43

209 See, for example, Greater Manchester Combined Authority (BUR55); Birmingham City Council (BUR27) para 3.7.1; Liverpool City Region (BUR36) para f

210 New Local Government Network (BUR22) para 1

211 Essex County Council (BUR19) para 26-27

212 Q114

213 Q249

214 See, for example, the Association of Convenience Stores (BUR39) para 14; British Chambers of Commerce (BUR35) para 7.2; British Retail Consortium (BUR20) and Intu Properties plc (BUR05) para 7

215 British Chambers of Commerce (BUR35) para 7.3

216 British Retail Consortium (BUR20)

217 Association of Convenience Stores (BUR39) para 14

218 Intu Properties plc (BUR05) para 7

219 R3 Intelligence (BUR01) para 5.2

220 British Retail Consortium (BUR20)

221 EEF (BUR53) para 40

222 Greater London Authority (BUR43)

223 Q249

224 See, for example, Local Government Association (BUR14) para 9.1; LGSS (BUR11) para 7; District Councils Network (BUR18) para 28; County Councils Network (BUR60) para 34

225 Chief Economic Development Officers Society (BUR15) para 28

226 Cornwall Council (BUR33)

227 The only supplement scheme in existence so far is a 2 per cent supplement on businesses in London to help pay for Crossrail.

228 R3 Intelligence (BUR01) para 5.2. See also Intu Properties plc (BUR05) para 1viii

229 Q40

230 Q78

231 Q113 [Cllr Tim Mitchell]; Q254 [Sir Edward Lister]

232 Rates are levied on business properties on the basis of their rateable value and the Uniform Business Rate, also known as the ‘multiplier’ (in 2015-16, 49.3p). The multiplier for England is set by the UK Government.

233Chancellor unveils ‘devolution revolution’”, HM Treasury, 5 October 2015

234 Q74

235 Q32

236 British Chambers of Commerce (BUR35) para 6.3

237 Gateshead Council (BUR34) para 6.2

238 Q17

239 Q18

241 See, for example, Central Bedfordshire Council (BUR02); Newark and Sherwood District Council (BUR39) para 4; LGSS (BUR11) para 5

242 Essex County Council (BUR19) para 22

243 Q33

244 Q33

245 Essex County Council (BUR19) para 17; LGSS (BUR11) para 1; Leeds City Council (BUR12) para 3.1.4; Greater London Authority (BUR43); Andy Hall at Q74; Sharon Gregory at Q112

246 Local Government Association (BUR14) para 5.1.2

247 District Councils Network (BUR18) para 12

248 County Councils Network (BUR60) para 35

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

250 County Councils Network (BUR60) para 23

251 Greater London Authority (BUR43)

252 British Retail Consortium (BUR20)

253 Federation of Small Businesses (BUR56) para 30

254 EEF (BUR53) para 13

255 New Local Government Network (BUR22) para 3

256 London Councils (BUR07) para 25

257 R3 Intelligence (BUR01) para 2.3

© Parliamentary copyright 2015

9 June 2016