100 per cent retention of business rates: issues for consideration Contents
List of issues for consideration
Our evidence review has revealed that 100 per cent retention of business rates gives rise to some specific issues and pitfalls to be avoided in designing and setting up the reformed system. The supporting evidence is set out in chapters two to eight at the pages indicated below.
We hope the Government will take our findings on board and use the consultation as an opportunity to explore them further with the sector, as well as examining them in detail in their own right. However, where a particularly pressing issue has emerged from the evidence, we have made a specific recommendation (in bold).
- There was a substantial amount of evidence on the impact of appeals, which represent a significant concern for some authorities, dwarfing growth in the tax base and affecting incentives, and injecting volatility into the system.
- Appeals pose a major challenge to 100 per cent retention and it is essential that the issue is resolved before 2020.
- The Government and local authorities should together explore the suggestions in paragraph 38 as to how appeals could be better tackled.
Ending Revenue Support Grant
- Without Revenue Support Grant, there is no obvious way to shift resources in immediate response to councils affected differently by sudden increases in need, for example immigration, and environmental challenges, such as flooding.
- The reformed arrangements will need to be supported by a system of grants which local government itself may need to devise, as any additional funding from the Government would be accompanied by further devolution of responsibilities. A grant could provide a means of equalising resources between authorities without undermining incentives.
Business rate revenue versus need
- There is likely to be little or no correlation between changes in business rate revenue and changes in local authority needs.
- Until the Government confirms how equalisation will operate, councils understandably fear that they will lose out in the reformed system, either at the point of reform or in the longer-term.
Divergence in revenue
- Under 100 per cent retention, divergence in business rate revenue between authorities could be substantial. Mechanisms to reduce this divergence, such as top ups and tariffs, the safety net or similar measures, will be even more necessary and significant and be needed to ensure the delivery of key public services.
- Revising the underlying assessment of needs should be tackled in collaboration with local government, with input from an independent body.
- The Government should set out timescales for this work and confirm as soon as possible whether needs will be reassessed in time for the start of 100 per cent retention in 2020. It will also need to explain how and when the inevitable changes in resources distribution will be brought into effect.
Top ups and tariffs
- The evidence supported the Government’s decision that top ups and tariffs should continue in the reformed system.
- The consultation should gather views on whether adjustments are needed to the way in which top up and tariffs operate.
- Regional redistribution fits in with wider Government policy on combined authorities and devolution deals, however the Government and local authorities should explore together the feasibility of this approach, which we suggest should include commissioning research.
The share of business rates in two-tier authorities
- There was substantial evidence that the shares of business rate revenue retained by districts and county councils in two tier areas do not properly reflect the distribution of responsibilities between them.
- Counties said that the current apportionment did not reflect their responsibilities for providing demand-led services or services which are linked to economic growth, such as transport, housing, schools, and gave them little incentive to promote growth.
- The Government and local authorities should explore together how the shares should be adjusted, including whether an approach based on an authority’s needs would be fairer.
- The shares must reflect whether authorities have taken on new responsibilities in return for additional business rate revenue, and which authority has taken them on.
Risk and volatility
- The evidence highlighted the potential volatility of revenue from business rates from appeals, business closures, the health of the local and national economy, and even the Government’s own policy decisions: this demonstrates the need for a safety net or similar mechanism.
- The Government and the sector need to consider how to protect authorities from the high volatility of business rate revenue, which could be by means of:
- Continuing use of the safety net, or similar mechanism, taking into account the concerns we heard that in the current system the safety net was set too low and might distort growth incentives; or
- A local government-led arrangement which insured authorities against changes in income.
- If the levy is to be abolished, consideration should also to be given to how the protection mechanism will be funded, as the Government has made it clear that local government will be required to take on new responsibilities in return for additional central government funding.
- To help protect themselves against risk, it may be prudent for authorities to increase their reserves.
- Our witnesses believed on balance that the current ten year reset period was slightly too long and we heard that it may act to distort the growth incentives which drive the system.
- A study should be carried out to consider how the reset could be adjusted to reduce its impact on growth incentives while taking into account authorities’ changing needs: this should also explore the viability of alternative approaches, such as a ‘rolling’ or ‘intelligent’ reset, which would take growth into account.
- The evidence generally supported more frequent revaluations, in line with the Government’s announcement, but there was no consensus as to how often they should take place.
Limits to growth
- Some authorities were not certain that they would be able to drive and generate growth, as a result of area characteristics which limited business rate revenue: such as the type of predominant business, the level of deprivation or the proximity to established commercial centres.
- 100 per cent retention must work in a way that ensures that areas with limited ability to generate growth in business rate revenue do not lose out.
- Currently, growth in business rates can only be generated by constructing new buildings or increasing net floor space: growth resulting from improvements to existing buildings is mostly removed in the revaluation process and redistributed, and therefore not retained locally.
- The Government and the sector should consider:
- What effect these constraints have on incentives to improve premises and invest in the local area, which would benefit the local economy.
- How heavily-developed urban areas which do not have the space to accommodate new development can grow their rates.
- How areas where rents are low and there is little demand for new property development can grow their rates.
- Whether large out of town developments are encouraged to the detriment of town and city centres.
The tax base
- To stabilise the tax base and strengthen incentives, the Government and the sector should consider:
- Before implementation, routinely assessing the effects on business rate revenue of national policy decisions, such as on academy transfers.
- Removing plant and machinery from business rates in order to encourage growth.
- How to ensure that revenue from online businesses is captured by local government, for example by a transaction levy on internet retailers.
Small Business Rate Relief and the move to the Consumer Price Index
- Reactions to the changes to Small Business Rates Relief (SBRR) were mixed: however, we believe that the Government and the sector should consider whether they will impact on authorities’ incentives to encourage growth in small businesses.
- The change to uprating the multiplier by the Consumer Price Index will reduce revenue and the compounded effect of this will become very significant over the coming years.
- Despite a commitment from the Government, there was uncertainty as to whether compensation for these changes would be forthcoming: the Government should confirm that this is the case and that, when devolving new responsibilities to local government, it will take into account the reduction in revenue resulting from these changes.
- The Government and local authorities should together consider:
- Whether properties on the central list should continue to be held by central government and how the revenue it generates could better be used under 100 per cent retention, for example in funding appeals or the safety net.
- How empty property rates impact on growth incentives. Empty property rates were thought to distort authorities’ incentives to attract businesses into vacant premises; however, we note that they also protect authorities in a recession.
- The implications of the reforms for community benefit agreements, which already allow the authority involved to retain 100 per cent of business rate revenue.
- The treatment of business rate revenue generated in Enterprise Zones under 100 per cent retention.
The infrastructure premium
The role of Local Enterprise Partnerships
- The proposal that LEPs should be involved in the decision-making process was criticised by both local authorities and the business sector.
- The Government should review whether it is practical, possible and fair for LEPs to play such a key role, taking into account the following concerns:
- Some LEPs are not representative of the full range of businesses, particularly retail;
- LEPs may not be sufficiently resourced, well-established, accountable and impartial.
- In some places, the area covered by the LEP is too large for it to be able to make effective local decisions.
- In some places, LEPs overlap.
The requirement for a directly elected mayor
- There were calls across the sector for the infrastructure premium to be available to all authorities, not only combined authorities with a directly elected mayor.
- The Government and local authorities should together consider whether, by placing areas without a directly elected mayor at a disadvantage, this proposal conflicts with the aims of 100 per cent retention.
Business Improvement Districts and the Business Rate Supplement
- There was concern that businesses might face cumulative raises in rates in the case where the infrastructure premium was introduced in an area which already had a Business Improvement District (BID) or, for example, in London where the Business Rates Supplement (BRS) operates to fund Crossrail: the Government should clarify whether the infrastructure premium will be levied on top of an existing increase in rates linked to a BID or the BRS.
Abolition of the Uniform Business Rate
- The ability to reduce rates without a corresponding power to increase them was unpopular among local authorities, and we heard it was unlikely that they would use a power to lower business rates.
- The power to raise and lower the multiplier and the power to vary it according to business type, which was frequently requested by local authority witnesses, could give authorities, or groups of authorities, an effective lever to stimulate and foster local economic growth. the Government and local authorities should together consider introducing these powers, with rises in rates limited to the increase in the average council tax. These powers could also help protect councils from any changes made by central government to the business rates system after 2020.
- Before proceeding further, it would be prudent to commission research on the likelihood of inter-authority competition resulting from the abolition of the multiplier.
- Some authorities were doubtful that they would be in a better financial position under a system of 100 per cent retention. Councils need reassurance that, now or in the future, they will not be required to take on new responsibilities that are unaffordable or likely to become unaffordable over time.
- There was broad agreement among witnesses on the nature of the additional responsibilities that local government would welcome. These responsibilities should:
- Be linked to economic growth.
- Include skills and transport.
- Be aligned with areas’ devolution proposals and deals.
- Not be demand-led.
- Based on the evidence, we recommend that decisions on additional responsibilities should be guided by the following principles:
i)New services should:
- Support public sector reform, devolution and localism and fit logically with the role and wider responsibilities of local government and complement existing services.
- Help residents to improve their personal circumstances and be aimed at making them less dependent.
- Not be high-risk or demand led: for this reason, the Government’s suggestion that attendance allowance be devolved to local authorities did not attract support.
- Be linked to forms of preventative action, for example, spending on early years and public health.
ii)Local government must have genuine discretion over how the services are provided and be able to control and influence their delivery.
iii)The funding levels for each new service should be agreed at the outset, and be accompanied by a full new burdens assessment, with councils having the freedom to manage resources as service demand increases.
The business rate retention pilots
- We understand that appeals are being dealt with separately in the 2015 pilots, so as not to impact on growth, and recommend that consideration is given to taking this approach in the reformed system.
- There are concerns that areas without pilots would be at a disadvantage.
- The pilots are an important opportunity to ‘road-test’ the arrangements, understand their impact and resolve issues. However, given the earliest estimated start date of the 2016 pilots is 2018–19, and the fact that it has taken so long to agree the 2015 pilots, it is unlikely that the 2016 pilots will able to inform the roll-out of 100 per cent retention in 2020. This will be a significant missed opportunity.