The Department for Communities & Local Government has proposed to reset the redistribution levels of business rates partially every five years under the 100% retention system.
In a consultation published on Wednesday the DCLG set out a number of proposals on the design of the 100% retention scheme relating to resets, pooling arrangements and appeals.
It said that adjustments to the formula for the redistributed element of business rates under the new system may need to be frequent for some councils, to reflect changes in relative need, but added resetting the system too often would “weaken the incentive for growth”.
For this reason, the DCLG has proposed a system of partial resets made every five years.
Under this proposal, every local authority’s business rates baseline would be set for five years, with top-ups and tariffs set to that level. Any growth in business rates the council received during this period in excess of their baseline would be retained, up to the point of the reset.
At that point, every council’s needs baseline would be recalculated. Councils would keep a proportion of the growth they had achieved, while the remainder of business rates growth would be redistributed.
To account for the “significant changes of income” brought about by resetting the needs formula every five years, the DCLG said it intended to explore “transitional” funding arrangements, which would unwind over the course of a reset period, to smooth the impact of changes.
It called for councils to provide further feedback on how the proposal could work in practice.
The consultation also included further proposals on measures to incentivise councils to pool their business rates.
The Local Government Finance Bill, which makes 100% retention possible, will make provision for councils to pool their business rates (as they can under the 50% retention scheme) and gave the communities secretary the power to force councils to join a pool.
Councils pooling their business rates under 100% retention will be allowed to create “local growth zones” for their combined areas, which will allow them to avoid a proportion of their business rates growth being included when baselines are reset for a specified period.
However, the DCLG said in the consultation that it would impose parameters on the size and operations of local growth zones. These could include restrictions on the proportion of growth those zones could retain; limits on the rateable value of hereditaments in the area; restrictions on the number of years for which local growth areas could exist; definitions of the geographical areas; establishing a connection between council investment in the local area and the growth zone; and rules on the purposes for which councils could use business rates income derived from growth zones.
Claire Kober (Lab), chair of the Local Government Association’s resources board and Haringey LBC leader, said the LGA welcomed the consideration of partial resets.
However, she added that the association still opposes the government’s power to force councils to join business rate pools against their will.
“It should remain up to local areas to decide to join a business rate pool arrangement and councils also want [the] government to bring forward measures to tackle avoidance and hand councils the power to set business rates and reliefs,” said Cllr Kober.
She added: “With local government facing an overall £5.8bn funding gap by 2020, we remain clear that councils must first and foremost be able to use extra business rates income to plug this growing gap before any extra responsibilities are considered.
“Local authorities should then be able to invest the rest into services which support local economies and drive local growth, such as closing skills gaps and improving public transport.”