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Why councils should be wary of business rates reforms

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LGC’s essential daily briefing.

Today’s financial difficulties: Unitary imposes spending freeze

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Travers on the Budget: A spending freeze is what passes as good news

News today that Britain’s high streets are facing their toughest trading climate in five years with a net loss of more than 1,000 shops so far this year does not come as a surprise. Indeed, the chancellor was responding to similar concerns when he announced a cut to business rates bills for smaller businesses not currently benefiting from existing small business rates reliefs at last week’s Budget.

The Treasury was quick to confirm that councils will be compensated for the £1bn cost of this tax relief, but that is almost beside the point. In recent years successive chancellors have repeatedly proved unable to resist the temptation of tinkering with business rates to address a perceived unfairness or unintended consequence of the current system.

The regularity with which this has been happening over the past few years should make local government think twice about plans to fund councils through the full localisation of business rates for two reasons.

Firstly, it suggests business rates in their current form are unfit for the modern world. The disparity in rates (not to mention taxes, but that’s another story) paid by internet-based businesses and those with a more traditional presence in our towns and cities is one of the most obvious areas in need of reform. The government has proposed a new digital sales tax but detail is light and the idea has been rejected by the British Retail Consortium as “tinkering”. They are calling for a wholesale reform of the system.

Secondly, the government’s continued ability to “tinker” with business rates at a national level gives lie to the very concept of localisation of business rates.

The recent Hudson review of local government finance processes at the Ministry of Housing, Communities & Local Government highlighted the complexity of the tax: set nationally, collected locally and spent by both national and local government. This has led to confusion amongst business, with councils unfairly shouldering much of the blame for the rate rises following last year’s revaluation for example.

The full localisation of business rates as currently proposed, with increases set nationally and required to be revenue neutral overall, will only add to the confusion while the level of redistribution required between councils will further undermine the notion of localisation.

Amongst the stated aims of the government’s fair funding review currently working up options for council funding beyond 2020 is to increase transparency and simplicity of the local government finance system. The Hudson review noted that the introduction of business rates pilots was a major driver behind the near doubling of variables required to calculate the local government finance settlement this year.

It seems unreasonable to ask local government to hitch its future to an increasingly impenetrable system creaking under the pressures of the modern world and piled high with a mish-mash of reliefs and exemptions over which it has no control. Localisation in name only hardly seems worth the bother.

Sarah Calkin, deputy editor

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