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Business rates reform explained

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Business rates reform: the key questions answered

What’s happening?

By 2020, central funding of local government through the revenue support grant will be replaced entirely by business rates income. Currently, councils can keep half of the business rates collected in their area. In addition, the nationally set ‘uniform business rate’ will be abolished, allowing authorities to lower their respective rates.

Combined authorities with directly elected mayors will also be able to increase the tax, provided they have the backing of business.

What are the advantages?

Supporters of the reform, including the Local Government Association and the Society of Local Authority Chief Executives & Senior Managers, say it will help councils shape their areas and generate economic growth. The freedom to reduce rates will allow them to encourage new businesses into their area. Any growth in business rates income will be theirs to keep. The reform will give councils greater certainty and improve their ability to plan

What’s the catch?

Full business rates retention, which the chancellor said is worth £26bn, will require councils to use the income for extra responsibilities.

These are still being worked out and communities secretary Greg Clark has committed to working with local government on what they are. Local government expects these extra responsibilities will be largely made up of the abolition of existing grants for some services, such as public health or new homes bonus.

Under the reform, councils would be expected to fund these services through business rates income. Excluding the dedicated schools grant, councils receive about £11bn in grants from central government departments, including health, transport and the Home Office

Beyond 2020, with revenue support grant abolished, minsters could still pile on the financial pressure by asking councils to do significantly more for their money.

What are the potential drawbacks of full business rates retention?

Full business rates retention will further weaken the link between the needs of a population and how much funding an area receives. The Treasury will extend the system of top-ups and tariffs, which shifts money from councils that generate large amounts of business rates income to those which do not. However, there is no further detail on how this will work at the moment.

The Special Interest Group of Municipal Authorities has reserved judgement on the chancellor’s announcement until this is known. The chancellor said the “established transfers will be there on day one but thereafter all real growth in revenue will be yours to keep”. This suggests the government is unlikely to want to revisit its equalisation process regularly as populations’ needs change.

Local authority balance sheets will suffer a bigger impact than they do currently if businesses close or relocate. The announcement this week promised the retention of the safety net system, which provides some cushion to councils which suffer in-year losses of greater than 7.5%.

It is not, however, clear whether this cushioning regime will be funded to a similar level or how it will be funded. Some critics have warned of a ‘race to the bottom’ as councils cut business rates to attract firms. It is, however, more likely councils will use their power to cut strategically to attract specific business or regenerate particular areas.

What other issues are there?

Aside from agreeing on an equalisation process and the additional responsibilities councils will have to fund, the split of business rates in two-tier areas will need to be addressed. Currently county councils receive 20% of the local share of business rates and districts 80%. But as counties are more grant reliant, this will need to be adjusted if they are not to be left at a major disadvantage.

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