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Analysis: Ministers still hold purse strings on devolved business rates

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Eighteen words on the first page of the Local Government Finance Bill, published this month, heralded the biggest reforms to the way the sector is financed in a generation.

By seeking to “omit” provisions for revenue support grant payments in the Local Government Finance Act 1988, the government subsequently reinforced its intention to move towards 100% business rates retention.

On the face of it, the bill is enabling, leaving as much wriggle room as possible to allow for the future design of the system – nothing has been ruled out, although not much has been ruled in either. A lot of the technical detail will be included in secondary legislation.

While that is as expected, a deeper delve into the bill shows central government, and the Treasury in particular, will not fully relinquish their control over the £26bn collected in business rates every year. LGC has analysed the key points of the bill with legal experts and some of the sector’s finance chiefs.

 

 

National appeals pot

Appeals pot

Appeals pot

Councils are to be reimbursed by central government for any income they lose to successful business rates appeals. The sector has broadly welcomed this ‘loss payments’ initiative and sees it as a way of stabilising what has been an unpredictable and volatile part of council finances. The national pot for appeals is to be funded by top-slicing non-domestic rates, so local government will still effectively pay rather than the money coming from central government resources. It is not yet known how much each council will have to contribute, or how loss payments will be made – those will be issues that will have to be addressed in secondary legislation.

 

Judith barnes

Judith barnes

“The central issue [with the national appeals pot] seems to be that if the money is top-sliced from receipts nationally, local government will still pay rather than it coming from central resources.”

Judith Barnes local government partner, Bevan Brittan

Pooling arrangements

Pooling arrangements

Pooling arrangements

Areas made up of two or more authorities could be designated as exempt from the top up and tariff redistribution system. As such these areas would reap the full benefit of any upturn in growth but would also bear the full cost of any losses. The communities secretary will get to decide if an area can benefit from this, though, and the bill in its current form suggests councils could be forced into ‘designated areas’ against their will. That is different to the opt-in pooling arrangements that currently exist. Significantly, every time such a decision is taken it will have an impact on how much funding will be available nationally for redistribution. Local government will be keen to make sure regulations require any future decisions taken by the communities secretary are transparent.

Multi-year council tax referendum principles

Referendum

Referendum

The bill paves the way for the communities secretary to set local authorities a limit over a number of years for raising council tax, rather than annually as at present. It builds on the social care precept principle whereby councils have been offered the chance to raise that part of the bill by up to 6% over two or three years. While multi-year referendum principles would provide councils with greater certainty and an ability to better plan in the medium-term, finance officers believe this measure only pushes at the margins. They think the government should give local politicians the freedom to set council tax increases how they see fit – they will, the sector argues, be accountable to their residents at the ballot box after all.

Sean Nolan

Sean Nolan

“What’s still critical is finding an acceptable balance between the haves and have nots at the same time as maximising incentives.”

Sean Nolan, head of local government, Chartered Institute of Public Finance & Accountancy

Inflation

Inflation

Inflation

Former chancellor George Osborne made a commitment at the March 2016 budget to change the measure of inflation for calculating business rates “from the higher RPI to the lower CPI” from 2020. The bill enables this but the wording is such that it leaves it open to the Treasury to change it again in the future.

 

Altering the central list

Central list

Central list

A further example of central government retaining control is the fact the bill enables the communities secretary to alter what is, and is not, on the central ratings list. Explanatory notes published alongside the bill referenced a focus on utilities although there are no such specifics on the face of the bill. At the LGA’s finance conference earlier this month Stuart Hoggan said the central list would be reserved for properties which “really need to be” on there, although there is a recognition businesses could put up a strong resistance to this if it increases the amount of rates they have to pay as a result of having properties on a number of local lists, rather than one on the single central list. Local government will be keeping a close eye on regulations to make sure there is transparency over those decisions – something lacking in the system at present.

Lee coyler

“I am concerned that the pressing need to reform mandatory reliefs has not been addressed. Those decisions are better taken locally.”

Lee Colyer, drector of finance and corporate servies at Tunbridge Wells BC

Infrastructure levy

Hard hat

As expected, the bill gives mayoral combined authorities, and the Greater London Authority, the power to impose an infrastructure levy worth no more than 2p per pound. However, ministers have ditched plans requiring local enterprise partnerships to approve the levy. Instead combined authorities will only have to ensure businesses are consulted on any proposed levies through a public prospectus. That document will need to outline a description of the work to be undertaken, an estimated cost, and show any potential impacts and benefits on businesses. The prospectus will also have to set out how long the charge will last for. The bill stipulates that money raised can only be spent on a project to which it relates. It cannot be used to fund housing, planning, adult social care, education, children’s, or health services. The levy can be used to pay off loans taken out for a particular project.

Helen randall

“The bill goes some way to devolving financial power to local government but, as ever, the Treasury is lurking in the background.”

Helen Randall, partner specialising in local government, Trowers & Hamlins

Property owner levies

Levies

The bill provides for the property’s owner, as opposed to the ratepayer, to be subject to a levy. This levy, which cannot run longer than five years unless approved again in another ballot, is to be spent on improving an area with a view to stimulating economic growth. Similar to Business Improvement Districts, the levy is different in that it would cover a whole local authority area as opposed to a specified part – usually a town centre or business park. London is the only place in the country to have been able to introduce a property owner levy so far as part of the Crossrail development. The bill broadens this initiative to the whole country.

Multiplier discounts and reliefs

Sale

Sale

Should local authorities wish to reduce the business rates multiplier in their area the bill would enable that, although the communities secretary retains the power to set the maximum amount of discount areas can apply. When the bill was published the government highlighted extended rate reliefs for public toilets and small businesses in rural areas. By retaining national control over rate reliefs, parts of local government’s income is still being controlled by Whitehall. The sector is likely to argue it should be up to each area to determine which reliefs should be applie

Guy Ware

 

“Every time the communities secretary makes a decision [on ’designated areas’] they are effectively hypothecating some of the business rates that are not then available to fund the national redistribution mechanism.”

Guy Ware, director of finance, performance and procurement, London Councils

 

Still to come…

The government’s fair funding review, which is currently underway, will inform the distribution of funding in the new system. Finding an acceptable balance between the winners and losers while maximising incentives for growth will be crucial to the success of business rates reforms. 

Contributions

Judith Barnes, local government partner, Bevan Brittan

Lee Colyer, director of finance and corporate services at Tunbridge Wells BC

Sean Nolan, head of local government, Chartered Institute of Public Finance and Accountancy

Helen Randall, partner specialising in local government, Trowers & Hamlins

Guy Ware, director of finance, performance and procurement, London Councils

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