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Full business rates retention presents a challenging conundrum

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The chancellor’s announcement that revenue support grant will be abolished and local government will retain 100% of business rates sent shockwaves through the sector last week.

As the dust settles there are more questions than answers over how the new scheme will work with even Department for Communities & Local Government permanent secretary Melanie Dawes admitting the department does not have a clear plan for implementing the reform. She promised the department would work with local authorities to design the system.

However, the sector is unlikely to speak with one voice. As our contributors on the following pages show there are competing interests within local government, while business leaders have their own concerns.

From Westminster City Council, which collects 8% of England’s business rates, to county councils, which are reliant on rates collected by their districts, different types of authorities have different needs that will have to be addressed in the design of the new structure.

The most pressing question for the government will surely be how it manages to redistribute what the chancellor described as a £26bn business rates pot so that more grant reliant authorities are not hugely disadvantaged. At the same time it will not want to completely neuter the increased link between the amount of income generated locally and how much cash a council retains.

Many have questioned whether this conundrum can be solved without producing a system that feels little different on the ground to the current one, particularly when local government will have to take on significant additional responsibilities in return for the sector as a whole keeping hold of 100% of business rates.

Business rate pot

 

LGC analysis of DCLG data on forecast business rates collection for 2015-16 found just 3.7% will be collected by authorities in the north East while London contributes almost 30% to the national pot. Almost half (45%) of London’s business rates income is generated in just three central London boroughs: Westminster City Council, Camden LBC and City of London Corporation. Their contribution accounts for about 13% of business rates collected nationally. This gives an indication of the scale of the redistribution challenge.

Under the current system, where local government ostensibly retains 50% of business rates, the top up and tariff system redistributes income from areas with high levels of business rates income to areas with lower levels of income.

All district councils pay a tariff, meaning they actually retain much less than the half of business rates currently destined for local government. This ranges from Copeland BC, which retains just 0.8% of its business rates, to North East Derbyshire DC which hangs on to 21.4%.

Of 125 unitary authorities, 37 pay a tariff while the remainder receive a top up payment. For example Solihull retains around 27% of its business rates. In cash terms this means Solihull MBC pays out £26m of business rates as a tariff payment to be redistributed around the country. Meanwhile, its neighbour Birmingham City Council receives a top-up payment of £126m, in addition to its full 50% local share of £198m.

Writing for LGC, Westminster chief executive Charlie Parker points out his borough only keeps 4p in every pound of business rates collected. He says any formula for redistribution must ensure there is an incentive for areas to generate growth.

A senior finance professional working for a northern council which receives a top-up also questioned what difference the reforms would make, describing it as a “smokescreen that hides the fact that local authorities are facing massive additional cuts”.

“The main issue for local authorities is when the funding reductions are confirmed, over what period and are reductions being applied fairly and that this fairness is recognised by all local authorities.”

As well as redistributing between the haves and have nots, decisions must also be taken about redistribution between different tiers of government. Currently district councils retain 80% of the local share of business rates collected in their area while county councils receive 20%.

Writing for LGC, District Councils Network chair Neil Clarke (Con) argues this split must be maintained, however his opposite number at the County Councils network Paul Carter (Con) calls for its urgent review.

There will be similar discussions in London where boroughs receive 60% of the local share of business rates while the Greater London Authority receives 40%.

As discussions heat up in the coming weeks and months, local authorities must attempt to overcome their differences for the good of the sector as whole.

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