Councils which have been “over-compensated” by a combined £36m due to “an historic error” will not have to pay the money back, housing and communities secretary Sajid Javid has told MPs.
The error relates to business rates pilots and impacts on 27 councils and the Greater London Authority.
This, combined with “the importance of the business rates retention system to the sustainability of local government”, has led Mr Javid to launch “an independent review of the internal processes and procedures that underpin the department’s oversight of business rates and related systems”.
“This should include modelling and analytical work, how officials manage the interface with policy decision-making, and resourcing and skills,” he said in a written ministerial statement.
Mr Javid said officials had “worked through the necessary calculations to prepare for the extension” of the business rates pilots programme in 2018-19.
“In doing so, an historic error has been identified in the methodology used to calculate the sums due to pilots,” he said. “An adjustment is therefore required to the methodology, which will reduce the amount due to these local authorities for participating in the pilot programme to the correct level.”
Affected councils have been informed today but Mr Javid said this “does not” impact on the finance settlement or the core spending power of those the error relates to.
Since 2014-15, locally-raised business rates have been lower than they would have been because the government has “under-indexed the business rates multiplier in each of 2014-15, 2015-6 and 2018-19”, Mr Javid’s statement said. “To compensate local authorities for their loss of income, therefore, the government has calculated the extent of the loss caused by under-indexation and paid that amount as a grant under section 31 of the Local Government Act 2003.”
This is paid to councils based on estimates made by local authorities before the start of each financial year. It is then adjusted once outturn figures are produced.
“When on account compensation payments were calculated for the six 2017-18 pilot areas, the methodology used to adjust tariffs and top-ups contained an error,” said Mr Javid. “This resulted in 27 local authorities and the Greater London Authority being over-compensated by £36m.”
Because these councils “will have been operating on the understanding that this funding has already been secured… a sudden reduction in their funding could potentially have an impact on the delivery of the objectives agreed as part of their devolution deals”, said Mr Javid.
While rules indicate the Ministry for Housing, Communities & Local Government “should recover the overpayment” Mr Javid said he had “issued a direction requesting that the permanent secretary does not do so in this extraordinary circumstance”.
He added: “In respect of the payments due to 2018-19 business rates retention pilot authorities, my department will use the corrected methodology to calculate the Section 31 grant compensation due to authorities. Local authorities will shortly be notified of these amounts.”
Responding Chartered Institute of Public Finance & Accountancy chief executive Rob Whiteman said the “modelling error” had not been apparent to the government or councils before now.
The fact the ministry is not going to clawback the funding showed recognition “this news comes very late in the year”.
He added: “The affected councils will of course be disappointed that when guidelines are issued for the 2018-19 rate retention pilots, there will be less resource than they may have modelled based on current data.”