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Three counties emerge as 100% rates retention pilot front-runners

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Three county areas have emerged as front-runners to pilot 100% business rates retention, despite concerns about how the revised system might work in two-tier areas.

LGC can reveal leaders in Leicestershire and Suffolk are keen to submit bids to pilot 100% rates retention in 2018-19. Surrey, which had reached an agreement with the government in February to become a pilot, is also set to participate.

However, finance experts and council leaders have voiced concerns about how the proposed pilots might work especially as the terms are set to be less advantageous than those in areas which have already reached agreements.

Pilots are already in action in Cornwall, Greater Manchester, Liverpool, West Midlands, and West of England while London is working with the government on a pilot to begin next April.

The current pilot areas have agreed a ‘no detriment’ clause, guaranteeing that these areas will not be worse off than under the current system should their business rates income reduce. But a prospectus for the new pilots published by the Department for Communities & Local Government last week suggested the 2018-19 pilots might not include such a clause.

District Councils Network chair John Fuller (Con) told LGC this had caused “a bit of anxiety” among his members and warned the government would get skewed results if it withdrew the no detriment clause because it would “only get buoyant areas piloting”.

Geoff Winterbottom, principal research officer at the Special Interest Group of Municipal Authorities, agreed and added: “Unless there’s some plan with pooling to deal with appeals then it’s only the stronger collection of authorities that will want to do this. So there may be some limited appetite.”

Under the current safety net system, individual local authorities have 92.5% of their baseline business rates income protected against losses, even if they are part of pooling arrangements. The new system will apply a single safety net threshold for a whole pooling area of 97%. While this is higher, which DCLG said reflected the “additional risk of greater retention”, councils in the pilot would be required to support each other against losses below that threshold.

Confusion also surrounds the stipulation pilots should only last one year, especially as it can take a number of years for councils to benefit from any uplift in business rates growth.

County Councils Network director Simon Edwards told LGC that “could also potentially deter participation”.

The government will, however, learn a lot about councils’ appetite for risk and their ability to manage it from the way they set up their pooling arrangements to underwrite losses and split the proceeds from any growth between different sets of councils.

Leicestershire CC’s leader Nick Rushton (Con) is in the process of getting the support of his districts and unitary Leicester City Council, but acknowledged “it’s the split where the arguments could occur”. While the districts “will want most of [the growth] they can’t have it”, Cllr Rushton said but added “hopefully there is a deal to be done” as the county council has estimated all of the authorities involved will collectively be £20m-£25m better off.

Arguments over how growth will be split are unlikely to rear their head in Suffolk where councils already split growth in proportion to the business rates income for each area as part of existing pooling arrangements. Leaders also decide together how a pot of money made up of some of the uplift in growth is used.

Ipswich BC’s leader David Ellsemere (Lab) said: “As long as no council is severely disadvantaged by this [100% rates retention] we are fairly confident we have got the mechanisms in place to do this.”

While the revival of the 100% business rates retention system has sparked interest in many areas, it hasn’t put a stop to pressing questions about the future of local government finance beyond 2020, when 100% retention was due to be rolled out nationally.

Gavin Callaghan (Lab), chair of Basildon Council’s policy and resources committee, and de facto leader, says he is still waiting for a response from communities secretary Sajid Javid 10 weeks after writing a letter in June asking for clarity on the way the sector will be financed in the future.

The Local Government Finance Bill, which would have paved the way for full business rates retention nationally, was dropped ahead of the general election and failed to make it into the Queen’s Speech.

Cllr Callaghan said: “More pilots just kick this into the long grass when what we need is decisive action and fast.”

CCN’s Mr Edwards warned ministers against viewing any business rates pilots in isolation. He said: “Importantly, rate retention, including pilots, needs to be considered in the context of local government finance as a whole – business rate reform cannot be considered in isolation from the fair funding review and the social care green paper.”

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