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Safety net payments 'fundamentally flawed'

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Whitehall officials are under pressure to rethink local government’s three-month old funding system amid accusations that it is “fundamentally flawed”.

The criticisms have been levelled after it emerged that unexpectedly large safety net payments to a handful of councils – more than two-thirds of which went to Westminster City Council - will result in additional funding cuts for the rest of local government.

Sir Stephen Houghton, chairman of the Special Interest Group of Municipal Authorities, said: “This funding system is fundamentally flawed and the poorest areas are losing out. The government needs to do something to address such blatant disparity.”

Sigoma and others are set to call on the Department for Communities & Local Government to rethink plans to holdback £120m from local government funding in 2014-15 in order to fund the safety net paid to councils predicting large business rates losses.

DCLG had previously intended to hold back just £25m as part of the new business rates retention funding model, but reconsidered its plans after this year’s safety net payments had come to a much larger total of £69m.

Those payments included £47m for Westminster and almost £4m for both Hammersmith & Fulham LBC and Brighton & Hove City Council. For full details see table below.

Sir Stephen said: “The fact that money is being taken from needs to safeguard alterations in Westminster’s huge business rate income as a result of miscalculations and pessimistic estimations is hard to take in tough times.”

Sigoma and others have suggested safety net payments were inflated this year because finance directors submitted overly prudent assessments of their business rate income and their likely losses on appeal, however LGC spoke to the 10 councils who received the largest safety net payments and they all stood by their estimates.

All 10 also said they had opted to lump all appeals risk in 2013-14, instead of spreading it over five year as allowed by DCLG, and many told LGC they had made the decision because it was financially beneficial to do so.

Newcastle City Council treasurer Paul Woods, an adviser to the LGA, said this was evidence of “gaming” and constituted a “system failure”.

While Sigoma and Mr Woods have called on DCLG to scrap all holdbacks, the Chartered Institute of Public Finance and Accountancy has also suggested DCLG proceed with caution while it was relying on forecasts rather than actual data.

Local govermment policy lead Alison Scott said: “Our concern is that it [increasing the holdbacks] might be premature at this stage.”

A spokesman for Westminster City Council said the council was concerned about the “pressure” it placed on the system.

“We highlighted these issues to minsters throughout the design of the business rate retention system.” He added: “We remain happy to work with CLG to design a system that can take into account Westminster’s unique outlier status.” 

Safety net explained

Safety net payments are paid to any council whose business rates receipts fall by more than 7.5% below their baseline funding level.

The calculation is made at the beginning of the year based councils forecast of their business rate income, including any outstanding appeals against rates set by the Valuation Office Agency.

Payments are made in 10 instalments over the year and, if actual business rate income proves to be higher than the forecast, the council can be required to repay some of the amount.

In the long term the safety net is set to be funded through levy payments on councils whose increases in revenue from business rates outstrips the increase in its funding level. However, in the short term it is funded through an annual top-slice of local government funding.

 

Safety net recipients

Local AuthoritySafety Net% of net
Westminster46,546,62268%
Brighton & Hove3,770,0605%
Hammersmith3,549,7655%
Copeland2,219,7423%
New Forest1,969,9463%
Fareham1,670,8752%
Dover1,486,5292%
Basildon1,188,6222%
Redcar and Clev1,145,5092%
Crawley1,031,8861%
Gosport972,6691%
Thanet727,8951%
Eastleigh579,2791%
West Dorset551,2021%
Great Yarmouth369,6941%
North Dorset232,6550%
South Kesteven199,9870%
Vale of White H193,5620%
Adur112,5660%
West Oxford99,2660%
Wycombe91,8910%
Carlisle71,9260%
Weymouth53,3540%
Brentwood30,8960%
South Oxford16,4830%
Dartford9,6190%

 

Westminster City Council - £46.5m safety net payment

A spokesman said: “Westminster is a huge outlier in NNDR collection and in the number and value of appeals which would create pressure on any one size fits all system including the operation of a national safety net.

“We highlighted these issues to minsters throughout the design of the business rate retention system. Due to the size of Westminster NNDR and our appeals assumptions, the five year spread is simply not an option and would have exposed the council to greater future risk – a position shared by other high tax base/tariff authorities.

“We remain happy to work with CLG to design a system that can take into account Westminster’s unique outlier status.” 

Hammersmith & Fulham LBC - £3.5m safety net payment

The borough has been adversely affected by a large number of appeals against the Valuation Office Agency’s rating Westfield shopping centre, which opened in 2009 and is the second largest shopping centre in Europe.

A council spokesman said the authority was lobbying for a reset of its baseline figures to take into account the new business rate levels for the centre.

Leader Nicholas Botterill (Con) said: “Hammersmith & Fulham stands to lose £4.1m per annum due to the poor performance of the Valuation Office Agency. The office failed to accurately assess the values of the new shops and business at Westfield shopping centre and more than 250 successful appeals in 2012-13 have so far resulted in a reduction in rateable values of 30%.

“As Britain’s low tax borough we take pride in scrutinising and challenging every penny of expenditure in order to lower the council tax burden and protect front-line services. By comparison the loss in business rates, which is the equivalent of an 8% increase in council tax, due to errors by the Valuation Office is extremely unhelpful.”

Copeland BC - £2.2m safety net payment

A spokeswoman said the council was facing an appeal against business rates by the owners of Sellafield power station.

New Forest DC - £2m safety net payment

A spokeswoman said: “We are not anticipating significant growth from new development as the majority of the New Forest district is a designated National Park. We are also faced with the decommissioning of a major power station in Fawley, which is worth approximately £1m a year in business rates.”

She added: “The impact of appeals still remains difficult to predict as backdated could be as much as £5m to 2010 and may not be settled until 2018.”

Dover DC - £1.9m safety net payments

A spokesman for Dover DC said the demolition of a large part of its Discovery Park enterprise zone had contributed to a large loss in business rates. He added: “This will be offset to some extent by Discovery Park splitting the remaining buildings into smaller hereditaments. However, this will be a net reduction in rateable value overall, in addition to which there will be initial periods when the new hereditaments are likely to qualify for empty property relief as well as ongoing enterprise zone discounts.”

Crawley BC - £1m safety net payment

Dave Rawlings, head of finance, revenues and benefits, told LGC Crawley’s business rate assessment was heavily influenced by the presence of Gatwick airport in the borough. “We are talking [a total rateable value] of £105m – about two or three times what you would expect for a district of our size.”

Mr Rawlings said Crawley had also been affected by DCLG’s decision to measure business rate income under the new system against an average of two years before the business rate retention system was introduced. “Those happened to be relatively good years for us so the base we were compared with was higher than usual. If you included this year in the base we would not be in the safety net.”

The council is also awaiting verdicts on appeals equal to 80% of the areas total rateable value, he said.

Crawley had decided not to spread the cost of appeals over five years because “we might be in the position where, in the future, we won’t be in the safety net [and] so we would lose money”. He added: “You can’t be worse off in the safety net.”

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