Councils will be handed the power to set business rates and will be able to keep all of the income raised by 2020, chancellor George Osborne has announced.
In his speech to the Conservative conference, Mr Osborne said local government grant from Whitehall would be phased out and councils will be allowed to keep all of the £26bn collected in business rates and effectively set their own business rates.
All councils will be allowed to cut rates but only cities with elected mayors will have the power to raise them, to boost spending on infrastructure.
According to a Tory briefing paper, the reform will include an extension of the “top ups and tariffs” system, which redistributes business rates income between authorities.
The safety net regime which protects councils against large year to year drops in business rates will remain but the growth levy – which claws money back from areas that see high annual rates of growth for use in other places – will be abolished.
Mr Osborne said: “Right now we have the merry go round of clawing back local taxes into the Treasury and handing them out again in the form of a grant.
“In my view, proud cities and counties should not be forced to come to national government with a begging bowl.
“So I am announcing this: today I am embarking on the biggest transfer of power to our local government in living memory.
“We are going to allow them to keep the rates they collect from business.”
The chancellor said councils would eventually be allowed to hold on to £26bn of business rates income that is currently retained by Whitehall.
“Right now, we collect much more in business rates than we give back in the main grant,” he told the conference. “So we will phase out this local government grant altogether.”
The extra income from business rates will be accompanied by more power and responsibility being devolved down to local authorities, the chancellor added.
“So this is what our plan means: attract a business, and you attract more money. Regenerate a high street, and you’ll reap the benefits. Grow your area, and you’ll grow your revenue too.”
In a further move to encourage councils and city mayors to boost economic growth, Mr Osborne said he would also hand them the power to set their own business rates.
“We’re going to abolish the uniform business rate entirely,” he added.
“Any local area will be able to cut business rates as much as they like to win new jobs and generate wealth. It’s up to them to judge whether they can afford it. It’s called having power and taking responsibility.”
Elected mayors of big cities would get even greater power over business rates, the chancellor told the conference.
“Provided they have the support of the local business community, these mayors will be able to add a premium to the rates to pay for new infrastructure and build for their cities’ future.
“Yes, further savings to be made in local government, but radical reform too. So an end to the uniform business rate.
“Money raised locally, spent locally. Every council able to cut business taxes. Every mayor able to build for their city’s future. A new way to govern our country.
“Power to the people. Let the devolution revolution begin.”
Mayors’ power to raise business rates was “likely” to be limited to 2p on the rate, the Treasury confirmed in a press statement, released shortly after the chancellor’s speech.
Jonathan House, a partner in PwC’s government and public sector team described the business rate reform as “an important measure to support regional cities, towns and counties to be engines for their own growth”.
“Retaining local business rates will better incentivise economic development and enable local voices to define clearly how this should happen,” he added.
“Success will come to those areas that can readily differentiate themselves from their competitors and really attract and support business growth.”
“The private sector is the vital engine for job creation and growth and this initiative should pave the way for councils to use these new powers to attract businesses and regenerate high-streets.”
A recent PwC survey of council leaders found that 92% thought they should have control over setting business rates.
Nick Forbes (Lab), leader of Newcastle City Council, warned the retention of business rates risked entrenching inequality in some areas.
“Business rate retention is good, but without a redistribution mechanism it will further entrench inequalities in areas with a low tax base.”
The reform was welcome by the District Councils Network, which said district councils had long argued “that districts need incentives that are significant, predictable and permanent to stimulate business growth in our areas”.
DCN director Stephen Brown pointed to the need to “delve beyond the headline announcement to fully grasp the details and implications for our members”.