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Councils must avoid being sold a business rates pup

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It is a rare thing for the government to give councils something they have long demanded. So last year’s announcement that business rates would be fully retained by the sector resulted in jubilation.

However, rarely has the phrase ‘be careful what you wish for’ been more apt than in relation to councils’ retention of 100% of non-domestic rates.

When they lobbied successive chancellors to localise business rates, councils would not have assumed this policy would be implemented alongside the phasing out of revenue support grant. The combination of the two leaves local services dangerously dependent on business rates and council tax, which both concentrate revenue in the richest areas.

We are no closer to discovering how business rates might be localised. How can you build a mechanism through which a fair portion of the business rate take in economically advantaged areas is transferred to poorer areas, without stifling the tax’s use as an incentive to encourage councils to support growth?

No evidence has yet emerged of the steering group, charged with designing a fair distribution mechanism, coming close to a breakthrough.

The perception exists that the distraction of Brexit and George Osborne’s sacking mean the ministerial impetus to finding a solution has evaporated.

Going beyond the distribution question, the sector needs to question the viability of business rates in the 21st century. This point is made this week by RSA chief executive Matthew Taylor in an LGC article in which he urges councils to take a lead in asking “whether business rates are a sustainable revenue source as more and more activity goes online”.

Rateable value of premises is no longer a fair indicator of business ability to pay tax. Struggling high street chains are hit by business rates which their more wealthy online competitors with few premises are largely spared. Meanwhile, improved digital technology will doubtlessly lead to a home working revolution: home workers could contribute hugely to growth and profits but less to local services.

If you really want to empower councils to spur local growth and successfully lead their place, they need a more sophisticated array of powers.

Business rate localisation should only occur in a climate of real fiscal devolution that can spur growth and change behaviour. There is the potential to use tax to deter car use, limit tourist traffic or reduce the build-up of betting shops; it could also be used to incentivise green industries, support high streets and prevent the loss of jobs and community wellbeing that results from pub closures.

The business rate is a blunt instrument for a bygone age when bespoke tax solutions are now required for individual areas. Councils should not allow their delight at winning an apparent victory in the fight for local empowerment through full business rate localisation to blind them from being sold a pup.

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