Economy and Infrastructure

IFS: Councils increasingly reliant on London’s business rates revenue

Councils across the country are increasingly reliant on business rates payments from London businesses, a report by the Institute for Fiscal Studies, funded by the Local Government Finance and Devolution consortium, has found.

The report announced that even though the business rates revaluation that is set to take effect this April is designed to be “revenue neutral” across England, London councils were set to see their business rates soar 11% above inflation in the next five years, while rates in the north will fall by 10%, though the average rates bills in the north won’t start decreasing until April 2018.

Revenue raised from business rates are redistributed between local councils, something which the IFS has said causes “councils which would be winners” to be taxed whilst “compensating losers from these changes”.

In addition, the share of rates from London councils means businesses will be taxed an additional £400m a year (raising their total tariff to £740m a year) to pay for “top ups” to northern councils, on top of a further £400m going into the pot of business rates that is retained by central government.

That means that a total of £800m of rates revenues are being raised in London to prop up services elsewhere in England, a figure that the IFS has said shows a trend towards the UK’s reliance on London’s strong economy for government revenues.

However, it was found that in the longer term London councils will see a positive benefit for additional business rates arising from new developments that will allow councils to retain their extra business rates revenues.

Neil Amin-Smith, a researcher at the IFS and an author of the briefing note, said: “Revaluation will mean rates bills will go up, and revenues become more concentrated in London. This is part of a more general trend of greater reliance on the capital for revenues.

He also said: “While some ratepayers’ bills will rise, in the long-run revaluation will cut average bills in the other regions of England, and especially the north. Bills will generally fall more in the suburbs and smaller cities than in both the central areas of major cities like Manchester and more rural areas.”

David Phillips, associate director at the IFS,  added that by stripping out the overnight effects of the revaluation on the amount of business rates each council is able to retain, “the government is stopping large overnight cuts (and increases) to council budgets and services”.

He added: “But it means councils have less incentive to boost demand for existing properties: they do not benefit from the resulting increases in rents and values of these, only from new development. This suggests devolution of other revenues may need to be considered if broader incentives for growth, beyond promoting new property development, are seen as desirable for councils.”

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