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Business rate changes: the impact on councils cannot be overestimated

Source: PSE - April/ May 16

Tiffany Cloynes, public services partner at Geldards LLP, reviews the changes made to business rates in this year’s March Budget and how these will impact councils over the coming years.

Announcements about business rates in the March 2016 Budget look set to increase the challenges facing local authorities in managing their own budgets in future years. 

Chancellor George Osborne announced that the UK government will increase Small Business Rate Relief (SBRR) from 50% to 100% and increase the threshold, so that a greater number of businesses will benefit from eligibility for this. The threshold for the standard business rates multiplier is to be increased to a rateable value of £51,000. According to the DCLG’s calculations, this will take 250,000 smaller properties out of the higher rate. In the longer term, it was said in the Budget that from April 2020 taxes for all businesses paying rates will be cut by a change in the annual indexation of business rates from retail price index (RPI), to be consistent with the main measure of inflation, which is currently Consumer Price Index (CPI). 

The 2015 Spending Review had already prepared local authorities for a very different system of finance, with the announcement that the Revenue Support Grant would end and councils would be allowed to retain 100% of business rates. Whilst the ability for local authorities to control the use of money raised for their areas was welcome, there was potential for the finances of different areas to vary greatly, depending on their ability to attract businesses and the extent of the business rates they could retain. 

The latest announcements mean even those areas with a high volume of businesses will receive less income than expected from their business rates. 

Practical arrangements remain to be seen 

It remains to be seen how the arrangements for retention of business rates will work in practice. Government has said that the approach will be piloted in Greater Manchester and Liverpool City Region. 

The LGA has described this as an important first step, but has also pointed out that local government will need to play a lead role in making sure any new national system works effectively. If local authorities are to take proper advantage of control over use of business rates, they need to be involved in implementing the delivery system. 

The government has said that local government will be compensated for the loss of income resulting from the business rates measures announced in the Budget. 

However, it is difficult to see how government intends to address this on an ongoing basis given that there will be less funding available to local authorities from business rates just as these become increasingly important to them as a source of income. The impact on councils cannot be overestimated. 

They need to adjust to a new system of funding and manage this effectively enough to ensure they have appropriate and sufficient resources to meet the demands for their services.

Innovative approaches 

On the positive side, the Treasury’s calculations, as reported in the Budget document, have concluded that the burden on ratepayers in England will be reduced by £6.7bn over the next five years. Any area stands to benefit from a healthy local economy and, even with the direct impact of business rates retention being reduced, it will be useful for local authorities to encourage businesses to set up and stay in their areas. 

Another positive factor is the innovative approach that local authorities have been taking in the delivery of their services and the discharge of their functions. There are many examples of authorities working together to achieve the most effective service delivery for their citizens, including delegating functions, sharing chief senior officers and creating new entities such as companies. The flexibility of councils in engaging with new ways of working and managing with limited resources will be important in adapting to their new system of finance. 

Overall, whilst the changes in business rates arrangements will undoubtedly be challenging, the potential advantages for businesses and the resourcefulness of local authorities means that councils are likely to be able to adapt and respond effectively to their changed circumstances.

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