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Business rates devolution will expose councils to ‘100%’ of appeals risk

The appeals system as it exists poses a serious threat to the devolution of business rates, the Communities and Local Government Committee has warned.

In its interim report on the proposals, the committee said that the appeals system was “often the very first issue raised in the written submissions and oral evidence”.

Local councils warned that under the current system they are responsible for 50% of appeals, but plans to devolve full control of business rates by 2020 mean they will be responsible for 100%.

Clive Betts MP, chair of the committee, said: “The issue of appeals is of significant concern to local authorities and it is essential that it is resolved before the government pushes ahead with business rates changes.

“Similarly, the government must address the alarm of councils, which are understandably worried that their spending needs and the funding of their local services will not be supported by their business rates revenue.”

The report warned that the issue is particularly concerning because, once a business appeals against the system, the council must set aside a sum of money in case it is successful, meaning that large sums of money are unavailable for long periods of time.

For example, Virgin Media is currently appealing against business rates in 60 local authorities. In Stockton-on-Tees alone, the borough council has set aside £2.8m in case the appeal is successful.

Greater Manchester Combined Authority told the committee that because of the appeals problems: “There is a significant risk that the government’s reforms will fail to meet their productivity and growth objectives.”

In Greater Manchester and Cambridgeshire, where business rates retention has been trialled, appeals for additional business rates were dealt with separately, and the committee recommended that this approach was considered.

The report said the government should also consider other proposals for dealing with the problem, including adjustments to top ups and tariffs; using the central list to fund repayments to businesses resulting from appeals prior to 2013, averaging out the value of appeals across the country; and more frequent revaluations.

It said it is “essential” that the issue is dealt with before the full programme is rolled out in 2020.

Cllr Claire Kober, resources portfolio holder at the Local Government Association (LGA), said councils had already spent £1.75bn on covering backdated appeals in the past three years, despite the intense pressures on council funding.

She added that local government participation was “critical” in ensuring devolution was implemented effectively.

“No matter which new services councils agree to take on, it is absolutely crucial that the amount of extra business rates income kept by councils matches the cost of them now and in the future,” she said.

“As every penny will count in giving councils the best chance of protecting services over the next few years, the Government also needs to allow councils to use some of the extra business rates income to plug existing funding gaps and ease some of the long-term financial challenges they face.”

LEPs ‘ill-suited’ to major role in business rates devolution

In addition, the report said the government should review the role it has set out for Local Enterprise Partnerships (LEPs) in implementing the proposals, saying they were “near-universally thought to be ill-suited” by witnesses.

Problems highlighted include the fact that LEPs do not represent the full range of businesses in the area, do not align with local authority boundaries in some areas and lack the experience and resources to scrutinise proposals to set business rates.

The British Chamber of Commerce also warned that there is a potential conflict of interest because “the leaders of billing authorities make up most of the ex-officio posts on LEP boards”.

Colin Stanbridge, chief executive of the London Chamber of Commerce, said: “It is all very easy for politicians and civil servants to say, ‘We have created these LEPs.’ But there is no transparency in them, people don’t know what they are and we don’t know what their powers are. We need a big review of that and so maybe out of that we will be able to find some sort of mechanism that will work.”

The report also set out recommended guidelines on how the money will be spent on new services. These include ensuring that the services support public sector reform, devolution and localism and fit logically with the wider responsibilities of local government.

Councils have previously warned that their funding may be negatively affected under business rates devolution because of government proposals to raise the threshold for paying rates and because some areas have a lower tax base than others.

A Department for Communities and Local Government spokesperson said: “This report not only recognises the significance of 100% business rate retention but also endorses the move towards greater financial self-sufficiency for councils - something local government has called for over decades. We will consider its proposals carefully.”

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