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Business rates: Finding the line of best fit

Source: PSE Oct/Nov 16

Following the DCLG’s consultation on 100% business rates retention, PSE provides an analysis of what each part of the local government spectrum is saying in response. Luana Salles reports.

When PSE went to print, it had only been a few weeks since the DCLG’s 12-week consultation on 100% business rates retention had closed.

A number of bodies, including the LGA, the District Councils’ Network (DCN), the County Councils Network (CCN) and the Rural Services Network, submitted responses to what was called a consultation of “general nature, [but that] has given participants the chance to consider the ultimate goals at stake for local government in attaining greater financial independence”. 

Line of best fit 

In his response, the DCN’s chairman, Cllr Neil Clarke, re-emphasised the need to strike a balance between “needs, growth, incentives, stability and resources”, adding: “This complex line of best fit must be designed with the long-term sustainability of local government finance firmly in view.

“The DCN, together with the rest of the local government community, would like to make the point in the strongest possible terms that the transfer of any new responsibilities must not only be fiscally neutral to each local authority at the point of transfer, it must remain fiscally neutral in the medium to long term.” 

Despite its focus on financial stability across the board, the DCN could not identify which grants would be best funded by devolved business rates, citing the post-Brexit world as one of the culprits for funding uncertainties. 

Some of the suggested fundable grants in the DCLG consultation concerned revenue support, public health, independent living, rural services delivery and the Better Care Fund.

“It is also unclear to what extent the government already intend to reflect material changes in responsibilities and associated risk transfers,” the DCN argued in its response. It did, however, clarify that district councils were vehemently against the idea of funding the Attendance Allowance from retained business rates, claiming that this move would be “unwelcome, unfair, and could possibly unhinge the new system before it starts”. 

But whatever the quantum of funding ends up being, the organisation demanded that a series of ‘asks’ were addressed, including the need to ensure funded services are “closely linked to place-based solutions” and that currently unfunded local government pressures were addressed “before any serious discussions take place on new responsibilities”. 

“This, alongside how any new ‘needs’ distribution may operate, would be a sensible starting point to then consider ‘new responsibilities’ rather than responsibilities being the starting point,” it said. 

County-based challenges 

Similarly, the CCN’s response largely stressed the importance of financial equity, arguing that the design of the retention system “must not be conducted in isolation, but as part of a broader consideration of local government funding and sustainability, fairness for taxpayers and the national economic and policy landscape”. 

“While much attention has been paid to city-regions in recent times, counties also face challenges. Low productivity levels, skills mismatches and infrastructure gaps all pose long-term threats. To ensure that the new system is set up to incentivise and enable growth, and to strengthen the link between business rate growth and income, CCN suggest there are a number of key opportunities which should be taken,” the county councils said. 

“Beyond meeting unfunded pressures, any additional responsibilities under business rates must be linked to strategic growth activity and all areas must have the ability to raise a strategic infrastructure levy in consultation with their businesses. Government should also take fast action now to broaden and deepen the devolution agenda, making a suite of growth, reform and fiscal powers and budgets available to all areas.” 

The CCN had previously called for safety nets and frequent ‘resets’ to ensure county councils, which have less business rates income because they have much larger numbers of business ratepayers claiming relief, don’t lose out under the proposals.

South east calls for transparency 

In its own consultation response, South East England Councils (SEEC) outlined four principles that it argued should form the basis for any new funding system: rewarding all tiers of local government so that they can see “clear local financial benefits from delivering growth”; a less complex system to improve accountability; predictable levels of council income to enable financial planning; and greater transparency about what is included in baseline funding assumptions. 

Expanding on the latter, SEEC deputy chairman, Conservative councillor Roy Perry, said: “The current system is so complicated that it is only understood by a handful of financial experts. This means there is no accountability to local people and cuts in government funding can be disguised within the complexity of the system. 

“We’d also like to see a move towards funding on a per capita basis to reflect better the south east’s large and growing population. This is a fairer and more transparent way of funding everything from social care to infrastructure to deprivation as it relies on actual numbers of people who use a service rather than more theoretical relative percentages.”

 2015 property values: growing London-centrism 

Meanwhile in London, the Institute for Fiscal Studies (IFS) found that, based on the results of the latest business rates revaluation, there is a “growing divergence” in property prices between the capital and the rest of the country. This effectively means the UK government will become more and more dependent on London’s revenue to fund countrywide services, which the IFS argued “may pose difficulties if more revenue sources are devolved to the local level”. 

The IFS analysis is based on the refreshed figures from the Valuation Office Agency, which announced the updated 2015 property values that will be used to calculate business rates from April next year – replacing the 2008 property values previously used. 

“This is also a big deal: between 2008 and 2015 property values have changed very differently in different parts of the country, with very large increases in some areas (notably ‘gentrifying’ parts of London), and big decreases in others (such as ‘struggling’ town centres in much of the rest of the country). These relative changes will have a huge effect on business rates bills,” the institute said. 

“The fact that London’s rates bills will be rising reflects its non-residential property market outperforming that in the rest of England – presumably because London is an increasingly relatively more attractive place to set up shop (or office).” 

The same pattern of London outperforming the rest of the country in financial terms can be seen in other indicators, the IFS added, including gross value added figures – which increased three times as fast in London as in the rest of England between 2008 and 2014 – and the numbers of people in employment, which have grown by 15% in the capital but just 4% in the rest of the country. 

“This trend means the UK government is becoming more and more dependent on revenues – from many other taxes like income tax, as well as business rates – from London to fund services across the country as a whole,” the analysis document said. “At the same time there is growing pressure for devolution of more of London’s revenues to the Greater London Authority – a difficult square to circle if these trends continue.” 

Winners and losers 

The revenues of individual councils won’t change initially as a result of the revaluation, with the government redistributing funding to ensure no council “wins or loses overnight”, the institute explained. But there may be winners and losers later on. 

“First, because councils in England notionally keep 50% of any change in their business rates revenues, any subsequent growth (or decline) in the business rates tax base will be worth more in those areas where rateable values have increased by more than average – and hence rates bills will increase – and vice versa,” it said. 

“Second, councils will have to bear their share of any successful appeals against the new values – and while estimates of the impact of such appeals can be made when the new valuations are introduced, such estimates are unlikely to be completely accurate. 

“The revaluation proceeds even bigger changes to the way business rates fit into the local government finance system. April 2017 will also see Liverpool and Manchester become pilots for a 100% business rates retention system that is set to roll out across England by 2019–20. This will have a big impact on the kinds of financial risks and incentives councils face.”

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