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Delays to business rate reforms mean councils face ‘financial cliff edge’

The government has not taken sufficient steps to assess the financial effects of the so called “staircase tax” on local authorities, the housing, communities and local government committee has warned.

The Non-Domestic Rating (Property in Common Occupation) Bill would mean that businesses that own one or more adjoining floors with a communal staircase would be taxed as though they had separate properties.

Consequently they would be unable to access the rates relief payments that they would be entitled to if they owned just one building.

When announcing the plans, the government stated that local government would be fully compensated for any loss of income as a result of the measures, yet councils have expressed concerns that they will suffer financially.

Since then, the government has said in a letter to the committee that “no compensation will be payable to local government.”

The committee has therefore called on the government to “explain in detail why it does not now plan to honour its Autumn Budget 2017 commitment to compensate local government fully for the loss of income resulting from the provisions.”

It has also conducted a short inquiry into how councils have been affected by the move from 50% to 100% business rates retention.

The evidence that the committee heard showed that the uncertainty over the reforms has resulted in councils making pessimistic assumptions about their budgets, which it warns could impact on service levels.

Part way through the inquiry the government announced 75% business rate retention in 2020-21, which the committee says did not help to restore councils’ confidence.

It has called on the government to reduce further uncertainty by taking a range of steps, which include publishing a timeline for the forthcoming consultations and key milestones with quarterly progress updates.

Clive Betts, chair of the housing, communities and local government committee, explained: “Many councils across the country are in a difficult financial position, with huge pressures on a whole range of provisions from children's services through to road repairs.

“After many years of financial constraints, the government now has an opportunity to go some way towards protecting vital services for taxpayers by ensuring that any extra revenue from the retention of business rates can be kept by councils on top of current funding.”

Lord Porter, chair of the Local Government Association (LGA), said that the LGA is pleased to see the committee backing it's calls for councils to be able to use extra business rates income to plug the growing funding gap.

“The money local government has to maintain vital services is running out fast.

“Councils will see their core funding from central government further cut in half over the next two years and almost phased out completely by the end of the decade.

“Delays to when business rate reforms will be implemented mean councils are facing a financial cliff-edge in two years that the government has to address,” he added.


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