Business rates retention

The 2016 Spring Budget included a pledge by the then Chancellor to move to a position where local authorities retain all the business rates income generated in their area, and that this change should be in place by the end of the current Parliament in 2020. We reported at the time in these news pages that this would involve a complex reallocation of more than £12.5 billion per annum of local authority funding. The Government has now published a consultation paper “Self-sufficient local government: 100% business rates retention” seeking views on how that reallocation should be managed.

From 1990 until 2013 local government simply collected business rates income which was then passed, net of allowed collection costs, to central government. This business rates income was pooled and redistributed to local government as a formula grant. From 2013 local government was allowed to retain up to 50% of the business rates income generated in its area. This apportionment was introduced under the Local Government Finance Act 2012. The remaining 50% is redistributed to local authorities as revenue support grant, and other grants. The amount retained by each local authority is up to 50% because some local authorities have more business rates income than others. Those “rates rich” local authorities pay a “tariff” that is used to support “top-up” payments made to local authorities whose business rates income would be insufficient for their needs.

The move now being consulted upon is a move to allow local authorities to retain up to 100% of business rates income. It seems likely that the existing redistributive mechanism of “tariffs” and “top-ups” will be retained in some form. This is to allow for the fact that some local authorities have a very large business rates base but a relatively small population requiring local authority services – Westminster and the City of London are two prime examples of these, but there are others; whilst for other councils the position is the reverse.

As well as move to retention of up to 100% of business rates income, there will be changes to allow all local authorities to apply discounts to the national business rates multiplier and to allow authorities with an elected mayor to levy supplements to the multiplier to fund infrastructure projects. At the same time as this consultation, the Government has published a discussion paper “Fair Funding Review: Call for evidence on Needs and Redistribution” that seeks to look at how each local authority’s needs should be measured when considering redistribution of business rates income between one authority and another.

The consultation on 100% retention is a lengthy one, with thirty-six different questions to address, the majority of them of interest to the local authorities whose income from business rates will be affected. The questions focus principally on what financial responsibilities should be transferred to local authorities to be funded from business rates, how the redistributive system between local authorities should work, how to manage the effect of appeals on retained business rates income and the extent of changes to the application of a national business rates multiplier. Whilst the consultation is of primary interest to local authorities, business ratepayers will have a direct interest in its outcomes because they will determine a great deal about how local authorities are funded and about the relationship between those authorities and their business ratepayers. 2020 is not that far away!