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In his speech on the second day of the Conservative conference the Chancellor, George Osborne, announced what he described as the biggest devolution of power to local authorities for 25 years – a “devolution revolution”. What are the changes he is proposing and how significant are they?
The Uniform Business Rates (UBR) will be “scrapped”. This was the announcement that took the headlines but, in fact, it turns out that the UBR will be replaced by a “national multiplier” for business rates.
Business rates retention for local authorities, the amount of new business rates revenue that each authority gets to keep, will be increased from 50% at present to 100%. But this will not happen immediately, it will be implemented by the end of the current parliament in 2020. And the current system of redistribution between local authorities whereby “tariff” authorities (who are relatively rich in business rate income) pay across business rate income to “top-up” authorities (those whose business rates income is less than their financial needs as assessed by central government) will continue. Indeed this redistributive mechanism will be enhanced by an additional safety net to provide additional funds for authorities whose business rates income falls by more than 7.5% in any year.
Local authorities will be able to offer business rates discounts below the national multiplier. But local authorities can already offer these discounts from the UBR under the Localism Act 2011. The truth is that such discounts are very rare because local authorities have to fund the cost of any discounts themselves and, with current revenue and Council Tax constraints, they are unable to do so.
Combined authorities with an elected mayor will be able to introduce business rates supplements to fund infrastructure projects if these supplements are supported by local businesses through a Local Enterprise Partnership. But such supplements are already allowed under the Business Rates Supplements Act 2009. The new supplements will be subject to business approval, just as business rates supplements are under existing legislation, and will be limited to a maximum amount, which is likely to be 2% – very similar to the current 2p cap on business rates supplements.
So, despite seemingly wide-ranging change, very little that is actually new has been announced. Whilst the detail could be more still prove to be more revolutionary, the initial assessment suggests that the changes will be nowhere near as fundamental as the rhetoric implied.
So why is the Chancellor announcing all this now when a business rates review is still going on which will report back next year? We suggest that there are two reasons, and they are both political ones.
The first is to steal a march on other parties. The devolution genie has been let out of the bottle by the independence referendum in Scotland and by other debates on local government, and the Chancellor has cannily stolen a march by offering devolution now, even if that may not be quite all that it seems.
The second reason is that the very high level of business rates in the UK is still a political hot potato. Recent figures from the Tax Foundation show that whilst the UK ranks 11th, out of 34 nations surveyed, for overall tax competitiveness; we rank 30th out of the 34 for property tax competitiveness. And that ranking is even worse if only recurrent property taxes, such as business rates, are considered and capital taxes on property are not. How convenient might it be for the government to be able to say that an excessive and uncompetitive property tax regime is a local government issue, rather than one for central government.
We will report more as the detail of these announcements becomes known but, in the meantime, it may be that the change will not be as significant as the words suggested.
