By Richard Johnstone | 29 February 2012
Government plans to give councils control of business rates include ‘perverse incentives’ that could slow down the approval of commercial developments in future years, the Centre for Cities has warned.
In a report published yesterday, the think-tank called on ministers to rethink their decision to review the funding distribution formula only once every ten years.Under the plans contained in the Local Government Finance Bill, rates will be localised from next April. To ensure an equal starting point in the first year, all town halls will receive funding based on their 2012/13 levels, using a system of top-ups and tariffs of rates income to ensure fairness.
In future years, councils will retain any local growth in rates from commercial developments as an incentive to approve them, although huge increases might be subject to a levy on ‘disproportionate gains’.
Ministers have proposed that the top-ups and tariffs be reset every ten years to take account of changes in authorities’ spending needs, and any growth or decline in their business rate bases.
But the Centre for Cities report, Urban outliers, said councils might begin to delay planning approval for commercial developments near the end of each decade, fearful that any increased revenue from them would be taken away when the system is re-examined. By holding off approval until the start of the new period, councils would retain the income increase from the developments for the duration of the new ten-year settlement.
Centre for Cities calls on the government to instead use a rolling-reset system, with revenues from any new developments excluded from the reset for an initial ten-year period.
The report also called for ministers to scrap plans to stop local authorities from benefiting from any increase in rateable value of commercial properties. Author Zach Wilcox said that not every place could or should focus on growing their total commercial floor space. Some councils already have dense business properties, such as London boroughs and Manchester City Council, and will focus more on improving services than can benefit commercial areas, such as transport upgrades.
When commercial properties are revalued every five years, their worth often increases because of improvements made by the council. Preventing councils from capturing any of the increased value would deter them from making these investments, the report said.
Responding to the report, a Department for Communities and Local Government spokeswoman said: 'The government believes an aspiration for a ten-year re-set provides appropriate certainty about the rewards of growth, thereby maximising the incentive effect, and assurance for those authorities worried about having a funding baseline for a long period that no longer meets their individual funding needs.'
The localisation would give councils a strong incentive to promote growth, local enterprise and jobs, she added. 'Most respondents to the consultation on business rates retention supported our proposal to adjust top ups and tariffs at revaluation.'
