By Richard Johnstone | 8 January 2014
Reforms to local government finance to allow councils to retain half of business rate growth have increased the level of financial risk faced by town halls, an analysis of the changes has found.
Examining the impact of the part-localisation since it was introduced in April 2013, the Local Government Association said the impact had been ‘varied’ across councils in England.
However, there were common concerns among authorities that the level of financial risk they face had increased, with town halls now exposed to both the impact of appeals against rate valuations and avoidance of the tax.
The Business rates retention: the story so far report said there was little scope for these risks to be managed under the current arrangements.
In a poll published on the day of the LGA’s annual finance conference, councils warned these risks outweigh the rewards available through the reforms.
This meant the intention of the reform – to increase development and boost local growth so councils can have extra funding for local services – may not be realised. According to the LGA, only 29% of authorities said the system provided enough of an incentive to promote economic growth.
More than one-third of those responding said the amount of rates they expect to receive in 2013/14 was down more than 5% compared to government projections. This was mainly due to business rate appeals reducing the total revenue, according to the councils.
In addition, almost two-thirds of respondents said their revenue plans were at risk due to a backlog of appeals that was still being processed. One authority told the LGA it could lose as much as 45% of their total business rate income if all outstanding appeals went against it.
The report stated: ‘While it is true that some of these appeals will go in the councils’ favour, the uncertainty of outcome and lack of knowledge about the timing of the decision mean that councils are forced to accept a significant, unpredictable financial risk, impacting on the availability of funding for services to local people.’
Also in the poll, two-thirds of authorities said business rate avoidance now represented a risk to their finances. Around 20% of all authorities have already budgeted for losses due to business rate avoidance, the report revealed.
A large majority (81%) of authorities said the locally retained share of rate increases should be increased from the current level of 50% once the system is re-examined by government in 2020. However, less than one-third (29%) said that they expected ministers to do so.
