DCLG proposes partial business rate reset every five years

16 Feb 17

The government is considering introducing a partial reset of the business rates localisation system every five years once the £12.5bn of revenue is devolved to local authorities from April 2019.

In a consultation published yesterday, the Department for Communities and Local Government also revealed it is no longer considering localisation of attendance allowance as part of moves to make the change fiscally neutral.

The further details of the plan come after the Local Government Finance Bill was introduced into Parliament on 13 January.

The consultation highlighted that finding the right balance between redistributing business rates to meet changing relative need, and using the system to provide an incentive for longer-term growth would be crucial to the reform.

Under the current partial localisation, local authorities retain 50% of business rate growth from a baseline that was set based on 2012-13 funding levels through a system of top-ups and tariffs. A reset was intended for 2020, and then fixed every 10 years.

DCLG stated that responses to an earlier consultation supported the idea of fixed reset periods, in order to provide stability to the sector about funding allocations, with the largest group of responses suggesting five-year reset periods.

However, the department said it was now consulting on the proposition that these would be partial resets, and called for further feedback about how this could work in practice.

Under the initial details set out by the department, a business rates baseline would be set for every local authority for a period of five years, through top-ups and tariffs. Any growth in business rates income that a local authority achieves during this five-year period will be retained by the local authority. Then at the point of the reset, the baselines will be recalculated while also allowing a proportion of growth achieved by an authority to be retained. The other portion of growth will go back into the pot to be redistributed.

If a local authority has seen a decline in business rates income over the five-year period, the partial reset would cancel out the losses, which they would not be expected to bear.

The department acknowledged that revisiting the needs formula at each reset could lead to significant changes of income for some local authorities. It would therefore explore the introduction of transitional arrangements.

Local Government Association resources board chair Claire Kober welcomed the consideration of partial resets, and also backed the department’s decision to rule out the localisation of attendance allowance.

Some areas of central government spending are set to be devolved to local government as part of the scheme in order to make the switch revenue neutral, but both councils and CIPFA have said these should not be demand-led services that are not linked to economic growth.

Kober said the LGA was united in opposition to councils having to use additional business rates income to pay for attendance allowance, and ruling this out showed the government was listening to the views of councils.

“It would have accounted for the majority of the extra business rates income kept by local government, leaving little left to fund the transfer of other services, and created a significant cost pressure for councils,” she stated.

"With local government facing an overall £5.8bn funding gap by 2020, we remain clear that councils must first and foremost be able to use extra business rates income to plug this growing gap before any extra responsibilities are considered. Local authorities should then be able to invest the rest into services which support local economies and drive local growth, such as closing skills gaps and improving public transport.”

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