The watchdog said that, although the Department for Communities and Local Government has made progress in designing the scheme, there are a number of potential issues that need to be addressed.
Short-term risks include failure to deliver the scheme on time or provide the sector with sufficient information, which could in turn undermine local financial planning.
There are also more significant long-term risks whereby poor planning and design could deliver a scheme that puts local authorities’ financial sustainability at risk or fails to create a mechanism that delivers local economic growth.
In the 2015 Spending Review, the government announced that 100% of business rates income would be retained by the local councils by the end of the current Parliament.
The process, due to start in 2019-20, is designed to encourage local authorities to develop their local economies and to enable them to become more financially self-sufficient.
It follows the introduction of the 50% business rate retention by councils, which began in 2013-14.
Changes to the business rate retention amount will follow changes to business rates, usually done every five years, which will come into force in April this year.
NAO head Amyas Morse, said: “The department faces a significant challenge in implementing 100% local retention of business rates by 2019-20. It has benefited from the experience of delivering the 50% local retention scheme and is using this experience effectively.
“The key question is whether there is enough money in the system to let services be delivered on the right scale and for self-sufficiency to be seen to succeed.”
The NAO noted that local authorities’ spending power (government grant, locally retained business rates and council tax) fell in real terms by 25.2% from 2010-11 to 2015-16 and will fall by a further 5.4% by 2019-20. At the same time, service demand, in part driven by an ageing population, is likely to grow.
The report stated “the challenge facing the department is to assure itself that the absolute level of funding in the system at the start of the 100% scheme is enough to address both current service pressures and the additional demand to come”.
In 2015-16, 50% retention netted local authorities £11.3bn, up £388m under the same scheme in 2013-14.
It is expected that by 2019-20 the 100% scheme will deliver an additional £12.9bn.
Meg Hillier, chair of the Public Accounts Committee, said: “There are real concerns over whether government can deliver a reliable scheme on time, and how this will affect funding for cash strapped local authorities which have to balance support for local businesses with collecting the money needed to run public services.”
