Budget takes small firms out of business rates

16 Mar 16

Small businesses are to be exempt from business rates from next April in a move that will reduce the revenue raised – which is 50% retained by councils – by £6.7bn over the next five years, George Osborne has announced.

Setting out wide-ranging reforms to business rates in today’s Budget, the chancellor also announced that areas that have reached devolution deals with government would be able to move to full retention earlier than 2020.

In addition, Osborne will raise the threshold for the higher rate from £18,000 to £51,000.

This extension of relief is expected to lower revenues by over £1.5bn in 2017/18, and over £1.4bn in each of the next three years compared to previous forecasts.

In 2020/21, the year Osborne has pledged to localise revenues to local government, the chancellor announced that the annual indexation would move from the retail prices index measure of inflation to the lower consumer prices index, which is expected to reduce revenue by £370m.

Overall, the changes announced today are expected to reduce the business rates yield by around £1.95bn in the year that it is devolved to councils, according to the Red Book. The Budget documents says local authorities will be compensated for the loss of income as a result of the business rates changes, with the impact considered as part of the government’s consultation on the implementation of 100% business rate retention in the summer.

“Business rates are the fixed cost that weigh down on many small enterprises,” the chancellor told MPs.

From April next year, 600,000 small businesses will pay no business rates at all. That’s an annual saving for them of up to nearly £6,000 – forever. In total, half of all British properties will see their business rates fall or be abolished altogether.”

Osborne also announced that the government would pilot approaches to 100% retention of business rates with Liverpool City Region, Greater Manchester and the Greater London Authority. This offer is also available to other city regions that have ratified their devolution deals, according to Budget documents.

Additionally, the Treasury confirmed three new devolution deals. Greater Lincolnshire, East Anglia and the West of England will all create what the chancellor called “mayoral authorities” in further devolution agreements. These will be in addition to the city mayors already agreed with Tees Valley, Newcastle and Sheffield combined authorities.

As well as allowing areas that have reached devolution deals to move quicker to full business rates retention, the Treasury said that existing mayoral devolution deals will receive ‘single pot’ funding settlements, giving them flexible un-ringfenced budgets to spend on local priorities.

In addition, there will be devolution of some criminal justice responsibilities to Greater Manchester as part of moves by the Ministry of Justice to create centres of expertise outside the capital.

Osborne said that a “devolution revolution is taking hold”.

He told MPs: “When I became chancellor, 80% of local government funding came in largely ring-fenced grants from central government. It was the illusion of local democracy. By the end of this Parliament, 100% of local government resources will come from local government – raised locally, spent locally, invested locally.”

CIPFA chief executive Rob Whiteman said that the tax cuts announced by the chancellor show he has chosen to make £3.5bn extra cuts to public services, rather than it being entirely necessary.

“While councils will welcome reduced costs for small businesses, they are likely to feel as though they’ve been stitched up,” he added.

“Business rate revenues are planned to replace Whitehall grants but have now been cut with no warning.”

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