MPs warn DCLG on difficulty of full business rate devolution

14 Jun 16

Ministers have been warned that it will be “difficult” to create a council finance system to both incentivise growth and protect authorities with high levels of need once business rates are fully devolved.

In an interim report on the proposals, the communities and local government committee urged ministers to consider how revenue would be matched to need as one of a “range of issues” in a forthcoming consultation.

Under the scheme, business rate revenue will be fully devolved to local authorities from 2020/21, while revenue support grant will end. A funding baseline is likely to be set for town halls using local business rates as well as either a top up or tariff payment to reflect a new assessment of local need.

However, MPs warned the abolition of revenue support grant would make it difficult to shift resources to authorities in direct response to need while also increasing incentives for growth.

“There is likely to be little or no correlation between changes in business rate revenue and changes in local authority needs,” the report stated.

“Until the government confirms how equalisation will operate, councils understandably fear that they will lose out in the reformed system, either at the point of reform or in the longer-term.”

In addition, the committee also warned that full localisation would increase the risk faced by local authorities from businesses appealing the rateable value of their properties. Local authorities would likely to have to set aside substantial sums of money, often for long periods of time, in case an appeal is successful that would “dwarf” any revenue increases under the plan.

Committee chair Clive Betts said the committee wants this important reform to work, but called on ministers to view it in terms of a wider, more comprehensive approach to fiscal devolution

“Our interim report has highlighted a host of issues regarding the reformed business rates system and we are calling on the government to take these on board and work closely with local government to find the necessary solutions.

“The government must address the alarm of councils, which are understandably worried that their spending needs and the funding of their local services will not be supported by their business rates revenue. Similarly, the issue of appeals is of significant concern to local authorities and it is essential that it is resolved before the government pushes ahead with business rates changes.”

Ahead of an expected consultation this summer, the report called on DCLG to specify how it will protect councils that rely on redistributed business rates and are worried that they will lose out under the new system. MPs recommended that consideration be given to handing local authorities power to increase their business rates multiplier and vary it according to business type.

Assurances would also be needed that councils will not be required to take on new responsibilities that are or will become unaffordable.

Ministers have called for ideas on what policy areas could be devolved to local government in order to make the switch revenue neutral.

Today’s 100% retention of business rates: issues for consideration report said there was broad consensus from witnesses that devolved responsibilities should be linked to the drivers of local economic growth including skills and transport and be aligned with areas’ devolution proposals and deals. They should not be demand-led spending, potentially excluding some benefits such as the Attendance Allowance.

Responding to the report, a DCLG spokesman said: “This report not only recognises the significance of 100% business rate retention but also endorses the move towards greater financial self-sufficiency for councils – something local government has called for over decades. We will consider its proposals carefully.”

Sean Nolan, the director of local government at CIPFA said the report was an important contribution to the debate around 100% business rate retention. “We are pleased that it represents many of the key issues CIPFA raised in its evidence to the committee,” he stated.

“The move to 100% retention of business rates is a positive shift towards allowing greater financial autonomy for local authorities. However, the long term opportunities come with a number of short term challenges.

“As highlighted in the report, it is crucial the new system balances incentives against the needs of authorities that currently have high net reliance on central [funding]. It is also important that measures are in place to protect against the volatility risks that come with appeals.”

Claire Kober, the resources portfolio holder at the Local Government Association, said the group would continue to work alongside government on how the new system should be designed.

“This includes how councils can be rewarded for growing their local economies and areas less able to generate business rates income remain protected,” she stated.

“Councils have been forced to divert at least £1.75bn from stretched local services in the past three years to cover the risk of backdated appeals – of which they have to cover half the cost at present. Under localised business rates, local government could be liable for 100% of the cost of successful appeals.”

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