London business rates to shore up North, IFS finds

4 Mar 17

April’s business rate revaluation will see £400m transferred from London councils to authorities in the North, according to an analysis by the Institute for Fiscal Studies.

The think-tank said revaluation would increase the tariff paid on business rates revenue in London to £730m a year, which is part of the current 50% retention system, leaving councils across England increasingly reliant on the capital.

Since April 2013, half of business rate growth has been retained by local government when a top up and tariffs system was put in place. Funding levels were determined on councils’ 2012/13 formula grant funding, and intended to ensure a fair starting point for all councils.

According to the IFS, next month’s controversial revaluation, although designed to be revenue neutral across England as a whole, would have different impacts across the country. Business rates in London are set to rise by about 11% above inflation in the next five years while rates in the North will fall by 10%, although bills won’t start falling until April 2018 due to transitional protections for those seeing higher bills.

The revenue increase in the capital will mean the tariff paid by London authorities will increase by £400m, while a similar amount will be gained by the Treasury from the capital for the retained half of the tax.

Neil Amin-Smith, IFS researcher, said taxation would become more concentrated in London.

“This is part of a more general trend of greater reliance on the capital for revenues,” he said.

“While some ratepayers’ bills will rise, in the long run, revaluation will cut average bills in the other regions of England, and especially the north. Bills will generally fall more in the suburbs and smaller cities than in both the central areas of major cities like Manchester and more rural areas.”

Using the system of top ups and tariffs to strip out the impact of revaluation from council finances stops large overnight cuts – and increases  – to council budgets and services, added IFS associate director David Phillips.

“But it means councils have less incentive to boost demand for existing properties: they do not benefit from the resulting increases in rents and values of these, only from new development. This suggests devolution of other revenues may need to be considered if broader incentives for growth, beyond promoting new property development, are seen as desirable for councils.”

The review also highlighted that, once rates revenue is fully localised to councils from 2019-20, London councils will benefit more for approving new developments due to the higher property values, while northern councils will get less of a boost from any additional development.

Responding to the report, CIPFA director of local government Sean Nolan said the IFS’s analysis of business rates revaluation was a very welcome.

“It shines a valuable light on the structure of the current revaluation system and the differences in average value of business rates across the country,” he said.

Redistribution within the current business rates system means that areas of higher need do not lose out by the relative success of other areas.

However as councils move towards 100% business rate retention, the impacts of regional variations will become a more significant, he warned, “which means the incentives for councils to grow businesses in their areas, must be balanced with support for areas with fewer growth opportunities”.

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