Government must address a range of issues before bringing in 100% business rates retention for councils.
Concerns such as any withdrawal of Revenue Support Grant (RSG), were raised by the Communities and Local Government (CLG) Committee.
An interim report focusing on retention reforms – a key element of the government’s devolution agenda – states that without RSG it will “prove difficult” to provide a system which gives incentives to growth and looks after those councils with particular needs.
As a result of the report, the committee is calling on government to specify how it will protect councils which rely on redistributed business rates and are worried they will lose out under the new system.
The committee also found the impact of appeals by ratepayers is dwarfing increases in business rates revenue and affecting growth incentives, with councils setting aside substantial sums of money – often for long periods of time – in case an appeal is successful.
Department for Communities and Local Government (DCLG) ministers will be invited to give evidence to the committee ahead of a final report due out later this year.
CLG committee chair, Clive Betts, said the government must address the apparent alarm of councils “understandably worried” that their spending needs and the funding of 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,” he said.
The report highlights the fact that, without RSG, it will likely prove difficult to shift resources to authorities in direct response to need, while increasing incentives for growth. It recommends that consideration should be given to handing local authorities power to increase their business rates multiplier and vary it according to business type.
Councils, the report says, also need reassurances they will not be required to take on new responsibilities that are or will become unaffordable.
The report lists principles by which decisions on new responsibilities should be based, such as giving local government genuine discretion over how services are provided and points to evidence that the “massive problem” with appeals has been “repeatedly ignored” by government.
A number of options are proposed to resolve this, including dealing with appeals outside the business rates retention system and funding them separately.
The committee also calls for:
- A review into whether Local Enterprise Partnerships should play such a key role in deciding whether to raise the infrastructure premium, following concerns that some are not representative of all business
- Consideration of whether, by making the infrastructure premium available only to those areas with a directly-elected mayor, it is placing areas without such a post at a disadvantage, in conflict with the aims of the new scheme.
Responding to the report, Cllr Claire Kober, resources portfolio holder at the LGA, said: “The voice of local government is critical in ensuring the move to localised business rates works effectively. We continue to work alongside government on how the new system should be designed to maximise the potential it offers to our local communities and businesses. This includes how councils can be rewarded for growing their local economies and areas less able to generate business rates income remain protected.
“Almost 900,000 businesses have challenged their business rates bill since 2010 and the committee is right to highlight the need to tackle this growing problem before any new system is introduced.
“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. Improvements to the appeals system are essential to avoid the need for them to divert significant sums of money that could otherwise be invested into local services.
“The government wants some of the increase in business rates income to be used by councils to pay for a range of new responsibilities that are still to be decided. Councils want to be able to invest some of this extra money into providing services that support local economies and drive local growth. For example, handing over responsibility to pay for skills and transport services would allow local areas to close skills gaps, improve public transport and boost businesses.
“No matter which new services councils agree to take on, it is absolutely crucial that the amount of extra business rates income kept by councils matches the cost of them now and in the future.
“As every penny will count in giving councils the best chance of protecting services over the next few years, the government also needs to allow councils to use some of the extra business rates income to plug existing funding gaps and ease some of the long-term financial challenges they face.”
Sean Nolan, director of Local Government at CIPFA said: “The interim report provides 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.
“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. It is also important that measures are in place to protect against the volatility risks that come with appeals.
“We hope both central and local government consider the report in detail.”
Cllr Neil Clarke MBE, chairman of the District Councils’ Network (DCN) responded: “The DCN welcomes this timely report, to which we contributed evidence, and is keen to ensure that the business rates system supports increased business growth – while ensuring funding stability for localities in the long-term so districts can continue to drive regional growth and deliver those services that residents value the most.
“The DCN endorses the committee’s proposal with regard to framing the conversation of additional responsibilities around principles rather than a more random list of specific responsibilities. The DCN is keen to, as part of its work in the DCLG/LGA steering groups, support this more thematic approach to development of new responsibilities for local government, for example in relation to creating employment and driving housing growth.
“The report also highlights the need to review the share of business rates in district/county areas and a future needs reassessment. We are committed to ensure that any new system should be designed around ‘place’ and delivering better outcomes for communities, rather than on a focus on institutions.
“The DCN supports the collaboration between the government and the wider local government family to develop the new business rates model, and is represented on the DCLG/LGA business rates steering groups. As well as this the DCN has formed a working group with the County Councils Network, the Rural Services Network and CIPFA to develop a collaborative local government solution to the issues raised.
“Nonetheless the DCN is clear that the business rates should not be used just to conveniently glue together immediate funding gaps in adult social care. Instead we need to look at more long-term solutions, such as the important role of preventative services, to develop sustainable local government revenue streams that both support those residents that need our help the most and continue to drive national economic growth.
“There is a dynamic balance to be struck between needs, growth, incentives, stability and resources, and this complex line of best-fit must be designed with the long-term sustainability of the local government finance system firmly in mind.”