The fears: 100% business rates retention and its consequences

It’s no secret that local authorities are feeling the pinch. Once upon a time, the setting of the annual budget was a fairly routine event. Nowadays it is common to hear: “We managed to balance the budget?!”, cried by councillors and officers across the country each February, with equal measures of relief, astonishment and exhaustion.

In addition to the funding cuts imposed on the sector, which have seen direct grant funding fall by 27% between 2011 and 2015, the interrupted implementation of the 100% business rate retention (BRRS) has added a new dimension to the challenge facing councils: uncertainty.

The revenue support grant is still on track to be phased out by 2020 but progress to set up its replacement funding system (100% BRRS) has slowed considerably.

Indeed, back in March the National Audit Office raised concerns that “the scale of the remaining challenges presents clear risks both to the timely delivery of the initiative and to the achievement of its overall objectives”—and this was before the added disruption caused by the snap election and the fall of the Local Government Finance Bill.

Cards

After a long summer of silence, DCLG have now confirmed that 100% BRRS is still on the cards and opened applications for more areas to pilot the scheme.

However, we are still no closer to nailing down the finer details of the policy than we were back in April, now with the added complication that there will not be any supporting legislation.

At LGiU (Local Government Information Unit) we have been supporting our member councils in navigating this complex landscape. Our latest essay, Local Government: In the money?, uncovers the key concerns expressed by senior council decision-makers when it comes to 100% BRRS.

We picked the top five issues raised by respondents to LGiU’s annual State of Local Government survey, which ranged from the technical to the systemic:

• How will councils deal with current and future business rate appeals payments and risk?
• If central government retains control of business rate policy, how will councils be compensated for policy changes?
• Which new responsibilities are the government planning to devolve, and accompanied by how much extra funding?
• Is the business rate system itself fit for purpose?
• Does the government have an ulterior motive or hidden agenda?

I’ll briefly discuss two of these issues to give a flavour of the complexity at both ends of the spectrum.

Technical

Historically, the cost of business rate appeals has been taken on by central government, but when 50% business rate retention was introduced in 2013 local authorities became liable for half of the payout.

This means that authorities must now hold back large sums of money to cover potential future payouts, money which cannot be used to fund services or operations. Councils have complained that the volatility this has introduced makes financial planning extremely difficult.

Systemic 

The business rate system has long been criticised by councils and businesses alike, but if councils are to rely on it for a large portion of their income these criticisms take on a new relevance.

Some respondents weren’t confident that the government understood the consequences of funding (newly-devolved) demand-led services with a volatile funding mechanism like business rates, pointing out that areas with high need often have a low business rate tax base.

Others echoed concerns expressed by the private sector that business rates as a form of taxation is skewed and unfair for rate-payers and about the incentives 100% business rate retention provides.

At a time when political attention is at a premium, it is inevitably tempting for policymakers to avoid difficult discussions in the name of expedience.

However, we strongly urge them to pay close attention to the views of the sector as they re-commence the roll-out of 100% BRRS. Council leaders, chief executives and other senior figures confront these issues day in, day out, and are an invaluable source of grounded knowledge.

It is vital that the coming conversations welcome as many voices as possible in order to maximise the chances of success, both in terms of stimulating local growth and (more importantly) protecting the future of vital community services.

By Jennifer Glover, Policy Researcher at LGiU.

Read ‘Local Government: In the money?’ here.