Compensation waiting game begins for £6.7bn hole in rates
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Councils are likely to have to wait until after the European Union referendum to discover how they will be compensated for a £6.7bn black hole caused by business rate reforms contained in the 2016 Budget.
Chancellor George Osborne this week announced that the threshold for small business rate relief will rise from £6,000 to a maximum of £15,000, with the higher rate rising from £18,000 to £51,000.
Initial panic in the sector following the Budget statement morphed into sceptical curiosity after a close reading of Budget documents revealed that the government indicated it could foot the bill for the move.
The Red Book document accompanying the chancellor’s statement, said: “Local government will be compensated for the loss of income as a result of the business rates measures above, and the impact considered as part of the government’s consultation on the implementation of 100% business rate retention in summer 2016.”
With the Brexit vote set to take place on 23 June, it looks unlikely that solid proposals will appear until the UK’s future in or out of the European Union is clear.
Despite the Treasury’s promise of compensation for local authorities, Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy voiced worries.
He said: “While councils will welcome reduced costs for small businesses, they are likely to feel as though they’ve been stitched up. Business rate revenues are planned to replace Whitehall grants but have now been cut with no warning.
“We will monitor plans to compensate councils closely to make sure they’re not left out of pocket. We wish to check Treasury assurances of ‘compensation’ is hard cash and not just ‘spending power’ sleights of hand.”
Simon Parker, director of think tank New Local Government Network, said: “The government promised stable, long-term funding for councils, but today’s announcements will only add to the sector’s confusion.
“George Osborne promised further cuts for 2019 and knocked a huge hole in business rate income without spelling out how councils will be compensated.”
Phil Vernon, business rates leader at accountancy firm PwC, said: “Local government will be particularly interested in the detail of these changes.
“With 100% of business rates being retained by local government by 2020, the risk associated with lower business rates receipts could fall on their shoulders and service delivery may be affected.”
The chancellor also announced that from April 2020, taxes for all businesses paying rates will be cut through a switch in the annual indexation of business rates from RPI to CPI, representing a cut in income for local authorities of £370m in 2020-21 alone.
In addition, the government will aim to introduce more frequent business rate revaluations – at least every three years – and said it would publish a discussion document later this month outlining how to achieve this “to support both businesses and the stability of local authority funding”.
This week’s Budget also announced that the government will pilot the approach to 100% business rates retention in Greater Manchester, the Liverpool City Region and London along with any other city regions agreeing deals by that point – three years ahead of schedule.
It said: “This will help to develop the mechanisms that will be needed to manage risk and reward under 100% rates retention and will help authorities to build financial capacity to reform core services and invest in long term economic growth from 2017.”
Lord Porter, chairman of the Local Government Association, said: “While it won’t in itself solve the long-term challenges facing councils and local services, allowing local government to retain 100% of its business rates income is now vital.
“Pilots announced today are an important first step, although it will be important to avoid a knock-on financial impact on other councils, and local government will rightly need to play a lead role in making sure any new national system works effectively and fairly.”
He also said that Osborne’s rejection of its call to bring forward £700m of new money in the Better Care Fund forward to this year from 2019/20 was “disappointing”.
He said: “The failure to do so means vulnerable members of the community still face an uncertain future where the dignified care and support they deserve, such as help getting dressed, fed or getting out and about, remains at risk.
“Vital social care services will also increasingly be unable to help ease the growing pressure on the NHS and the threat of a care home crisis will creep closer to becoming a reality.”
