Is pooling business rates working?

The attention of finance professionals at the moment will be firmly focused on planning budgets for 2014/15 and developing medium-term financial strategies which reflect the unprecedented level of change facing us in the coming years.

As part of considering the future it is always useful to reflect on what change we have been through and at the same time ask ourselves two fundamental questions:

1. Have the intended benefits of our plans been realised?
2. What lessons have we learnt and how could we do things better?

This time last year many of us were weighing up the pros and cons of the new business rates retention system, and in particular business rate pooling. Now that the scheme has been up and running for nine months, it’s a good time to ask ourselves these two important questions.

So, have the intended benefits been realised? In my view the jury is still out on this one.

On the positive front there is no doubt that the financial benefits of pooling business rates are there. In Northamptonshire for example the business rates pool should generate around £2m of additional funding per year. This ultimately means more services can be delivered to local communities than would otherwise have been the case; a clear benefit at a time when government funding is reducing.

In addition it has brought all councils in the pool closer together as they have one common goal. This has produced wider benefits through closer working together to solve common service and financial problems. This will become increasingly beneficial over the coming years as more health funding becomes integral to the wider local government financial planning agenda.

However, there are also some very serious flaws in the business rates pooling system. Why haven’t all councils in two-tier areas formed business rates pools given the apparent financial benefits? Firstly, we need to look at the last minute change by government introducing a levy rate at 50% which led to some pools being financially unviable. Secondly, there may be a lack of trust in the new system: there are a lot of uncertainties around the new funding mechanism, such as councils not having sufficient certainty over their business rates levels in the future and what will happen when the new system is reset. Thirdly, and this isn’t necessarily a criticism of the scheme itself, there can also be a lack of trust in potential pooling partners.

I worry there may be some disasters waiting to happen. When setting up a pool all councils are required to sign up to an agreement which sets out how the pool will operate. But, what happens if all goes sour and the pool is disbanded? Will the agreement provide sufficient clarity about the share of any losses in the case of any fall out?

And what about the lessons we have learnt so far?

These broadly involve improving relationships, better information sharing and a greater focus on forward planning.

As we know the days of certain funding streams in local government are long gone and councils need to improve their forecasting and financial modelling skills. Business rates is no exception to this and it is important that councils see forecasting as an important part of their financial planning process. This is even more important when business rates are pooled as your partner councils are relying on you. If one council gets their forecast horribly wrong it can directly affect the cash other councils in the pool receive.

Councils have all the information to facilitate realistic forecasting of business rates. By bringing together the knowledge of the planning, revenues and finance teams this can be achieved. Don’t underestimate how difficult this will be. You will encounter resistance from planning teams who will be reluctant to provide estimated dates when pre-planning applications may materialise into businesses operating on those sites. Similarly, revenues teams may prove reluctant to put rateable values on business premises. It is the role of the finance team to facilitate the necessary cooperation between these stakeholders and any forecasts should be made over a period of at least five years to lead to meaningful financial planning.

One valuable source of intelligence to facilitate business rates forecasts will be your relationship manager at the Valuation Office. Establish your links with the relationship manager as early as possible as they work with you to forecast your likely business rate yield. This is of particular importance given the major uncertainty surrounding business rates appeals that needs to be factored into financial forecasting.

Business rate pooling certainly has its benefits, and these are much more than purely financial. However, there may still be a sting in the tail for those pools who fail to understand what the future may hold, both in terms of their financial position, or worse still, their relationships with fellow councils in the pool.

Glenn Hammons is head of finance, LGSS and chief finance officer (s151) at Northampton Borough Council and East Northamptonshire Council.