Risky Business
Author: Jonathan Werran, The MJ |
Localis’ Alex Thomson comments on the current business rates retention scheme.
Council chiefs have this week demanded changes to the business rates retention scheme – giving local authorities all the proceeds of economic growth and protection from appeals.
The call follows publication of a Local Government Association (LGA) report which finds the majority of councils feel the new system lacks sufficient incentives for them to boost local economic growth.
Only 29% of authorities polled believe the system of local and central shares offers enough motivation to increase local business rates revenues.
Most of the mechanism has been locked-in until the next reset of business rates, which is not scheduled to take place until 2020 at the earliest.
The paper, released in time for the LGA’s finance conference this week, found nearly four out of five respondents (77%) did not have enough time to get to grips with the new system and conduct robust financial planning ahead of its introduction last April.
These time constraints and the system’s complexity forced some authorities to increase their contingency reserves so that any unexpected losses of business rates income would not endanger their financial sustainability.
Zach Wilcox, an expert at the Centre for Cities think-tank, told The MJ the scheme’s in-built complexity and uncertainty would reduce the effectiveness of incentives and make it more difficult for prosperous areas to realise the benefits from growth.
Additionally, the LGA findings – based on a survey of 31 authorities – indicated one
third of councils’ business rates revenue projections varied by more than 5% compared with Department for Communities and Local Government (DCLG) estimates – mostly due to the impact of business rates appeals.
Further evidence for the unreliability of initial forecasts includes the unexpectedly high call on the safety net in 2013/14. This led to the recent Government decision to hold back an extra £50m from council funding to finance the safety net from 2014/15 onwards.
Adding to the uncertainty for local government finance experts, some £4.2bn of business rates, equivalent to 17.5% of the total, was subject to appeals in 2013/14.
Under the new arrangements councils are now liable for half the costs of any successful claims – including backdated liability which may go back to 2005 or further.
Some 81% of authorities were unhappy with the time taken to resolve appeals, and the LGA fears the next revaluation of business rates, which is set to take effect from 2017, could herald a fresh wave of appeals and increase volatility.
Chair of the LGA finance panel, Cllr Sharon Taylor said: ‘Councils risk losing more than they stand to gain under the current scheme.
‘What should have been an incentive for local authorities to grow their local economies has instead created more risk and uncertainty,’ Cllr Taylor added.
‘Business rates reform can only work if there is a chance that the benefits for local
government will outweigh the risks,’ she added.
‘A way forward is for authorities to retain all of the growth from the local share and for the risks posed by appeals and avoidance to be dealt with.’
Alex Thomson, chief executive of the Localis think-tank, said further modification was needed.
‘Crucially there could and should be a much keener incentive to help drive growth, while at the same time the Government needs to take steps to ensure that councils can manage their risks effectively,’ Mr Thomson said.
A DCLG spokesman said councils now generate more than 70% of their income locally and the business rates retention scheme also enables councils to retain a large proportion of their business taxes.
‘This means that business rates collected locally, stay local, providing income, reducing councils’ dependency on central government grants and helping local authorities to deliver sensible savings while protecting front-line services,’ the spokesman added.