Rethinking business rates

Businesses play a key role in local communities across the country, and it is vital that we allow them to prosper and grow in order to create new jobs in the private sector.

There is a great deal that can be done to create an environment for them to succeed – for example, by making corporation tax more competitive or by reducing red tape for small and medium enterprises.

However, giving businesses a stake in their local community can lead to an enhanced sense of cooperation and openness with the people who live there. Businesses, local authorities and local people should not be competing – rather they should be working together to achieve mutually desirable objectives.

Of course, there will be times when agreement cannot always be found, but a sense of cooperation can lead to more jobs, regeneration of local areas and housing which meets the needs of local people.

The localism bill makes such cooperation even more important. For instance, planning rules are being changed dramatically to give local people a greater say in the process, meaning that businesses must consult more with local people.

By creating local enterprise partnerships instead of the bureaucratic and expensive RDAs, businesses have now been given a greater say in how they can help to develop our communities. After all, who is more likely to know best – an unelected regional bureaucrat – or a medium sized business owner in the community itself?

However, there is more which can be done. A review of local government finance is expected this year and as part of this review the business rates system should be looked at. Business rates are worth a huge £18bn each year, but unfortunately the current system fails to make any link between the rates businesses pay locally and the amount of money and benefit that each community receives from this tax.

Such a system creates perverse financial incentives and undermines partnership working between local authorities, social enterprises and local businesses. As local authorities have no financial incentive to increase the amount they contribute in business rates (as central government takes all the money away), this prevents them from developing effective long-term development strategies along with local business partners keen to invest.

There are two ideas which the local government finance review should look at – introducing a  ‘business rates bonus’ and a discussion on the potential merits of allowing local authorities to ‘buy’ themselves out of the current system.

The ‘business rates bonus’ was originally suggested in the Conservative Party green paper Control Shift – and this allows local authorities to keep a proportion of any growth in business rates for a six-year period. This is a good medium-term solution to the current malaise and would offer local authorities a financial incentive to encourage businesses to become based locally.

Going further, if a new approach were developed, it could potentially allow local authorities to buy their way out of the current system – by paying an annual levy similar to the difference they currently receive from or pay into the system. They would then be able to take control of any additional income from their business rates in order to start working more effectively with local businesses and improve their communities.

When giving consideration to developing a new system such as this, it would be important to mitigate against any possibility that deprived areas are left with fewer resources. It is unlikely that anyone would contest the argument that some distribution in the system is both fair and just if we are to improve social mobility and reduce regional inequality – particularly in respect to areas such as the west midlands.

We must start to facilitate a stronger relationship between local authorities and businesses to develop a sense of cooperation, which can lead to greater economic growth and more private sector jobs.