Winners and losers emerge as councils prepare for business rate shift

Despite few details about the move towards 100% business rate retention, some councils are making preparations for the shift, as Herpreet Grewal reports

In October 2015 former chancellor George Osborne announced that local authorities would be able to retain their business rates.

Osborne said it was time to face up to the fact that ‘the way this country is run is broken’ because people feel remote from the decisions that affect them. He said all £26bn worth of business rates will be kept by councils instead of being sent up to Whitehall, admitting that we ‘collect much more in business rates than we give back in the main grant’.

He said the government would abolish ‘this local government grant altogether’ and ‘give councils extra power and responsibilities for running their communities’.

Ed Cox, director of IPPR North, among others, welcomed the announcement saying it took ‘the devolution agenda into a new bold frontier’. Cox said it would ‘give local leaders the powers and incentives to create greater prosperity – a power which for too long has been held in Whitehall and stymied a rebalancing of the economy’.

But he also warned that ‘unless we retain some redistributive mechanism, there is a significant risk it will starve poorer areas of crucial support and allow wealthier ones to collect all the riches’.

After all the feelgood fanfare and more than a year later, the government has not been more specific about exactly what these proposals mean for local authorities – although it has conducted a consultation which recently concluded.

The consultation document outlines various ways that a new system could work including suggestions of phasing the transition of any new funding distribution mechanism ‘over a number of years or setting a fixed period over which the damping will be phased out’. It also suggested that ‘allocating funding to combined authorities and allowing them to lead the distribution of funding to their constituent councils may be one way of introducing this approach in areas where there is a complex political landscape’.

A Department for Communities and Local Government spokesman told New Start that ‘more information will be forthcoming in due course’ regarding the next steps by government.  But even the recent autumn statement by chancellor Philip Hammond revealed little.

Jonathan Carr-West, chief executive of the Local Government Information Unit, said: ‘The one thing local government would have wished for in the autumn statement above all would have been some clarity about local government finance reform. How will 100 per cent business rate retention work? What sort of redistribution mechanisms will there be? Of this we heard nothing. Though we did hear about a further cut in business rates which throws further doubt on their sustainability as a finance source.

‘Without some certainty about how local government is going to be financed in the medium and long term. It is impossible for local authorities to plan strategically. We’re still waiting for that. The chancellor promised a “resilient economy” but local government will not be feeling any more resilient.’

Suzanne Malcolm, economic development manager at South Oxfordshire and Vale of White Horse district councils and a board member of the Institute of Economic Development, said: ‘My general impression is that councils are not yet clear in how the changes to business rate legislation will affect them, particularly in non-unitary areas.

‘Business rates are one of the biggest concern areas to businesses and there is a lack of understanding of what influence local authorities currently have on business rates and any retention.’

Malcolm added: ‘There is clearly benefit about more local control of business rates and it also helps local authorities recognise the benefit of supporting and growing local business and indeed the proposed changes have helped my local politicians recognise the need for a more comprehensive business and innovation strategy (local economic development strategy).’

Despite this state of purgatory that local authorities may be experiencing, some are ploughing ahead by planning for pilots to test what the retention of business rates could look like for their area. The consultation document states: ‘Piloting will allow places to benefit early from growth in their local tax base, and to see in full the impacts of local decisions that drive local business rates growth in their budgets from 2017 – up to three years ahead of schedule.’

The 2016 Budget announced that the Liverpool City Region – consisting of the local authority areas of Halton, Knowsley, Liverpool, St Helens, Sefton and Wirral – is working to pilot a local government finance system based on retention of 100 per cent of business rates income.

Knowsley Council is leading this exercise on behalf of the Liverpool City Region. The objective of the pilot is to test the system being designed to enable 100 per cent rates retention and to test the potential for additional responsibilities to be devolved to local government as part of that system.

But at this stage further detail seems scant. A Knowsley council spokeswoman said: ‘The details around business rate retention and redistribution mechanisms are currently being worked through and under discussion with the DCLG, so until these discussions have concluded, this information isn’t yet available.’

In Cornwall, a council spokeswoman said that initially there would be ‘minimal impact on the council’s finances’ and ‘it remains unclear exactly when and how the move to 100 per cent business rate retention will be brought into effect’.

Cornwall is still negotiating with the government on launching a pilot to trial what 100 per cent business rate retention would look like in the county. The council says: ‘If successful, Cornwall will be the first rural pilot of 100 per cent business rate retention and will be in a better position to influence the development of future funding reforms that support business growth in rural areas.’

The spokeswoman added that the move to 100 per cent business rate retention will be ‘fiscally neutral’. This means on implementation, Cornwall will get to retain 100 per cent of local business rates but will also see a corresponding and equal reduction in other grants and/or service responsibilities.

The move represents both significant risk and reward. On implementation the council will be nearly completely funded from local business rates and council tax and its ability to provide quality services will depend directly on the strength and sustainability of the local economy, the spokeswoman added.

Birmingham Council is also set to back a West Midlands-wide business rates pilot to ensure the region is best prepared for when central government financial reforms become mandatory for local councils.

In a recent statement the council said any pilots will operate on a ‘no detriment’ basis, so that no participating authority can be any worse off financially than they would otherwise have been – but there is the potential for financial benefit arising from the real terms growth in the share of business rates that is currently passed to government.

Council leaders in the West Midlands have backed the idea, which now needs all seven metropolitan councils to formally agree to the plan, before any final sign-off by the government.

Cllr John Clancy, leader of Birmingham Council, feels a new funding system is imminent.

‘The government’s reform of local government finance will become a reality sooner rather than later,’ he said.

He believes pilots like Birmingham’s ‘will give us the opportunity to look at how it works in the West Midlands, and then help shape national thinking about the way the full national scheme will be implemented in due course’.