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Council’s £42m business rates deficit puts future funding stream in doubt

Council’s £42m business rates deficit puts future funding stream in doubt

🕔19.May 2016

Birmingham city council is running a £42 million deficit on its business rates collection fund.

The huge hole in the finances raises questions about what may happen in 2020 when Government grant to the council is finally phased out, to be replaced by business rates.

Birmingham, in common with all councils, will be able to keep all of the business rate income it collects. The switch is designed to encourage local authorities to concentrate on job creation through economic generation – the more businesses they can attract, the better off they will be.

But town halls across the country are suspicious, not least because businesses routinely appeal against their rates bills and councils cannot collect any money while an appeal is outstanding.

If an appeal is successful, the council has to cover half of the cost.

In Birmingham’s case the £42 million deficit consists of £24.5 million for 2015-16 plus a historic deficit of £17.6 million after allowing for backdated appeals.

The position is worse than the £36.6 million deficit forecast a year ago.

The council’s annual outturn report sets out the main reasons for the deficit:

  • Appeals against rates bills have been more successful than anticipated, resulting in downwards adjustments to rateable values.
  • Failure to collect business rates from firms that have entered into administration, or where the council is considering enforcing bankruptcy.
  • An increase in unoccupied property relief for several large assessments during March 2016.

The business rates issue was picked up by the Local Government Association in its response to the Queen’s Speech.

Cllr Claire Kober, Resources Portfolio Holder at the LGA said:

The move towards local government as a whole keeping 100 per cent of its business rates income by 2020 is something we have been campaigning to achieve for the last decade.

The Government wants the increase in business rates income to be used by councils to pay for a range of new responsibilities that are still to be decided and to replace current government grant funding to run specific services, such as public health. This will coincide with core government funding to councils being phased out completely.

It is therefore absolutely crucial that the amount of extra business rates income kept by councils matches the cost now and in the future of any new responsibilities or transferred grants they agree to take on. The Government also needs to consider allowing councils to use some of the extra business rates income to plug existing funding gaps or ease some of long-term financial challenges they face.

Cllr Kober pointed out that almost 900,000 businesses have challenged their business rates bill since 2010 and councils have been forced to divert at least £1.75 billion from local services in the past three years to cover the risk of these appeals and backdated refunds – of which they have to cover half the cost of at present.

She added:

The sheer scale of appeals suggests that too many businesses are not happy with what they are being charged or are simply taking advantage of the fact that it is too easy to appeal, meaning they think they have nothing to lose.

By 2020 local government could be liable for 100 per cent of refunds. As every penny will count in giving councils the best chance of protecting services over the next few years, we also need urgent reform of the appeals system so councils can use the money set aside to cover the risk of these appeals to invest in vital local services.

The British Property Federation has warned of a lack of detail in the Local Growth and Jobs Bill announced in the Queen’s Speech, which paves the way for business rates retention and also gives metro mayors the power to raise additional funding for infrastructure. Chief executive Melanie Leech said:

The measures that will provide an incentive for local authorities to encourage investment in their area are very welcome. Local areas know their infrastructure needs best, and this could help them unlock important projects.

We know that the Government would be legislating to bring forward the devolution of business rates, but the lack of detail means that our concerns remain that the devolution of business rates has the potential to introduce considerable complexity for both rate payers and landlords, particularly those who operate across the country.

We would like to see government ensure that devolution of this sort does not exacerbate disparities between economic performances of local areas.

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