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Business rates retention ‘huge opportunity for councils’, insists Greg Clark

Business rates retention ‘huge opportunity for councils’, insists Greg Clark

🕔06.Jul 2016

Devolution from Whitehall to English councils is still on course despite the political fallout from Brexit, with the Government seemingly determined to press ahead with a radical strategy to allow town halls to keep and spend all of the business rates they raise.

Communities and Local Government Secretary Greg Clark launched a three-month consultation into the planned changes, asking councils, businesses and local people to have their say on how the new business rates system should operate.

He also signalled the first steps in a long-awaited Fairer Funding Review which he said would provide councils with “their fair share of funding according to local needs under the new system”.

Mr Clark said 100 per cent business rate retention would be “a huge opportunity for local authorities of all kinds to take control as never before”.

Business rates retention would make councils the drivers of economic growth in their communities, giving them an incentive to prioritise economic regeneration, while also helping to transform the key services that their residents’ value, he added.

Councils in England will gain control of £12.5 billion from business rates to spend on local services. But in order to ensure that the reforms are “fiscally neutral”, councils will gain new responsibilities, and some Whitehall grants will be phased out.

The consultation paper suggests areas of responsibility that may be devolved to councils to be funded through business rates could include the Better Care Fund, the Independent Living Fund, Early Years grants and the Youth Justice grant as well as Attendance Allowance paid to older people with special needs.

A business rates retention pilot scheme will get underway in Manchester and Liverpool next year.

Mr Clark added:

We will not impose a one-size-fits-all solution across the country. In fact, I would encourage you to consider how the system can be tailored to local needs and opportunities – especially in areas where communities are pressing forward with Devolution Deals, combined authorities and elected mayors.

For years, councils have been calling for central government to give them the power to retain local taxes, including business rates.

Today, we set out the first steps towards making that ambition a reality, transforming the relationship between Whitehall and town halls and putting local government at the heart of delivering strong economic growth for their communities.

The intention is that by 2020 councils will retain all of the business rates they raise, but will no longer receive direct grants from the Government.

Council leaders have joined with the Local Government Association in warning that the change could benefit richer areas, more easily able to attract new businesses, and leave poorer areas worse off. Last month, the Communities and Local Government Select Committee warned of “massive problems” with business rates retention which Ministers were ignoring.

Mr Clark responded by setting out a number of key principles:

  • A level of redistribution between councils, through a system similar to top-ups and tariffs – underpinned by the Fair Funding Review.
  • Protection built into the system to insulate authorities from shocks, or significant reductions in income.
  • A system of redistribution of funding that recognises the needs and demands of different councils, including in cases where there are combined authorities and mayoral areas.

He said the new system would be designed to encourage and reward councils that promote and support economic growth in their areas, and steps would be taken to “manage risk” including the huge number of appeals lodged by businesses against their rates calculations, which leave councils facing a financial headache.

Birmingham city council is running a £42 million deficit on its business rates collection fund. The council cannot collect any money while appeals are outstanding, leading to months of delays, and then has to meet half of the cost if an appeal is successful. There are also concerns about firms that go bust or enter administration, often leaving the council unable to secure unpaid business rates bills.

The consultation paper says there is widespread agreement that the current system is in need of reform. Too many rating appeals are made “with little supporting evidence and are held up for too long, creating costs and uncertainties for businesses and local authorities.

The Local Government Association broadly welcomed the new system but said it had to be implemented “in a way which balances rewarding councils for growing their local economies but avoids areas less able to generate business rates income suffering as a result”. The LGA said:

Decisions over which grants and responsibilities councils will have to pay for from any extra business rates income are also crucial. As well as consideration of the grants and services listed in this consultation, councils are keen that any new responsibility they agree to take should support their vital role in driving economic growth. Handing over responsibility for skills and transport services is the most logical fit as it would allow local areas to close skills gaps, improve public transport and boost local economies.

Councils do not want responsibility for administering the Attendance Allowance benefit for older people. Responsibility for administering it would create significant cost pressures for councils whose budgets are already under significant strain. That is because cost pressures and applications for demand-led services like Attendance Allowance can go up very quickly whereas it can take much longer for local areas to generate business rates income.

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