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Government ignoring ‘massive problems’ over business rates retention, MPs claim

Government ignoring ‘massive problems’ over business rates retention, MPs claim

🕔16.Jun 2016

A decision to allow councils to keep all of the business rate income they raise from 2020 has “massive problems” which Ministers are repeatedly ignoring, MPs have warned.

The House of Commons Communities and Local Government Committee believes the 100 per cent business rates retention scheme is fraught with difficulties and may leave some councils worse off.

The plan has been presented by Chancellor George Osborne as a major reform of local government finance. Councils will no longer receive a direct annual grant from Whitehall but will be able to keep all of the business rate income they raise.

Mr Osborne has claimed the new system will give town halls an incentive to concentrate on economic regeneration, attracting new businesses and creating jobs, and improving their finances at the same time.

But a major sticking point according to the MPs is the increasing trend by firms to appeal against their business rates bills. Councils are forced to set aside huge sums of money while the appeal is heard, which can take several months, and then have to cover half of the cost if the appeal is successful.

Birmingham city council is running a £42 million deficit on its business rates collection fund, consisting of £24.5 million for 2015-16 plus a historic deficit of £17.6 million after allowing for backdated appeals.

MPs are also concerned about how business rate income will be redistributed by the Government from wealthier parts of the country to in an effort to make sure poorer areas do not lose out.

The CLG Committee found the impact of appeals by ratepayers is dwarfing increases in business rates revenue and affecting growth incentives, with local authorities setting aside substantial sums of money, often for long periods of time, in case an appeal is successful.

The interim report – focusing on plans to bring in the reformed scheme in 2020 – also states that without Rate Support Grant it will prove difficult to provide a system which gives incentives to growth and looks after those authorities with particular need.

Committee chair Clive Betts said:

The committee believes this is an important policy and we want it to work. We believe the policy needs to be seen as part of a wider, more comprehensive approach to fiscal devolution.

Our interim report has highlighted a host of issues regarding the reformed business rates system and we are calling on the Government to take these on board and work closely with local government to find the necessary solutions.

The issue of appeals is of significant concern to local authorities and it is essential that it is resolved before the Government pushes ahead with business rates changes. Similarly, the Government must address the alarm of councils, which are understandably worried that their spending needs and the funding of their local services will not be supported by their business rates revenue.

The report highlights evidence that the “massive problem” with appeals has been “repeatedly ignored” by Government and proposes a number of options to resolve it. These include dealing with appeals outside the business rates retention system and funding them separately.

The report was welcomed by the Centre for Cities think tank. Chief executive Alexandra Jones said:

The committee is absolutely right to highlight the need for reforms in the current business rates system, with the problem of backdated appeals just one of a number of issues which should be addressed before the tax is devolved in 2020.

Alongside that, there should be more frequent valuations of properties, and the requirement for business rates to generate a fixed yield each year should be replaced with a fixed rate system, to make the system more predictable, accurate and efficient.

The other big question raised by the committee is the trade-off between offering places incentives to boost their tax base and retaining some redistribution. Our analysis shows that the best way to grow the overall local government funding pot is if Government prioritises giving places sharp incentives to grow, rewarding them for taking difficult political decisions by allowing them to retain more of the tax proceeds from doing so.

That would encourage places to grow their economies, while also increasing the money for much-needed redistribution to places with weaker economies.

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