posted on 19 July 2011, updated on 19 July 2011
The government has published proposals to allow the local retention of business rates by local authorities and to let them borrow against future rate income. Legislation will be set out later this year.
The consultation is the outcome of a review into local government funding that sought to repatriate rates, create a financial incentive for councils to promote local growth, reduce dependency upon central government grant and maintain protections for business and vulnerable areas.
The key components of the proposed scheme are summarised below.
A baseline level with top ups and tariffs to create a fair starting point for all
The government would establish a baseline, which could be based on next year's formula grant allocations, for each council in the first year of the scheme (2013/14) so no council would be worse off at the outset. Councils that collect more than that baseline would pay an individually set tariff to government, while those below it would get an individually set top up grant from government.
An incentive so all councils can grow
Tariffs and top up grants would remain fixed during future years meaning councils would retain any business rate growth they generate. Councils such as those in local enterprise partnerships, or districts and counties, will be allowed to voluntarily pool business rates to enable the wider economic area to benefit from growth and reduce any volatility.
A levy to recoup disproportionate gain
The government would create a levy to recoup a share of any disproportionate financial gain. It could vary according to each individual council's own circumstances and would be used to manage significant unforeseen falls in a council's business rates income.
A reset button to ensure stability
This will allow the government to adjust top ups and tariffs to balance out changes in local circumstance. A longer period between resets, for example 10 years, would create a greater incentive effect, while a shorter one would allow frequent reassessment of budgets. This reset could be fixed or decided by government.
No change for business
There will be no difference in the way business pay tax or the way the tax is set. Rate setting powers will remain under central government control and the revaluation process will stay unchanged. Rate relief to the needy will be unaffected. National discounts and rate relief will continue to be supported, meaning no adverse change to such groups as charities, amateur sports clubs, voluntary groups, those in hardship, and eligible rural or small firms.
Tax increment financing
This will allow councils to pay for future infrastructure developments by allowing them to borrow against projected rate growth. Councils are not currently permitted to retain their rates so cannot borrow against them. Rate retention would remove this barrier. The consultation sets out two options. An open structure that lets councils invest and take on the risks alone or one with stronger government controls that guarantees revenue and disregards the levy or reset processes.