Tory business rates proposal will cause two-thirds of councils to face funding gap of £28 billion by 2025

2nd December 2019 / United Kingdom

The government’s proposed Business Rates Retention System (BRRS) would see runaway growth for the very richest local authorities, while two-thirds of councils would see their income fall in real terms by 2025 according to new research by the New Economics Foundation (NEF).

The BRRS is a system by which central government decides how much of the revenue raised from business rates councils keep, and how much is pooled nationally and redistributed in the form of grants.

At present, local authorities keep 50% of business rates receipts and government originally planned to increase this to 100% in 2020, but under current plans this has been scaled back to 75% retention by 2021. Meanwhile grants from central government to councils have been slashed from £32.2 billion in 2009/10, to £4.5 billion in 2019/20. NEF estimates that local governments will face a funding gap of £27.8 billion by 2025.

The aim of the BRRS was to give councils more control over the money they raise locally, and stronger incentives to create and support local jobs and firms. But the report outlines some of the key problems with the system, making it unfit for purpose:

It provides weak incentives to increase business activity and grow revenue. Councils have very little control over the level and eligibility for business rates, and the tools available to grow revenue are weak.
Councils with smaller business rates bases (disproportionately poorer councils in more deprived communities) gain significantly less from the current system than councils with larger business rates bases, as councils are rewarded in proportion to the value of business property in their area.
It exposes councils to risk and volatility in revenue. The safety net – designed to protect local authorities in case there is a significant fall in their business rates – is set well below the level the council needs to deliver services (currently 92.5%)

The report sets out the following reforms to the BRRS to reduce geographic inequalities while still protecting local authority devolution and control:

Raise the safety net to 100% so all authorities are protected against large losses.
Local authorities should be rewarded based on growth to their business rates revenue proportionate to their level of need so that no matter whether they have a large business rates base or not, they will be fairly rewarded.
Government should either mandate or incentivise greater regional pooling of local authority business rates (a system which spreads the risk across a geographical area as local authorities can pool their business rates into one common fund), to improve the redistribution of business rates receipts without putting funds directly under central government control.

Sarah Arnold, Senior Economist at the New Economics Foundation, said:

“Local government finances are unsustainable, and the lack of funding is having a severe impact on the vital local services on which residents rely day-to-day. Local authorities are responding to the funding gap by draining reserves, with many in danger of completely running out of money.

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“While the Business Rates Retention System was intended to give councils more control over their money and incentives to improve the local job market, in reality it has introduced uncertainty and instability into the local government finance system and is biased against more deprived communities in the UK.

“With seriously limited additional support now coming in the form of grants, councils are likely to be faced with hard choices in the event of a bad year or two of business rates revenue. We need a more just and equitable system that keeps meaningful local control, while protecting poorer local authorities from risk and volatility.”

Business rates, sometimes called non-domestic rates, are a property tax paid by occupants of non-domestic properties to local councils. This year, councils are expected to collect £25.0 billion, after reliefs, in business rates. They form a substantial portion of local authority funding in England, along with council tax.

Between 1990 (when the tax was introduced) and 2012, business rates were collected locally and then passed on to central government who redistributed it back to councils in the form of a formula grant. However, from 2013/14 onwards, the Business Rates Retention system (BRRS) was created. Under this system, councils kept 50% of business rates revenue (subject to tariffs and top-ups and the levy and safety net), as well as an equivalent proportion of any growth in business rates in subsequent years. The remaining 50% is still pooled nationally and redistributed in the form of a series of grants.

The government was consulting this year on plans to increase the proportion of business rates retained to 75%. Consultation has now closed but the government has not released any results or response.