The Business Rates Campaign
DAVID MAGOR OBE IRRV (HONS)
CHIEF EXECUTIVE
Institute of Revenues Rating and Valuation
1
The Swanley Question
• Business Rates
An Opportunity or a Foregone
Conclusion?
• Yes, it probably is a foregone conclusion, but
that doesn’t mean we shouldn’t use this as
another opportunity to tell government
about the value of local councils.
Business Rates – The Questions
• Should Parish and Town Councils receive a share of
the NNDR?
• What responsibilities/conditions could be imposed?
• Should Parish and Town Council properties be
exempt from NNDR?
• How can parish and town councils support the local
economy?
• How should Town and Parish Councils respond to
the consultation?
LOCAL GOVERNMENT FINANCE (1)
• The Local Government Finance Settlement accounts for in excess of 50% of
Local Government funding which is made up of specific grants and formula
grants
• Formula grant consists of Revenue Support Grant and Business Rates which has
been paid into the centre and then redistributed back
• Formula grant has been widely criticised as being complex, lacking
transparency and clearly Government say, is not working
LOCAL GOVERNMENT FINANCE (2)
• The current local government finance system lacks direct financial incentive for
local authorities to grow their economies
• The Centralisation of business rates since 1990 had led to planning
restrictiveness, no incentive to pursue development - growth in commercial
property can lead to a direct financial disincentive (i.e. cost of increased
congestion on roads)
LOCAL GOVERNMENT RESOURCE REVIEW
TERMS OF REFERENCE
• To build into the local government finance system an incentive for local
authorities to promote local growth over the long term
• To reduce local authorities’ dependency upon central government, by
producing as many self sufficient authorities as possible
• To maintain a degree of redistribution of resources to ensure that authorities
with high need and low tax bases are still able to meet the needs of their areas
• The protection for businesses and specifically, no increases in locally-imposed
taxation without the agreement of local businesses
THE GOVERNMENT SOLUTION
• Build an incentive to local authorities to promote local growth
• Reduce local authorities’ dependency up-on central government - we have the
most centralised local government finance system in the world with councils
getting more than half their income from central government - repatriate
business rates
• Maintain a degree of redistribution of resources to ensure that authorities
with high need and low tax bases are still able to meet the needs of their areas
• The solution must not put their deficit reduction programme at risk!
• The scheme must operate within spending review control totals
and protect the interests of the wider economy
GOVERNMENT AGENDA
• Local Government Resource Review
- Part of agenda for decentralisation and localism
- Redistribution of power and funding from government to local people
- Aim is to keep levels of council tax down
• Spending Review
- Provide greater flexibilities to local authorities
- Three areas of reform to local government finance:* Local retention of business rates
* Replacement of council tax benefit by local council tax support
* Technical reforms of Council Tax
THE PRINCIPLES OF BUSINESS RATE RETENTION
• Ensure a fair starting point for all local authorities
• Deliver a strong growth incentive where all authorities can benefit from
increases in their business growth and from hosting renewable energy
projects
• Include a check on disproportionate benefits
• Ensure sufficient stability in the system
• Include an ability to reset in the future to ensure levels of need are met
STATEMENT OF INTENT
THE CENTRAL AND LOCAL SHARES OF BUSINESS RATES
• The Government announced that business rates would instead be shared
between central and local government on a percentage basis
• The local share of business rates will be retained in full by local government set
at 50%, a level sufficiently large to maintain a strong incentive for growth upon
all local authorities
• 50% share principle also applies to all rate reliefs
• The sector will retain all growth on the local percentage share (which will be
fixed for the duration of the reset period) whilst the local share will form the
baseline for setting each authority’s baseline funding level and therefore tariff
or top up amounts
GLOSSARY OF KEY TERMS (1)
• Baseline Funding Level: An assessment of how much funding each local
authority needs each year to deliver services, taking into account need and
resource (to be calculated by applying the 2012/13 formula grant process to
the 2013/14 and 2014/15 spending control totals)
• Business rates baseline: An assessment of how much business rates income
each local authority will collect each year
• Spending baseline: Based on the formula grant distribution (Note: An
authority’s spending baseline level will provide a stable starting point for the
rates retention scheme
• Disproportionate financial benefit: The relationship between an authority’s
business rates base and its spending baseline (Note: Authorities with a
business rates base significantly higher than its spending
baseline will experience disproportionate financial benefits to
its spending baseline when compared with an increase in its
business rates base)
GLOSSARY OF KEY TERMS (2)
• Income: An authority’s income from business rates after taking account of
central share, major precepting authority payments, tariffs and top ups as
appropriate to that authority
• Local share: The percentage of business rates retained by local government
• Central share: The percentage of business rates that will be paid
to central government and re-distributed to local government
GLOSSARY OF KEY TERMS (3)
• Tariffs and top ups: Achieve a one-off rebalancing of resources to ensure that
no authority is worse off as a result of its business rates base at the outset of
the scheme:- An authority will pay a tariff if its business rates base is more than its
spending baseline level
- An authority will receive a top up if its business rates base is less than its
spending baseline level
- Tariffs and top ups will be self-funding, fixed at the start of the scheme and
index linked to RPI in future years
• Tariff authority: An authority with a higher business rates base than its
spending baseline level, and, which therefore pays a tariff
• Top up authority: An authority with a lower business rates base than its
spending baseline level, and, which will therefore receive a top-up
GLOSSARY OF KEY TERMS (3)
• Safety Net: To protect local authorities whose business rates income decreases
(Note: The safety net of 7.5% below baseline funding level will be available to
all local authorities)
• Levy: To be set so the authority keeps at least 50p in each pound of growth in
its business rate income
• Resets: The first reset is scheduled for 2020 and thereafter, every 10 years
SHARING OF INCOME
• Two tier authorities
- District councils will receive 80% of the local share of business rate
- County councils will receive 20% of the local share of business rate
- Fire and rescue authorities will receive 2% of the local share of business rate
- Greater London Authority will receive 40% and London Boroughs will receive
60% of the local share of business rate
• Single tier authorities
- With separate fire authorities, they receive 98% of the local share of
business rate
- With no separate fire authorities, they receive 100% of local share of the
business rate
THE SEVEN ELEMENTS OF BUSINESS RATES RETENTION
• Setting the baseline
• Setting tariffs and top ups
• The incentive effect
• A levy recouping a share of disproportionate benefit
• Adjusting for revaluation
• Resetting the system
• Pooling
ELEMENT 1: SETTING THE BASELINE
• To establish a fair starting point for all local authorities and ensure that no-one
loses out at the outset of the system a baseline would be set at the position in
2013-14 for each local authority
• The starting point will be within the overall envelope of the expenditure
control totals set out in the 2010 Spending Review
• This means that a proportion of business rates revenues will be set aside and
directed to local government through other grants
ELEMENT 2: SETTING TARIFFS AND TOP UPS
• In order to achieve this fair starting position, government would calculate a
tariff or top up amount for each local authority
• Those authorities with business rates in excess of their baseline level of
funding would pay a tariff to government
• Those authorities with business rates yield below their baseline would receive
a top up grant from government
• The tariff and top up grants would be self funding and remain fixed in future
years
ELEMENT 3: THE INCENTIVE EFFECT
• In future years, local authorities would keep a significant proportion of
increases in their business rates
• Authorities whose business rates grew would retain a significant proportion of
that growth in revenues
• Those whose rates declined or grew at a lower rate would experience lower or
negative growth
ELEMENT 4: A LEVY RECOUPING A SHARE OF DISPROPRTIONATE BENEFIT
• To manage the possibility that some local authorities with high business rate
tax bases could see disproportionate financial gains, government would recoup
a share of disproportionate benefit through a levy
• The proceeds would, in the first instance, be used to manage significant
negative volatility in individual authorities’ business rates and so ensure
stability in the system
• Depending on the amounts raised, resources could also be redistributed to, for
instance, authorities with lower growth, or for example, to fund regeneration
schemes, in areas with high growth potential
ELEMENT 5: ADJUSTING FOR REVALUATION
• The system would be adjusted to take account of changes in the distribution of
business rates yield resulting from five yearly revaluations
• The system would ensure that the incentive to promote physical growth in the
business rates base remained in place for all authorities
ELEMENT 6: RESETTING THE SYSTEM
• Government would have the option of resetting the system if it was felt that
resources no longer met changing service pressures sufficiently within
individual local authority areas
• The longer the period between resets, the greater the incentive effect and
level of certainty for local authorities about the funding system
ELEMENT 7: POOLING
• Local authorities, for example those in local enterprise partnerships, or districts
and counties, could choose to form voluntary pools within the system
• Thus allowing them to share the benefits of growth and smooth the impact of
volatility over a wider economic area
OVERVIEW OF SCHEME DESIGN
1. Setting the
spending
baseline
2. Setting the
Business Rate
Baseline
3. ‘Tariff’ and
‘Top-Up’
Essential to give
authorities a
stable starting
point
THE STARTING POSITION….
3. Growth
Incentive
4. Levy
\Safety Net
5.Adjusting
for
Revaluation
….Future Years
6.Resetting
the System
THE STARTING POSITION: CALCULATING EACH INDIVIDUAL AUTHORITY’S
BUSINESS RATE BASELINE OVERVIEW OF SCHEME DESIGN
Forecast
National
Business Rates
Local Share
(National
Business Rates
Baseline within
Rates Retention
Scheme
National Level
Billing Authority
Pays Central
Share to HMT
(based on a
percentage)
Outside the Rates Retention scheme
Divided by
Proportionate
Shares*
Billing Authority
Business Rates
Baseline (Before
Tier Split Share)
Tier Split Share
Transfer of
Business rates to
Major Precepting
Authorities (e.g.
Shire Counties and
Fire Authorities
Individual
authority
Business Rates
Baseline
Local Authority Level
* A billing authority’s proportionate share will be established when
setting up the rates retention scheme. Equals a billing authority’s
business rates income (after allowable deductions e.g. for business
rates reliefs) as a proportion of total business rates yield, at a given
point in time or on the basis of its average income over a number of
years.
THE STARTING POSITION: CALCULATING TARIFFS AND TOP UPS
Individual
Authority
Business Rates
Baseline
Is greater
than
Individual
Authority Baseline
Funding Level
(Based on
2012/13 Formula
Grant Process
Tariff Authority
*Tariffs and Top Ups will remain fixed, linked to RPI
Individual
Authority
Business Rates
Baseline
Top Up Authority
Is less than
Individual
Authority Baseline
Funding Level
(Based on
2012/13 Formula
Grant Process
FUTURE YEARS: ADJUSTING FOR REVALUATION
Top Up
Top Up
Top Up
Top Up
Individual
Authority
Business
Rates
Authority A
Individual
Authority
Business
Rates
Individual
Authority
Business
Rates
Authority B
Authority A
Before Revaluation
Individual
Authority
Business
Rates
Authority B
After Revaluation
THE CENTRAL AND LOCAL SHARES OF BUSINESS RATES
• Business rates are to be shared between central and local government on a
percentage basis
• The local share of business rates will be retained in full by local government set
at 50%, a level sufficiently large to maintain a strong incentive for growth upon
all local authorities
• 50% share principle also applies to all rate reliefs
• The sector will retain all growth on the local percentage share, which will be
fixed for the duration of the reset period
• The local share will form the baseline for setting each authority’s baseline
funding level and therefore tariff or top up amounts
DISTRIBUTION OF THE LOCAL SHARE
• In England generally
- 80% to Billing authorities
- 20% to Major precepting authorities
• In London
- 60% to billing authorities
- 40% to the Greater London Authority
REVENUE SUPPORT GRANT
• Under the current system the amount of business rates collected has not been
sufficient to fully fund the services local government provides, after allowing
for funding raised through council tax and specific grants
• The Government has made up this difference with Revenue Support Grant
- Government will provide Revenue Support Grant to make up the difference
between the local share of business rates at the outset of the scheme and
the spending control totals for local government in 2013-14 and 2014-15,
having taken into account the amount which will be required to fund the
New Homes Bonus
- The amount of Revenue Support Grant for 2013-14 and 2014-15 will be set
out in the 2013-14 Local Government Finance Report. In future years, the
total amount of grant funding will be determined through
Spending Reviews
CALCULATING BUSINESS RATE INCOME (1)
• Government will define in regulations what a billing authority’s business rates
income is for the purposes of determining the local and central shares
• The definition of income for billing authorities will include a number of
adjustments to deal with a range of issues, including:- Central share payments
- Payments to major precepting authorities
- Tariff and top ups
- Reliefs (mandatory and discretionary)
- Hardship relief
- Repayments of refunds in respect of previous years
- Costs of collection
- Losses in collection
CALCULATING BUSINESS RATE INCOME (2)
• The exact treatment of these issues in the income definition is still being
considered
• It will not be possible to know the precise amount a billing authority will be
liable to pay until after the end of the financial year, though it will be necessary
for them to make central share payments in advance of this point, based on
their budget forecasts
• Government will also define in regulations the timing and manner of central
share payments
LIST OF GRANTS INCLUDED IN THE BUSINESS RATES RETENTION SCHEME FROM
2013/14 THAT ARE TO BE FUNDED BY THE CENTRAL SHARE
•
•
•
•
•
•
•
•
•
Bus Service Operators Grant – London buses element only
2011-12 Council Tax Freeze Grant
Council Tax Support Grant
Early Intervention Grant
GLA General Grant
A proportion of GLA Transport grant
Homelessness Prevention Grant
A proportion of Lead Local Flood Authorities Grant
Department of Health Learning Disability and Health Reform
Grant
• A proportion of Sustainable Drainage Systems Maintenance Costs
Grant
USING TIER SPLITS TO CALCULATE INDIVIDUAL AUTHORITY
BUSINESS RATES BASELINES
• Each billing authority business rate baseline is then split between the billing
authority and its major precepting authorities (on the basis of major precepting
authority shares) to determine individual authority business rate baselines. Tier
splits are set as follows: - 80% for district councils
- 20% for county councils which have responsibility for fire and rescue services
- 18% for county councils which do not have fire and rescue service
responsibilities
- 2% for single purpose fire and rescue authorities
- 100% for unitary authorities which have responsibility for fire and rescue
services
- 98% for unitary authorities which do not have fire and rescue service
responsibilities;
- 60% for London Boroughs
- 40% for the Greater London Authority
CALCULATING TARIFFS AND TOP-UPS
• In each authority, the baseline funding level and individual authority business
rates baseline are then compared to determine whether the authority in
question will pay a tariff or receive a top-up
• A local authority must pay a tariff if its individual authority business rate
baseline is greater than its baseline funding level
• Conversely, a local authority will receive a top-up if its baseline funding level is
greater than its individual authority business rate baseline
• Tariffs and top-ups will be fixed until the business rates retention system is reset
but will be uprated by RPI each year
THE BUSINESS RATES POOLING PROSPECTUS (1)
• Benefits of pooling
• How pooling would work
• Government’s approach to pooling
• Designating a pool
• Conditions
• Dissolving a pool
• Timetable
THE BUSINESS RATES POOLING PROSPECTUS (2)
• Submitting a pooling proposal
• Interactive calculator
BENEFITS OF POOLING
• Provides a new tool to deliver what’s needed to promote growth and jobs,
allowing investment decisions to support economic priorities
• Encourages collaborative working across local authorities, rather than
constraining activity within administrative boundaries
• Allows the benefit from investment in economic growth to be shared across
the wider area - providing a growth dividend to pool partners
• Helps local authorities manage volatility in income by sharing fluctuations
across budgets
• Local authorities are already coming together to assess the economic
performance across their natural economic areas, identifying
issues and challenges for improvement
RENEWABLE ENERGY PROJECTS
• Business rates income from new renewable energy projects to be disregarded
from calculations in the rates retention scheme - the Government response to
consultation confirmed:- The qualifying technologies that would be included in the definition of
renewable energy projects, but said that the list would be kept under
review
- For Energy from Waste plants, where a significant value of the rateable value
relates to the waste disposal function, the Valuation Office Agency would
apportion the rateable value from Energy from Waste plants that is
attributable to the renewable energy element
- Where existing renewable energy projects expand, above RPI increases in
rates income should be treated as being from new renewable energy
projects, and as such, be retained in full by the local authority
RENEWABLE ENERGY PROJECTS: QUALIFYING TECHNOLOGIES
• Onshore and offshore wind power
• Hydroelectric power
• Biomass and biomass conversion
• Energy from waste combustion
• Anaerobic digestions, landfill and sewage gas
• Advanced thermal conversion technologies - gasification and pyrolysis
• Geothermal heat and power
• Photovoltaics
TAX INCREMENT FINANCING
NEW DEVELOPMENT DEALS
• The introduction of business rates retention provides local authorities’ with a
new source of income - business rates growth
• This will enable local authorities to borrow, within the Prudential Borrowing
code, against future increases in business rates to fund the provision of
infrastructure and to unlock additional economic growth - this is know as tax
increment financing
• TIF is within the business rates retention scheme so subject to the reset (Note:
so ability to borrow limited to reset period but the Government’s ambition of a
10 year reset period should enable a greater take up in future)
• 3 New Development Deals will allow local authorities to retain growth for 25
years - NDD areas in Newcastle, Sheffield and Nottingham
THOUGHTS ON ADMINISTRATIVE IMPACTS (1)
• Legal interpretation
• Need for professional competence
• Fiduciary responsibility
• Cost of collection
• Collection performance
• Exemptions
• Reliefs
• Insolvency
INITIAL THOUGHTS ON ADMINISTRATIVE IMPACTS (2)
• Write off
• Arrears
• Inspection
• Valuation
• Forecasting
• The importance of the NNDR 1
The Problem and a Possible Solution
•
•
•
•
Create a meaningful database
Where is the Central List?
What about the Central Share?
Devise a scheme to challenge CLG but not
upset Billing Authorities and Major Preceptors
• Get the numbers right!
• Determine spending parameters
• Use the Localism Act powers
The Problem and a Possible Solution
• The source of funding
• Develop a distribution formula
• Recognise the complexity and be prepared to
compromise
• Assigned revenue from the Central Share
• Distributed through a range of
–
–
–
–
Ceilings
Thresholds
Caps and
Pools
IN SUMMARY
• The most significant reform of local government finance in the last 25 years
• Non domestic rates are a significant element in the development of localism
• Ratepayers will continue to exercise their right of challenge on both valuation
and collection matters
• Billing authorities need to be more aware of the importance of managing the
application and administration of non domestic rates
CONTACT DETAILS
David Magor OBE IRRV (Hons)
Chief Executive IRRV
Telephone: 0207-691-8973
E-mail: David.magor@irrv.org.uk