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.

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.”

Contact

Becky Malone, becky.​malone@​neweconomics.​org, 07925950654

Notes to editors

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.

We have developed a model of the business rates retention system to illustrate the impact of the government’s proposed plans as well as options for reform. We projected forwards business rates growth at local authority level using growth in revenue since the 2017 revaluation. We assume that following any planned revaluations (the next one is currently planned in 2021/​22), multipliers will be adjusted so that the overall quantum of business rates will remain constant. Otherwise we have assumed multipliers will be uprated in line with CPI so that revenue grows with inflation. To model the expected baseline scenario under the government’s proposed plans, we assumed: 75% retention rate, 92.5% safety net, and a 0.5 levy rate.

Authorities who experience a disproportionate growth in business rates income pay a levy on that growth. This pays in part for a safety net for local authorities that are subject to a significant shortfall in business rates. The safety net for local authorities is currently set at 92.5% of baseline need, meaning that rates available will never fall more than 7.5% below predicted need.

Councils currently retain a proportion of the growth in their business rates, subject to the levy. This means that councils with smaller business rates bases (which tend to be poorer authorities) do not gain as much in cash terms as councils with larger business rates bases from growing that base. For example, consider two councils who each grow their business rates revenue by 10%. If the first council’s revenue is £100 million and the second council’s is £50 million, the first council will gain twice than the second council, subject to the levy (£10 million compared to £5 million). As the business rates earning potential is not particularly linked to need, this means that revenue available to councils is decoupled from need as time goes on. An alternative approach is to reward councils in proportion to need – so that if they grow their base by 10%, they are rewarded with an additional 10% of the amount they need to deliver services. This means that unlike under the current system, the amount of revenue retained by councils does not further decouple from need over time.

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