Councils to lead local path to growth boosting jobs and firms

New detail published on radical rate retention plans

Letting councils keep their own business rates will put all parts of the country on a stronger path to economic growth, Local Government Secretary Eric Pickles said today, as more detail of how fair new local government financing proposals will work were published.

The Government has published eight technical papers, exploring how councils would be allowed to keep locally generated business rates, enabling them to borrow against future rate income. Legislation will be introduced later this year to allow changes to start as soon as possible.

Under the new system 'tariffs or top ups' would be put in place to ensure a fair starting point for all councils - north or south, metropolitan or district. Top up grants will bring up funding levels so no council is worse off as a result of its business rates base at the outset of the scheme. And a levy will recover a share of any disproportionate gain, to fund a safety net for places in need of additional support. Those with business rates income above a baseline funding level would contribute a tariff payment to the system whilst those with income below the baseline would receive top-up funding.

There will be no change in the level of business rates nor in the way that they are paid. Local charities, voluntary groups and small businesses will continue to get the same reliefs from Government.

In the past, many councils have seen their business rates base grow without reward, because the money was sent to Government for redistribution as Formula Grant. The new scheme will enable councils to benefit from any increases in the total revenue from business rates, providing a direct financial incentive for local authorities to promote local economic growth.

Ministers are confident that the new proposals will boost local firms and local jobs as councils are put in charge of their own financial circumstances, and rewarded for building stronger relationships with business to strengthen the local economy.

Last year £19 billion in business rates collected by councils was recovered by Government and redistributed back out through a complex grant. The Organisation for Economic Co-operation and Development (OECD) called this one of the most centralised systems in the world.

Secretary of State for Communities and Local Government Eric Pickles said:

"Councils deserve to see their business rate income repatriated in a balanced, fair and equitable way. Our changes will mean they can strive for self-sufficiency and have their own means to support local jobs, growth and protect the most vulnerable places.

"The new business rates system will be much more transparent and today we are setting out more of the detail of our proposals so councils all across the country can see the potential impacts and how they could benefit.

"The top up and tariff measures will safeguard those places that have relied on Government grant by making sure those areas with more business rate income than they need share a slice of that income. Every area will be rewarded for supporting local firms and growth. This is what councils want and precisely what we mean by localism."

Notes to editors

1. The technical papers published today are:

• Establishing the Baseline - discusses the detailed issues and options for establishing individual authorities' baseline funding levels, against which to compare their baseline business rates and so calculate tariffs and top-ups;
• Measuring Business Rates - considers how an authority's business rates will be calculated;
• Non-Billing Authorities - considers the mechanisms through which "non-billing" authorities will be funded within the business rates retention system;
• Business Rates Administration - sets out how the business rate retention scheme will operate;
• Tariff, Top-Up and Levy Options - seeks views on the detailed options for setting tariffs and top ups, and for the operation of the levy and the safety net;
• Volatility - considers how, within the rates retention scheme, income volatility could be handled;
• Revaluation and Transition - sets how revaluation and transitional arrangements might work within a rate retention system; and
• Renewable Energy - sets out how the Government's commitment to allow communities hosting renewable energy projects will be able to keep the business rates generated from such projects; and
• An interactive calculator - to enable councils to make estimates of the main variables for their area, and to see the comparative impact of different approaches to scheme design.

2. The core components of the proposed rate retention scheme are summarised as follows:

• A baseline funding level for each authority, based on their 2012-13 formula grant, from which top ups and tariffs would be derived to create a fair starting point for all and ensure no council is worse off in the first year of the scheme (2013-14) as a result of their business rates base. Councils with business rates in excess of their baseline funding level would pay an individually set tariff to Government, while those with less business rates would get an individually set top up grant from Government.
• An incentive so all councils can benefit from growth: Tariffs and top up grants would remain fixed during future years, meaning councils would benefit from 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: 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 fund a safety net to manage significant unforeseen falls in a council's business rates income, for example, a significant reduction in income as a result of a major local employer closing.
• 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 businesses 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. Rates retention would remove this barrier.

The consultation document can be found here: www.communities.gov.uk/publications/localgovernment/resourcereviewbusinessrates.

3. The plain English guide to rates retention is available here: www.communities.gov.uk/publications/localgovernment/resourcereviewplainenglish.

4. Details of the Local Government Resource Review Terms of Reference published on 17 March 2011, and Second phase of the Local Government Resource Review: Terms of Reference published on 29 June 2011 are available here:
www.communities.gov.uk/localgovernment/localgovernmentfinance/lgresourcereview/.

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