The Business Rates Campaign

DAVID MAGOR OBE IRRV (HONS)CHIEF EXECUTIVE

Institute of Revenues Rating and Valuation

1

The Swanley Question

• Business RatesAn 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 REVIEWTERMS 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 INTENTTHE 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’

THE STARTING POSITION….

Essential to give authorities a stable starting point

3. Growth Incentive

….Future Years

4. Levy \Safety Net

5.Adjusting for

Revaluation

6.Resetting the System

THE STARTING POSITION: CALCULATING EACH INDIVIDUAL AUTHORITY’S BUSINESS RATE BASELINE OVERVIEW OF SCHEME DESIGN

* 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.

Forecast National

Business Rates

Local Share (National

Business Rates Baseline within Rates Retention

Scheme

Billing Authority Pays Central

Share to HMT (based on a percentage)

Divided by Proportionate

Shares*

Tier Split Share Transfer of

Business rates to Major Precepting Authorities (e.g.

Shire Counties and Fire Authorities

Billing Authority Business Rates

Baseline (Before Tier Split Share)

Individual authority

Business Rates Baseline

National Level Local Authority Level

Outside the Rates Retention scheme

THE STARTING POSITION: CALCULATING TARIFFS AND TOP UPS

*Tariffs and Top Ups will remain fixed, linked to RPI

Top Up Authority

Individual Authority Baseline

Funding Level (Based on 2012/13

Formula Grant Process

Individual Authority

Business Rates Baseline

Tariff Authority

Is greater than

Individual Authority Baseline

Funding Level (Based on 2012/13

Formula Grant Process

Individual Authority

Business Rates Baseline

Is less than

FUTURE YEARS: ADJUSTING FOR REVALUATION

Authority A Authority BAuthority A Authority B

Before Revaluation After Revaluation

Top Up

Individual Authority Business

Rates

Individual Authority Business

Rates

Individual Authority Business

Rates

Individual Authority Business

Rates

Top Up

Top Up

Top Up

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: 0207-691-8973E-mail: David.magor@irrv.org.uk