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Government approach to local retention of Business Rates questioned by NAO

Thursday 20 April 2017

In February it was announced that business rates would be revised in order to offer lower bills to businesses across the country and support the sector’s financial self-sufficiency and promote economic growth.

The Department for Communities and Local Government has now made progress in putting together the scheme which allows for 100% retention of business rates by local authorities, however the scale of the remaining challenges has been questioned by the National Audit Office (NAO), citing that there are clear risks both to the timely delivery of the initiative and to the achievement of its overall objectives.

The scheme, which is due to commence in 2019-20, plans to drive local economic growth and promote financial self-sufficiency for English local government. The National Audit Office has however raised questions as to whether the Department’s current planning approach is best configured to deliver a scheme capable of meeting those objectives fully. In their latest report, the NAO have highlighted the substantial design and delivery challenges still facing the Department in the context of an increasingly tight timetable and reduced staffing levels in its core delivery team.

The Department hopes that by allowing local authorities to retain 100% of business rates, it will incentivise them to grow their tax bases by adopting pro-development planning practices which in turn will support economic growth. But tax base growth does not necessarily mean economic growth.

A clear understanding of the link between business rates and economic growth needs to be established to ensure that the scheme is configured to maximise economic growth rather than just growth of the tax base. The NAO stated in their report that these issues had not been fully examined in the Department’s work to date and that crucially, the Department had not looked in detail at whether the current scheme, in which authorities retain 50% of business rates, has promoted pro-growth behaviour in authorities.

The promotion of financial self-sufficiency through the 100% local retention scheme is a response to a long-term reduction in local authority funding. Local authorities’ spending power fell in real terms by 25.2% from 2010-11 to 2015-16 and is expected to fall by a further 5.4% by 2019-20. With a Spending Review suspended until after the implementation of the scheme, there is a potential risk of a lack of sufficient funding for the sector.

Whilst figures show that between 2015-16, £11.3 billion was retained in business rates under the 50% local retention scheme, and an additional estimated £12.5 billion is to be retained locally by 2019-20, there are concerns surrounding the implementation within the allotted timeframe.

Whilst recognising the progress of the Department they have highlighted potential risks to the timely delivery of the 100% scheme, stating that significant and challenging issues remaining outstanding, such as the delivery of the Fair Funding Review. The NAO notes the pressure to deliver by 2019-20 could result in a scheme that has not been fully tested. The experience of the 50% scheme, in which the operation of the appeals process proved problematic, demonstrates the clear risk posed by unforeseen issues.

Amyas Morse, head of the National Audit Office said:

“The Department faces a significant challenge in implementing 100% local retention of business rates by 2019-20. It has benefited from the experience of delivering the 50% local retention scheme and is using this experience effectively. The key question is whether there is enough money in the system to let services be delivered on the right scale and for self-sufficiency to be seen to succeed.”

A further consultation on the design of the reformed system is open until 3 May.