Business rates are past their sell-by date

By Sir Stephen Houghton | 25 January 2021

When the Business Rates Retention mechanism was introduced in 2013, I argued that such a move would result in ‘divergence’ between wealthier authorities and poorer ones. Sadly, this is exactly what has happened. In 2020-21 compared to a needs-based allocation, our councils lost out on £225m of vitally needed funding. In 2018-19 the worst 10% actually experienced a decline rather than growth, despite the national overall growth above base of 7.2%. This retained growth is not included in the core spending power calculations, so no account was taken of this when allocating COVID emergency funding.

The Government has perpetuated the issue by failing to ‘re-set’ the baseline in 2020 as was promised when the reforms were introduced. We calculated the business rates growth above inflation in 2020-21 to be £1.9bn. Delaying the re-set harms more deprived communities who are less able to raise funding from their local tax bases.

When I spoke to the Housing, Communities and Local Government Committee inquiry into local government finance and the impact of COVID-19, I made it clear that a re-set would be a great way to ‘level-up’ more deprived areas. Indeed, the committee included it as part of their list of ‘asks’ to the secretary of state. Sadly, this went unheeded and the re-set was delayed – the Government again chose to kick the can down the road, rather than deal with the issue.

The Government decided not to provide any support for this fiscal hit to more deprived communities. Instead, they increased the Rural Services Grant to its highest ever level and created a new pot called the ‘lower tier services grant’ which primarily went to districts –the major benefices of retained business rates. Readers will also no-doubt remember that the Government has chosen to continue to eliminate ‘negative’ Revenue Support Grant to the benefit of the councils with the highest tax bases.

Business rates are an unsustainable way to fund local government partly because localised economic downturns could risk vital local services. The coronavirus pandemic has shown this to an extraordinary degree. Councils have distributed billions of pounds of reliefs, the bureaucracy of which has been no mean feat. It is likely that due to the continued economic downturn and lockdowns we will see further reliefs being delivered in the coming months. In addition, returns submitted to the Ministry of Housing, Communities and Local Government detailing COVID pressures indicate that our members will lose almost £300m of business rates income.

Businesses need support this year and an ad-hoc programme of reliefs is not a sustainable or fair way to proceed. There is increasing consensus in the business community that reform is needed – in response to the economic statement from the chancellor earlier this month Colliers International said that the Government must address the ‘elephant in the room’ with rates bills ‘still hanging over heads’ of retail, hospitality and leisure sectors. However, the substantial reforms that businesses require would likely reduce the tax take and damage local services.

A good start would be to decouple the link between business rates and local services. This is vital if we are going to have any chance of solving the bigger taxation issues whilst ensuring equality of services across the country. I have consistently called for services for our communities to be based on the needs of those communities. What cannot be delivered locally from council tax should be met from national taxation. If we don’t take this step and businesses continue to fail due to COVID-19, a council will inevitably fail – a disastrous outcome for residents and businesses.

Decoupling would allow the Government to deliver on its ‘levelling up’ agenda by considering targeted business support without worrying about the impact on local services if business rates income fell. By moving away from business rates as a means of funding services, we can transition to a fairer sustainable grant-based system calculated by need.

Incentive funding should only kick in once councils have their base needs funded. In addition, the incentive pots should recognise that the ability to achieve growth varies between councils and regions.

Once the Government has determined the quantum, ideally over a multi-year period to ensure stability and allow better long-term financial planning, an independent body should decide the formula on how funding is divided up. This would ensure there is no concern of political interference and address the growing divide in local service funding.

Cllr Sir Stephen Houghton is leader of Barnsley MBC and chair of Sigoma


Taxation tribulations for a post-COVID nation

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