Communities Secretary sets out rates retention scheme

The Communities Secretary has unveiled the basic components of the government’s proposed scheme that would allow local authorities to keep business rates and borrow against future income.

Eric Pickles said the scheme would be based on:

• A baseline level with top ups and tariffs “to create a fair starting point for all”: The government said it would establish a baseline, which could be based on next year's Formula Grant allocations, for each council in the first year of the scheme (2013-14) so no council is worse off at the outset. “Councils that collect more than that baseline would pay an individually set tariff to government, while those below it would get an individually set top up grant from government.”
• An incentive so all councils can grow: Under the proposals tariffs and top up grants would remain fixed during future years meaning councils would retain 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 ‘safety net’ levy to recoup disproportionate gain: The government would create a levy to recoup a share of any disproportionate financial gain. This levy could vary according to each individual council's own circumstances and would be used to manage significant unforeseen falls in a council's business rates income.
• A reset button to ensure stability: This is intended to allow the government to adjust top ups and tariffs to balance out changes in local circumstance. A longer period between resets would create a greater incentive effect, while a shorter one would allow frequent reassessment of budgets. This reset could be fixed or decided by the government.
• No change for business: “There will be no difference in the way business 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 also continue to be supported.
• Tax Increment Financing: TIF will allow councils to pay for future infrastructure developments by allowing them to borrow against projected rate growth. Rate retention would remove the current barrier where councils are not permitted to retain their rates so cannot borrow against them. The government is consulting on two options: an open structure that lets councils invest and take on the risks alone; or one with stronger government controls that guarantees revenue and disregards the levy or reset processes.

The detailed mechanism will be unveiled later this year after consultation. Draft legislation is also expected later this year.

Eric Pickles said: "Our proposals to repatriate business rate income are balanced, fair and equitable creating self-sufficiency, the right incentives for all areas to grow and protecting the most vulnerable places. This is what councils want and precisely what we mean by localism.

"It will be much more straightforward, by letting councils keep the products of enterprise we will end their disparaging dependence on government handouts, finally start rewarding economic growth and support local firms and new jobs.”

The Communities Secretary insisted that the top up and tariff measures would safeguard those places that have relied on grant by making sure successful areas share a slice of their income. “From the offset no area will see less funding than they would have got under the old grant system,” he said.

Pickles argued that central redistribution had “weakened local accountability, gave councils no reason to promote business growth and meant local funding was dictated by bureaucratic formula not local need”.

The consultation document can be found here:

A plain English guide to rates retention can be here.