Incremental approach
Tax increment finance is now law. So what can it do for your project? Nick Maltby reports.
On 31 October 2012 the Local Government Finance Act received Royal Assent. While the main work of the Act is to transform the way that local authorities are funded by the introduction of a system of business rate retention, the Act also legislates for Tax Increment Finance (TIF). So what can this new mechanism do for your projects?
How we got here
The Act, as far as it relates to TIF, has been a long time in the making. Under the last government, expressions of interest were invited in 2008, only for progress to stall after 84 local authorities had submitted 124 bids.
Once the coalition came into power, the prospects for TIF at first looked bleak until Nick Clegg’s announcement of September 2010 at the Liberal Democrat Party Conference, “[And] I can announce today that we will be giving local authorities the freedom to borrow against those extra business rates to help pay for additional new developments.”
This was followed in October 2010’s Comprehensive Spending Review with statements to similar effect, which were expanded on in that autumn’s Local Growth White Paper. 2011 saw the announcement of a Local Government Resource Review leading to the publication of a consultation document, Local Government Resource Review: Proposals for Business Rate Retention.
TIF Options 1 and 2
Consistent with the Consultation Document and the Government Response, the Act sets out two forms of TIF within the new business rates retention system.
The first (Option 1) allows authorities to determine for themselves whether to invest in a TIF scheme but provides no special treatment. Under this system authorities benefit from any uplift in business rates subject to any top up, tariff or levy and can decide to borrow against these additional rates if they wish. Problems with Option 1 include the timing of the reset and the uncertainty within the business rate retention system more generally. Only Enterprise Zones are outside this reset, having a 25 year life. For Option 1 there is no specific legislation beyond allowing local authorities to retain business rates.
Option 2 is a fund based system run by central government but free from the risk of loss to the levy or reset process. This gives local authorities and developers the certainty of revenues against which to borrow. Not surprisingly business favours this option although it does reduce resources available for the wider local government sector. Option 2 is provided for in paragraph 39 of Schedule 1 under the heading, ""Designation of Areas and Classes of Hereditament", which will be pursuant to regulations made under the Act. The Government confirmed in the March 2012 Budget a limit of £150m for Option 2 TIF schemes for the period 2013 – 2019 and a geographical limit to core cities. If you are not a core city, then Option 2 will not help you at present.
Implementation and comment
It is expected that these powers will be in effect by 1 April 2013. The implementation brought about by the Act does not represent the sort of implementation of TIF that the industry had hoped for and it is a pity that the Government has not framed a version of “pay as you go” or developer-led TIF although they do give local authorities primary TIF powers unlike the Scottish system.
Can we make it work?
For most authorities who want to use TIF the only game in town will be Option 1 (or an additional Enterprise Zone). Here it will be open to local authorities to enter into private arrangements with developers under which developers underwrite the prudential borrowing undertaken by local authorities on their behalf on appropriate terms, as is the case in the US. However, whether this happens will depend on individual local authorities’ appetite for risk.
The key question is the timeframe of the reset given the problems around 10 year or less time horizons for infrastructure investment. If the Government wants Option 1 TIF to happen then it will need to provide some comfort, perhaps through a City Deal, at least to top up authorities or those in a pool that a relaxed view of the reset can be taken. Tariff authorities (mainly districts) should go elsewhere for investment.
Nick Maltby is Director of Nick Maltby Associates. He can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it..
