Local Government Finance

1. BUSINESS RATES AND POOLING Local Government Finance

2. Background • Business rates are a tax paid by the occupiers of non-domestic property. • The amount paid is calculated by combining the rental value of the property with a “multiplier” determined each year by central government. • Over £20bn collected from business rate payers in England last year. • From April 2013, the business rates retention scheme will commence. • Instead of transferring all business rates to central government for redistribution, local authorities will keep 50% of the business rates they collect. • The remaining share of business rates will be paid by local authorities to central government and then redirected to the local government sector as a grant. • The system has been changed to create an incentive for local authorities to promote local economic growth and to reduce dependency on central government

3. Overview of the rate retention scheme 1: Split total business rates into central and local shares 2: Set baseline funding levels & business rate baselines 4: Levy & Safety Net 3: Calculate tariff & top-up 5: Growth incentive

4. Calculating baseline levels • In setting up the business rates retention scheme, central government has calculated two baselines for each local authority. • The baseline funding level is an assessment of how much funding each local authority needs each year to deliver services • The business rate baseline is an assessment of how much business rates income each local authority will collect each year.

5. Calculating tariffs and top ups • Where councils have a larger business rates baseline than their baseline funding level, the “excess” will become a tariff payment. • Where councils have a smaller business rates baseline than their baseline funding level, they will receive top up payments. • Tariffs and top ups will be fixed amounts, uprated annually by RPI. • Councils will also be able to keep the local share of all their business rates growth – the more an authority grows its business rates base, the better off it will become.

6. The safety net and levy • A safety net to protect local authorities whose business rates income decreases: • The safety net of 7.5% below baseline funding will be available to all local authorities. • funded by… • A levy on disproportionate benefit will be charged on increases in business rate income: • This will be set at a 1:1 ratio- so for every 1% increase in business rates, an authority would see no more than a corresponding 1% increase in income. • This is capped at 50p in the pound. • This will ensure that a local authority is always better off if it grows its business rates income. • Only tariff authorities will be levied

7. Local authority A- a tariff authority £15m Tariff £10m = £5m Business rates baseline Baseline funding level Authority A has a baseline funding level of £10m. It has a business rates baseline of £15m and so pays £5m in tariff. 0.50 Tariff and tops up and levy in practice Local authority B- a top-up authority £18m Top-up = Baseline funding level £12m £6m Business rates baseline Authority B has a funding need of £18m. It has a business rates baseline of £12m and so receives £6m in top-up grant. Levy = 1 - Baseline funding £18m Business rates baseline £12m i.e zero levy Levy = 1 - Baseline funding £5m Business rates baseline £10m i.e levy of 50p in £ -0.50

8. Pooling • Local authorities can pool together to benefit from the rate retention scheme. • Pooling is voluntary, so it is for local authorities to decide if pooling is in their interests or not. Local authorities may use pooling to: • Lower levy payments as the pool levy rate may be lower than their individual rate • More resilience to manage fluctuation in business rates income as risk is spread across the pool • Use income generated within the pool to support shared priorities and projects (e.g. economic growth) across a wider area – delivering greater strategic outcomes • Foster better relationships at political level and closer working at operational levels with neighbouring councils • 13 pools comprising of 90 local authorities will operate from April.

9. Example of pooling • Local Authority A (tariff) and B pool (top up) • Pooled baseline funding level = £10m + £18m = £28m • Pooled business rates baseline level = £15m + £12m = £27m Rather than authority A paying a tariff of £5m and authority B receiving a top up of £6m, the pooled authority receives a top up of £1m. Rather than authority A paying a levy of 50p in the £, pooling will result in pooled authority not pay a levy and will keep proceeds from growth Levy = 1 - Baseline funding £28m = - 0.04 Business rates baseline £27m i.e zero levy £28m £27m Top-up = Baseline funding level £1m Business rates baseline

10. Issues for rate retention scheme • The business rates retention scheme creates a direct link between economic growth and local authority resources. • So local authorities will be rewarded through the scheme- the more business rate income generated, the more income they will have to spend on local services. • However, local authorities will also be exposed to more risk- if their business rates income decreases, the less income they will have to spend on local services. For pooling specifically: • Who to pool with?: mix of top up and tariffs is an important factor • Risk and volatility in business rates: A variable in the scheme which local authorities cannot control or influence • Growth forecasts

11. Tools to assist authorities to pool • Potential opportunity for local authorities but increased risk because of the volatility in business rates income. • To help with the decision, what tools can we give local authorities? • Needs to be: • flexible, • user friendly – easy to understand • dynamic • with function for users to generate their own scenarios for planning • Limitations • Past data volatile, with no real trends • Usefulness?