Councils to keep £26bn raised from business rates

Earlier this month (5 October 2015), George Osborne announced major plans to transfer new powers from central to local government. Under the Chancellor’s proposal, local authorities will be given greater control over setting local business rates and retaining the money raised. Following this overhaul, the Chancellor has pledged that this will enable local authorities to increase business activity in their areas.

The “Devolution Revolution”

During his speech at the Conservative Party conference in Manchester, George Osborne proposed a number of reforms. In what has been described as “the biggest transfer of power to local government in living memory”, the Chancellor announced that:

• Local governments are to be allowed to retain 100 per cent of local taxes to spend on local government services – instead of these being sent to central government. This includes £26 billion of revenue raised from business rates, which are currently calculated on the value of the property a business occupies;
• The government will abolish the Uniform Business Rate – the single national tax imposed on every council – and will give local authorities the power to cut (but not raise) business rates; and
• Elected mayors in large cities, such as London and Manchester, will be given the power to increase rates (although subject to an expected cap of 2p) for spending on local infrastructure projects – providing that they are supported by local business.

25 years ago, central government set local rates at a uniform national rate. Under the present system, councils collect business rates, which are sent to central government. This revenue is then re-distributed back to local areas as a grant – this is after a significant proportion has been deducted by central government.

Since 2013, local councils have been allowed to retain rates, although only half of the proceeds. This was introduced to ensure that local areas enjoy the benefit of taking steps to boost business growth in their area. However, the Chancellor’s recent “shake-up” goes much further: moving to the retention of the entirety of business rates by 2020.

Implications for Local Authorities

Under the local government finance reforms, local authorities will enjoy increased flexibility in managing their finances; councils will be able to cut business rates for the types of businesses that residents demand in their locality. Those local areas, which successfully attract businesses, will retain all of the benefit from increased business rate revenues. However, it is inevitable that with new powers, come new responsibilities for local authorities – especially in relation to financial independence and greater local accountability.

For those following the business rates overhaul, the government is due to set out further details in its Spending Review, which will conclude on 25 November 2015.