Local councils will be able to keep much of the funds they raise from business rates in future.
Under the present system, the monies collected from businesses on a local level are pooled by central government and then distributed across all councils in England according to a complicated method of calculation.
But the Communities Secretary, Eric Pickles has told MPs that, as from 2013, local councils will be granted more power over the taxes raised from businesses.
Last year, business rates generated some £19.6 billion in revenue, and the new system, the Government insisted, will provide councils with a greater degree of financial freedom and encourage more local authorities to put more effort into attracting businesses to their areas.
With councils creating barely half of their own income, the hope is that the new regime will mean that local authorities will be in a position to account for almost 80 per cent of their revenues by holding onto their business rates.
Mr Pickles added that councils will also be able to fund major projects by borrowing money against future business rates revenue.
Countering arguments that poorer areas will suffer as a result of the changes, the Minister said that the new system “would be balanced, fair and equitable”.
Those councils that are able to raise more money will subsidise those with less funds through a series of tariffs.
Business groups welcomed the plans.
Katja Hall, the CBI’s chief policy director, argued that the move will incentivise local authorities to be more pro-growth and more supportive of the role of businesses in regional economies.
Ms Hall said: “It’s good to see that the Government has kept the needs of businesses and the economy at the front of its mind in its review of business rates. After all, rates are the third largest tax that a business will pay, and it’s the Government’s aim to have the most competitive tax system in the G20 by 2015.
“We are happy to see the uniform business rate retained, as the aim of driving growth through business rates would have been undermined if the Government had chosen to move away from this.
“Retaining the uniform business rate means that business rates remain predictable so that firms can invest with confidence and aren¹t hit by unexpected tax hikes.”
It was a sentiment echoed by David Frost, director general of the British Chambers of Commerce.
Mr Frost said he believed that allowing councils to retain business rate funding would link directly to the success of local business communities.
He added: “That means councils will pay ever closer attention to the requirements of their local businesses and in ensuring they are able to flourish.
“Retaining business rate revenues will promote a pro-growth and pro-business attitude among councils. Alongside Tax Increment Financing, which will allow councils to borrow against future revenues to finance infrastructure projects, these plans have the potential to really drive economic development at a crucial time for the UK economy.”
Alexander Ehmann of the Institute of Directors concurred.
He said that allowing councils to keep a chunk of the business rates generated in their area will encourage many to go for economic growth, and has the potential to create a much needed culture change in local government.
Mr Ehmann added: “We also welcome the clear commitment to keep the level of rates under central government control. We must never return to the days of extravagant councils destroying businesses by imposing ever-higher rates.
“Tax increment financing is certainly worth considering, but there is a danger of irresponsible borrowing by councils. We would need clarity about what is to be permitted, with what safeguards, and who would pay if an anticipated increase in business rates did not materialise.
“It is important that councils are now given the tools to implement business-friendly decisions, for example by making rapid, pro-growth, planning decisions. The Government is taking action on these fronts, and it will be essential to carry those plans through to fruition.”
