The Government is to allow local councils to retain the funds they generate from business rates.
At the moment the money raised through local business rates, which are charged on offices, factories and retail outlets, is transferred to a central Treasury pool. The funds are then redistributed to all councils in England in the form of a grant.
But in a speech to the Local Government Association, the Deputy Prime Minister, Nick Clegg said that the present system does little to encourage councils to boost growth and development in their areas.
Mr Clegg argued that over-centralisation means that barely 50 per cent of local government income is being raised locally. The new plans could see that figure rise to 80 per cent.
Mr Clegg continued: “We will localise the retention of business rates. I think everybody here can agree that with hindsight centralising rates back in 1988 in the Local Government Finance Act was a mistake. It set back meaningful localism by a generation.
“At the moment you have no financial incentive to promote economic growth and prosperity in your area. You are not rewarded for success.
“By localising the retention of business rates you are given a dramatic new incentive to work with business and with others, in order to boost economic prosperity in your areas.’
The Government insists that poorer regions will not be adversely affected by the reforms.
The Deputy Prime Minister added: “More deprived areas will not lose out. From the start, no authority will receive less funding when the new arrangements are introduced than they would have done previously.”
Councils will also be given the ability to borrow against business rate income in order to provide the cash for local developments.
The proposals won a broadly positive response from business groups.
David Frost, the director general of the British Chambers of Commerce (BCC), commented: “The Government’s plans to allow councils to retain business rates are a step in the right direction, and will enable communities to benefit from their own success. Giving councils the freedom to lower rates will help them attract thriving businesses to their areas, which in turn will boost enterprise and growth.”
But Mr Frost warned that this must not be used as an opportunity to increase rates, which could see a return to the days of councils using rates to subsidise lower council taxes. The BCC wants a national cap to be implemented in order to prevent the system from being misused. Firms should also be given a guarantee that business rates will not be set above the current uniform rate.
Mr Frost concluded: “Retaining business rate revenues will promote a pro-growth and pro-business attitude among councils. Together, with new powers to borrow against those revenues to finance infrastructure projects, these plans have the potential to really drive economic development at a crucial time for the UK economy. But we have heard a similar rhetoric from the Government on these issues before. Now is the time to act on these promises and create the right conditions for the UK economy to thrive.”
Stephen Robertson, director general of the British Retail Consortium (BRC), also welcomed the proposed changes but added a caveat too.
The Government, the BRC insisted, should not grant local authorities the power to vary business rates from council to council as such a move would damage investment and growth.
The present Uniform Business Rate (UBR) means that firms face the same business rates regime, regardless of their location, a fact that, the BRC said, offers certainty and minimises administrative costs.
Mr Robertson commented: “Nick Clegg is right, local authorities should have a financial incentive to promote business growth in their areas. Allowing them to keep some of the extra business rates revenue generated by local business expansion is the way to do that.
“But, letting local authorities set business rates would damage growth and jobs. The localised business rate system was scrapped in 1990 because it created huge inconsistencies in rates and left businesses – who have no vote – open to excessive and unpredictable rate hikes.
“The present system gives businesses with premises spread across the country the certainty and consistency they need and minimises administrative costs.
“The Government should be clear now that its plans for the future of local government financing do not include powers for local authorities to vary business rates.”
