WIREDGOV

Councils will get to keep their own business rates under new local government financing proposals that will be fair and benefit those that grow financially, Local Government Secretary Eric Pickles announced yesterday.

The Government yesterday published proposals to allow the local retention of business rates by councils and to let them borrow against future rate income. Legislation will be set out later this year so changes start as soon as possible.

Yesterday's consultation is the outcome of a review into local government funding that sought to repatriate rates; create a financial incentive for councils to promote local growth; reduce dependency upon central Government grant; and maintain protections for business and vulnerable areas.

The proposals will fundamentally shift councils away from their dependence on Government grant, where pleas of poverty earned a bigger share. Any council that grows it's business base would see increased business rates that they would keep. Importantly, there will be no change to the way business pays the tax, who is eligible for discount, or the way it is set nationally.

A system of new 'tariffs or top ups' would be put in place to ensure a fair starting point for all councils - north, south, metropolitan or district - by balancing out those with business rates income above a baseline funding level and those with income falling below it. A safety net levy on disproportionate gain will also provide extra protection where needed. The detailed mechanism will be set out later this year following consultation.

Ministers believe a new system is needed to end a long-standing problem where councils have no direct growth incentive, to build stronger relationships with business and to put councils in charge of their own financial circumstances.

The Organisation for Economic Co-operation and Development (OECD) ranked England's local government finance system as one of the most centralised in the world. With less than half of spending raised locally councils have less autonomy than Germany, Spain, Italy, USA, France or Japan. Last year £19 billion in business rates collected by councils was recovered by Government and redistributed back out through a complex grant.

Secretary of State for Communities and Local Government Eric Pickles said:

"Our proposals to repatriate business rate income are balanced, fair and equitable creating self-sufficiency, the right incentives for all areas to grow and protecting the most vulnerable places. This is what councils want and precisely what we mean by localism.

"It will be much more straightforward, by letting councils keep the products of enterprise we will end their disparaging dependence on government handouts, finally start rewarding economic growth and support local firms and new jobs.

"The top up and tariff measures will safeguard those places that have relied on grant by making sure successful areas share a slice of their income - from the offset no area will see less funding than they would have got under the old grant system.

"Central redistribution weakened local accountability, gave councils no reason to promote business growth and meant local funding was dictated by bureaucratic formula not local need."

A plain English guide to accompany the consultation has been produced. The core components of the proposed rate retention scheme are summarised as follows:

• A baseline level with top ups and tariffs to create a fair starting point for all: Government would establish a baseline, which could be based on next year's Formula Grant allocations, for each council in the first year of the scheme (2013-14) so no council is worse off at the outset. Councils that collect more than that baseline would pay an individually set tariff to Government, while those below it would get an individually set top up grant from Government.
• An incentive so all councils can grow: Tariffs and top up grants would remain fixed during future years meaning councils would retain any business rate growth it generates. Councils such as those in local enterprise partnerships, or districts and counties, will be allowed to voluntarily pool business rates to enable the wider economic area to benefit from growth and reduce any volatility.
• A levy to recoup disproportionate gain: Government would create a levy to recoup a share of any disproportionate financial gain. It could vary according to each individual council's own circumstances and would be used to manage significant unforeseen falls in a council's business rates income.
• A reset button to ensure stability: This will allow the Government to adjust top ups and tariffs to balance out changes in local circumstance. A longer period between resets, for example 10 years, would create a greater incentive effect, while a shorter one would allow frequent reassessment of budgets. This reset could be fixed or decided by Government.
• No change for business: There will be no difference in the way business pay tax or the way the tax is set. Rate setting powers will remain under Central Government control and the revaluation process will stay unchanged. Rate relief to the needy will be unaffected. National discounts and rate relief will continue to be supported, meaning no adverse change to such groups as charities, amateur sports clubs, voluntary groups, those in hardship, and eligible rural or small firms.
• Tax Increment Financing: This will allow councils to pay for future infrastructure developments by allowing them to borrow against projected rate growth. Councils are not currently permitted to retain their rates so cannot borrow against them. Rate retention would remove this barrier. The consultation sets out two options. An open structure that lets councils invest and take on the risks alone or one with stronger Government controls that guarantees revenue and disregards the levy or reset processes.

Notes to editors

1. Spending Review funding levels for local authorities for 2013/14 and 2014/15 will remain the same. At the next Spending Review, the Government will review the total spending figures for local government with a view to more closely aligning local authority functions and responsibilities with business rates income from 2015/16.

2. The consultation document can be found here: www.communities.gov.uk/publications/localgovernment/resourcereviewbusinessrates.

3. The plain English guide to rates retention is available here: www.communities.gov.uk/publications/localgovernment/resourcereviewplainenglish.

4. Detail of the Local Government Resource Review Terms of Reference published on 17 March 2011, and Second phase of the Local Government Resource Review: Terms of Reference published on 29 June 2011 are available here: www.communities.gov.uk/localgovernment/localgovernmentfinance/lgresourcereview/.

6. Consultation responses to the Local Government Settlement 2011-12 can be found here: www.local.communities.gov.uk/finance/1112/consultreps/index.htm (external link).

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