Councils to be able to retain 100% of business rates in finance overhaul

Local government will be able to retain 100% of local taxes including business rates by the end of this Parliament, the Chancellor of the Exchequer has announced.

In a speech to the Conservative Party Conference George Osborne also said:

• the Uniform Business Rate would be abolished and local authorities would be able to cut business rates as much as they like;
• the core grant from Whitehall would be phased out;
• those areas which chose to have city-wide elected mayors would get further flexibilities. This would include being given the power to increase rates for spending on local infrastructure projects, “as long as they win the support of local business”.

The Treasury said: “The reform will mean local government retaining all revenue from business rates for the first time since 1990. These new powers must come with new responsibilities, as well as phasing out the main grant from Whitehall, to ensure the reforms are fiscally neutral.

“Local government will of course also need to contribute to fiscal consolidation over this Parliament, and the government will set out further details in the Spending Review.”

Since 1990, local business rates have been set by central government at a uniform national rate. Rates are collected locally, but then transferred to central government to be distributed back to local areas in the form of grant. Since 2013, local councils have been enabled to retain 50% of the proceeds of rates.

The Treasury said: “The latest reforms go much further, moving to 100 per cent retention of the full stock of business rates by 2020. It will mean that all income from local taxes will go on funding local services.”

It added that directly elected mayors – “once they have support of local business leaders through a majority vote of the business members of the Local Enterprise Partnership” – would be able to add a premium to business rates to pay for new infrastructure.

“This power will be limited by a cap, likely to be set at 2p on the rate,” the Treasury suggested.

Responding to the Chancellor’s announcement, Cllr Gary Porter, Chairman of the Local Government Association, said: "Today's announcement by the Chancellor is great news for councils and shows that the Government has listened to the arguments set out by local government. The LGA has long-argued that the current system of business rates needed reform so councils could effectively support small businesses and boost high streets.

"Councils have been hugely restricted in their ability to introduce local discounts with government setting the charge and keeping half of business rates income. With greater local control, councils will have flexibility to reduce business rates for the types of shops and businesses that residents want in their high streets and neighbourhoods.”

Cllr Porter added: "Councils and businesses both agree that business rates should be a local tax set by local areas. It is right that all of the money which a business pays is retained by local government and this will be a vital boost to investment in infrastructure and public services.

"While this is good news for councils and businesses, local authorities will face almost £10 billion of cost pressures by 2020 so we will now seek to work with government about how this proposal can be introduced more quickly.”

The LGA chairman said the association would expect measures to ensure local areas with less ability to generate business rates income did not suffer as a result of the changes and all councils were also given leeway to vary business rates up as well as down.

"Councils currently have to fund half of all business rates refunds but, by 2020, they will be liable for 100 per cent under this new system. This makes reform of the appeals system even more urgent to protect councils from the growing and costly risk and appeals and ensure businesses are happy with what they pay,” Cllr Porter said.