TIF Uncovered
The Local Government Finance Bill was published last month. Alan Aisbett looks at the implications for enterprise zones, business rate retention and tax increment financing.
Current Business Rate Pooling Regime
One of the principal benefits of an Enterprise Zone (EZ) will be the ability of the local authority in whose area the EZ is situate to retain the business rate growth from the EZ for a period of 25 years.
However, the current statutory regime requires local authorities to pool business rates collected by them by paying to the Secretary of State their respective non‑domestic rating contribution. Section 60 and Schedule 8 of the Local Government Finance Act 1988 contain the "pooling" provisions. Paragraph 4 (1) of Schedule 8 in particular enables the Secretary of State to make regulations containing the rules for the calculation of the amount for a chargeable year in respect of each billing authority. The Non‑Domestic Rating Contributions (England) Regulations 1992 (SI 3082) were made pursuant to paragraph 4 (1) and contain the rules for the purposes of that paragraph.
Proposed Statutory Change
The Local Government Finance Bill 2011 published in December 2011 contains the proposed legislative amendments to enable the Business Rate Retention scheme proposed by the Local Government Resource Review to proceed. Essentially the existing pooling provisions in Section 60 and Schedule 8 are amended such that following enactment they will only apply to Wales. In their place, so far as England is concerned, will be a new Section 59A and Schedule 7B to be inserted in the Local Government Finance Act 1988.
Baseline, Tariffs and Top Ups
In order for there to be any business rate retention scheme there must be arrangements in place which achieve a degree of equalisation of business rates across local government to protect those local authorities who have a low business rate base and conversely to avoid disproportionate benefits applying to those local authorities who have a high business rate base (and also to maintain income for upper tier non billing authorities).
The Government intends to achieve this by setting a baseline for each local authority based on a comparison between current rates income and formula grant. Depending upon how the former relates to the latter local authorities will, annually, either pay a sum to Central Government by way of a tariff or receive a sum from Central Government by way of a top up. This system of tariffs and top ups will be reflected in an annual local government finance report which will be laid before Parliament. The report will set out each local authority's central and local share percentages of non domestic rates.
Levy
In order to incentivise business rate growth tariffs and top ups will be fixed in future years. However, the new Business Rate Retention scheme will contain arrangements for the payment of a levy by local authorities which will address disproportionate benefits accruing to local authorities, as a consequence for example of large tax bases.
As a consequence the Secretary of State will be required to establish a Levy Account and make regulations specifying when payments are required into that account from any local authority in any given year. The Secretary of State may also make regulations specifying when safety net payments are to be made to local authorities from the Levy Account. Safety net payments are the corollary of the levy and are intended to fund support for local authorities whose income drops by more than a set percentage below their baseline funding level.
Re‑sets
Finally the scheme also envisages a re-set of the system of tariffs and top ups. However, it is envisaged that this will occur no earlier than every 10 years unless there are exceptional circumstances. The re-sets of tariffs and top ups will be a ministerial discretion when drawing up the relevant Local Government Finance Report.
Tax Incremental Finance
Whilst local authorities will in theory be able to harness potential business rate growth to forward fund infrastructure there will be an inherent uncertainty over long term cash flows as a consequence of the system of levies and re-sets. However, whilst this uncertainty may not inhibit prudential borrowing across authorities' rates income as a whole or borrowing confined to the 10 year re-set period or prevent business rates being used as part of an investment fund, it will inhibit local authorities from securing long term loan finance on the back of a defined rates income stream.
As a consequence the Government has also stated that it is willing to exempt certain defined projects and schemes from the levy and re-set for a given period of time to enable traditional TIF style projects or schemes to proceed. However, such projects or schemes will be the subject of a central approval process.
How will all of this apply to Enterprise Zones? Once the Local Government Finance Bill has been enacted the level of retained business rate for each local authority will be fixed by reference to the central and local percentage share for that authority and set down in a Local Government Finance Report. These percentage shares will be fixed by reference to the baseline funding position and tariffs and top ups. These will apply across the authority.
It is assumed that there will be an ongoing approval process for the business case for the developments within the EZ. Once that business case is approved (taking into account potential levels of collection, displacement etc) then the local authority will be free to retain the business rates deriving from that development (although making internal adjustments for the transfer of the baseline amount (and any attributed tariff) to its central business rate fund to fund services elsewhere).
It is not thought likely that any further legislation will be required in relation to the business rate retention as part of TIF. The Business Rate Retention proposals for EZ's refer to local authorities retaining the uplift. It is assumed that the "uplift" will be determined though the new regime unless there is to be a separate definition of uplift purely for EZ's (as is currently the case in Scotland)?
Prudential Borrowing and TIF
Pursuant to Section 1 of the Local Government Act 2003 a local authority may borrow money (a) for any purpose relevant to its functions under any enactment or (b) for the purposes of the prudent management of its affairs. If a local authority's functions includes all of its powers and duties then this provision should be wide enough to borrow to facilitate development in a TIF zone probably involving the provision of infrastructure particularly bearing in mind the breadth of the wellbeing power and the General Power of Competence once Section 1 of the Localism Act 2011 is brought into force).
The provision which may require some consideration is Section 13 of the 2003 Act. Sub‑section 13 (1) states that except as provided by sub-section 13 (3) a local authority may not mortgage or charge any of its property as security for money which it has borrowed. Sub-section (3) states that all money borrowed by a local authority together with interest shall be charged indifferently on all the revenues of the authority. Therefore if a local authority were to prudentially borrow by reference to the available business rate increment in an EZ it is the whole of its revenues (not just the EZ revenues) which would be secured for the debt. To charge a specific income stream would require an amendment to Section 13.
Alan Aisbett is a partner at Pinsent Masons. He can be contacted on 0121 626 5742 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..
