The Local Government Association has expressed disappointment that the government has not created a method of accurately compensating councils for losses resulting from business rate appeals.
In a consultation released before Christmas, the Ministry for Housing, Communities and Local Government proposed the use of a “proxy” mechanism to work out provisions against valuation changes.
In its response, the LGA said that it supported the government’s aim of removing the risk of appeals on local authorities by using a centrally managed appeal system.
However, it added: “It is disappointing that there is not a direct measure of losses due to appeal.
“We agree that, in the absence of a more direct measure, that a proxy (which assumes that valuation changes not backdated to the start of the list are classified as physical changes) may be the only viable option.
“We note with disappointment that MHCLG, and experts in the sector, have not been able to find a workable method to mitigate the impact of provisions on authorities’ day to day ability to spend.”
In its consultation, the MHCLG said that the proxy would top-slice business rates income in order to compensate all changes to an authority’s local list backdated to the beginning of the revaluation cycle, as a “valuation only change”.
Changes not backdated to the start of the list would be classified as physical changes and not compensated.
It said: “Although any proxy cannot be 100% accurate, in the absence of better information, the Government believes that this proxy represents the best way to ensure that authorities are fairly compensated for valuation change outside of their control.”
The LGA also gave cautious support to a proposal to reform the way the forthcoming business rates retention system is administered.
The reform would use local authorities’ own estimates of their income from business rates, after provisions, to set an accurate business rates baseline each year.
The government consultation said: “The result will be that each local authority will have certainty each year that their income net of provision will be equal to their needs assessment.
“Accordingly, provisions will no longer adversely impact on an authority’s income, and any perverse incentive to underestimate provisions in order to protect income levels in the short-term will be removed.”
In response, the LGA said: “The LGA notes that this appears to be the only method that can deal with the impact of appeals on local authorities under business rates retention.”
However, it said that the new system requires further exploration and modelling, and needs to be explained better and operated in a transparent way.
The LGA also called for more modelling of the impact of a proposal to introduce phased resets of business rates baselines used to calculate the amount of business rates growth councils can retain.
“The LGA can see the merits of phased resets as they would allow local authorities to keep the benefits of growth for a defined period, they would avoid cliff-edges and allow for planning,” the response said.
A blog post by the Institute for Fiscal Studies said that the principle of rolling resets was welcome.
It said: “The valuations are made by the Valuation Office Agency not councils,so risk associated with appeals is a risk outside of councils’ control.
“And our analysis has shown that these risks can be substantial.”
Commenting on the consultation, Paul Dossett, head of public sector assurance at accountancy firm Grant Thornton, said: “It is important that the government has recognised the volatility in the provisioning for appeals.
“Some of the risk for councils would be further offset by the Valuation Office determining appeals in a more timely manner”.
