The Institute for Fiscal Studies (IFS) says that the government’s proposals for reform of business rates retention need further work.The Ministry of Housing, Communities and Local Government (MHCLG) is consulting on its proposals for reform ahead of the move from 50% to 75% retention in April 2020.
The IFS welcomes some of the proposals.
The ministry is proposing phased resets to replace the fixed resets that have led to sudden and large changes in business rates.
This would provide councils with consistent incentives to promote growth in the non-domestic rate base.
The consultation offers councils the ability to change the split between upper- and lower-tier councils, allowing county councils which have to fund social care to take a greater share of business rates expansion.
The IFS also welcomes that the consultation is looking at the problem of valuation changes, brought about by appeals.
This is a large financial risk for councils, and one over which they have no control.
The IFS says, though, that: “The consultation’s description of how proposals to protect councils from the risk of valuation changes will function is confusing, imprecise, and appears to be internally inconsistent.”
“For example, the consultation says that the proposal will result in a one year lag before councils see business rates growth reflected in their income, but the mechanism set out would result in a two year lag”.
The IFS also says that many of the questions raised in the consultation can only be answered on the basis of an empirical analysis of the impact of the options being made available, and that such an analysis has not yet been provided.
David Phillips, associate director at the IFS, said: “Much of what is in this consultation is sensible and welcome, such as proposals to reduce the risk to councils’ funding arising from business property valuation errors.
“However, as the Hudson review concluded, this is a very complex area where clarity and accuracy from the government are vital.
“The issues with this consultation suggest that MHCLG still has some way to go on this front.”
