The system of business rates retention cannot survive in the long-term without significant reform and the consideration of alternatives due to changes in the economy, according to a report by MPs.
The Housing, Communities and Local Government Select Committee this week included the call in a wide-ranging review of local government finance.
It said that it welcomed policies allowing local government more control of the revenue it raises, but said the current business rate retention system is too complex and lacks transparency.
The report said: “The system attempts to create incentives for growth whilst also redistributing revenues according to need.
“The tax is already coming under pressure from changes in the economy and the Treasury Committee is currently conducting an inquiry on the tax and its impact on business.”
2nd Housing & Regeneration Finance Summit
October 31, 2019, County Hall, London
Evidence to the committee from Leeds City Council said “rates receipts are sensitive to a number of factors that we would argue are entirely out of the control of local authorities”.
North East Lincolnshire added that “multiple appeals has seen a financial impact measured in millions of pounds of reduced business rates that could not have been foreseen or influenced but has affected the funding available to the council at a local level with no central adjustment or relief for us”.
It also highlighted the “increased risk” from its reliance on relatively few big payers of business rates.
In other evidence, Jonathan Carr-West, chief executive of the Local Government Information Unit, questioned whether business rates retention even meets its own aim of encouraging growth.
He said: “I do not think it necessarily does what it is meant to do.
“It creates perverse incentives, in that it encourages you to encourage certain types of business, which might not be the ones you wanted if you were taking a more rounded place shaping view. There is no causal link between business rates income and need…
“It does not capture a lot of modern business activity.”
The committee said that the Ministry of Housing, Communities and Local Government needs to reform the retention system.
“The government should consider making the system simpler by bringing back the Revenue Support Grant to redistribute to councils in need rather than trying to do this through an increasingly complex business rates retention system.
“The government also needs to start considering alternatives to business rates as a revenue stream for local government, given the risks to this tax over the long-term.”
The report also called for reform of councils’ other main form of tax revenue – council tax – saying that the government should consider the case for new bands at the top and bottom of the scale.
It said: “Council tax is a regressive tax which has become disconnected from property values.
“All houses built over the last 25 years still have to be valued by the assessor as to what the value of the property would have been in 1991.
“This cannot continue.”
Responding to the committee’s report, Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy, said: “The committee is absolutely right in its conclusion that local government simply cannot achieve financial sustainability without reform to existing revenue streams and devolution of stronger revenue raising powers.”
Ian Fletcher, director of real estate policy at the British Property Federation, said that fundamental reform of business rates was critical, as well as an urgent review of the company voluntary arrangement (CVA) process.
He said: “CVAs are increasingly compromising business rates, and the crippling impact rates are having on businesses means this is not a sustainable source of funding for local authorities.”
Paul Dossett, head of local government at audit firm Grant Thornton, said: “If not made a priority, we run the risk of many councils being unable to provide vital services people rely on every day – from social care to pot hole filling.
“Councils need to be provided with a genuine long-term funding solution to provide some level of certainty so that their long-term planning can be meaningful.”
