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Viewpoint - 22/06/2012

Institute of Revenues, Rating and Valuation comments on the rates retention scheme

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In response to the summer consultation exercise, it is clear that the government intends that, from 1 April 2013, the local government finance system will provide for business rates income to be shared between local and central government.

Business rates will be shared equally between central government and local authorities

David Magor, Chief Executive of the Institute of Revenues, Rating and Valuation (IRRV) explains:

In order to achieve this, the government has proposed that the 'central' and 'local' share percentages will be 50%. The 'local share' of business rates will be retained in its entirety by the local government sector as part of the Rates Retention Scheme (RRS). The 'central share' will be paid by billing authorities to the Department of Communities and Local Government (DCLG) and will be used by central government to provide funding to local authorities outside the rates retention scheme. Whilst there was initial disappointment at the local share only being set at 50%, the list of grants and subsidies being financed from the central share has tempered the initial gloom.

This arrangement will share risk and reward

Setting central and local shares enables both risk and reward to be shared between central and local government. At the individual authority level, the local share percentage of any growth in business rates will be retained by the authority. But importantly, and in contrast to the original proposals, central government will bear its share of any reduction in local business rates. Now the central and local shares have been fixed, the intention is to leave them unaltered until the system is next reset, which the government has indicated could be up to 10 years later although there is some debate as to whether the reset periods should coincide with revaluations.

Billing authorities now have the challenge to maximise their rate income to create the opportunity to secure 'growth' which can be retained locally. This will mean that billing authorities will adopt a more aggressive stance when defending rate income.

Rebalancing is required to provide local authorities with a fair starting point

To provide a fair starting point for each authority under the RRS, there will need to be an initial rebalancing of business rate resources, so that resource-poor authorities receive 'top up' funding, which will be financed from the 'tariffs' paid by resource-rich authorities. The process of rebalancing will create an equalisation system similar to the pre-1990 situation but with the significant difference which will be the creation of a level playing field based upon a rate base that will be properly assessed.

In order to calculate individual authorities’ tariffs and top ups, there will be a calculation of each billing authority’s business rates baseline at the outset of the scheme. The baseline figure will be notional, since billing authorities’ rates income for 2013/14 will not be known until after the end of the financial year and because any figure based on a single year’s receipts could be distorted by the impact of financial adjustments for prior years, including those in respect of successful rating appeals.

Independently, DCLG will also calculate a figure for each authority’s 'spending baseline'. This will be derived from authorities’ formula grant entitlement. The difference between an authority’s business rates baseline and its spending baseline will determine the size of its tariff or top up.

Authorities will be protected from excessive growth or losses

In order to protect authorities from excessive growth or losses an authority (including a major precepting authority) could be liable for a levy, or eligible for safety net payments, depending on whether its rates income in any year (inclusive of tariffs and top ups) was excessively more, or less, than its baseline starting position, which itself would be annually up-rated by RPI. The protection afforded by this mechanism will give local government confidence to participate fully in the new regime.

The ability to retain growth will encourage local government to properly participate in the levy and collection of the rate. Growth will need to be protected and I fully expect billing authorities to take a positive stance in defending the list and the rates that are levied against it. It could be argued that the billing authority’s rights in relation to rating appeals should also be restored together with an 'encouragement' from government to protect liability.

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