The business rates review must take into account how the tax helps fund local services.
As we all know, business rates are an extremely important source of income for local government, accounting for around a quarter of all council spending power.
Collectively, councils currently keep half of the business rates collected in England, and this is shared to help councils that are less able to generate business rates.
This money is used to pay for vital local services, such as caring for older and disabled people, protecting children, fixing potholes and collecting bins. The remaining half goes to central government to redistribute as it sees fit.
The amount of business rates income kept by local government nationally is proposed to increase to 75 per cent from April 2021, with redistribution continuing across the sector. This is happening at the same time as central government funding to councils is being phased out.
As a result, funding for local services will be even more intrinsically linked with business rates – a source of funding where central government sets bills and most discounts and reliefs.
So it is imperative that the Government works closely with councils as part of its review of the business rates system. The impact on how local services are sustainably paid for must be a central consideration of the review.
Business rates are complex. Under the business rates retention system, local authorities have the opportunity to grow their business rates as a means of generating additional income. At the same time, this will have to be balanced with growing needs across the sector as a whole.
Maintaining this balance involves resetting business rates baselines (BRBs) regularly, but whether these will be full or partial resets has yet to be resolved.
Greater retention of business rates may come with additional responsibilities. But meanwhile, one of our key cost drivers – adult social care – is growing faster than business rates, and the review will need to address this. The business rates system needs to be modernised and improved – for example, to ensure sectors such as online businesses make a fair contribution. The review should also consider new sources of funding for local government, such as a tourism levy, an e-commerce levy and new local enterprise zones.
While it is right that a business can challenge its valuation, the sheer scale of appeals is heaping further financial pressure on councils. More than one million businesses have challenged their business rates bill since 2010, with 55,000 appeals still to be decided and councils having to put billions aside to cover the financial risk and uncertainty. Tougher powers are also needed for councils to tackle business rates avoidance, which our recent survey found is costing local services £250 million a year.
Councils recognise the need to reform business rates, but this should not be at the expense of their own finances and funding for local services; government needs to guarantee it will compensate for any impacts.
With financial stability and long-term investment, councils can protect local services and work with the Government, businesses and other stakeholders to grow local economies and improve high streets.
Our communities cannot afford further financial uncertainty as one of the main methods of funding local services is dragged through years of debate and wrangling.