A recent paper from the Local Government Association and a consultation on councils retaining 100% of their business rates show that the devolution of power to a local level is continuing and opens up opportunities for communities to shape their own futures.

Devo Next

The Local Government Association (LGA) recently published a 'green paper', Devo Next: What Next for Devolution? to stimulate debate and conversation in councils and with local partners and wider stakeholders and to agree some key principles which will underpin the next phase of devolution. It asks four questions:

  • Do we have the right principles underpinning devolution?
  • How can we use devolution to deliver effective public service reform?
  • How can we move from functional devolution to fiscal devolution?
  • How can we make sure our residents are engaged?

100% Business rates retention consultation

The localisation of business rates is part of the answer to the third question. If it can be proven to work well, the principles underpinning it could spur on further devolution of taxation.

The Government is finally consulting on how to implement its commitment to allow local government to retain 100% of the business rates that they raise locally. Full business rate retention will give local councils control of around £12.5 billion of revenue to spend on local services. The consultation is open for 12 weeks from 5 July to 26 September.

It envisages 100% retention of business rates by all councils by 2020, with the chance for some areas to pilot it earlier (Greater Manchester and Liverpool are already starting to pilot it). The offer to pilot is open to any area that has ratified its devolution deal. Pilots might look different in different places: the key here is flexibility to adapt the regime to fit a particular area.

Timescale

The Local Growth and Jobs Bill, announced in the Queen's Speech, will set out the legal framework for business rate retention. It is expected to be introduced to Parliament in early 2017. Piloting will begin in April 2017 and there will be full implementation of business rate retention across the whole of local government by May 2020 (the end of this Parliament).

Fair Funding Review

Some councils will receive more business rates than others so a system of top ups and tariffs will still be needed, as currently. This means that areas with high levels of business rates will have to contribute some of them to fund areas that might not get enough revenue from their business rates to fund their needs.

There will be a new baseline assessment of each council's needs – the Fair Funding Review – and this will set the funding baseline. Councils with business rates income above the baseline will pay a tariff and those with income below the baseline will receive a top-up. This will be based on the current system and there will be a periodic reset.

Unlike the present system, if an area's business rates income increases between resets, that area will be able to keep 100% of the increase rather than have to pay some of it back as a levy.

Enterprise Zones will continue to operate as now, so that they will be guaranteed 100% of business rate growth for 25 years and any income above current baselines in Enterprise Zones will be disregarded when working out tariffs and top-ups.

Fiscally neutral

The move to 100% business rate retention will be fiscally neutral, so the main local government grants will be phased out and local authorities will be given extra responsibilities – possibly in the form of new statutory duties. Grants likely to be phased out include:

  • Revenue Support Grant
  • Public Health Grant
  • Improved Better Care Fund
  • Early Years
  • Attendance Allowance

The final package of responsibilities will be different for each authority.

The 'new burdens' doctrine should still apply so that if councils are getting more responsibilities that end up costing them more, they will be funded through section 31 grants.

Devolution deals

For existing and future devolution deals, some or all of their commitments could be funded through retained business rates rather than grant commitments, giving those areas fiscal autonomy.

The Government believes that Combined Authorities with a directly elected Mayor should have the opportunity for an enhanced role over the distribution of resources in their area, perhaps having a single area-wide'baseline' of relative need.

New tax flexibilities

Local authorities will be able to tailor their own business rates regime to fit the local economic environment:

  • Local authorities will get the ability to reduce the business rates tax rate (the multiplier)
  • Combined Authority Mayors (if they have their LEP's support) will be able to levy a 2p in the £ supplement on business rates to fund new infrastructure projects.

The consultation suggests that the "infrastructure projects" that the levy would fund should be defined in a similar way to the Community Infrastructure Levy definition: roads and transport, flood defences, educational facilities, medical facilities, sporting/recreational facilities and open spaces, but welcomes views on this.

Evolution of Devolution

These reforms will mean much more flexibility for councils and signal a move away from central funding and the freedom to spend money on local priorities, but with commensurately more responsibilities devolved locally. Each area will be different and those in a position to become pilot areas should take the chance to shape the local tax system in a way that works for their area.