This briefing note on the business rates consultation may interest developers, the public sector and those involved in renewables or regeneration, particularly those considering Tax Increment Financed projects.

The Government has recently published a consultation document seeking views in relation to its proposals for business rate retention (BRR) in England and options for enabling local authorities to carry out TIF within the business rates retention system.

The BRR model proposed by the Government incorporates the concept of a tariff/top-up to achieve a level playing field to begin with, and a levy to recoup a share of any disproportionate benefits resulting from the retention of business rates that could be made by local authorities with a high business rates base.

This short briefing note covers:

  • A short summary of the proposals for BRR;
  • A summary of the two main options for the operation of TIF within the BRR model;
  • Interaction with Enterprise Zones and "Renewables";
  • Key Issues for developers to consider; and
  • Key Issues for local authorities to consider.

The BRR model

The consultation proposes amending the current system so that local authorities will be able to retain a proportion of the business rates generated within their areas.  As some authorities collect business rates in excess of their current formula grant the Government proposes setting a baseline for each authority at the outset of the new scheme so that authorities do not see a significant reduction in their revenue which would have a detrimental impact on service delivery.  The consultation requests input on what considerations should be taken into account in setting the baseline.

In order to achieve the right balance the Government also proposes introducing a tariff/top up scheme.  Where an authority collects business rates above its baseline, it would then pay the difference to the Government in the form of a tariff.  Where an authority collects a level below the baseline, the Government would pay a top up grant to that authority.

The model also includes a levy to recoup a share of any disproportionate growth achieved by authorities as a result of the new scheme.  Where an authority with high business rate taxbases receives disproportionate financial gains through the retention of business rates, the Government plans to recoup part of that by imposing a levy on that authority.  The consultation suggests that the proceeds of the levy would be used by Government to manage negative volatility in individual authorities' business rates and therefore ensure stability in the new model.

The operation of TIF within the wider BRR model

The consultation proposes two options for operation of TIF within the BRR system.  The two options pivot around the concept of this levy:

  1. The first option allows local authorities to decide for themselves whether to enter into a TIF scheme or not. The additional business rated generated would be retained by the respective local authority but would be subject to the disproportionate benefit levy applicable to the BRR system as a whole. The rates retained would also be subject to the tariff/top-up system, and would be vulnerable to adjustment for revaluation or reset in order to maintain sufficient stability within the wider rating system. Access to a TIF scheme under this option would be unrestricted but the potential loss of a portion of the additional rates to the levy/reset is a risk that may limit the number of participants.
  2. The second option would vary the first option to limit the access to TIF, so that local authorities that wished to invest in a TIF scheme would require central Government approval. Once a local authority had been approved for a TIF scheme, they would retain any additional business rates generated from the TIF project for a defined period of time. Unlike the first option, the retained rates would not be subject to the disproportionate benefit levy, and would not be considered in assessing tariffs/top-ups.

Certainty would benefit both the private and public sector and the second option might better deliver this. The public sector needs to be clear on the costs involved in order to develop a TIF project and their 'Plan B' if additional rates do not flow as expected.

Enterprise Zones (EZ) and Government's renewable energy commitment

Areas that are allocated EZ status will benefit from:

  1. A business rate discount of up to £275,000 per business over a five year period; and
  2. Additional rates generated in the EZ being retained by the Local Enterprise Partnership for at least 25 years for local reinvestment purposes.

Subject to Government proposals being introduced, TIF may be linked to EZ status in order to fund key infrastructure in an EZ, but it is ultimately a separate scheme. Critically, under the proposals outlined in the Government consultation, TIF would be available outwith EZ also.

Under the Government's renewable energy commitment, any communities that host "renewable energy" projects will be allowed to retain the additional business rates generated. This commitment will operate separately from EZs and TIF. This will be explored in greater detail in a Government paper to be published in August, so watch this space.

Key Points for developers:

  • Although local planning decisions are made independently from business rates factors, the financial incentives and potential benefits of TIF schemes to local authorities may be a major factor in influencing planning decisions. This may be of particular advantage to developers of commercial space or renewable energy projects, which can struggle to gain planning consents and should allow developers to engage in more detailed forward planning, for example, seeking to influence the boundary of a TIF scheme or including non-contiguous areas.
  • Early engagement with local authorities that are considering TIF schemes may prove fruitful to developers. Developers who are prepared to structure affordable and deliverable commitments relating to proposed TIF infrastructure projects could be influential in local authorities' decision making process regarding demarcation of TIF areas and whether the local authority should progress its TIF project.
  • Developers who engage with local authorities in relation to TIF schemes should be aware of the national and EU procurement rules that a public body is bound by, and the risks to the developer if these are not adhered to. Confidence that the local authority can manage the state aid and procurement rules will be important to provide confidence for the private sector incurring costs at all.
  • Given the recession and ensuing number of repossessions of property by lenders, TIF projects may also give banks the opportunity to improve the position of "their" less attractive assets that are currently not viable for development.

Key points for local authorities:

  • The local authority must be careful to ensure that the TIF plans do not advantage any local companies in such a way that would constitute unlawful state aid, i.e. the TIF project must not favour a particular undertaking in a way that distorts trade or competition.
  • Local authorities will need to be comfortable that there will be a genuine sustainable increase in business rates within the boundary of the TIF rather than simply displacement of business from (nearby) areas into TIF zones. Measures to combat displacement should be considered.
  • In order to prevent unnecessary problems/unexpected costs arising from TIF projects, local authorities should ensure that they follow national and EU procurement rules in respect of advertising and tendering, in order to ensure that any contracts entered into are effective under national and EU law. The private sector property developer is also more aware of the risks it faces if the public sector is (successfully) challenged.
  • TIF projects by nature, require public assistance to enable viable private sector development.  The public sector may wish to consider ensuring a level of binding commitment and anchor development agreements before proceeding with a TIF together with tangible contractual remedies where the private sector fails to develop quickly enough, or worse fails to develop at all.

Please click here to register for further updates on TIF as the consultation progresses.