Buried within the recent Queen’s speech lies mention of the Business Rates Supplement Bill (‘the Bill’). This Bill proposes the introduction of supplemental rates, which will be levied upon businesses in order to promote economic development in their local area, at a grass roots level. During the current economic downturn however, these additional rates could prove to be snakes in the grass for local businesses already facing acute financial hardship.

THE HISTORY OF THE BILL

The subject of supplemental business rates was first suggested in Sir Michael Lyon’s inquiry into local government funding, which was published in March 2007. Following extensive public debate, which stemmed from Lyon’s recommendations, a white paper was produced in October 2007. Among his findings, Lyon recommended the right for local authorities to levy up to 4 pence in the pound upon non-domestic ratepayers.

The Government responded to these suggestions in Budget 2007 and clarified that any such supplement would have to be subject to credible accountability to business rate payers as well as offering real protection to small and small to medium sized enterprises, which may be disproportionately affected by these additional rates.

HOW WILL THE BILL OPERATE?

The Bill proposes that upper tier local authorities (such as county councils or unitary authorities outside London) and the Greater London Authority can levy a supplement on business rates currently payable. The Bill recommends that the maximum national supplement that can be levied is 2 pence per pound of rateable value. The Bill also suggests that the implementation of these supplemental rates takes place by 1 April 2010 so as to be consistent with the billing year which runs from 1 April – 31 March.

The additional rates paid are to be used to promote economic development within the local area. The Bill does not prescribe the kind of projects envisaged under the umbrella of economic development and Government does not intend to legislate on this matter. However, in London, it is predicted that the supplemental rates levied will help to raise some of the multi-million pound funding necessary to facilitate the Crossrail project. The Impact Assessment of Business Rates Supplements Bill 2008 predicts that in London, supplemental rates could help to raise £177.9m per annum while nationally, could amount to £319.3m. Advocates of the Bill suggest that levying these supplemental rates will enable local government to develop local and sub-regional economies in a way that previously would not have been possible. The imposition of the supplemental rates will obviously result in a greater tax burden on non-domestic ratepayers in areas where they are introduced, but it has been argued that this additional cost should be offset by tangible improvements to the local economy.

WHAT DEGREE OF CONTROL DO LOCAL AUTHORITIES HAVE IN ENFORCING THE SUPPLEMENTAL RATES?

In implementing the supplemental rates, local authorities can decide:

  • how long the supplement will be levied for;
  • whether businesses with property with a rateable value of over £50,000 will pay a tapered supplement according to their rateable value;
  • whether the supplement is gradually phased in over a number of years; and
  • whether to offset Business Improvement District (BID) levies against liability to pay supplemental rates. BIDs, in contrast to supplemental business rates, tend to be limited to narrowly defined geographical areas and tend to be focussed on short term issues, rather than issues of long term economic investment.

WHAT PROTECTION EXISTS FOR LOCAL BUSINESSES?

The Royal Institute of Chartered Surveyors has voiced concerns about the implementation of the Bill. In particular, it has expressed unease at the practical consequences of the Bill in light of the present economic climate. The Bill has also been condemned by the Institute of Directors for similar reasons. A key question therefore during this time of financial uncertainty, is whether the Bill offers adequate protection to small local businesses that may already face a bleak economic future.

Any authority that wishes to levy a Business Rates Supplement is under a legal duty to consult with the businesses in question and any other affected stakeholders. In addition, the authority has a duty to produce a prospectus outlining details of the supplement and the projects it will fund. The prospectus will be required to address (among other things):

  • detailed plans on expenditure, timing and funding sources;
  • the way in which the supplement will work, including anticipated duration, estimated amount and any exemptions that may apply; and
  •  the impact that the supplement will have upon local businesses and the benefits that will be delivered to the local area.

There are exceptions to the supplement for businesses with a property with a rateable value of £50,000 or less. This figure is based upon the rateable value of each individual property owned by the business. Therefore, if a business owned a portfolio of small properties, each of which had a rateable value of less than £50,000, but which cumulatively had a rateable value of more than £50,000, the business would not be affected by the Business Rates Supplement. This removes a significant majority of smaller businesses who would otherwise be burdened by the supplement. Nationally, based on 2007 data collected for the White Paper, ninety per cent of business properties have a rateable value of below £50,000, (this equates to around 86% in London).

Further, if money obtained from the supplemental rates would fund more than one third of any single project, local businesses will have the opportunity to vote on the matter. When such a vote takes place, the authority requires the support of a simple majority of the businesses affected both in terms of rateable value and the number of non-domestic properties affected.
There are also a number of internal and external bodies who will safeguard local businesses’ interests, ensuring that the authorities levying the supplement act with propriety and comply with all the relevant legislation. Internally, these bodies include Monitoring Officers and Finance Officers and externally, the Audit Commission. Also, a new local performance framework will provide a structure of assistance and intervention for authorities who fail to meet their obligations under Business Rates Supplements powers.

CONCLUSION

In the present economic climate, businesses facing economic uncertainty are unlikely to welcome the imposition of additional payments, which (in the short term at least) could tighten their purse strings even further. The impact of the Bill upon individual businesses will be highly dependent on the local authority and proposed project in question (including issues of duration and cost and whether exemptions and tapered relief will be applied). It will not be possible to accurately assess the effect of these supplemental rates until the financial burden incurred by local businesses can be compared to the benefits derived from the local projects which receive funding. Local businesses should be mindful however, of the control mechanisms in place to ensure that local authorities act appropriately in implementing supplemental rates.