Independent research from the Institute of Public Finance shows how much companies could lose from the relocalisation of business rates.

Business' fears that the Lyons Inquiry into local government finance will recommend relocalisation of business rates were dealt a fresh blow today by independent research commissioned by the British Chambers of Commerce (BCC) from the Institute of Public Finance (IPF).

The BCC’s Director General, David Frost, said the report will make uncomfortable reading for businesses across the country: “We have been saying since this debate began that relocalisation is likely to lead to increases in business rates. If introduced, the sky’s the limit for local authorities that will see businesses become cash cows for hard-up local authorities if central Government devolves business rates to the local level.”

The report shows that businesses in different areas of the country could face increasing bills if central Government fully devolves the decision to fix business rates to individual local authorities. IPF’s main findings when investigating different schemes for a fully relocalised rate in England were that:

  • Reducing council tax by 1pc would add 1.2pc on average to business rates but in some areas the average could be more than 2pc;
  • If councils decided to increase their annual spending by 1pc, and had to find the whole of this increase from business rates, this could add up to 5.7pc to the average business rates in some areas, and the national average increase would be 2.5pc;
  • If councils increased their annual spending by 1pc and this cost was shared with council tax payers, this could add up to more than 2pc to business rates in some areas and the overall national average would be 1.1pc.

“Businesses already struggle under an oppressive burden of tax and regulation,” said Mr Frost. “Increasing business rates could create business wastelands, causing significant damage to local quality of life as firms close or move to lower-rate areas.”

“Business, national government and local government must work together to find an alternative solution. Allowing businesses to subscribe to the delivery of specific services or projects through additions to local authority budgets is one area that must be fully explored.”

“The way ahead, which balances economic benefits with the business costs and disbenefits, and enhances accountability is the wider introduction of Business Improvement Districts and the principle of the Local Authority Business Growth Incentives (LABGI), both of which the British Chambers of Commerce advocates.”

Mr Frost added that businesses were opposed to relocalisation because it is tantamount to taxation without representation and rate rises would be unrelated to services provided to businesses. Relocalisation is unsustainable without some form of equalisation, whereby account is taken of different authorities’ differing abilities to raise revenue from businesses. The distribution of the business rate base is extremely varied across England, with the second highest values of business rates per head after the Corporation of London (£166,000) found in Westminster (£10,000) and the lowest in Derwentside (£285): a difference of 35 times between the two. In comparison, for council tax, the highest tax base per head is just two times that of the lowest.

Equalisation is clearly an essential part of the business rate system but none of the options for equalisation is entirely satisfactory. A system of dynamic equalisation would allow each local authority to take its own decision on the local business rate and any extra revenue raised would be put in an additional pool. The pool is then divided up among all authorities in proportion. So, for example, if authority A increases its rate by 1p and authority B by 2p then authority B will receive twice as large an amount when the pool is divided. The actual amounts raised would not be known until after the end of the financial year, however, so there would be no predictability.

Looking ahead to the content of the Lyons Inquiry Mr Frost noted that business rates could be relocalised for one of several reasons: “The perception seems to be that local government should be given something, especially if the Lyons Inquiry does not propose other local taxes, the adoption of local income tax, or shifts funding responsibility for a major service elsewhere.”

Mr Frost continued: “It is unacceptable to relocalise business rates simply because it would be a zero cost option for government generally favouring voters over non-voters. Relocalisation would undermine investment, returns on property investment, retail performance and small business growth.”

“The proponents of relocalisation have so far left many questions conspicuously unanswered. What the business community now wants to see are some clear, quantified answers to the following questions:

  • What will businesses get for the additional money they might be expected pay?
  • Where will the additional money raised go?
  • How will businesses be represented?
  • How will Local Authorities be accountable to businesses?
  • By what criteria will equalisation be carried out?

Only with these answers will we get the properly informed debate with the accurate information needed to make economically-sound judgements about the future of business rates.”