Councils across England increasingly dependent on payments from London businesses

The business rates revaluation taking effect this April is designed to be revenue neutral across England as a whole. But business rates in London are set to rise by about 11% above inflation in the next five years while rates in the North will fall by 10%. Even so average rates bills in the North won’t start falling until April 2018 as cuts in bills for individual properties are being introduced only gradually to fund some transitional protection for those seeing higher bills.

Business rates revenues are redistributed between local authorities, “taxing” councils which would be winners and compensating losers from these changes. Following this revaluation London councils’ share of business rates will be taxed to the tune of an additional £400 million a year (raising their total ‘tariff’ to £730 million a year), to pay for bigger ‘top ups’ to northern councils. In addition, ratepayers in London will pay an additional £400 million into the central pot of business rates currently retained by central government. So, all-in-all, an additional £800 million of rates revenues will be raised in London to support services elsewhere in England. This reflects a more general trend towards greater reliance on London – and its stronger economy – for government revenues, which can then be redistributed to the rest of the country.

But going forward councils will get to keep the additional business rates revenue arising from new developments in their areas. The revaluation means that the value to councils of any additional development will now be greater in London. So in the longer-term London councils will enjoy a positive effect from this growth in their tax base when they retain the extra business rate revenues arising when new development takes place. In contrast, Northern councils will get less of a boost from any additional development.

These are among the main findings of a new briefing note by researchers at the Institute for Fiscal Studies, funded by The Local Government Finance and Devolution Consortium.

The report also shows:

• As well as rising in London, rates bills are more likely in the South, centres of big cities like Greater Manchester and in some rural areas. Businesses located in the suburbs and in smaller cities will be more likely to see cuts in their bills.
• While ultimately revenue-neutral for England as a whole, changes in the relative values of properties over the last seven years mean that individual ratepayers will see very large changes in bills. In April, above-inflation increases are capped at 5% for so-called ‘small’ properties, but 42% for ‘large’ properties. To pay for this, the scheme also caps cuts in bills at 20% for ‘small’ properties and just 4.1% for ‘large’ properties next year.

The government is expecting many businesses to appeal against their new valuations and so rates are rising by an additional 4.6% to fund the cost of these appeals. But individual councils will bear the risk that appeals in their area reduce bills by more than this.

• Between 2013­-14 and 2015-16, 42 (out of 326) councils put away less than 3% of revenues to cover appeals costs, whereas 54 put away more than 8%, suggesting this could be a significant risk. If ratepayers are more likely to appeal in areas like London where rateable values and bills have gone up, councils in such areas would be more likely to find themselves bearing the cost of above-average appeals levels.
• Going forward the government intends to handle the risk associated with backdated appeals centrally rather than locally when councils move to retaining 100% of business rates in 2019–20 (rather than 50% now). This will sensibly insulate councils and the services they provide from a risk – valuation error – that is largely outside their control.
  

“Revaluation will mean rates bills will go up, and revenues become more concentrated in London. This is part of a more general trend of greater reliance on the capital for revenues“ said Neil Amin-Smith, a researcher at the IFS and an author of the briefing note. “While some ratepayers’ bills will rise, in the long-run revaluation will cut average bills in the other regions of England, and especially the north. Bills will generally fall more in the suburbs and smaller cities than in both the central areas of major cities like Manchester and more rural areas.”

“By stripping out the overnight effects of the revaluation on the amount of business rates each council is able to retain, the government is stopping large overnight cuts (and increases) to council budgets and services,“ said David Phillips, Associate Director and another author of the briefing note. “But it means councils have less incentive to boost demand for existing properties: they do not benefit from the resulting increases in rents and values of these, only from new development. This suggests devolution of other revenues may need to be considered if broader incentives for growth, beyond promoting new property development, are seen as desirable for councils.”

Notes to editors

1. ‘Small’ properties are defined as those with a new rateable value of £20,000 or less outside London, and £28,000 or less inside London. ‘Large’ properties are defined as those with a new rateable value of more than £100,000.

Full information on the transitional relief arrangements and the number of properties benefitting and losing out as a result of these arrangements are available at: https://www.gov.uk/government/consultations/business-rates-revaluation-2017.

2. The report ‘The Business Rates Revaluation, Appeals and Local Revenue Retention’ went live on the IFS website on Saturday 4 March 2017. For queries, please contact @email or one of the authors.

3. This research forms part of a major programme of work funded by The Local Government Finance and Devolution Consortium. This consortium is generously supported by Capita, CIPFA, ESRC and PwC and is also supported by the Municipal Journal and a large group of local government bodies, including 27 non-metropolitan counties and a number of unitary, district, metropolitan, and London councils.