Briefing Note (BN233)

100% business rate retention pilots: what can be learnt and at what cost?

Date: 12 April 2018
ISBN: 978-1-911102-90-8
DOI: 10.1920/BN.IFS.2018.BN0233

The business rates retention scheme (BRRS) means that councils bear a proportion of the real-terms change in business rates revenues in their areas. When the BRRS was introduced in 2013–14, this proportion was up to 50%. However, since April 2017, the government has been piloting 100% retention of real-terms changes in business rates revenues in a number of areas of England. From April 2018, a further 10 areas are piloting 100% schemes.

In this briefing note, we examine two questions. First, what are the financial implications of the pilots for different councils? In particular, what is the financial benefit to councils taking part in the pilots, and what does this imply for those councils not in pilot areas? Second, what can be learnt from these pilots? The government has explicitly set out what it hopes to learn, but how informative are the pilots actually likely to be?

What are the pilot schemes?

  • Pilot areas retain 100% of any real-terms changes in business rates revenues. A ‘no detriment’ clause protects all pilot councils from losing out relative to a situation where they had instead remained under 50% retention.
  • There is considerable variation across pilots in how revenues are divided between upper- and lower-tier councils. In most two-tier pilot areas, counties will now retain a greater share relative to districts than under the rules of the 50% retention system.
  • Pilot councils in the second wave of pilots are required to form pools with the other pilot councils in their areas. The pooling arrangements – how revenue will be shared and, to some extent, spent – have not been systematically published in full despite having a potentially significant effect on individual councils’ funding.

Where are the pilot areas?

  • Pilot areas in the first wave were chosen by the Ministry of Housing, Communities and Local Government (MHCLG). For the second wave, areas were invited to submit bids to become pilots and MHCLG chose 10 areas from among those that applied.
  • Pilots in the first wave are mostly in urban areas; those in the second wave mostly in rural areas. Accordingly, the first wave mostly consists of Labour-controlled councils, and the second wave Conservative-controlled councils. There is a mix of councils from the north and south of England. Together the pilot areas cover 53% of the English population and raise 63% of English business rates revenues.

What are the financial implications of the pilots?

  • Pilots will gain as a result of retaining 100% rather than 50% of any real-terms growth in revenues in 2018–19. In addition, the way the system has been set up means they will also benefit from 100% (rather than 50%) of any real-terms growth since 2013–14.
  • These factors, among others, lead us to estimate that pilot areas will see a financial benefit in 2018–19 of around £870 million in total, calculated based on councils’ revenue forecasts. This is equivalent to 3.6% of pilot councils’ core spending power, or almost 2% of the spending power of all councils. This financial benefit represents a cost to central government, to which this revenue would otherwise have flowed.  This revenue could have been used to reduce the budget deficit, or fund tax cuts or higher central government spending. There is therefore an ‘opportunity cost’ to the 100% business rates retention pilots.
  • One alternative option for using this money would have been to have increased grant funding for all English councils instead. £870 million, equivalent to 2% of councils’ core spending power, would have enabled an increase in grants of £16 per person, on average. If this had been allocated according to official assessments of spending needs, one-in-ten areas would have seen spending power that was £16.80 per person or 2.1% higher than is currently planned for 2018–19. But most – although not all – pilot areas would have received less funding, as they gain more from pilot status than they would have gained from needs-based grants.  

What can be learnt from the pilots?

  • The government’s stated goals for the second wave of pilots are to ‘test more technical aspects of the 100% business rates retention system, such as tier-splits’, allow councils to make decisions jointly, and test councils’ administration and technical planning.
  • The scope for learning from the pilots is likely to be limited though. The non-random selection of pilot areas means they are unlikely to be representative of all councils. And with the pilots only guaranteed to last until the end of 2018–19 councils’ responses may differ substantially from how they would respond to the longer-term introduction of 100% retention. In addition, the ‘no detriment’ clause means councils are not facing the risks that they would under nationwide 100% retention.
  • There may, on the other hand, be other benefits to the government of running the pilot schemes. For instance, they may help maintain the momentum of local government finance reform following the setback of the June 2017 election (since which time the legislation to take forward previous plans for a national roll-out of 100% rates retention has not been resurrected).