Transcript Distribution of Formula Grant to Local Authorities

BUSINESS RATES AND
POOLING
Local Government Finance
Background
•
Business rates are a tax paid by the occupiers of non-domestic property.
•
The amount paid is calculated by combining the rental value of the property with a
“multiplier” determined each year by central government.
•
Over £20bn collected from business rate payers in England last year.
•
From April 2013, the business rates retention scheme will commence.
•
Instead of transferring all business rates to central government for redistribution, local
authorities will keep 50% of the business rates they collect.
•
The remaining share of business rates will be paid by local authorities to central
government and then redirected to the local government sector as a grant.
•
The system has been changed to create an incentive for local authorities to promote
local economic growth and to reduce dependency on central government
Overview of the rate retention scheme
1: Split total
business
rates into
central and
local shares
2: Set
baseline
funding levels
& business
rate baselines
3: Calculate
tariff & top-up
4: Levy &
Safety
Net
5: Growth
incentive
Calculating baseline levels
•
In setting up the business rates retention scheme, central government has
calculated two baselines for each local authority.
•
The baseline funding level is an assessment of how much funding each local
authority needs each year to deliver services
•
The business rate baseline is an assessment of how much business rates
income each local authority will collect each year.
Calculating tariffs and top ups
•
Where councils have a larger business rates baseline than their baseline
funding level, the “excess” will become a tariff payment.
•
Where councils have a smaller business rates baseline than their baseline
funding level, they will receive top up payments.
•
Tariffs and top ups will be fixed amounts, uprated annually by RPI.
•
Councils will also be able to keep the local share of all their business rates
growth – the more an authority grows its business rates base, the better off it
will become.
The safety net and levy
• A safety net to protect local authorities whose business rates income decreases:
•The safety net of 7.5% below baseline funding will be available to all local authorities.
funded by…
• A levy on disproportionate benefit will be charged on increases in business rate income:
•This will be set at a 1:1 ratio- so for every 1% increase in business rates, an authority
would see no more than a corresponding 1% increase in income.
•This is capped at 50p in the pound.
•This will ensure that a local authority is always better off if it grows its business rates
income.
•Only tariff authorities will be levied
Tariff and tops up and levy in
practice
Baseline funding level
£10m
Local authority B- a top-up authority
Tariff
=
£5m
£18m
£12m
Business rates baseline
£15m
Business rates baseline
Baseline funding level
Local authority A- a tariff authority
Top-up
=
£6m
Authority B has a funding need of £18m.
Authority A has a baseline funding level of £10m.
It has a business rates baseline of £15m and so pays
£5m in tariff.
Levy = 1 - Baseline funding £5m
It has a business rates baseline of £12m and
so receives £6m in top-up grant.
Levy = 1 - Baseline funding £18m
0.50
Business rates baseline £10m
Business rates baseline £12m
i.e levy of 50p in £
i.e zero levy
-0.50
Pooling
•
Local authorities can pool together to benefit from the rate retention scheme.
•
Pooling is voluntary, so it is for local authorities to decide if pooling is in their
interests or not. Local authorities may use pooling to:
•
•
•
•
•
Lower levy payments as the pool levy rate may be lower than their
individual rate
More resilience to manage fluctuation in business rates income as risk is
spread across the pool
Use income generated within the pool to support shared priorities and
projects (e.g. economic growth) across a wider area – delivering greater
strategic outcomes
Foster better relationships at political level and closer working at
operational levels with neighbouring councils
13 pools comprising of 90 local authorities will operate from April.
Example of pooling
Local Authority A (tariff) and B pool (top up)
Pooled baseline funding level
= £10m + £18m = £28m
Pooled business rates baseline level
= £15m + £12m = £27m
£28m £27m
Business rates baseline
Baseline funding level
Rather than authority A paying a tariff of £5m
and authority B receiving a top up of £6m,
the pooled authority receives a top up of
£1m.
Rather than authority A paying a levy of 50p
in the £, pooling will result in pooled authority
not pay a levy and will keep proceeds from
growth
Levy = 1 - Baseline funding £28m =
Top-up
=
Business rates baseline £27m
£1m
i.e zero levy
- 0.04
Issues for rate retention scheme
•
The business rates retention scheme creates a direct link between economic
growth and local authority resources.
•
So local authorities will be rewarded through the scheme- the more business
rate income generated, the more income they will have to spend on local
services.
•
However, local authorities will also be exposed to more risk- if their business
rates income decreases, the less income they will have to spend on local
services.
For pooling specifically:
•
•
•
Who to pool with?: mix of top up and tariffs is an important factor
Risk and volatility in business rates: A variable in the scheme which local
authorities cannot control or influence
Growth forecasts
Tools to assist authorities to pool
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Potential opportunity for local authorities but increased risk because of the
volatility in business rates income.
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To help with the decision, what tools can we give local authorities?
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Needs to be:
•
flexible,
•
user friendly – easy to understand
•
dynamic
•
with function for users to generate their own scenarios for planning
•
Limitations
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Past data volatile, with no real trends
•
Usefulness?