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Business Rate Retention: Securing Public Sector Service Delivery in the 21st Century

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Abstract

Kevin Muldoon-Smith and Dr Paul Greenhalgh consider how the recent business rates announcements will affect the commercial property sector
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The Chancellor's announcement on 5th October at the Conservative
Party Conference in relation to business rate devolution took many
by surprise and has since received considerable attention in the
press over the last few week s (the SNP quickly announced similar
proposals). The reality of the situation is currently difficult to fathom
ahead of the impending Public Spending Review. However, what
is positive is the exposure that this traditionally esoteric issue has
received in recent weeks and the opportunity for debate that has
been revealed. This debate, and the overall uncertainty, raises
multiple concerns in relation to the long term security of public
sector service delivery in England. Primarily, how will authorities
securitise public sector service delivery through the performance of
local property markets? All of these issues are of relevance to those
professionals working in the fields of revenues and valuation and
the roles they play in the design, administration and management
of the business rate model. This experience and expertise may
be increasingly prominent given the perilous state of local
government finances. Indeed, the Local Government Association
has recently announced that a dozen local authorities are on the
brink of financial failure. In order to reflect upon the rhetoric and
reality of the recent announcements, the remainder of this article
is structured around a series of critical questions that probe the
uncertainties and ambiguities in the recent proposals in relation to
business rates and business rate retention.
100% of what?
The original business rate retention scheme gave local authorities
the potential to retain 50% of business rate income and up to 50%
of any growth in business rates revenue from new assessments
added to the Rating List, synonymous with construction of new
employment (commercial and industrial) floorspace. The remainder
was returned to central government and redistributed in England
in a similar way to the previous formula grant method of funding.
The Chancellor's recent announcement has extended the 50%
principle to 100%. Local authorities will now be able to retain and
exploit 100% of local business rates income – but what does this
actually mean?
Upon closer examination, the reality is that local authorities
will only be able to retain growth associated with the addition of
net new floorspace. Any increase in the value of existing floorspace
over time (traditionally captured by the national rateable valuation
exercise) will still be stripped out of business rate income.
In other words, it is only possible to create business rate growth
through the construction of new business properties – any increase
in the value of existing business stock is precluded. This means
that any location that does not have the space to accommodate
new construction, or does not have the underlying rental values to
support new development, will be at a disadvantage. Questions
arise around what type of local growth is getting the boost,
economic growth, new jobs or new property development. If the
latter, there is the risk of displacing existing businesses from older
properties if new floor space development is not matched with a
concomitant increase in occupier demand. This may also lead to
an increase in rateable value appeals, because the value of existing
property could be affected in those locations where businesses
have vacated (because of blight) and also in new development
locations, where the value of older premises decrease as new
property is added in to the local property supply (counteracting the
windfall of new development).
What are the implications of a reduced local
rate of taxation?
The Chancellor has also suggested that local authorities will
now have the power to lower the rate of business rate taxation
in order to attract new businesses. This is potentially a positive
development, however, it is important to note that the uniform
business rate has not been abolished – it will still exist (although
it may be called something else). All that has changed is the ability
for local authorities to lower this rate at the local level if they
so wish. It is difficult to imagine local authorities already facing
budgetary pressures agreeing to further decreases in local taxation.
Presumably, only those authorities with a budget surplus will have
sufficient budgetary tolerance.
There is also some uncertainty in relation to the flexibility of
any reduction in the local business rate level. Will it be uniform
at the local level or will local authorities have the ability to adjust
taxation for dif ferent types of property, businesses and locations?
For instance, will it be possible to remove small businesses from
business rate taxation all together? The Scottish administration
announced a degree of simplicity, where local authorities will be
able to lower the business rate against local criteria, such as the
type of property, its location, occupation and activity. So far, this
level of detail has not been released in the English proposals.
Business rate retention
Business rate
retention
Kevin Muldoon-Smith and Paul Greenhalgh
examine the benefit of business rates and
valuation as an element of securing public
sector service delivery in the 21st century
VALUER DECEMBER 2015
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What about empty property rates?
Surprisingly, the current debate has largely ignored the issue of
empty property rates. Under business rate retention, the higher
rate of empty property liability means that local authorities are
not rewarded with any additional income from attracting new
businesses into existing vacant premises (small businesses pay a
lower rate of taxation). Failure to include empty property rates in
the recent announcements is a missed opportunity. If government
abolished empty property rates, or if local authorities had the
power to alter the rate, this would incentivise local authorities to
promote indigenous economic growth by rewarding them for
creating conditions whereby vacant space is reoccupied, rather than
the current situation where they get penalised.
How will the safety net operate?
The current business rate retention scheme has a safety net in
place for those local authorities that see a reduction in business
rate income by more than 7.5%. The recent commentaries presume
that the 7.5% safety net will stay in place in its current state – as yet,
there isn't any confirmation of this. Local authorities will now be
able to keep all of the proceeds above their baseline position. In the
current scheme this is capped and dispropor tionate income funds
the safety net provision through a levy paid to central government.
Now that this levy has been abolished (and given that the
original levy contribution was not enough to fund the safety net
in the first place) it is unclear how the new safety net provision, or
regeneration schemes like New Development Deal areas, will
be funded. A mechanism is already in place to fund the existing
shortfall in safety net payments through the Settlement Funding
Assessment. Presumably this mechanism could be extended, with
a top slice of the Settlement Funding Exercise paying for the
unfunded safety net facility.
What are the implications of the
infrastructure levy?
How will the new local infrastructure levy work in practice? At first
glance it looks like a classic Business Improvement District (BID),
where businesses in a defined area agree to pay an extra level of
business rates, after a local ballot, to fund local improvements.
Importantly, under a BID, a majority of businesses in a defined
area have to vote in favour of an uplift in property tax. However,
under the infrastructure levy scheme there isn't any provision for
a local ballot, rather, an elected Mayor would only need to secure
the agreement from a majority of private sector Local Enterprise
Partnership (LEP) members. This opens up a discussion in relation
to the democratisation of fiscal decentralisation, especially in
relation to who decides and who pays for new local infrastructure.
An uncertain conclusion
The fact remains that local authorities can only plan their spending
in the medium to long term if they have a degree of certainty in
relation to future income. Under the current system this is not
possible. Although central government has transferred 100% of
existing business rates and potential growth to local areas, they
have also transferred 100% of the risk. It is worth noting that there
hasn't been any additional finance given to local authorities – only
its potential.
The issue of risk is particularly important in relation to the
rateable value appeal process. Local authorities are liable for the
cost of any successful appeal backdated to 2010 (and beyond where
historical appeals have not been resolved) – three years before the
existing business rate retention scheme went live in 2013. In the
current scheme, they are only liable for 50% of this liability, while
after 2020 it will be 100%. Many local authorities already find that
the cost of successful backdated appeals more than outweighs the
proceeds of any growth. The new proposals will only make this issue
worse.
There is still a great deal of uncertainty in relation to the 2020
business rate changes and what the practical impact will be in
local areas up and down England (Scotland is moving ahead even
quicker). As ever, the devil will be in the detail. However, what
seems certain is that change is around the corner in England (and
the devolved administrations) and that local authorities will be
expected to fend for themselves. Alongside the experience of
professionals operating in the fields of revenues and valuation,
the development of urban models and systems of intelligence
that can monitor and help manage and plan these new systems of
urban finance will be central to ensuring the ongoing security and
resilience of public sector service provision in the 21st century.
Paramount in this concern will be securing, harnessing and
exploiting the power of urban data. R3Intelligence, a research
consultancy at Nor thumbria University, has developed a hybrid,
multi-criteria urban property information model for all locations
in the UK, which has the underlying ability to monitor, manage
and plan business rate retention activity. The resource utilises
existing and new forms of data to provide baseline monitoring
and future scenario modelling in order to understand and plan the
urban finance, property market and public sector service delivery
relationship.
Kevin Muldoon-Smith is Associate Lecturer and Paul Greenhalgh a
Reader in proper ty economics with the Department of Architecture
and Built Environment at Nor thumbria University. Contact them on:
kevin.muldoonsmith@r3intelligence.co.uk;
paul.greenhalgh@r3intelligence.co.uk;
www.R3Intelligence.co.uk or Twitter @R3intelligence
Business rate retention
“If government abolished empty property rates, or if local authorities had the
power to alter the rate, this would incentivise local authorities to promote
indigenous economic growth by rewarding them for creating conditions whereby
vacant space is reoccupied
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