Non-Domestic Rating (Levy and Safety Net) (Amendment) Regulations 2014
The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Stowell of Beeston)
My Lords, these regulations will help to maintain the smooth operation of the business rates retention scheme in England. The scheme allows local authorities to retain up to 50% of business rates income in their area, which provides a direct incentive and a boost to those authorities that go for growth. This incentive could deliver a £10 billion boost to the economy by 2020.
The scheme was first introduced last April and since then we have continued to hold discussions with local government on how it operates in practice. These regulations make some technical changes to the rules for calculating the levy and safety net under the business rates retention scheme, which we have identified as a result of those discussions. All of the changes we are making today have been agreed with representatives of local government.
The rates retention scheme includes a safety net system to protect those authorities which, for whatever reason, see a large drop in their business rates income. The safety net ensures that no authority’s income from the rates retention scheme can drop by more than 7.5% below their baseline funding level. Authorities in that situation receive a safety net payment which increases their income to the 7.5% threshold.
Equally, there are some authorities which, because they have such a large amount of business rates income in comparison to their spending, are potentially able to generate significant sums in business rates growth. These sums may be very large when compared to the authorities’ spending requirements. Therefore, the system includes a levy on those authorities which can generate growth which is disproportionate to their spending. The income from the levy is used to fund the safety net.
These regulations make some technical changes to that levy and safety net system. First, the regulations, together with the original regulations which they amend, ensure that changes to business rate reliefs introduced by central government are not captured within the calculation of the levy or safety net. So, for example, in the Autumn Statement of last year the Government announced that small business rate relief will continue to be doubled until 31 March 2015, a change that was welcomed. This rate relief for business reduces the rates income for local government. These regulations ensure that the reduction in income from this change, and other changes introduced by the Government, are not included in the calculation of the levy and safety net.
We have done this because we will separately compensate local government for the lost rates income from central government changes to business rate reliefs. We will do this outside the rate retention scheme using a grant under Section 31 of the Local Government Act 2003. Indeed, the Section 31 payments for 2013-14 have already been made, and the payments for 2014-15 will commence in April.
If we did not make the amendments in these regulations, local authorities might also receive compensation for the Autumn Statement measures through a reduced levy or a safety net payment. For example, if an authority is already on the safety net then the Autumn Statement measures would merely increase their safety net payment, and this would duplicate the compensation they are already receiving through the Section 31 grant.
So these amendments ensure that authorities will receive the correct amount of compensation for changes to business rate reliefs introduced by the Government. The amendments and the method for calculating the Section 31 grants delivering the compensation have all been agreed with local government.
The regulations also make a number of technical improvements to the original scheme. They will ensure that when an authority which is paying a levy or receiving a safety net also chooses to reduce rate bills using a local discount scheme, it will have to meet only the local share of the cost of those discounts. The original regulations required it to meet the full cost of the local discounts, which was rightly criticised by local government, so I am pleased to be able to correct it now. We are also taking the opportunity to correct an error concerning the treatment of relief in an enterprise zone and we have also included amendments to future-proof, to use the common phrase, business rate retention pools so that we do not need to return to the House with further regulations every time those pools change.
I hope that I have been able to explain the measures clearly. They are designed to ensure as far as possible simplicity of the operation of the scheme. I commend the regulations to the Grand Committee.
Lord McKenzie of Luton (Lab)
My Lords, I thank the noble Baroness, Lady Stowell, for a very clear explanation of the regulations. As will be clear from our contributions in another place, we will certainly not be opposing them.
I shall come in a moment to the matter of helping to maintain the smooth operation of the current system and explore how the general progress of the new system is proceeding, but first I have one or two specific questions. On the adjustments being made to small business rate relief, is it just the extra small business rate relief for 2013-14 and 2014-15 which is being adjusted for or the totality of it? I have not worked through the formula, but I would be grateful for an answer. As for the Section 31 grant which is keeping local authorities whole, is that an exact compensation for each authority for the adjustment being made under the proposals?
The noble Baroness referred to discretionary rate relief; some of it has been amended under the provisions, but not all of it. Paragraph 7.7 of the Explanatory Note states:
“The 2013 regulations ensure that certain discretionary discounts (relating to not for profit organisations, community sports and social clubs, rural properties and property in enterprise zones) and hardship relief will be included for the purpose of calculating retained rates income, but that other discretionary relief will be ignored”.
Can the noble Baroness give a few examples of what is likely to be in that other discretionary relief which will be ignored?
I am trying to get a handle on what is happening to the safety net and the levy. For the two years in question, could we have an update on the amounts of the safety net now expected to be payable in comparison to the original estimate? Do we know how much of that safety net expenditure is attributable to appeals rather than to other changes in the capacity of the business rate base in any particular council? In respect of that safety net, how much is actually being paid for by the levy and how much is being top-sliced from the RSG? It is important to understand who is actually bearing the cost.
I conclude on the noble Baroness’s assertion that these regulations are helping to maintain the smooth operation of the new system. It is clear from looking at what is happening to local authority support, using the Government's own preferred measure of the spending power of the household, that the 10 most deprived authorities in England will lose 10 times the amount in spending power per household compared to the 10 least deprived local authorities between 2010-11 and 2015-16. If you look at the cumulative cut in spending power per household over that period of 2010-11 through to 2015-16, some of which I accept precedes the business rate retention scheme, for the 10 most deprived authorities there is a reduction of 25.3%, while for the 25 most deprived it is 22.5% and for the 50 most deprived it is 20.96%. However, for the 10 least deprived it is 2.54%. Can the Minister explain how these outcomes are justified? Is it an intent of policy that this be the outcome or some quirk that was not intended to happen? We have seen enough of the system now to be able to ask legitimately whether the Government really intend this redistribution. Perhaps we could understand where it is articulated because if we extrapolate forward what has happened over the past couple of years the situation for local authorities, particularly those most deprived and challenging authorities, is very dire indeed.
Baroness Stowell of Beeston
I am certainly grateful to the noble Lord for confirming that the Opposition do not oppose these regulations. As noble Lords will be aware, when this Government came into power we made some changes to business rates. One of our various changes was having measures to reduce the burden of business rates on business; the others were to ensure that local authorities were able to enjoy the benefits of the business rates that they collected and to do so in a way that encouraged and supported growth, so that they would see the benefits and enjoy some of the proceeds of that growth. We believe that this system is working well.
The noble Lord, Lord McKenzie, asked me some specific questions to which I am happy to respond. First, he asked about the Section 31 grants, which are paid to compensate local authorities for the reliefs that were announced in the Autumn Statement. I can confirm that each local authority will be compensated for the relief that they actually give. He also asked about the small business relief and the share for local government. I have been given an answer but I am struggling as I read it to recall which point the noble Lord raised. However, I think that the plus symbol in the regulations is 50% of the full cost of the small business rate relief that is the local share. Does that answer the point that the noble Lord raised? I think that he was asking about the small business relief and the half for local government share. I may need to come back to that one and perhaps clarify it.
The noble Lord asked for an update on the safety net and how that is working. In the last financial year, we have paid £69 million in safety net payments. Those numbers may change when outturn figures are available at the end of the year but, at the moment, I cannot give him any further information. I should make it clear that while I said “the last financial year”, it is the current financial year in which we are paying £69 million in safety net payments. Clearly, as we are still in that financial year I am not able to give him the final data on that number.
To go back to the question that I was struggling to answer, I think that the symbol that the noble Lord was asking about is T. In Regulation 4, there is a calculation and, in that rather scientific-looking formula in the regulations, T is 50% of the amount of small business rate relief given to local ratepayers. In other words, it is the amount of relief given as a result of the Government’s decision to double small business rate relief in 2013-14 and 2014-15. I hope that that clarifies the noble Lord’s question.
We have set aside £120 million from revenue support grant to pay for the safety net in 2014-15. If it is not needed, we will return it to authorities. I think that the noble Lord asked me how much of the safety net was being paid for out of the revenue support grant beyond that collected via the levy from those authorities that operate a surplus, if I can describe it in that way.
The noble Lord also pointed to paragraph 7.7 of the Explanatory Memorandum and asked for examples of other discretionary relief that will be ignored, as described in that paragraph. I spoke about other Localism Act relief schemes. These are local authority-run schemes, such as that in Croydon town centre. These regulations ensure that local authorities pay only their local share of the cost of those schemes. To expand briefly on that, we are saying—as the noble Lord understands and as I mentioned—that we have given local authorities the power to introduce their own discounts and reliefs. However, we need to ensure that, in introducing those discounts and offering those reliefs, they have to meet only 50% of the costs and not the full costs. The deal is that central government will meet half those costs, so we are amending the regulations to ensure that what we intend is borne out in practice.
More generally, to give some statistics on how the scheme is operating, our latest estimates show that business rates income in the next financial year, 2014-15, will be £22.4 billion, of which half, £11.2 billion, will flow directly to local government under the rates retention scheme. Local government will also retain a further £112 million for enterprise zones, renewable projects and collection costs. Some 92% of authorities will have more money in 2014-15 than their baseline funding level. Therefore, in only its second year, the rates retention scheme is delivering benefits for authorities that go for growth.
As to the noble Lord’s point about spending power more generally and the way in which local authorities are funded, he will know, because we have debated this in the past, that this Government are very clear that the changes we have made to how local authorities are funded represent the difference between us and the previous Government in principle. We are ensuring that areas of the country that are not currently in a position to benefit as much from this new system of going for growth are properly supported and that the grants that they receive and the spending power that is set for those areas reflect the pressures on them in terms of demands on their local services and the time that it may take them to be in a strong position to go for growth. We think that the way in which we have changed how local authorities are funded is right. We also think that the principle of encouraging growth is right.
With regard to towns and high streets, we are also making sure that local businesses have the right environment to be able to expand and flourish. The changes that we make, whether they are to business rates or other measures, such as tackling parking charges or development regulations in towns, mean that where there is potential for growth, that growth takes place and local authorities are able to benefit from it. They, in turn, can pass on the benefits to their local taxpayers.
I hope that I have been able to respond to all the points raised and I commend the regulations to the Grand Committee.
Lord McKenzie of Luton
Before the Minister sits down, I am grateful for some very detailed responses there. On the safety net for 2014-15, I think that she gave us a figure for the top-sliced amount. Can we have a figure for what is expected to be raised from the levy? Reverting to the more general point, one can see an argument in favour of encouraging people to go for growth, but if we look at what has actually happened in people’s loss of spending power, do the Government believe that it is right that the most deprived authorities should lose much more in percentage terms than the least deprived authorities? Is that an outcome of government policy which the Minister is happy with and believes is right?
Baroness Stowell of Beeston
On the specific question of money expected to be raised by the levy, I shall have to follow up in writing. As to the more general point about spending power, the point that I was trying to make to the noble Lord is that this Government are ensuring that those areas of the country in greatest need are properly supported. Spend per household in those areas is higher than in those areas that are wealthier. We certainly want to ensure that our approach supports all areas of the country to grow and to receive the benefit from a stronger economy so that, in time, they are all operating at their full potential.