Draft Non-Domestic Rating (Rates Retention and Levy and Safety Net: Miscellaneous Amendments) Regulations 2026
(1 day, 9 hours ago)
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The Minister for Local Government and Homelessness (Alison McGovern)
I beg to move,
That the Committee has considered the draft Non-Domestic Rating (Rates Retention and Levy and Safety Net: Miscellaneous Amendments) Regulations 2026.
It is a pleasure, as ever, to serve under your chairship, Mrs Barker. The Government are delivering long-overdue funding reforms for English local government and introducing improvements to realign funding with need and deprivation as part of the first multi-year settlement in a decade. A key element of the reforms is the reset of the business rates retention system, which is a central component of the local government finance framework. Under the business rates retention system, English councils retain a share of the business rates they collect and benefit when their local business rates income grows. Resetting the system realigns funding with need while maintaining the incentive for authorities to promote growth.
In parallel with reforms that reset how business rates are used for funding, the Government are also reforming business rates tax policy. As a result, technical amendments are required to the framework through which business rates fund local government, in order to mitigate the impact that the changes would otherwise have on local government funding. The business rates retention system is built on straightforward principles, but it necessarily requires complex administrative arrangements that are underpinned by legislation that must be kept up to date as the system changes. The amendment regulations before the Committee provide the updates that are required this year to give practical effect to the reset and wider reforms that are being delivered through the settlement, in addition to the adjustments needed as a result of changes to the tax. Although technical in nature, the purpose of the amendments is clear, as I will now outline.
The instrument changes two sets of regulations: the Non-Domestic Rating (Levy and Safety Net) Regulations 2013 and the Non-Domestic Rating (Rates Retention) Regulations 2013. The levy and safety net regulations set out how councils are protected from significant reductions in business rates income by the safety net, and how that protection is funded by a levy on business rates growth. The rates retention regulations cover the day-to-day operation of the system and set out the full process for allocating business rates income between billing authorities, major precepting authorities and central Government.
To balance risk and reward over the multi-year settlement, we are introducing changes this year to both the safety net and the levy to ensure an appropriate balance of risk and reward within the business rates retention system against the backdrop of wider reform. We are increasing the safety net from 92.5% of baseline funding levels to 100% for 2026-27. That will provide authorities with improved certainty over their incomes for 2026-27 budgets as they know that they will receive their full baseline funding level—their assessed need to be provided via business rates income—offering stronger protection across the delivery of the reforms.
The Government are introducing a new approach to the levy based on a marginal tax-style system, similar to the structure of income tax, that will apply to all local authorities. The approach balances the reward of business rates growth with the need to fund safety net protections. It will better support growth across the sector by applying a lower levy rate to early growth and a lower top rate than the current 50% levy faced by many authorities.
The regulations also change the classification of grant compensation that local authorities are paid in lieu of business rates that they would otherwise have collected. These amounts will be treated comparably to business rates to streamline local government accounting under the business rates retention system.
The reform programme has established new key values related to the business rates retention system, delivered through the recent settlement. Some of the values are used in safety net and levy calculations, which means we need to ensure that they are adjusted in the regulations to reflect their new values. As such, the instrument specifies new baseline funding levels and adjusted tariff and top-up values for local authorities. For most local authorities, the top-up or tariff figures set out by the settlement are the same values that we use to calculate their eligibility for the safety net or the requirement to pay the levy for a year. In such cases, we simply point to the settlement values.
However, for authorities operating under 100% retention arrangements, we specify alternative top-up or tariff figures for the purposes of the levy and safety net. That ensures that councils operating at the standard 50% retention level do not bear additional costs that might arise in supporting authorities with 100% arrangements, should they require safety net payments. The top-up and tariff values for the coming year are interim figures that reflect the latest available data, but they will need to be updated next year once the final data is available.
Another change stemming from the reform programme is the need to update formulae that have been replaced in the wider system. In the business rates retention system, we use factors representing the relative costs of operating in different areas, or area cost adjustments, to calculate a modest allowance of rates that each billing authority can retain to support its costs in administering business rates, otherwise known as a cost of collection allowance.
Peter Fortune (Bromley and Biggin Hill) (Con)
The Minister raises the cost factor, and Bromley’s cost factor has been set at 1.038, which is above the average. What work has been done to ensure that authorities such as mine are not impacted by setting the cost factor above the average, in terms of their ability to collect business rates?
Alison McGovern
I thank the hon. Gentleman for his question. The Department conducts significant work with local authorities to understand their costs, precisely so that we can make the adjustments I am talking about. If he has specific questions relating to Bromley, I encourage him to drop me a note at the Department so that I can get him a technical response.
The City of London has a long-standing bespoke funding arrangement known as the “offset”, the administration of which is set out in the retained rates regulations. For 2026-27, it has already been agreed that the offset will remain in place, and that its value will be uprated from £13.5 million to £14 million in line with established precedent, to ensure that its value keeps pace with inflation.
Finally, we are making a number of small amendments to manage complexity where possible, including disapplying provisions that no longer apply, future-proofing routine calculations and streamlining major funding mechanisms in the system.
These regulations make a series of important technical changes to the administration of the business rates retention system, and they implement what is required to update the system as a result of local government funding reforms and changes to the tax that have already been announced. If approved, the regulations will ensure that councils receive the business rates income that the system is designed to deliver.
I commend the regulations to the Committee.
David Simmonds (Ruislip, Northwood and Pinner) (Con)
It is a pleasure to serve under your chairmanship, Mrs Barker.
The Opposition do not propose to divide the Committee on this instrument, but I have some questions that I would like to put to the Minister. One of the challenges with an instrument of this nature is to understand what its consequences will be. We have just heard my hon. Friend the Member for Bromley and Biggin Hill raise a question on behalf of his constituents about what this will mean in practice.
The Government’s consultation on the business rates reset clearly described it as a “redistributive act”. The purpose of it is to take business rates growth away from places that have also had the consequences of developments, allocating it to other areas. We do not have the information in front of us to set out what the consequences will be at a local level, but we know that has been a key concern for council leaders of all parties, not least because if they consent to a very substantial development that leads to very significant growth in their business rates income, that growth in income is intended to offset its negative consequences. For example, the development might generate additional traffic or lead to a lot more workers travelling to a particular area, requiring additional emergency facilities. The loss of that income through redistribution to other parts of the country, through a formula that we do not have in front of us, could have quite a significant negative consequence.
Over the years—it is no different with the current Government—central Government have been very keen to encourage local authorities to give consent to developments that create additional business that pays more business rates, creates jobs and all the rest of it. We know that is facing a significant challenge at the moment, and local authorities looking at this instrument can see that they will be losing out, having put the cost of consenting to a development on to local taxpayers, which will certainly discourage them from being so willing in future.
Can the Minister set out briefly for the Committee what she expects to be the consequent changes in funding levels? Clearly, those could be quite substantial, and this is a system of top-ups and tariffs, as we have had in place to a degree for a long time, so it would be helpful to understand whether there are any significant winners or losers as a consequence of the decision that people are being asked to make.
Secondly, when the Minister refers to a reset of the business rates mechanism, what does she expect it to reset to, so that those local authorities have a clear line of sight that says, “This will be the consequence for your business rates collection at a local level”?
Finally, I draw the Minister’s attention to the explanatory memorandum that she has kindly circulated. Paragraph 5.6 addresses the way in which the funding is to flow. She is making a change to shift it from the general fund—that is part of the annual budget-setting process of a local authority—into the collection fund, which is subject to a longer period of decision making. I can see why there might be some arguments for doing that. However, it would be helpful to understand what she expects the consequence to be, so that when our local authority colleagues set their budgets, they have a clear sense of what the consequence will be of shifting the flow of that money from an account covered by the general provision on fixing council tax, which has to be balanced in-year, to a collection fund, where more flexible rules apply.
Alison McGovern
I thank the hon. Member for Ruislip, Northwood and Pinner for his speech. As ever, he made considered points and asked very reasonable questions.
David Simmonds
I apologise, but I meant paragraph 5.13, not paragraph 5.6, of the explanatory memorandum. I had turned over the page and misread my record.
Alison McGovern
I thank the hon. Gentleman for his diligence in making sure the Committee is absolutely clear on what he was referring to. I will write to him and circulate that response to the Committee, so that we all have absolute clarity on that point.
On the reset, the Committee will know that the business rates retention system was always designed to be reset periodically. It needs to redistribute locally raised business rates, so that we get a balance between aligning the funding system with need and providing local authorities with the incentive for growth, as I mentioned in my speech. As a matter of fact, it has been over a decade since we assessed how much business rates authorities can raise, which means that retained business rates have accumulated over that period. That is the point of the reset, which was always designed to be in the system.
The hon. Gentleman asked what the effect will be, and obviously it is part of the overall spending power that we set out as part of the settlement. Local authorities should now have a clear line of sight on their spending power and how this affects them. If any Members have concerns that they would like to raise with me directly, as the hon. Member for Bromley and Biggin Hill did, I would be very happy to engage with them on a one-to-one basis. As I said, I will write a note in response to the question raised by the hon. Member for Ruislip, Northwood and Pinner on the explanatory memorandum.
In conclusion, these technical amendment regulations are essential to the system. As I have just set out, we want to allow local authorities to grow and to feel the incentive of keeping local business rates. However, from time to time, the system needs to be reset to make sure that local council funding aligns with need, as it must.
Question put and agreed to.