Non-Domestic Rating (Rates Retention and Levy and Safety Net) (Amendment) Regulations 2018

Baroness Pinnock Excerpts

Tuesday 27th March 2018 Grand Committee

[The Parliamentary Under-Secretary of State, Ministry of Housing, Communities and Local Government and Wales Office (Lord Bourne of Aberystwyth) (Con)]

My Lords, these regulations, which are highly technical, make changes to the regulatory framework governing the day-to-day operation of the business rates retention scheme. The amendments in these regulations are necessary to ensure that the regulatory framework properly reflects the impact of the 2017 business rates revaluation, our decision to create new 100% business rates pilots in London and 10 other areas of the country, and changes to the compensation arrangements in enterprise zones.

Before saying something about each of the changes, I remind the Committee that the rates retention scheme was introduced with effect from 1 April 2013. For the first time since 1990, it allows local authorities to keep a percentage of the business rates they collect from local ratepayers and gives them a direct financial interest in maintaining and extending their business rates’ bases.

When the scheme was first set up, local government was able to keep 50% of locally raised business rates, subject only to a redistribution mechanism that requires authorities which have more business rates than their relative needs to pay over some of that income as a so-called tariff, while authorities that have a lower business rates income than their relative needs receive a top-up payment.

In 2017-18, we allowed local authorities in five newly created 100% pilot areas to keep all the local business rates they raised. Additionally, we increased the GLA’s share of business rates from 20% to 37% and, in return, it took on direct responsibility for financing Transport for London’s investment grant from its additional share.

In December last year, we announced that we would create a further 11 100% pilot areas, including in London. In 2018-19, therefore, local authorities in Berkshire, Cornwall, Derbyshire, Devon, Gloucestershire, Greater Manchester, Kent, Leeds City, Lincolnshire, Liverpool, London, Solent, Suffolk, Surrey, West of England and the West Midlands will all keep 100% of the business rates they raise locally. The regulations before the Committee this afternoon will give administrative effect to the 11 new 100% pilots that will come into force on 1 April 2018. They will ensure that the sums paid and received by the pilot authorities over the course of the year reflect the new pilot arrangements.

As well as amending the administrative arrangements of the rates retention scheme to reflect the new 100% pilots, the regulations also make changes to tariffs and top-ups following the revaluation. As I said earlier, tariffs and top-ups are the way in which we redistribute local tax income between richer and poorer authorities under the rates retention scheme. They were originally set in 2013-14 based on the difference between the business rates that authorities were expected to collect in that year and their relative need, as established in that year’s local government finance settlement. Since then, they have been uprated only by inflation.

However, as a result of the business rates revaluation that took effect on 1 April 2017, the amount of business rates that authorities will actually collect in 2017-18 will be very different from what they collected in 2016-17. If, therefore, we were simply to uprate the existing tariffs and top-ups by inflation, as we have done in the past, authorities could find their income from business rates substantially changed, for reasons quite unconnected to their efforts to secure growth. Therefore, when we set the scheme up in 2013, we announced that we would adjust tariffs and top-ups to strip out the impact of revaluations.

In the 2017-18 settlement, we announced adjusted tariffs and top-ups for all authorities, but, as we said at the time, we would revise them in the 2018-19 settlement to reflect updated data. These revisions were duly made in February as part of the local government finance settlement for 2018-19. However, the revised values are also used in the calculation of levy and safety net payments under the rates retention scheme. The changes made by the regulations before the Committee this afternoon ensure that the revised values for tariffs and top-ups in 2017-18 and 2018-19 will be used in levy and safety net calculations. Without these regulations, the calculation of the levy and safety net payments due to or from authorities would be wrong. Authorities that needed a safety net payment would fail to get one, and other authorities might be forced to pay a levy that they could ill afford.

Finally, the regulations make changes to the financing of enterprise zones. Under the rates retention scheme, certain areas have been designated as enterprise zones. In those zones, authorities are entitled to keep all of the growth in business rates income. The growth is used by local enterprise partnerships, or LEPs, to help regenerate the zones. Enterprise zones were first set up in 2013, and there are now more than 200 separate zones in nearly 100 local authorities. As well as keeping all the growth in business rates in an enterprise zone, authorities are also able to give business rates relief to new businesses relocating there, thus further stimulating economic development. Where authorities use their powers to award relief, they can be compensated by central government for the reduction in their income. Compensation is given to local authorities by allowing them to deduct the cost of the relief from the 50% share of business rates that they otherwise pay to central government under the rates retention scheme. Of course, with the advent of 100% business rates pilots, any compensation owed to 100% pilot authorities will be paid via a Section 31 grant because there is no longer a central share from which it can be deducted.

When the first enterprise zones were set up in 2013, authorities were entitled to receive compensation for the relief they gave for a period of five years until 31 March 2018. That period, set out in the rates retention regulations, has not changed since, despite the fact that we have set up new enterprise zones in 2014, 2015, 2016 and 2017. In order to ensure that every enterprise zone is treated on an equal footing, regardless of the date that it came into being, the regulations ensure that authorities can be compensated for up to five years after the enterprise zone came into existence, regardless of whether that was 2013, 2017 or any year in between.

To sum up, the regulations make technical changes to the administration of the business rates retention system to reflect the impact of the revaluation. They allow the new 100% rates retention pilots to operate from 1 April 2018, and they put all enterprise zones on a level playing field. Without the changes, authorities would be unable to receive the income from the business rates retention scheme to which they are entitled. I commend these regulations to the Committee.

[Baroness Pinnock (LD)]

I register my interest as a councillor in the borough of Kirklees, which is part of the Leeds combined authority, rather than Leeds City, for the 100% business rates retention scheme. The people in Kirklees would not be happy to think they were part of Leeds City, so we had better make that clear.

[Lord Beecham (Lab)]

Not yet.

[Baroness Pinnock]

Not ever, I would say. As the Minister said, these are quite complex technical amendments, which, in the circumstances, I particularly welcome. Obviously, as he has indicated, they are to enable the so-called 100% business rates retention pilot authorities to come into existence next week.