Lord McKenzie of Luton
Main Page: Lord McKenzie of Luton (Labour - Life peer)Non-Domestic Rating (Levy and Safety Net) Regulations 2013
Lord McKenzie of Luton Excerpts
Lord Ahmad of Wimbledon
My Lords, these regulations put in place the last elements needed for the operation of the rates retention scheme in 2013-14. That scheme, as we have discussed previously, is designed to deliver the Government’s objective of returning an element of business rates to local control in a way that incentivises authorities to work with their local business communities to improve economic conditions in their local areas. It does so through a partial redistribution of business rate resources, taking account of the individual authority’s needs, in order to provide a fair starting point for each local authority. That starting point is fixed until the next reset of the scheme in 2020, and any growth in business rates above this starting position is shared between central and local government and can be used by authorities to support local services and stimulate further growth.
As the Committee will appreciate from looking at these, and earlier, regulations, while the principle of the rates retention scheme can be explained simply enough, the mechanics needed to deliver it are both complex and technical. Therefore, before turning to the detail of the regulations, it may be helpful to the Committee if I first remind noble Lords of the technicalities of the scheme and the mechanics of establishing authorities’ starting positions.
The key to the scheme is the establishment for each authority of two numbers: its baseline funding level and its business rates baseline. Its baseline funding level reflects the level of resources that the authority should have under the rates retention scheme, taking account of its needs and the availability of other resources such as council tax. Its baseline funding level, together with the level of revenue support grant that it will receive, the RSG, represents the authority’s share of general government funding—the 2013-14 equivalent of its formula grant entitlement.
The second number, its business rates baseline, is the estimate of each billing authority’s business rates income in 2013-14, apportioned between that authority, central government and major precepting authorities in accordance with the shares approved by Parliament in the local government finance report. If the authority’s business rates baseline is more than its baseline funding level, it is required to pay the difference to the Government in the form of a tariff. Tariffs are then used to provide top-up funding to those authorities whose business rates baselines are less than their baseline funding levels. Because of the way in which the scheme is set-up, tariffs and top-ups sum to zero and, moreover, are fixed for the duration of the scheme. This provides the fixed starting position against which future growth can be measured and retained.
However, as we discussed during the passage of the Local Government Act 2012, while incentivising growth is vitally important, we all recognise that business rates at the local level are, by their nature, subject to a fair degree of volatility. This is a key issue. As a result, if we did nothing else, in any year authorities could see their resources fall, perhaps quite considerably, and this could leave them with less money than implied by their starting position. Reductions in income could be because of changes to commercial property. To take an example that has recently been in the news, one need only think of the impact on North Warwickshire’s business rates of the closure of Daw Mill colliery to understand the impact of such changes. I know that this is a challenge for local authorities that find themselves in similar situations. It could also be because of successful appeals against rateable values, which lead to an authority having to refund rates in respect of a number of previous years. For whatever reason, we quickly concluded that the scheme needed some way of mitigating the effect of local volatility. Having looked at this and discussed it with the local government sector, we concluded that the best way to do this was through a safety net.
Overall, the rates retention scheme provides authorities with about one-fifth of the general funding available to them through business rates, council tax and revenue support grant. The safety net works by ensuring that the one-fifth available through business rates can never fall by more than 7.5% before the authority receives assistance. The safety net is financed from a levy charged on the most highly resourced local authorities when they see growth in their business rates.
With that preamble, I turn to the regulations themselves. These give effect to the levy and safety net by reference to baseline funding levels and business rates baselines that have already been set out in the local government finance report, and which are set out for each authority in Schedule 2. Importantly, Regulation 5 provides that the baseline funding level is indexed every year so that the level of protection available through the safety net keeps pace with inflation.
The regulations provide for the calculation of levy rates and safety net thresholds in Regulation 6. The safety net threshold is set so that no local authority can see more than a 7.5% reduction from its baseline funding levels. This gives force to the policy that I have just described and ensures that authorities will have reasonable stability of income from which to deliver important local services.
The way that the levy is calculated means that only those authorities that pay a tariff—that is, those that, at the start of the scheme, have more business rates than their baseline funding levels—will ever be levied. Authorities with relatively small business rates bases will never be levied, and will be allowed to keep all of the growth that they achieve.
Regulation 7 means that authorities are able to receive a safety net payment on account during the course of the year. The payment will be based on the authority’s own estimates of the business rates income that it seeks to collect. This provision ensures that authorities do not have to wait for the final outturn figures before receiving safety net assistance, and therefore do not suffer cash flow problems through having to wait for funding.
I do not pretend for a moment that these regulations are not complex; indeed, I said that at the start. However, they have been developed with the working group that we set up to help us work through the finer details of the implementation. They have therefore benefited from the practical help and advice of those in local government finance departments who will have to work with the scheme and with the detailed regulations. We are confident that, with their input and the consultation that has taken place, the regulations will deliver the policy to which the Government are fully committed. I commend them to the Committee.
Lord McKenzie of Luton
My Lords, I thank the Minister for introducing these regulations. As the Minister said, they are quite complex. Holding concepts such as business rates base line, base line funding levels and retained rates income in one’s mind is a challenge—certainly for me—as one goes through the detail, but I think I understand the thrust of what is before us.
Clearly, we support a safety net system, but as we argued during the passage of the primary legislation, we would wish to see the threshold at a level higher than 92.5%. Just as the noble Lord raised the example of the dire consequences of particular closures on the finances of a local authority, we argued when the primary legislation was being considered that, when a local authority is faced with the prospect of the major regeneration of an area, there ought to be arrangements in place so that it would of its own volition see a significant drop in its business rate base for the specific purpose of regenerating an area, and hopefully building a much bigger rate base in the future. I do not think that those circumstances are specifically catered for here. We also anticipated the problem that a local authority might cope with a 7.5% fall for one year, but there is no additional relief should that recur year on year. This may not happen in many circumstances, but the cumulative effect is not catered for here.
What is the overall estimate of levy amounts and safety net payments to be collected next year? I think the noble Lord said that tariffs and top-ups will sum to zero, but for the provisions that are before us—the safety net and the levy—what are the separate estimates of those two amounts for next year?
I have one or two other specific questions. On the safety net, why is the schedule of payments cast in the way that it is under the regulations and what is wrong with a Friday? Apparently, when a payment falls due on a Friday, one is not permitted to send or receive it; one has to wait until the next business day. I am not quite sure why that is. Can the Minister expand a little on the types of adjustment that flow from paragraph 1(4) of Schedule 1—for example, the effect of adjustments made for amateur sports clubs and the circumstances in which deductions are permitted or not? What are the criteria that separate the different categories of arrangements? Subject to those points, I have no further issues to raise.
Lord Ahmad of Wimbledon
My Lords, again I thank the noble Lord, Lord McKenzie, for his support for what the Government are seeking to do. As a general point, I know—and I am sure the noble Lord will share my experience—that when we were looking at introducing the whole issue of business rates and the ability of local authorities to retain the 50% business rate, it was done irrespective of political affiliation. It has been campaigned for long and hard at a local authority level. I am glad that a broad level of support has been given.
The noble Lord raises some general points, particularly in relation to places that struggle to attract growth, which is indeed a driver for increasing the level of business rates. This system of tariffs and top-ups is intended to ensure a stable starting point. There may be some local authorities that fall from year to year below the 7.5%. For them there is additional funding available—for example, the efficiency support grant for those councils that face a loss of more than 8.8% in their spending power.
A few other aspects in this regard are index-linking tariffs and top-ups to RPI, which ensure that councils with low tax bases and high needs see a major part of their income uprated by RPI. Also, the concept of a safety net will ensure that public service provision does not suffer as a result of the local volatility mentioned in my opening remarks. A safety net threshold of 7.5% is the most generous level consulted upon. As the noble Lord acknowledged, this will guarantee local authorities a minimum of 92.5% of their business rates levy.
Lord McKenzie of Luton
I thank the Minister for his answers, but I do not think I asked a question that I intended to ask about the baseline funding level, which is uprated each year. I think I read that it is uprated by the small non-domestic rate multiplier. Why that metric?
Lord Ahmad of Wimbledon
This is the point where I look over my shoulder. I think the noble Lord is correct on this. There may be some elements of local government finance that during my time I sought to understand. He is correct in his interpretation.