Draft Non-Domestic Rating (Levy and Safety Net) (Amendment) Regulations 2025

Jim McMahon Excerpts

Monday 3rd March 2025 General Committees

[The Minister for Local Government and English Devolution (Jim McMahon)]

I beg to move,

That the Committee has considered the draft Non-Domestic Rating (Levy and Safety Net) (Amendment) Regulations 2025.

It is a pleasure to serve under your chairmanship, Mr Dowd. The Government are working to fix the broken foundations that have left councils of all political stripes in crisis and as a result will put them on a more secure financial footing. In particular, we have already set out the objectives and principles on which we will reform the local government finance system, and held an open consultation on them. However, as we work to rebuild local government, we must keep delivering now, to ensure that councils have the certainty that they need to set budgets and carry on providing essential services.

The business rates retention system is a well established part of the local government finance system. It allows councils in England to keep a fixed proportion of the business rates that they raise locally, and hence to benefit from increases in business rates income in their local areas. The system is underpinned by straightforward principles, yet it operates via a series of necessarily complex administrative arrangements between councils themselves and between local and central Government. Those arrangements are governed by secondary legislation, which must be updated regularly for the system to carry on running in the way it was intended to do and so that councils receive what they are entitled to.

The amendment regulations before the Committee make the updates that are necessary this year. Although the changes are technical, the reasons for them are simple. Seven principal sets of regulations govern the business rates retention system, and these amendment regulations make changes to one of them—the Non-Domestic Rating (Levy and Safety Net) Regulations 2013. Those regulations describe how councils are protected from significant falls in their business rates income via a safety net and how, in part, that is paid for via a levy on the growth in their business rates income. Three changes are needed in the regulations this year. All affect the calculation of the measure of income—known as retained rates income—against which we calculate eligibility for the safety net or requirement to pay levy.

First, we adjust this measure of income to continue taking into account authorities that have a higher level of retention. We do that each year. Under the rates retention system, there are a number of councils that in 2025-26, as in previous years, will retain more than 50% of the growth in their business rates income. In other words, they benefit from enhanced rates retention arrangements. It is important, in performing the levy and safety net calculation, that the calculation is made at the normal—50%—rates retention level for all councils. That ensures that where there are additional safety net arrangements for those councils with enhanced retention arrangements, that does not disadvantage councils that run at the 50% level. These regulations do that by adjusting a figure set out in the local government finance report for each council with enhanced retention arrangements to what it would have been had the council been operating at 50% rates retention.

Secondly, each year we amend regulations to mitigate the impact that changes in the underlying tax have on the rates retention system. This year we need to adjust authorities’ income for two reliefs: supporting small business relief and the retail, hospitality and leisure relief. These regulations will make sure that major precepting authorities—generally county councils and fire authorities —are not doubly compensated, through the levy and safety net, for a reduction in business rates income resulting from awarding those funded business rates reliefs.

Major precepting authorities will be compensated via grant for that loss. However, the grant is not automatically accounted for in their retained rates income. That income would therefore appear lower than the amount they have in year, which would affect the accuracy of levy and safety net calculations. These amendment regulations add back the value of compensation for the new business rates reliefs to major precepting authorities’ retained rates income. That ensures that the compensation is taken into account and therefore a more accurate measure of each council’s income is used to calculate levy and safety net payments.

Finally, these regulations correct a figure used to calculate the amount of small business rates relief compensation to add back to North Northamptonshire’s retained rates income, for the purpose of levy and safety net calculations. An error was made in the Non-Domestic Rating (Levy and Safety Net) (Amendment) Regulations 2022 following the set-up of the council in 2021. A figure of 67.4% was included, rather than the correct figure of 67.8%. This error was recently discovered and we are taking the first opportunity to rectify it.

Several aspects of the rates retention system rely on councils submitting their certified or audited data, which we use to make calculations, including the levy and safety net calculations. Where such data is outstanding, we make interim calculations to ensure that no council loses out, or is required to provide for future payments of levy, because it is waiting for its accounts to be audited. That is the case for North Northamptonshire, whose interim calculations were based on the intended 67.8% figure.

Now that we have discovered the error, we must correct it. The rectification of the error will not affect the council’s requirement to pay levy or its eligibility for the safety net for 2021-22 or 2022-23. That is because North Northamptonshire is not required to pay any levy, nor is it eligible for any safety net for those years, a situation that the rectified figure will not change. However, the council will pay a levy from 2023-24, due to the impact of the 2023 revaluation of business rates, so changing the figure will have an impact the amount of levy paid going forward. The amendment ensures that that levy will be calculated on the correct basis, and my officials have notified the council of the change.

These technical regulations make several important updates to the administration of the business rates retention system and, if passed, will mean that councils receive the business rates income they are expecting and thus have budgeted for. I commend them to the Committee.

--- Later in debate ---

[Jim McMahon]

I thank the Opposition spokesperson for his typically constructive response. On the matter of structural reform, there is agreement that it is far better that local government has long-term security and stability, and that, as much as possible, we tie down tax that is raised at a local level with the local accountability that comes with it. That is as important for council tax payers as it is for the local business community.

We also recognise that the groundwork that was done on devolution has the business rates retention scheme hardwired into it. The financial construct of many devolution agreements was based in large part on the business rates retention scheme being able to better reflect that, when areas come together and organise for growth, they ought to benefit from the proceeds of that growth. The business rates retention system has been built up over a period of time, and I would say it has maintained cross-party support on that basis.

As I said, these are generally very technical measures, but I completely take the point that local authorities need notice to be able to prepare. Most local authorities will be preparing on the basis of the information that has come in, and the measures will not be a surprise to them. I can assure the hon. Gentleman that officials have been in regular contact with North Northamptonshire council to let the local authority know that the adjustment is coming, so that it can prepare the ground. I hope that that gives him comfort.

On the hon. Gentleman’s points about local government reorganisation, we are now at a point where the statutory invitations have been sent out to the remaining 21 counties. Interest has been high, and we expect all—or perhaps the vast majority—to submit some kind of proposal about that process. We fully accept that that will require a significant amount of resourcing, from both the Department and local government itself, and we also recognise that in bringing together a range of different funding streams for councils at different layers of government and different geographies around the country, we will have to work to ensure that the alignment of assets, liabilities, revenue and so on is taken into account. I can assure the hon. Gentleman that officials are working on that.

It would be naive of me to say that I can absolutely guarantee that there will never be an error—the fact that we are here to reconcile an error shows that errors sometimes happen in very complex calculations—but I can say that we are doing all we can to ensure that we work that through that system. If the hon. Gentleman would find it useful, I would be happy to arrange a technical briefing with officials about how we are gearing up for that.

[David Simmonds]

I am grateful for the Minister’s offer—I am sure we will take him up on that—but can he give the Committee an assurance that such technical programmes are encompassing all of those Departments that have a direct stake in local government? For example, previous reorganisations have sometimes resulted in special educational needs and disability school facilities being entirely within one of the resultant local authorities, with another having a significant general fund revenue cost—which would be visible in the Ministry of Housing, Communities and Local Government—in transporting children across the border to access those schools that have, in fact, always been the traditional schools enabling that county. That can have a significant financial impact, and it would be good to know that those kinds of measures are being considered fully across Government.

[Jim McMahon]

I share the shadow Minister’s observation about the complexity of the system; it only takes a small part of it to throw quite wild numbers out in different parts of the country, because there is a lot of commonality in local government but different types of councils are affected very differently by different elements of public service pressures. County councils, in particular, are affected far more on home-to-school transport, for instance, than those in more urban areas. I completely understand that point.

I will say that we are eyes wide open as to the amount of change that is going through the system. Just on business rates, we have the business rates reset, the business rates relief work being done in terms of retail, hospitality and leisure, and the revaluation that is taking place at the same time. We then have a number of devolution agreements coming, and I am sure that retention will form part of those discussions and negotiations. On top of that, we have the more fundamental review of local government finance, where the funding formula is being looked at again.

There is quite a lot of change in the system, and I am very alive to the need to ensure both that the data is accurate and up to date and that we take local government expenditure in the round, to make sure that, in the end, every council has the resources needed, on a fair basis, to deliver decent public services. We are on with the political work, in terms of the outcome, but also the technical work, in terms of the process, to make sure that it is robust.

In conclusion, these technical amendment regulations are required to make sure that the business rates retention system operates as it should. I hope that the Committee will join me in supporting them.

Question put and agreed to.