This week the Chancellor announced the biggest shake up of the business rates system since 1990.
The reform, which is due to come into effect in 2020 will see power handed to local councils to retain all of the proceeds of business rates, currently valued at £26bn. Councils will also be able to lower business rates under the proposals, in order to attract new investment and jobs.
Under the existing system, councils only retain up to 50% of business rates and the rest is sent to the Treasury, which takes in approximately £11.5bn before redistributing £9.4bn in grants, ensuring areas with fewer businesses do not lose out.
However, instead of going to the government “with a begging bowl” as Mr Osborne put it, councils can now proactively lower their rates to attract investment in their area.
“Attract a business, and you attract more money; regenerate a high street, and you'll reap the benefits; grow your area, and you'll grow your revenue too”, he said.
Businesses currently pay a uniform business rate, calculated by multiplying the rental value of a property by either the standard rate (49.5p) or the lower rate (48p), before subtracting any business rate relief. However, this could be reduced at the discretion of local authorities under the new proposals.
Elected mayors in certain cities such as London, Manchester and Sheffield will also be allowed to increase rates, in order to fund major infrastructure projects. This will be subject to an expected cap of 2p and support from local businesses.
The plans have been described by Mr Osborne as the “biggest transfer of power to our local government in living memory.”
The BBC’s economics editor, Robert Peston blogged: “This is not comprehensive decentralisation of tax-raising and spending powers.
That said, it does put local authorities in competition with each other to attract businesses - by easing planning restrictions for example - and thereby increase their revenues.
But although local authorities will be able to cut business rates, they won't be able to put them up, unless that is they are cities like London and Manchester with directly elected mayors.”
He goes on to say:
“On the one hand, [the devolution of tax raising powers] creates incentives for all local authorities to become friendlier to the private sector - and therefore may spur wealth creation that benefits the whole country.
But it could also seriously widen the gap between rich and needy councils - in the sense that councils with the most serious social problems, and therefore the biggest costs, may find it hardest to woo businesses to their areas, and therefore may find it hardest to increase their revenues.
And in a worst case, if one council is run by a business genius, and another by a business dumb-dumb, residents of dumb-dumb town could see important public services undermined by emigrating businesses.”
Although some business leaders have welcomed the pending devolution as a step in the right direction, others have questioned whether the reform was as radical as it first seemed.
A spokesman from the British Retail Consortium (BRC), which has led the charge on the call for rates reform, issued a muted welcome, saying “the detail of the Chancellor's plan and on-going review is now absolutely essential.”
This sentiment was echoed by the Confederation of British Industry (CBI), whose director-general, John Cridland added: “This must not be a way to increase rates without the consent of the local business community.”
Director-general of the Institute of Directors (IoD), Simon Walker, said that while more than 60pc of his members backed devolution of rates, “councils must avoid the temptation to increase rates to raise revenues, and instead compete to attract businesses to the areas, which will bring jobs and wealth”.
Debbie Warwick, of property consultancy Daniel Watney, told the Telegraph the proposals could “wreak havoc” on the private sector.
“The uniform rate was originally introduced to give businesses a sense of certainty. For larger businesses with operations spanning several authorities, not knowing the multipliers each property will pay will wreak havoc on their long-term planning.”
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