Oral evidence: Business Rates, HC 665Monday 7 March 2016
Oral evidence, 7 March 2016.
Witnesses
Councillor Tim Mitchell, Cabinet Member for Finance and Corporate Services, Westminster City Council, Paul Dransfield, Strategic Director, Major Programmes, Birmingham City Council, Sharon Gregory, LGSS Group Accountant, Cambridgeshire and Northamptonshire County Councils, and Councillor Claire Kober, Chair, LGA Resources Panel, Local Government Association, gave evidence.
Chair
Good afternoon. Thank you for coming and being the second panel for our evidence session this afternoon. Just so we have it all on the record, could you go down the table and say who you are and the organisation you represent?
Cllr Mitchell
I am Tim Mitchell, Westminster city councillor for finance and corporate services.
Paul Dransfield
I am Paul Dransfield. I am a strategic director of Birmingham City Council.
Sharon Gregory
I am Sharon Gregory. I am group accountant within the LGSS. I look after local government funding, in particular the business rates retention scheme. I am here today particularly on behalf of Northamptonshire and Cambridgeshire County Councils.
Cllr Kober
I am Claire Kober. I lead on resources for the Local Government Association. I am also leader of Haringey Council.
Chair
Thank you all for coming. Some of you may have heard the questions we have already asked the first panel. You are probably going to get something fairly similar, so you have had a chance to prepare for them. To begin with, what was your initial reaction when the Government said, “We have had a 50% scheme. It is now going to be 100% retention”? What are your views on that?
Cllr Mitchell
My initial reaction was that the devil will be in the detail. The Chancellor used the words “fiscally neutral”, so I realised that, in Westminster City Council’s case, we were not going to be keeping £1.8 billion, which we currently collect.
Paul Dransfield
The Birmingham position, right from the outset of business rates, has been to support the general direction of travel towards full devolution, as part of a wider movement for localisation of taxation resources. The key thing for us to express is wanting to be involved in the design of that scheme from local government, rather than it being designed upon us.
Sharon Gregory
We have broadly welcomed the move to 100% retention, and in Cambridgeshire we are currently running the 100% retention business rates pilot. One of the prime considerations in my authorities, and certainly in the billing authorities within our two counties, is that we are now moving to a conflicting role for local authorities, in that, on the one hand, we are there to support businesses; on the other hand, we also need to maximise our income to support front-line services. As we move to 100% retention, that impact is doubled, so that is something we are bearing in mind.
Cllr Kober
From an LGA perspective, obviously it incentivises councils to grow, which fits really nicely with the focus on place that most councils have nowadays: the idea that councils are a shaper of place and a convenor of the public sector, rather than simply a deliverer of services. I guess that the experience—thinking about individual authorities, as you have seen in the previous session—has been mixed, which has been partly dependent on the authorities’ ability to grow their business rates, versus the growth in service demand that they have experienced over the previous years. We need to bear in mind that the 50% system has been introduced at a time when council budgets have been shrinking, and therefore the benefits that people might otherwise have seen have been somewhat limited, given the reduction in budgets. The biggest issue, which again came out in the previous session, has been the uncertainty generated by the appeals.
Chair
Are there any additional risks in going to 100%, except the fact that it is twice as much as the current system? One thing that has been said to us is that it means authorities are more reliant on tax, which could be very volatile as the economy goes up or down. Are you more content to rely on that, rather than on the whims of Government changing their mind?
Cllr Mitchell
From Westminster City Council’s point of view, we take that point, but in our view the present system, because of the appeals, would not be a sustainable form of funding, from the point of view of being able to plan adequately for our budgets for the coming years. The appeals system makes it very, very difficult.
Paul Dransfield
I would echo that sentiment. The key thing with the 50% retention approach is that the top-up tariffs and appeals management are shared across that central/local dynamic. Pushing that all into the 100% component, for local government to control, transfers those risks as well. It is about having the right systems, checks and balances, like all forms of funding in government, to protect those who are most vulnerable to that. My ideal sentiment is to try to get local government to work together to agree how to compensate for those things. When we launched the 50% thing, to be honest, Westminster, Birmingham and Manchester all worked together to co-design that initial system. I would hope that we can do a similar exercise again. You cannot just do it; it needs that period of 12 to 24 months to seriously look at some of the detailed design and risk management issues that a new system will throw up, and to make sure we have solutions for them.
Sharon Gregory
As the previous panel have said, the devil is really in the detail. We would obviously be supportive of any system or scheme where we become masters of our own destiny. It really depends on how much risk and reward is in the system and whether that risk is proportionate. It depends on the view of the individual authority as to how truly risky their business rates base is. In some areas within the counties I represent, we have some very big businesses that represent a large proportion of the business rates base, and there are significant risks around those businesses leaving or failing. If those buildings are demolished, then very quickly you see a big reduction in your business rates. The other problem that we are experiencing, which goes back to my previous comment about the conflicting roles of a local authority, is that we have a role to make sure that our local needs are met. For instance, in both of the counties I represent we are seeing our big business units being redeveloped, in many cases into student accommodation. The area needs that student accommodation, but we lose business rates on that building and we still do not get council tax, because students are exempt from council tax. Those are some of the risks that we are thinking about, but generally we would support being masters of our own destiny.
Cllr Kober
I would just add that, obviously, the stakes are much higher in moving from a grant-based system to one that relies on tax retention and 100% retention of business rates. It just signals that fundamental shift in risk. As came out in the previous session, there is the issue that not all authorities have equal capacity to generate business rates—that is the bottom line—and there is no direct correlation between effort put in and outcome delivered. That is why getting to some of the detail around the determination of need, but also thinking through how we deal with equalisation and distribution within a new system, will be absolutely critical. We can all think of recent examples where a big player has left a local area and the local authority has absolutely no power to do anything about it. This afternoon, I immediately thought of Redcar and steel as a recent example. Thinking about what the safeguards are in the system to mitigate the risk of cliff-edge funding differences will be really important. The other higher level issue for me is that, with these changes, essentially we will be using business rates to fund demand‑led personal care services. If you look at the business of a local authority being the services that they provide and where they spend their money, my own council spends almost £6 in every £10 on adult or children’s social care. That raises some quite challenging questions, particularly when you come to questions around additional responsibilities that might be tipped in and how we think about those. The appeals issue, again, is relevant here in terms of risks. The other thing that Westminster did not mention was the permitted development rights for turning office accommodation into residential. I know Westminster have huge examples of the impact that is having. That is having an impact in various parts of the country.
Chair
Finally from me, are you getting signals from the Department that it wants to engage generally with local councils to make sure this is designed in a way that actually works?
Cllr Kober
Yes, absolutely. From an LGA perspective, the Department is very keen to work together with the LGA. The thing we have to be honest about is that the LGA represents councils across the country, and, as you will see, there are winners and losers depending on how you configure any new system. Therefore, speaking personally, I would want to ensure that the LGA did take a position on distribution, but that may prove just too difficult when it comes to it. We have to try.
Kevin Hollinrake
Just very quickly for clarification, I may have misunderstood this, but, Mr Dransfield, I think you said that, with the current system, successful appeals were blended out through the system of top-ups and tariffs. That is not the case, as I understand it.
Paul Dransfield
No, what I meant was that 50% of the risks are shared, so at least it is a shared national and local risk, rather than 100% falling on the local system.
Mary Robinson
On the subject of risks, given the correlation between demographic trends, population flows and business rates, can your future funding needs be met through retaining 100% of business rates in that situation, looking into the future at those different correlating factors?
Cllr Mitchell
The dilemma, from Westminster’s point of view, is that the present system has a needs formula, but it does not work for us at present. Any new system, we would advocate, needs to fix some of those problems. Take, for example, population density. Westminster loses out on the population density formula, where the denser your population the greater the allocation you receive, because we have Royal Parks. Just down the road here, we have very large swathes where, apart from the odd park manager, we have no one living at all. Then the rest of the city is very densely populated.
Paul Dransfield
This is a really tricky issue to deal with. At the end of the day, we have been in a situation for the last five years where the resource base of local government has been declining overall, unless you are a really buoyant, council tax‑geared authority. The sense that we have been managing risks that are worse than potentially having control over your own business rates and council tax going forward is a moot point, perhaps. It is again the same thing: we need to understand more about our projections at a local level for population shift and be a bit more intelligent amongst ourselves as to how we can manage the thing. There are two real reasons why business rate devolution is on the cards. One is to take off the reliance on the revenue support grant funding, but the other one is to promote business growth. Evidence suggests that promoting business growth and growth in your economy potentially has an impact on some of the demographic demands on services. We need to think about that relationship more carefully. In terms of geographic area, I can talk from a Birmingham perspective and think about that holistically, but this is where we have to think more widely than individual authorities, at a regional and sub-regional level, about how we work together to tackle some of these issues. If we get all of that economic and social forecasting better aligned, we can perhaps manage some of the risks and be more proactive. One thing I wanted to pick up about this whole thing, linked to the opportunities to create economic growth, is that it is not a today and tomorrow thing. Devolution will devolve what we have today. There is incentivisation for growth, but sometimes that growth takes quite a long period. To move the industrial and economic base of an area takes quite a lot of infrastructure investment and movement. You can project that forward, but realising it and aligning that to the social impact it creates again takes time, so that is something we have to think about. This signals a need for local and regional government to move into more strategic economic and regional planning, so that we all know where we are going more sensibly.
Sharon Gregory
From Cambridgeshire and Northamptonshire’s position, this is our biggest concern. We are two of the fastest growing counties in the country, and we know that the current system does not keep up with the growth that you achieve. We can talk about that more when we talk about distribution, but the relative needs formula, as it stands at the moment, which is the fundamental basis for the business rates system, does not keep pace with growth of local authorities. It is also difficult to perceive an environment where business rate growth is going to exceed growth in demography, so it is just going to exacerbate it. We have big concerns about demography, obviously, but also about the impact of the national living wage; that is going to come as a big hit. We welcome the move to the improved better care fund, but we would have liked to see that transition much faster, to get much faster support for the social care authorities. I guess the question of whether future funding needs can be met through 100% retention will depend very much on the level of protections available, what is happening with the safety net and the mechanics of the system. Until we know in more detail how the system is going to work, it is quite hard to say categorically whether or not that will happen.
Cllr Kober
By the point of transition to the new system, along with the fact that it will be fiscally neutral, we will have experienced 10 years of funding reduction. The idea that, at that point in time, with 100% rates retention, there will be sufficient funding in the system is very optimistic, if I can put it that way. The challenge is going to be the extent to which business rate growth can be generated into the future. Whether you can see at a future point in time that it might be possible, depending on the extent to which you can change the demographic outcomes of a place, is a much longer term view. The idea that this is going to assist with the very real and pressing funding pressures that councils up and down the country are facing is, perhaps, too optimistic.
Mary Robinson
I have one last question for Sharon Gregory, if I may. Given your overarching responsibilities for various local authorities—and we heard from the previous panel that there are sometimes interesting dynamics between two-tier authorities—in your view, how should the distribution of rates revenue between district and county councils be treated under 100% retention?
Sharon Gregory
With my Northamptonshire and Cambridgeshire County Councils hat on, we would say that, fundamentally, the split in two-tier areas is not appropriate and does not reflect the distribution of responsibility for authorities in two-tier areas. County councils pay a vital role in delivering growth. The growth could not happen without the infrastructure that we provide. We also incur the vast majority of the ongoing costs of that growth, particularly social care. We would like to see that addressed as a matter of urgency, to have a better split within the two-tier areas to represent where the true costs lie within each tier.
Mary Robinson
What do you think the best way forward is, to do that?
Sharon Gregory
It is about assessing costs and need, in particular, and generally looking at the role that authorities play. At the moment, the idea is to incentivise planning authorities, but there is no recognition of the role that county councils play in the planning process. Again, the growth could not happen without the role we play there. I would ask that we look at a more appropriate split, based on the responsibilities that we have.
Mr Prisk
Coming again to the question of the redistribution mechanism, I think I am right in saying that, looking at the four authorities present, Westminster is the only tariff authority and the other three are top-up. One or two of you have touched on this issue of the way that the existing redistribution mechanism works, although, clearly, it is operating at the moment for a 50% retained system. If we now move fully to 100% retention, what would you change to improve the mechanism? What do you feel would actually make things work, given that we are moving from 50% to 100% retention, and what would the impact on your budgets be? Perhaps I will start with Westminster, as the tariff authority, and then move across from there.
Cllr Mitchell
We keep only £83 million out of the £1.8 billion that we collect in business rates at the moment, so we are definitely a tariff authority. Our main ask on this concerns growth. The new arrangements give an incentive for floor space growth, but self‑evidently in a city centre environment there is very limited floor space growth. We argue that there should be an incentive for rateable value growth, which we as a council would partially benefit from. There would be, yes, as I mentioned earlier, a formula-share of some of the extra funding that we would receive. Also, there are the wider macro-economic points, in terms of the Treasury benefiting from corporation tax, income tax and the like. The present system does not incentivise us for growth.
Paul Dransfield
There is a bit of a juxtaposition here, but this was debated when the 50% system was put in place. Just to set the scene for Birmingham, we collect about £420 million of business rates. We are a top-up authority and our top-up is currently £127 million per annum. An issue I would like to see not change but reinforced is the ability for that top-up to relate more to need, if there was a way of assessing that top-up against some form of need to be supported, as opposed to just being a figure that is calculated. Obviously the whole needs-based assessment has fallen away in its applicability. If that could be strengthened in some way, and I am happy for it to be simplified, that would help. That would help authorities deal with deprivation issues. The second bit, the bit I am keenly interested in, is how growth is dealt with going forward. At the moment, for authorities such as Westminster, the growth that they get is in relation to the amount of the business rate share that they keep, and the growth on the tariff that they incur is handed back into the central share. There is an opportunity there for that growth to be used wisely, to help with mitigating some of the risks we all face, if we handle that carefully. There will be a lobby for more authorities to keep 100% of their growth, but I just do not think that is possible, given the distortions you get in the system. That was rehearsed when the 50% system was debated, and indeed Westminster was very mature in its approach. I suspect that maturity might continue, if that is seen as part of helping to balance both the risks and the needs of varying local authority areas.
Sharon Gregory
Looking at the existing distribution mechanism, we feel there should be a fundamental redesign of the distribution mechanism, but we have to be practical. With any local government funding system, there are going to be winners and losers. It is more a case of finding a least-worst-case scenario for people. From the 2013‑14 implementation of the business rate retention scheme, we have the formula grant, which underpins our determination of need in the scheme. Looking at the relative‑needs formula for the education and social care authorities, there are 114 indicators, 52 of which include estimates of population or subsets of population, which come from the ONS. That uses historical trend data. If you are quite a new county, for instance, that suddenly blossoms and grows, the system does not account for or keep up with that. Of those 114 indicators, 33 calculate population by extrapolating data from the 2001 census, and 45 include an element of ministerial judgment. That makes it very difficult for authorities to really understand or calculate. We also have some elements in there looking at historical spend. Essentially, you are rewarding authorities; the more money you spend, the more money you receive. I do not really feel that is appropriate. There are some very big cliff edges within the system, and we need to look at ways in which we can smooth those out, particularly for, for instance, Northamptonshire County Council, which gets massively hit through the area cost adjustment. We are on a big cliff edge there, where our near neighbours do much better than we do out of the process. To summarise, we would like to see more relevant and timely data used within any distribution mechanism, with less ministerial judgment and more empirical data, and smoothing of cliff edges. We would like to see a less complicated and more transparent system. I remember I had been in the job for two days, and I had to explain to one of my councillors why the most landlocked county in the country had lost funding because of a change to coastal funding.
Chair
Did you succeed?
Sharon Gregory
Hopefully. Two days into the job, I was trying to get to grips with the four‑block model. One of the other things we need to address is the issue of the safety net. We need to ensure that no authority is better off as a result of no growth compared to a small amount of growth. Do you grow a little bit and risk not jumping into the safety net? That is something we could look at within the distribution system as well.
Cllr Kober
From an LGA perspective, I know that we would support the comments made previously on the need for much more real‑time data and data that are more current. Certainly, we place a lot of importance on the needs assessment and getting that right. In our view, that needs to be absolutely fundamental and wide-ranging, starting from the basis of: “What is local government for? What is its function?”, and then thinking about distribution starting from that point of time, so really going back to first principles.
Mr Prisk
Presumably, therefore, if you want it to be more timely information, you are looking for more frequent revaluations—every two or three years, not five or longer.
Cllr Kober
This is the point at which the LGA says there are different views. They are often dependent. If you are a place that struggles with really challenging demographic pressures, then you are going to want your revaluations as quickly as possible. Those places that have a much greater ability to grow are likely to want to see the benefits of growth for a longer period of time before having that revaluation. The LGA would tactically sit on the fence on this one.
Bob Blackman
Tim, on the Westminster position, at the moment you keep a very small proportion of the business rates compared to that which comes in. Given that this is now going to be potentially an incentive for you to convert office space into residential accommodation, because you would keep the council tax but not keep the business rates, why is Westminster City Council not saying, “Let us provide more residential accommodation, rather than business accommodation”?
Cllr Mitchell
Picking up on Claire’s earlier point, we have lost over 1 million square feet of office space already. We recognise that, if Westminster is to continue to thrive, there needs to be office space. Dealing with the particular point in terms of planning for the central activity zone, which is this area, roughly—the West End—we have put in a policy revision to be able to stop that happening. That is something we have been very keen on, because we have been responding to our local communities, which have been very concerned to see the loss of small office space at the expense of premium residential. Anecdotally, from the point of view of residents—although it has not been backed up by evidence that this is the case—the premium residential has been unoccupied.
Bob Blackman
Given that a lot of the office accommodation in Westminster was originally residential and converted to business premises, some of this is reverting back, is it not?
Cllr Mitchell
Since the war, we have had a presumption that, if you are an existing office, we will grant conversion to residential. That had been working very nicely, but then the system was broken by the changes. The ability to change without permission meant, as I said, that we lost a million square feet in about a three-year period, a very rapid change, as opposed to the organic change that had been happening since 1945.
David Mackintosh
The question is probably best to the LGA, but I would be interested in views from everyone else as well, on whether local government is able to devise and implement its own redistribution arrangements and how you think this could work in practice.
Cllr Kober
This is the $64 million question. On an optimistic day, I would like to think that local government is sufficiently mature to do this, and the answer you have just had from Westminster demonstrates the maturity of local government. Westminster recognises that it operates not just within the confines of an administrative boundary, but within a much larger functional economic geography, and that is true of local authorities up and down the country. I would like to think that the maturity of local government and the desire for the LGA to be the convenor of local government would mean that we can get to the bottom of this and do it, but we have to recognise that, however complex a system and however hard we work at it, there are going to be winners and losers. Therefore, designing a system that is going to result in winners and losers, when you are the representative of all local authorities in this country, is not to be underestimated as a task. It is still a question that remains unanswered, but we would like to get there.
Cllr Mitchell
Could I come in here, please, just to add to the point made by Sharon Gregory in respect of Northamptonshire and Cambridgeshire in terms of population? Population count is key, because, as a council, we have had problems in the past with the population count. The 2001 census was a particularly bad example. We have to be collectively a lot cleverer about counting our population, because so much, as we have heard in terms of adult social care and children and young people, is driven by the population count.
Chair
It would be great if local government could sort this out itself, but some of the witnesses last time said that they thought that one tax—i.e. business rates—was being asked to do two things that were contradictory: both to provide the necessary incentives to grow local economies, and also to be the basis for redistribution. There was a feeling from one of our witnesses last time that you almost had to separate those out, and you might still need an element of Government grant to do the redistribution if business rates were really going to be a proper incentive. Are there any views on that?
Cllr Mitchell
I would argue that we need to separate out the needs-based element from the growth-based element. As I said, from Westminster’s point of view, we do not aspire to keep every single pound of growth. We think it is important that there is a funding mechanism in place for that growth, but perhaps that would be separate for the baseline.
Chair
Does the LGA have a view?
Cllr Kober
Just thinking it through, really, we would take the position that there is certainly a tension there. I broadly agree with what my colleague from Westminster has said.
Chair
Do you want to have a further think about it and come back to us?
Cllr Kober
Yes, definitely. I am sure we will, and we will write to you.
Kevin Hollinrake
I think Councillor Mitchell has already answered this. I am going to ask the other three whether they disagree with him. Under the current system for increasing your business rates, do the incentives actually work? Do people feel they do or they do not?
Paul Dransfield
For increasing growth?
Kevin Hollinrake
The incentives through increasing business rates, yes.
Paul Dransfield
If I kick off around enterprise zones initially, I think they are a key part of the learning that we have been doing already. By way of illustration, we have a single small geography of an enterprise zone in Birmingham. We have an economic plan associated with delivering growth in that enterprise zone. That is forecast by 2023 to deliver £48 million per annum in additional business rates, and the plan is underway. The issue, though, is that, to achieve that £48 million, we have to use about £27 million annually in terms of servicing capital expenditure to create the infrastructure, road changes, without recourse at all to central Government funds. Nevertheless, that still leaves £21 million of growth purely for decision making about where that goes against the service pressures we are going to face or to create further growth in the economy. Taking the enterprise zone sense of how that works, because theoretically under a 100% devolution model enterprise zones do not have to exist on a national basis, because they can work more locally, we have to take account of how in local government we bring about the environment for creating that up-front expenditure to support that longer term growth. That is the key bit we have to grapple with.
Kevin Hollinrake
Touching on that point, then, what about the resets? You have invested all this money and created all this business rate revenue, and yet there is a reset after 10 years and you effectively lose a significant proportion of that revenue.
Paul Dransfield
I do not think that the reset can be a pure growth reset so you start from scratch again. It has to take account of existing investments people have made, and indeed in the existing system, the enterprise zones that are already approved, and some of the devolution deals that have been agreed for combined authorities and elected mayors, have some integral agreements about the use of business rates for growth. They need to be taken account of at the initial outset of the system, because it will disadvantage people who have already made that start, but, in that system, the way in which we do the resets needs to consider all of those components. It is not a full reset; it is an intelligent reset, as I would call it, that takes account of leaving people with that incentive to grow.
Sharon Gregory
The fundamental question is: “How do you determine what growth would have happened without the business rates retention scheme?” I do not think it is possible to do that. For the county councils, we would generally say we are not incentivised to create growth, because we get so little of the rewards of growth.
Cllr Kober
To the point about how you can differentiate between the growth that would have happened anyway and the growth that you have incentivised through particular action, of course you cannot tell that. To turn the question on its head, if you look at the use of the new homes bonus, we can all see that councils have taken more challenging decisions with half an eye on the additional revenue that could have been provided through the new homes bonus. There is definitely something there. The key issue will be revaluation, and the challenge will be how to ensure that the reset, as the colleague from Birmingham said, does not mean an authority starts from scratch again; that, at the same time, you do not create windfall gains and losses; and, from the other perspective, that you do not dilute the incentive to grow to such an extent that politicians are no longer willing to take difficult decisions because there is only a very short period of time in which positive financial growth will be felt.
Kevin Hollinrake
Looking at the current system of resets, how do you feel that works? In terms of the longer term planning, if the reset is in year 10 and you are in year 9, there is not a lot of incentive to drive economic developments.
Cllr Kober
I heard this in the last session. I am sure there is some impact around the margins, but most of us work in much longer planning cycles. The ability to deliver or land something big in your area often takes a period of time. It is not a certain or straightforward path, so it is very difficult to say, “Something is going to come in at nine years and six months, and therefore we will hold it over.” As I say, I am sure that you could pick out an individual example or two where an authority would be able to decide, “We will shift that decision by a few days, and therefore take the benefit after the reset”, but I think it is really marginal as an issue.
Kevin Hollinrake
Excuse my ignorance, but is the current system of resets an intelligent reset, or is it simply a blanket reset taking no account of the things you were talking about, Mr Dransfield?
Paul Dransfield
The current system?
Kevin Hollinrake
Yes.
Paul Dransfield
The reset system has not really had any material effect so far, but, effectively, the reality is that, on the base—other than in enterprise zones—the growth in business rates has been relatively modest overall, because it has been compensated by these other factors colleagues mentioned earlier, around the appeals system, etc. There has been very little growth, having been through a difficult economic cycle anyway. It is how we plan for that future. Into the future, what does business rate growth look like nationally? It is not going to be big, double-digit numbers flying through for everybody. Some individual areas and authorities will get that, but it should create some steady state growth that allows us to keep local services sustained and work to growth before. The way I would see it is not against 10‑year resets, but something every three or four years that keeps looking at how it is all operating in the bigger picture and what refinements are needed. All these systems change fairly regularly, but, if you are more in control of that change yourselves, then you can deal with the circumstances put before you.
Sharon Gregory
I think there is a case for a 10‑year reset system, as long as it is underpinned by a fair distribution mechanism and more frequent revaluations.
Cllr Mitchell
And a fairer appeals system. Perhaps we will come to that in more detail but, from our point of view, the present system does not work on appeals.
Helen Hayes
Following on from those answers, given the makeup of businesses that you have within your local authority areas—you might like to just describe, broadly speaking, what that looks like—how does that affect your ability to grow your revenue base from business rates and what is your strategy for doing that? Perhaps from the LGA perspective, Claire, you might just comment on the range of possibilities that there are across local authorities in the country and what you have identified to be some of the challenges.
Cllr Mitchell
Could I briefly start from Westminster’s point of view? We have a very diverse business rate economy, and, though many people will see the West End and the retail and entertainment sides, there is a significant office side, hence my response earlier to Mr Blackman about how we regretted the loss of office space. On growth, I have already pinpointed our problem, in that floor space growth in Westminster is going to be limited, but growth in the value of the business space is something that we do not share in at the moment. If I just touch on the appeals issue, which shows the growth/appeals conundrum that we have, to date, under the present system, since 2013‑14 we have lost £220 million on appeals, but we have only gained £100 million in terms of growth.
Bob Blackman
Is that per annum or in total?
Cllr Mitchell
In total. That is not taking into account the safety net, which we do have. We are safety netted to a loss of £6 million per year.
Paul Dransfield
It is interesting in Birmingham. We class it as industrial and commercial. The commercial sector of our business rates, which is effectively the retail and office core, is around 75% of our rateable value. Only 9% is industrial, which, in a place like Birmingham, is quite surprising when you think of it in that way. Similar percentages flow through for education and training: 6.5%. It gets to quite small figures. The rateable values are effectively all driven by office, largely retail, both small and large in scale. That is where the incentivisation to growth is naturally going to be, because effectively they create the biggest multipliers in rates. We have had similar figures to Westminster on appeals. Going forward, we have to provide forty-something million pounds’ worth of dampening down per annum to provide for successful appeals. If we are going to redesign this system, that has to be one of the No. 1 points. In conversations I have already had with DCLG officials, they are recognising that they have to help us come up with ideas on how to deal with and stabilise the appeals system before we can launch a new model. That is a shared interest across everyone.
Sharon Gregory
Across Cambridgeshire and Northamptonshire we have a mixture of businesses. We are fundamentally rural, but we have Cambridge city, Northampton and some big county towns as well. We have a lot of science, bio-medical and obviously agriculture, which, as you know, is not part of the business rates retention scheme. Automotive engineering is a big part, particularly in Northamptonshire. The one thing that I am not sure has been brought up by anyone else is the central list and the argument for bringing properties from the central list and reverting them back to local authority control. Both of the authorities I represent have made significant investment in the development of their local train stations, bringing much-needed growth to the area, granted, but we see no benefit at all from the additional growth in business rates resulting from the improvements to those train stations. I wanted to make that point. Given our mixture of businesses and our geographical make‑up, some of our areas are quite restricted in growth, particularly in the big cities. It is more about expanding and developing the businesses that we already have, I guess, and trying to add value through that. We have also been enormously successful, in both counties, in rolling out superfast broadband, which is wonderful, but that means that we have more internet-based companies. The effect of that is to have more smaller companies, which tend to be eligible for small business rate relief, hence the reduction in our business rate income. Many of them are home‑based, and they may not be subject to any kind of business rate levy at all. Particularly in the Cambridgeshire area, we have a lot of growth in businesses, but they are not high-value businesses. They add a lot of GVA to UK plc, but they tend to be more niche, such as biomedical companies, with a very low floor space. Clearly, that is quite an issue for us.
Cllr Kober
Just to add a couple of points from an LGA perspective, there are obviously issues of geography, which are fairly clear; issues around infrastructure, not only heavy infrastructure but also things like superfast broadband; and the skills of a particular area. You then look at things like the changing dynamics in retail, manufacturing, the service industries etc., thinking about the way that business rates are calculated and the extent to which they adequately reflect the nature of the business being done. There are quite a number of issues, from an LGA perspective.
Chair
We are a little time‑constrained now, so I am going to try and focus on the issues. First of all, the Government are suggesting that there will be the power to lower the multiplier. Will that really give you any more power than you currently have with the system of reliefs that you can use? Are you likely, as a council, to use it?
Cllr Kober
That is the big question mark, really: does a system that allows us only to take down, rather than the flexibility to push up, really provide anything beyond the discretionary rate relief that is already in place? Our argument would be no, from an LGA perspective. If you are saying that flexibility should be enhanced for directly elected metro‑mayors, why should it not be enhanced for all local authorities?
Paul Dransfield
I agree. I can see some circumstances where reliefs that are currently in play to incentivise new companies and new start-ups could play a role, although, in the previous session, people were worried that some would take decisions on a geographic basis, as part of an incentivisation for people to move from one area to another. That might be quite a dangerous dynamic. We have tended to use the reliefs that are currently in play, and they have been quite useful. Unfortunately, that has tended to be in two components: first, in a recessionary dynamic, hardship relief has been well in play over recent years; and secondly, another relief that is really useful is where you are trying to create the growth by investing in infrastructure—metro schemes and everything else—to provide some temporary support to businesses affected by those. I would expect there to be a continuation of reliefs but careful consideration of what further reliefs are available going forward, particularly around geography.
Cllr Mitchell
From Westminster’s point of view, we have not really used the reliefs system at present as a policy tool, because of the appeal and revaluation issues I have already highlighted. On the assumption that we would have to bear the cost of any lowering of the multiplier, I do not see that we would be interested, unless those issues were dealt with.
Sharon Gregory
We would like to see full local decision making on reliefs, and, from a county council perspective, we would certainly like to see more input into the decision-making process around local reliefs. We noticed that the recent paper that was submitted alongside the business rates review consultation talked about the system in Northern Ireland, where they have a two-step multiplier. We have mooted looking into, in two-tier areas, a two‑step approach to calculating the multiplier, with maybe a regional, county multiplier and the districts setting the local multiplier.
Chair
In terms of the infrastructure premium, that is only going to be allowed where there is an elected mayor, and you have to get the approval of the LEP. Are those conditions the right ones to allow the premium to be put into place?
Paul Dransfield
From a Birmingham perspective, it is very much an anchor of the west midlands working together, so an infrastructure levy would be based on a broader geography. We have already done some calculations. Obviously, it is a matter for an incoming mayor to decide whether they would like to have and campaign for a supplementary business rate, but, for the west midlands, something like a 2% precept generates about £35 million a year of revenue. You can invest nearly £1 billion there, so you could design quite a significant infrastructure scheme to benefit the region for that scale of money. It is worth considering, but obviously it will be up to the politicians of the future to determine whether they want to do it. Having these tools, though, is key. Whether you use them is everybody’s choice, but the more tools we have to be able to do things, the more things we can solve.
Cllr Mitchell
It is not clear to us whether the existing business rate supplement system, which is a 2% levy on big businesses on London and which goes to fund Crossrail, would have on top of it a further 2% levy. I suspect businesses would not be too keen if they were to see a further 2%. DCLG, to date, has not been able to clarify whether, under the 100% scheme, there would be both two‑percents.
Cllr Kober
We would simply add that, if you want to maximise the incentives for growth, then you need to maximise the flexibility in the system and allow local determination.
Sharon Gregory
We need to consider the implications in two-tier areas of the 2p increase in rates. The county council, under the current mechanism, would get very little benefit or a much reduced benefit from that. That is just one point. I would reiterate what Claire said earlier, in that we would like to see that flexibility to increase the infrastructure premium extended to areas without elected mayors. We believe that some areas can get to that point at a much faster rate than others.
Chair
With the LEP having a veto? Are you comfortable with that?
Sharon Gregory
We have a particular issue in Northamptonshire, for instance, where we have two LEPs. Cambridgeshire is currently in the early stages of moving to a devolution solution. Cambridgeshire currently has a unified LEP, but if the devolution moves with Suffolk and Norfolk, what happens then?
Chair
You have raised some interesting questions. Somebody else may have to answer them.
Bob Blackman
Finally, the amount may be disputed, but the view is that, by the time we get to the stage of the introduction of the 100% retention of business rates, there will be a gap between the funding provided and the responsibilities. What extra responsibilities would you wish to have devolved to you and why?
Cllr Mitchell
Many of the points that were raised by the leader of Essex County Council we would concur with. It is twofold. One is skills and employability, so skills and training funding, and then—
Bob Blackman
Were that to happen, that would be likely to go to the Mayor of London, rather than Westminster City Council. Is that not true?
Cllr Mitchell
Potentially, but therefore the discussion is about how devolution is shared. The role of the London council leaders is key to that, and we had some suggestions for that, which have been welcomed by Boris Johnson but not formalised at this stage. There was co-decision making, and I think that will be key, because we would argue that, as local authorities, we are closer to the issues than a regional authority, which the Mayor of London is. The other issue where there is room for devolution is on infrastructure, but there are two types of infrastructure: there is the transport-related infrastructure, which of course is a regional responsibility in London, and there is local infrastructure. For example, we have the West End Partnership, which is Westminster and Camden working together on West End issues, based around Oxford Street and more widely, where we have a bid in the Treasury at the moment that could well be dealt with by this mechanism.
Paul Dransfield
I do not think there is a lot to add, on this theme, to the previous ones: skills, business support and some transport areas that are currently not devolved to local government. They are all in most people’s devolution deals anyway, so there is the sense that, if the timing is right, some of those things could be aligned, were there an imbalance in the funding. I would concentrate more on what we should not do. I would be very nervous of devolving areas that we cannot control. One of my fears is around the benefits bill. In effect, if local control over the benefits bill was part of it, that would be a difficult challenge.
Bob Blackman
Is it not the administration of benefits?
Paul Dransfield
Well, we administer benefits—
Bob Blackman
Yes, but are they not proposing more control over the administration, rather than the actual sum of the benefits themselves?
Paul Dransfield
Yes, but they still need to be careful about that. It is administering a national scheme and the variability in how much the administration costs depends on the demands of the benefits system. I am trying to just point out that things that we are probably able to better move forward at a local level, such as skills, are better devolved, leaving some things that are designed nationally to be retained at a national level.
Bob Blackman
Have you any concern about the current series of area reviews going on in, for example, further education, which could lead to either amalgamation or slimming down of the sector, at the same time as you gain responsibility? Does that not give you cause for concern?
Paul Dransfield
We are conscious of all those reviews going on. It is not helping our agenda for delivering real improvement in skills. That is the objective we all have, and we need the tools to be able to do that. That is the general drift. The reviews that are going on nationally are disturbing the ability to find out how much and what functions it is possible to devolve, but that is something Government need to overcome with local areas. It is universal across the country. Everybody is interested in having better control over skills.
Sharon Gregory
I do not think I have an awful lot more to add. With regards to the devolved responsibilities, our prime concern is that the responsibilities are fully funded when they come in.
Bob Blackman
They will be fully funded out of the business rates you collect.
Sharon Gregory
I think we have argued the case, really, for whether the business rates system can sustain responsibilities for local government going forward.
Cllr Kober
There is a point of principle here, is there not? There is a possibility that business rate taxpayers see little connection between what they are paying and what services it is going to fund. As I said previously, my council spends almost £6 in every £10 on social care in one form or another. That is not an outlier; that is about right. For me, in terms of rolling in additional responsibilities, surely we would want to be thinking about responsibilities like skills and transport, where there would at least be a greater connection between the business rates that you pay and the funding of things that drive forward the local economy, generate growth and ultimately benefit us.
Bob Blackman
Similarly, we are talking about the Mayor of London as opposed to the local authority necessarily having a role in transport, because TfL is clearly the transport authority across London. You would not see any of that; the Mayor and TfL would.
Cllr Kober
Except that, as my colleague from Westminster said, in the way it has developed over the last eight years or so, the relationship between the boroughs and the GLA is a partnership of equals, recognising the GLA’s strategic role and the boroughs’ fundamental role in terms of understanding areas, people and delivery.
Chair
Thank you all very much for coming and giving evidence this afternoon. That has been very helpful to our deliberations. Thank you. Oral evidence: Business Rates, HC 665 21