IFS - The government’s proposals for the reform of business rates retention need further work

18 Feb 2019 03:44 PM

Ahead of a proposed move from 50% to 75% business rates retention in April 2020, the Ministry of Housing, Communities and Local Government is seeking views on its proposals for the reform of certain elements of the business rates retention system in England. IFS researchers Neil Amin-Smith and David Phillips have submitted evidence.

 Much of what is proposed is welcome. In particular:

• The proposed adoption of ‘phased’ resets of redistribution rather than ‘fixed’ resets would provide councils with consistent incentives to promote growth in their business rates bases each year and remove the ‘cliff edge’ in previous proposals;

• The consultation also offers councils the opportunity to change how revenues are split between upper and lower-tier councils. This could provide an opportunity to increase the extent to which county councils (which fund social care) benefit from business rates growth. Doing so could help to minimise funding risk and divergences between councils;

• The consultation recognises that valuation changes (‘appeals’) currently constitute a big financial risk over which councils have no control. The proposed solution should, in principle, help to mitigate this risk.

However:

• The consultation’s description of how proposals to protect councils from the risk of valuation changes will function is confusing, imprecise, and appears to be internally inconsistent. For example, the consultation says that the proposal will result in a one year lag before councils see business rates growth reflected in their income, but the mechanism set out would result in a two year lag. For such a major reform such issues are disappointing, especially given recent concerns about the operation of and complexity of the BRRS (as set out in the Hudson Review).

• Many of the key questions posed by the consultation can only really be answered if empirical analysis of the impact of possible options is made available. Such analysis has not yet been provided.

David Phillips, Associate Director at the IFS, said:

“Much of what is in this consultation is sensible and welcome, such as proposals to reduce the risk to councils’ funding arising from business property valuation errors. However, as the Hudson review concluded this is a very complex area where clarity and accuracy from the government are vital. The issues with this consultation suggest that MHCLG still has some way to go on this front.”