How big a change is this?
It is the biggest change to local taxation in more than a quarter of a century and involves devolution of political power from Whitehall to local government. The British Chambers of Commerce (BCC) said it was surprised the chancellor had announced the shakeup without prior consultation. “It is highly questionable for the chancellor to announce major changes to business rates without consulting broadly with the business communities that pay them,” said the BCC’s director-general, John Longworth.
What is the current system for levying business rates?
Business rates were introduced by Margaret Thatcher in the late 1980s as part of the reform of local government finance that included the ill-fated poll tax. Every business is assessed and given an individual rateable value. This is then multiplied by a common business rate to find the sum a business must pay. Local authorities are responsible for collecting the tax and since 2013 have been allowed to keep half the revenue themselves. The rest is pooled centrally and redistributed back to local authorities.
What will happen now?
Under the new plan, local authorities will keep the £26bn raised in business rates in exchange for taking on new responsibilities. Councils will be able to cut the business rate if they think that by doing so they will be better off as a result of new firms coming to their areas.
So councils will be able to cut the business rate but not raise it?
For most councils that will be the case. But the chancellor made an exception for those authorities that have elected mayors. Mayors will be able to raise the business rate provided the money is spent on improving local infrastructure and has the support of business locally. There will be an upper limit on any increase, likely to be fixed at 2p, according to the Treasury.
Will it work?
Osborne’s hope is that allowing councils to compete over the level of the business rate will lead to job creation and higher levels of output. But Prof Steve Fothergill of Sheffield Hallam University says there is no evidence of this. Fothergill conducted a year-long review for the Thatcher government at a time when councils were able to levy their own business rates. He studied districts over a 10-year period and adjusted for changes in economic circumstances. It found that there were no detrimental effects when business rates went up and no positive effects when they went down. Fothergill said one possible reason was that when business rates went up rents went down and vice versa.
Won’t this make rich councils richer and poor councils poorer?
There is certainly a risk of this. Business rates expert Paul Turner-Mitchell said: “Any proposal would have to address the fact that this could exacerbate the current north-south divide.” Prosperous areas would be able to cut the business rate but poorer areas would not, he added.
He gave the example of Westminster council, which raises almost £2bn a year from business rates, more than in Birmingham, Manchester, Sheffield, Liverpool and Bristol combined. That’s despite the fact that the population of Westminster is 227,000, compared with 3 million for the five other authorities.
Isn’t this a bit like Labour’s proposal in the 2015 election?
It is, but with one significant difference. Labour said councils could only keep any additional revenue they generated from business tax. Osborne’s plan means all business tax goes into local coffers.
So what will happen to less well-off areas?
The Treasury said authorities that start from a weak financial position would not be penalised and that a system to redistribute money to poorer parts of the country would be announced. It has not yet determined how this will work.
