Councils will retain all local taxes including the total £26bn from business rates, while areas with elected mayors will be able to set an additional infrastructure levy, under plans announced by chancellor George Osborne today.
By the end of this parliament, government will abolish the Uniform Business Rate system allowing councils to cut the tax if they wish, while areas with directly elected mayors will be able to add a premium to business rates to pay for new infrastructure.
To establish the extra levy, councils must have support of local business leaders through a majority vote of the business members of the Local Enterprise Partnership. The increase will also be capped, with the limit likely to be set at 2p on the rate.
In return the main grant from Whitehall will be phased out ‘to ensure the reforms are fiscally neutral’ and local government will ‘need to contribute to fiscal consolidation over this Parliament’, Treasury officials said.
A Conservative spokeswoman confirmed to Transport Network that areas without elected mayors would not be able to increase business rates but the tax would go up every year by the RPI rate of inflation.
She added that despite stating the extra levy cash would have to be spent on infrastructure there would be no direct government oversight or exact detail on what constitutes suitable infrastructure.
In fact, when applying to the Local Enterprise Partnership for permission to raise the tax councils would be expected to outline in advance what it would be spent on.
'It would be very similar to the Crossrail charge we saw in London [where a business rates supplement helped pay for the new line]. It would be very difficult for a council to promise to deliver something and then not put the money into that project,' she said.
However she added there would be no governance structure installed to prevent such a thing happening and it would be left for voters at the ballot box to judge the council accordingly.
Senior sources in the Department for Communities and Local Government have also confirmed there would be some redistribution mechanism to help councils less able to raise cash through business rates, although the details have yet to be confirmed.
Further details will be announced in the Spending Review.
Cllr Gary Porter, chairman of the Local Government Association, welcomed the announcement but argued councils should be given powers to raise business rates as well as cut them.
'With greater local control, councils will have flexibility to reduce business rates for the types of shops and businesses that residents want in their high streets and neighbourhoods,' he said.
'It is right that all of the money which a business pays is retained by local government and this will be a vital boost to investment in infrastructure and public services.'
He added that local authorities will face 'almost £10bn of cost pressures by 2020' and so the powers should be devolved more quickly.
'Councils currently have to fund half of all business rates refunds but, by 2020, they will be liable for 100% under this new system. This makes reform of the appeals system even more urgent to protect councils from the growing and costly risk and appeals and ensure businesses are happy with what they pay,' Cllr Porter said.
Cllr Gerald Vernon Jackson, Lib Dem Group leader at the Local Government Association, said: ‘It was Liberal Democrats in government that pushed for a review of business rates and we as a party have long campaigned for power to be returned to local communities.
‘But the chancellor has also announced an Infrastructure Tax which only an elected city mayor will be able to levy. So outside these areas, local authorities who decide that they need to invest in new infrastructure would be powerless to act. Once again, the chancellor’s obsession with mayors is leaving other local communities to drive their economies with one hand tied behind their back.’
Melanie Leech, chief executive of the British Property Federation, said in response: ‘It will be imperative for Treasury to engage with industry to ensure that this does not lead to a proliferation of different rates of tax across the country, which businesses will find difficult to negotiate and which could lead to uneven growth across the country.’
Since 2013, councils have been enabled to retain 50% of the proceeds of rates. They will now retain 100% by 2020.