Currently, councils in England collect some £19 billion of business rates each year. This cash is paid over to the national Treasury and then redistributed to councils according to a complex formula. There is absolutely no link between the amount of business rates collected locally and the amount given back through the formula.

The council is forecast to receive about £95m in business rates in 2011/12 but it is difficult to predict and can vary by several millions per annum.

The government has promised to establish a fair starting point for all local authorities to ensure no-one loses out at the start of the system but the proposals do not allow councils to generate additional resources by increasing the business rate poundage [the multiplier] beyond inflation [RPI] in any partiular year. Councils will merely be given powers to set a lower rate if they can afford it and are inclined to do so.

A paper going to the cabinet on 13th October recommends resisting the changes, currently out for consultation until 24th October, because:

• they transfer too much financial risk to Brighton & Hove City Council relative to the levers available at a local level to influence business rates growth
• the likelihood of Brighton & Hove not exceeding national growth targets is high meaning that the council will lose further funding under the new scheme and have to reduce spending as a result
• the scheme is complex to understand and financial planning will be difficult given uncertainty over a number of key variables within in the system (for example levels of inflation and growth forecasts)
• the City Council would need to increase the levels of reserves held to cope with the level of risk being transferred and the financial planning uncertainties

In an effort to sell the idea, planning minister Greg Clark has suggested that the revamped business rates system could be used to invest in planning departments because councils that have efficient planning procedures would be more attractive to overseas businesses seeking to relocate in the UK and thus generate more business rates.

ECONOMIC PARTERSHIP COMMENT

Greg Clark's idea for selling the scheme smacks of desperation.

For Brighton & Hove this is an important issue because the proposals have significant implications for about £100m per annum of future funding.

The proposals for local authorities to retain locally collected business rates are supposed to provide financial incentives for local authorities to improve their local economy and encourage growth but it isn't that simple. Also, there are alternative mechanisms for incentivising councils to support business growth which are far less complex, for example the now defunct Local Authority Business Growth Incentive Scheme (LABGI) or the New Homes Bonus.

The Council is right to decline the opportunity being presented by central government but Communities Secretary Eric Pickles wants to see this happen so it probably will.

Click here to download Cabinet Paper on localism of UBR