London Councils unveils business rate retention model for the capital

London Councils has revealed the first detailed model for how business rates across the capital could be collected and shared between local authorities, stimulating economic growth as well as supporting vital services.

The organisation, which develops policy on behalf of 33 boroughs, has developed a scheme under which the £5.5billion of rates collected annually could be used to fund local services and also do more to incentivise economic development.

The government has said it intends to change the way rates are collected across England. Currently, local authorities collect business rates – a national tax on commercial properties – on behalf of central government. They then receive funding back in the form of formula grant.

To replace this process, London Councils has developed a model which does the following:
•Offers each London borough both an individual borough reward and a share of a London wide growth reward for encouraging economic growth
•Pools the rates collected across the capital, before re-allocating funding to each council based on their residents’ needs,
•Ensures a stable system which would bring businesses and local authorities together in a much closer working relationship to help develop stronger communities.

The model explicitly addresses one of the major challenges around business rate retention – how to reconcile the fact that some local authorities have significantly higher potential to grow their business rate yield than others.

Councils with high existing business rate yields are likely to grow disproportionately faster than those with a low yield. For example, a high-yield authority who grows their business rate by 1 per cent and keeps all of that growth could see a 10 per cent increase to their available funding, whereas a low-yield authority could see just a 0.3 per cent increase.

While the precise levels of local retention would be for London’s council leaders to decide, London Councils has developed a model that would address this problem while providing a fair and tangible incentive for each council. Under its model, each local authority that grows their business rate yield by 1 per cent would see a corresponding 1 per cent increase to their funding levels.

The capital would continue to share a proportion of its business rates with the rest of the country to ensure fairness across England and in recognition of the important role London plays in driving the nation’s economy.

Hugh Grover, London Councils director of fair funding, said:
“Our model clearly demonstrates how a business rate retention model could work in the capital, incentivising local authorities to individually grow their business rates while still ensuring that London as a whole benefits.

“The model is not restricted to London – it would be possible to make this system work for other groups of authorities elsewhere in the country. We are discussing our model with government and hope it will inform future developments in this area.”