Consultation outcome

Technical adjustments to the Business Rates Retention System in response to the Non-Domestic Rating Bill

Updated 13 December 2023

Applies to England

Scope of the consultation

Topic of this consultation:

This consultation covers proposals for updated technical adjustments to the Business Rates Retention (BRR) system in light of the Non-Domestic Rating Bill currently before Parliament.

Scope of this consultation:

This consultation seeks views from local government, local government representatives and sector experts, on:

Technical adjustments to the BRR System:

• whether they agree with the proposal to revise the calculation of the under-indexation factor to compensate local authorities for any future decisions to under-index either BR multiplier
• whether they agree with the proposal to re-design NNDR data collections from 2024/25 to collect more dis-aggregated data to make possible the revised calculations regarding under-indexation
• whether they agree with the proposal to revise the method to indexing Baseline Funding Levels (BFLs) and Tariffs and Top-ups (T/TUs) from 2024/25, devising an local authority-specific weighted average change, initially using a proxy, of both the small and standard multiplier
• whether they agree with the proposal to index future Designated Area baselines using the same approach that we are recommending taking with the indexation of BFLs and T/TUs

Geographical scope:

These proposals relate to England only.

Impact assessment:

Since the government does not envisage that the proposals within this consultation document will have an impact on business, no impact assessment has been produced.

Basic information

Body/bodies responsible for the consultation:

Local Government Finance Directorate within the Department for Levelling Up, Housing and Communities.

Duration:

This consultation will last for 5 weeks from 28 September to 2 November 2023.

Enquiries:

For any enquiries about the consultation please contact: BRRSA@levellingup.gov.uk

How to respond:

You may respond by completing an online survey.

Alternatively, you can email your response to the questions in this consultation to:BRRSA@levellingup.gov.uk.

If you are responding in writing, please make it clear which questions you are responding to.

Written responses should be sent to:

BRR Operations, Local Government Finance Stewardship, Local Government Finance
Department for Levelling Up, Housing and Communities
2nd Floor, Fry Building
2 Marsham Street
London
SW1P 4DF

When you reply, it would be very useful if you confirm whether you are replying as an individual or submitting an official response on behalf of an organisation and include:

• your name
• your position (if applicable)
• the name of the local authority or organisation you are responding on behalf of (if applicable)
• an address (including postcode)
• an email address
• a contact telephone number

1. Summary

1. The Non-Domestic Rating (NDR) Bill, currently before Parliament, brings forward changes to the ways that business rates multipliers will be calculated and applied. Subject to the passage of the Bill through Parliament, it is anticipated that the changes could be implemented from 2024/25.

2. As a consequence of the Bill changes, we are considering making technical amendments to how we administer the Business Rates Retention System (BRRS). These amendments would be necessary to maintain the accuracy of levy and safety net payments and future income compensation paid to local authorities for the impact of tax policy decisions. We intend to implement these technical changes to the BRRS for 2024/25 to align with the commencement of the provisions in the Non-Domestic Rating Bill relating to multipliers.

3. The government seeks views on its proposals, principally on the updated technical adjustments that we propose to make. It particularly welcomes views from councils, their representative groups and sector experts.

2. Background

The Non-Domestic Rating Bill

4. Most of the changes introduced by the NDR Bill have no impact on the BRRS, or where they do have an impact, would require very little change to BRRS administrative arrangements beyond routine amendments, for example, to accommodate the introduction of a new business rates relief.

5. But, subject to Parliamentary approval, the NDR Bill will make changes to the way that non-domestic rating multipliers will be calculated and applied. These would:

a. Index the multipliers to the annual change in Consumer Price Index (CPI) as a default, instead of Retail Price Index (RPI), as at present, whilst retaining the power for Treasury to under-index the multipliers (that is, to increase them by less than CPI). In substance, local authorities are already familiar with this policy change as, in recent years, the multipliers have been indexed to CPI, when they have not been frozen.

b. De-couple the small and standard multipliers. At present the standard multiplier is 1.3p higher than the small business rating multiplier. The 1.3p is a supplement on top of the small business rating multiplier. The small business multiplier is currently indexed to RPI, with the standard multiplier linked to it via the supplement. The two multipliers therefore only change by the same amount. In future, however, ministers would have the discretion to treat the multipliers differently – that is, to index one by CPI (as per paragraph 5a), whilst freezing, or under-indexing the other; or to under-index them both, but by different amounts. The concept of the supplement (and the requirement to set the supplement at a level to recover the cost of small business rate relief) has been removed; both will instead be independently linked to CPI. In future, therefore, subject to ministerial decisions, the gap between the multipliers may change.

The Business Rates Retention System

6. Local authorities administer the business rates system and retain a portion of the rates they collect through the Business Rates Retention System. A core principle of the BRRS is the retention of a proportion of business rates collected locally, including a proportion of any growth, subject in some cases to the payment of a levy. There is also a safety net mechanism included in the design of the system which protects local authorities from shocks to the business rates they retain locally.

7. The annual change in the small business rating multiplier (SBRM) is currently a key component of the BRRS. Key elements of the BRRS are indexed to it. This has an impact on how core elements of the system are indexed. Baseline Funding Levels (BFLs), Top-ups and Tariffs (TUs/T) and (implicitly) Business Rates Baselines (BRBs) all change annually in line with changes in the SBRM.

8. Ever since the BRRS was launched, government has periodically taken tax policy decisions to under-index the inflationary rise that would otherwise be built into the multiplier. Any under-indexation of business rates multipliers reduces the amount of business rates that local authorities collect and, without intervention, LAs would also lose out financially as a result. Government therefore compensates local authorities alongside the BRRS so that, as far as is practicable, local authorities’ retained income is unaffected by tax policy decisions over which they do not have control.

9. Looking forwards, given the two multipliers could be separately indexed, the gap between them could widen, especially if the de-coupled multipliers are indexed at different rates.

10. This would have a number of consequences for the administration of the BRRS. Firstly, it raises questions about how we should continue to index key elements of the BRRS annually, and how we can continue to compensate local authorities accurately for historic and future under-indexation decisions. Secondly, there are practical considerations to consider related to the data we would need to collect to make accurate compensation calculations.  

11. This consultation proposes approaches to deliver technical amendments which will enable the BRRS to continue to operate in line with pre-existing policy positions regarding accurate income compensation to local authorities, and accurate calculations of core aspects of the BRRS such as the safety net and levy mechanisms. The questions in the consultation seek views from respondents on these proposals.

3. The technical adjustments

12. There are 3 areas in which we believe amendments to BRRS administration are needed.

a. Section 31 under-indexation payments and NNDR forms 

13. When the government compensates local authorities for their loss of income as a result of the under-indexation of the multiplier, it does so using an under-indexation Factor (UIF). This is currently calculated as the difference between a (notional) fully indexed small business rates multiplier and the (actual) under-indexed small business rates multiplier on which ratepayers are billed.

14. The current standard multiplier is not part of the under-indexation factor. As a result, we know that the under-indexation factor is currently likely to be marginally too generous. But, in the absence of disaggregated data we are currently unable to make a more accurate calculation. However, because the small and standard multiplier have always been linked and the difference between them is presently only 1.3p, the over-compensation has been modest.

15. However, given the multipliers are now going to be decoupled, the gap between them could grow. Depending on how the multipliers diverge in future, this could increase the scale of over-compensation, or could see authorities under-compensated for their lost income. This suggests that we need to revisit the methodology currently used to calculate total under-indexation compensation due to local authorities.

16. In future, we therefore propose to make a more nuanced under-indexation calculation. This would calculate compensation based on two under-indexation factors (UIFs) – one UIF for the small multiplier and another for the standard multiplier, which would be updated annually, based on the indexation/under-indexation of the multipliers. On the basis of annual data provided by local authorities (see below), the UIFs would be applied to local authorities’ net business rates in the same way as now, to compensate local authorities annually for the financial impact of decisions to under-index either BR multiplier.

17. To do this we will need to capture more granular information annually in NNDR forms from billing authorities. Key elements of Parts 2 and 3 of NNDR1s and NNDR3s, including gross rates payable, transitional arrangements, mandatory and discretionary reliefs awarded, and accounting adjustments will need to be broken down to show the income from hereditaments subject to each of the small and standard multipliers. An illustration of what the expanded form could look like for NNDR1s is provided below.

18. A read only draft version of the NNDR1 form, with calculations removed, has also been included alongside the consultation as an annex to this consultation. This is not the final version of the NNDR1 24/25 form, and there is likely to be further changes between now and when the form is launched in December. However, this draft should give interested stakeholders a clear idea of how the new data forms are likely to look in relation to the proposals set out in this consultation specifically.

19. Government does not propose making any amendment to the historic calculation of under-indexation compensation up to and including 2023/24.

20. The government recognises that the proposed changes to NNDR data forms will have an impact on authorities and, particularly, on the systems that they employ to generate that data and submit NNDR1s and NNDR3s in line with statutory requirements. The government is currently discussing with authority representatives, the proposed software changes that will be needed including the need for additional funding in line with the New Burdens principles.

21. From the conversations to date, the government recognises that it will take time to deliver the necessary changes to software to allow local authorities to return data back to the department in the new format being proposed. However, without the proposed changes to data collection forms, it is not clear how accurate calculations of the compensation due to authorities, estimated to be £2.6 billion in 2023/24, can continue to be made, if and when the small and standard multipliers are indexed differently. Therefore, it remains the government’s position that these revisions to data collection are necessary to continue to run the system following the changes to business rates multipliers introduced by the NDR Bill.

22. Noting these challenges, if data collections are changed but in the immediate term some local authorities are unable to access data from their software in the new format required in order to fill out NNDR data forms, the government will have to develop and incorporate a workaround measure to continue collecting data on the current aggregated basis, alongside the newly revised, more granular basis. This would have to be done until such a time that software can allow all local authorities to provide the granular data set out in paragraph 17 above.

23. In such circumstances, we consider that we would have to estimate the compensation owed to any authority who was unable to complete the NNDR form in line with the more granular data requirements. This would be necessary given granular data would not be available to continue making accurate calculations of compensation. Taking this approach would come with the risk that any compensation for the loss of income as a result of any future under-indexation decisions is not calculated with the accuracy that it would have been calculated on had more granular data been submitted.

24. If software changes can be implemented in time for granular data to be submitted for NNDR3 data collections, then it would be possible to reconcile the compensation that is originally estimated at the NNDR1 stage. However, if software changes were still not in place at that stage, compensation for the loss of any income will again have to be reconciled on an estimated basis.

25. The government will also continue to work with local authority representatives collaboratively to understand how the changes required to software systems can be delivered as quickly as possible.

Question 1: Do you agree that a more sophisticated calculation will be required to ensure that future under-indexation grant compensation remains accurate?

Question 2: Do you agree that more dis-aggregated data will be required from NNDR forms to make a more sophisticated under-indexation compensation calculation?

Question 3: Do you agree that the government will need to introduce an interim workaround measure to estimate the calculation of under-indexation grant compensation if local authorities are initially unable to complete NNDR forms with more granular data?

b. Baseline Funding Levels and Tariffs/Top-ups 

26. We also need to determine how we should index Baseline Funding Levels (BFLs) and tariffs/top-ups (T/TUs) after the NDR Bill measures take effect. This will affect the numbers shown in the annual Local Government Finance Settlement, because in line with statute, T/TUs, and the basis of their calculation, is an element of the annual Local Government Finance Report (LGFR), which must be approved by the House of Commons.

27. Tariffs/Top-ups (T/TUs) for each authority were originally set in 2013-14 when the BRRS was set-up. They were calculated as the difference between Baseline Funding Levels (BFLs) (broadly speaking, the amount of business rates that authorities were felt to need) and Business Rates Baselines (BRBs) (broadly speaking, the amount of business rates that each authority might be expected to receive as their share of the 2013-14 business rates collected locally). Since 2013-14, apart from adjustments in 2017-18 and 2023-24 to strip-out the impact of Revaluations, BRBs, BFLs and T/TUs have been uprated annually in line with the change in the small business rates multiplier.

28. By uprating BRBs, BFLs and T/TUs annually, we ensure that the element of retained rates income represented by BFLs grows in line with inflation (since the small business rating multiplier is uprated in line with inflation, and where it is not as a result of under-indexation, authorities are appropriately compensated by means of a section 31 grant as set out in paragraph 13). This means that each year authorities see an inflation-adjusted amount represented by the BFL that they can keep, and which is not subject to a BRRS levy.

29. Secondly, because BFLs are used to determine safety net thresholds, the point at which help is available through the safety net is also inflation adjusted. This means that authorities do not have to experience as large a fall in income before the safety net kicks-in. BFLs are also used as the baseline for the calculation of business rates “growth”, on which a levy can be charged, and they are also an element of Core Spending Power (CSP).

30. Until now, for the sake of simplicity, we have always used the change in the small business rating multiplier as the basis for uprating BRBs, BFLs and T/TUs. The actual rate of change in the small and standard multipliers has, of course, always varied slightly for any year. But, because the multipliers have been closely linked in practice, the impact on outcomes has been insignificant.

31. Looking forwards, if the divergence between the multipliers were to increase, continuing to use only the change in the small business multiplier (or the standard multiplier), could have a significant impact on authorities. Depending on how the multipliers diverged, authorities could find a much larger (or smaller) proportion of their income was subject to a levy. They could equally find they are unable to access safety net payments until their income from business rates had fallen more substantially in real terms.

32. To avoid these arbitrary effects, we are proposing that from the 2024/25 Settlement we should use a weighted average multiplier of both the change in the small and standard multipliers to index BFLs and T/TUs. This would better reflect the combined change in business rates multipliers in future and would mean that levy rates and safety net thresholds would be more accurately calculated than if this technical amendment was not made.

33. We believe that using a weighted average of the change in the small and standard multipliers would reflect the ‘truest’ combined change in any multiplier changes from 2024/25 and it would align with the approach we are proposing to take with section 31 compensation.

34. We propose that a weighted average approach to indexing BFLs and T/TUs would need to be tailored for individual local authorities (both billing authorities and major precepting authorities) because of the variation in individual local authority business rates bases.

35. To illustrate the need for an local authority specific weighted average, looking at rateable values (RV) across the country, 82% of London’s RV is £51,000 or above (i.e., subject to the standard multiplier). Whereas only 63% of RV in the South West is £51,000 or above. Alternatively, an England wide weighting could be applied to all local authorities across the country. This approach would be simpler to implement and to understand, however, it would mean that authorities could find a much larger (or smaller) proportion of their income was subject to a levy. Or alternatively authorities could find that they are unable to access safety net payments until their income from business rates had fallen more substantially in real terms.

36. We also propose to fix this weighting for a period of time, only updating it periodically alongside future revaluation cycles. Analysis from the 2017 rating list suggests that rateable values remained steady over the course of the list. 254 billing authorities saw a maximum share change of 2% or less across the life of the 2017 list.

37. The weighted average adjustment could be delivered through one of two methods: either by a proxy based on existing publicly available data, or through a bespoke data collection which would need to be run before the provisional Settlement this year.

38. The practicalities of running a bespoke additional data collection at short notice suggest that a proxy based on existing data might be the most viable approach for the initial weightings that we set. To set the proxy we could either use prior year NNDR data which is already published and available, or we can use Rating List data published by the Valuation Office Agency (VOA).

39. Our proposal is to use RV shares form the VOA’s Compiled List data which will be resilient to future Revaluations as we will update weightings for each local authority to mirror revaluation cycles. It also would avoid any data validation concerns that might arise when using NNDR data.

40. Government will keep the use of the proxy under review to consider whether it remains a suitable method to index Baseline Funding Levels and tariffs/top-ups after 2024/25.

Question 4: Do you agree that the proposed changes to indexing Baseline Funding Levels and Tariffs/Top-Ups are required, and if so that a weighted average should be used to index Baseline Funding Levels and Tariffs/Top-Ups from 2024/25?

Question 5: Do you agree that the weighted average should initially be delivered by a proxy based on existing business rates data, and it should be fixed until the next revaluation?

c. Disregarded amounts 

41. Designated areas are grounded in legislation under paragraph 39 of Schedule 7B to the Local Government Finance Act 1988. Designated area baselines, over which LAs keep 100% of BR growth locally, are currently indexed to increase in line with the change in the small business rates multiplier. This ensures that retained growth is measured and awarded in real terms.

42. The changes to how multipliers are calculated and applied in the NDR Bill means we need to re-consider how we index designated area baselines to ensure that growth continues to be measured and retained in real terms. This is because, if there is a divergence between both multipliers, continuing to use only the change in the small business multiplier could have an impact on achieving our continued policy of ensuring that growth from designated areas is measured and retained in real terms.

43. We therefore think that we need to consider options to ensure our current policy intention of measuring and awarding growth in designated area in real terms continues. This applies to existing designated areas which are currently ‘active’, taking account of the legislation that those arrangements are grounded in. We will also need to consider how to index new designated areas from 1 April 2024.

44. The government will follow up after this consultation on further details regarding how we plan to treat both existing and new designated areas in a way that best achieves our long-standing policy intent in this area.

Question 6: Do you agree that the approach to indexing Designated Area baselines needs to be reviewed to ensure that growth is still measured and retained locally in real terms?

Annex A: Summary of consultation questions

Question 1: Do you agree that a more sophisticated calculation will be required to ensure that future under-indexation compensation remains accurate?

Question 2: Do you agree that more dis-aggregated data will be required from NNDR forms to make a more sophisticated under-indexation compensation calculation?

Question 3: Do you agree that the government will need to introduce an interim workaround measure to estimate the calculation of under-indexation grant compensation if local authorities are initially unable to complete NNDR forms with more granular data?

Question 4: Do you agree that the proposed changes to indexing Baseline Funding Levels and Tariffs/Top-Ups are required, and if so, that a weighted average should be used to index Baseline Funding Levels and Tariffs/Top-Ups from 2024/25?

Question 5: Do you agree that the weighted average should initially be delivered by a proxy based on existing business rates data, and it should be fixed until the next revaluation?

Question 6: Do you agree that the approach to indexing Designated Area baselines needs to be reviewed to ensure that growth is still measured and retained locally in real terms?

About this consultation

This consultation document and consultation process have been planned to adhere to the Consultation Principles issued by the Cabinet Office.

Representative groups are asked to give a summary of the people and organisations they represent, and where relevant who else they have consulted in reaching their conclusions when they respond.

Information provided in response to this consultation may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Environmental Information Regulations 2004 and UK data protection legislation. In certain circumstances this may therefore include personal data when required by law.

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Personal data

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Data Protection Officer
Department for Levelling Up, Housing and Communities
Fry Building
2 Marsham Street
London
SW1P 4DF

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DLUHC may appoint a ‘data processor’, acting on behalf of the Department and under our instruction, to help analyse the responses to this consultation. Where we do, we will ensure that the processing of your personal data remains in strict accordance with the requirements of the data protection legislation.

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Please contact us at the following address if you wish to exercise the rights listed above, except the right to lodge a complaint with the ICO: dataprotection@levellingup.gov.uk or

Knowledge and Information Access Team
Department for Levelling Up, Housing and Communities
Fry Building
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London
SW1P 4DF

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