The Local Government Finance Act 2012 creates a new model for funding local authorities from April 2013, linking their financial revenue to the decisions they take to support local firms and local jobs.
Local government will retain a 50% local share of business rates and then keep a 50% share of any growth they generate, subject to a levy, providing a strong incentive to go for growth.
The new system could deliver around an extra £10 billion to the wider economy by 2020, and generate more business rate income for councils to help pay off the deficit and support frontline services that protect vulnerable communities.
Following consultation responses, the government has changed the approach to the levy to increase the rewards for growth. The maximum levy will now be 50p in the pound. This translates into very real benefits for authorities: after the central share and levy payments, at least 25p in each extra pound of business rates generated locally will be retained locally.
The document also confirms the safety net for when councils experience unexpected drops in revenue will guarantee a real terms income from business rates of 92.5%. This means council income will never fall below 7.5% of its baseline funding level ensuring no area gets left behind.
The document confirms that the government will implement the majority of the technical proposals for the operation of the scheme set out in the summer consultation, together with changes to a number of detailed aspects.
Local Government Minister Brandon Lewis said:
“Today, after listening to councils, we are setting the central principles for how the new rate retention scheme will work next year. Ahead of the formal funding settlement next month this will give councils the certainty and security to begin planning their budgets for next year.
“The old flawed system of government handouts to local authorities encouraged a begging bowl mentality, with each council vying to be more deprived than its neighbour.
“These reforms allow councils to stand tall, and rewards them for supporting local jobs and local firms. All councils, including the least prosperous, have the opportunity to gain from this system.”
The consultation originally proposed a levy set at higher ratio. This would have meant that a district council with a business rates baseline of £100 million and a baseline funding level of £5 million would have been subject to a levy rate of 95p in the pound. So if the authority realised business rates growth of £2 million, £1 million of this would have been paid to the central share, £200,000 would have been paid to the county council, and £760,000 would have been paid in a levy, leaving the authority with £40,000 of growth.
Today’s document confirms that levy rate will in fact be limited to 50p in the pound creating a much greater growth reward. This would leave that same authority with £400,000, ie 10 times more.