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Overhaul of town hall funding hands councils the means to boost finances

Councils will be freed to generate greater levels of income, encouraged to support local firms and jobs and be well placed to reap the rewards…

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Councils will be freed to generate greater levels of income, encouraged to support local firms and jobs and be well placed to reap the rewards of success, Communities Secretary Eric Pickles said today, as he confirmed that Government will introduce major reforms enabling councils to keep a share of business rates they collect rather than paying them back to Whitehall.

Ministers are committed to letting councils benefit from business rates growth in their areas and borrow against future rate income. They see this as the means to putting all parts of the country on a surer path to economic growth and, following consultation, have today set out further detail on how the changes will be introduced.

Last year £19 billion in business rates collected by councils were recovered by Government and redistributed back out through a complex grant. The Organisation for Economic Co-operation and Development (OECD) called this one of the most centralised systems in the world.

Ministers believe that the new business rates system will not only be more transparent but by introducing a new incentive for councils to work with business in their areas and grow their economies, will increase the amount of revenue they generate from business rates and provide confidence that they will receive their fair share of that revenue.

The reforms will establish a direct link between the effort that councils put into growing local economies, supporting jobs and infrastructure and the amount of money that they have to spend on local services and local people.

Council tax payers and business rate payers stand to benefit from additional income that rate retention could bring authorities, through better services and more investment.

The Government is not proposing to change the way that business rates bills are calculated, the way that properties are valued or the way business rates levels are set. National discounts and rate relief will continue to be supported meaning there will be no adverse change to such groups as charities, amateur sports clubs, voluntary groups, those in hardship and eligible rural or small firms.

Ministers are clear that helping small shops and businesses grow is a crucial part of rebalancing and rebuilding the economy. To that end, the Government has doubled small business rate relief helping half a million small firms for two years, scrapped red tape making it easier for small shops to reapply for discounts and has given councils powers to set local business rate discounts. Ministers are also committed to supporting local high streets though policies such as town centre first and are currently considering recommendations from the recent Mary Portas high street review. 

The Government will today introduce legislation to devolve greater financial powers and freedoms to councils. The Local Government Finance Bill will set out the legislative foundations to implement changes from April 2013.

In developing the proposed reforms the Government has taken steps to ensure that the interests of the vulnerable and local taxpayers are protected, that the changes are fair to all councils and will encourage growth.
Communities Secretary Eric Pickles said:

We need to restore the country to strong sustainable growth and Local Government has a key part to play in this. For too long councils have been hamstrung and discouraged by a system that failed to encourage and reward economic success.

This isn’t simply about redistributing the proceeds of growth.  If these reforms lead to every council working as hard as it possibly can to help businesses thrive, then they have the potential to benefit individually and increase growth overall.  It’s good news for communities - growth in business rates means more money to invest in local services.  And it’s good news for local businesses, who can look forward to an even stronger partnership with councils.

Our reforms are fair and sustainable. They will deliver long term certainty and protection for those areas in need of additional support.

The reforms being announced today include measures to:

  • enable councils to directly retain a portion of their business rate growth

  • introduce tax increment financing giving councils freedom to borrow against future income from business rates to pay for roads and transport projects alongside other local priorities

  • ensure a stable starting point for all authorities. No authority will be worse off as a result of their business rates base at the start of the scheme

  • establish a national baseline alongside a system of top ups and tariffs. Councils with business rates in excess of a set baseline would pay a tariff to government whilst those below would get an individually assessed top up from government. This would ensure that all councils would start from a level playing field. How far they then progressed beyond that would be entirely down to them

  • create a levy to take back a share of growth from those councils that gain disproportionately from the changes. This money would be used to fund a safety net providing financial help to those authorities who experience significant drops in business rates, for example caused by the closure or relocation of a major business.

The changes to the way in which councils are financed should be seen in the context of wider reforms designed to support local growth. Local government will have access to new financial measures including over £430 million of funding under New Homes Bonus, up to a £1 billion in Community Infrastructure Levy, access to the £2.4 billion Regional Growth Fund and the £500 million Growing Places Fund (through their Local Enterprise Partnerships).

The reforms should also be considered alongside changes to give councils greater financial autonomy - for example putting councils in charge of providing financial support for council tax. This reform will enable expenditure on council tax support to be reduced by over £400m a year in England, will give local authorities a greater financial stake in getting people back into work, and ensure that vulnerable pensioners continue to receive support. The Local Government Finance Bill includes measures to introduce localised schemes in England from 2013-14.

Eric Pickles said:

The reforms we are delivering to the way support for council tax is provided will mean councils are much better placed to help their residents get off welfare and reap the benefits of work instead. They will directly benefit from improving the prosperity of the local area that will in turn drive down their benefit bill.

The reforms go hand in hand with wider economic reforms and will mean the new system will be a fairer one, where tax payers can be more confident that spiralling benefits bill are controlled and where work pays.

Notes to editors

  1. Proposals for a new business rates retention scheme were first published for consultation in July 2011. The proposals were based on four key principles:
  • to build into the local government finance system an incentive for local authorities to promote local growth over the long term

  • to reduce local authorities’ dependency upon central government, by producing as many self sufficient authorities as possible

  • to maintain a degree of redistribution of resources to ensure that authorities with high need and low tax bases are still able to meet the needs of their areas; and

  • protection for businesses and specifically, no increases in locally-imposed taxation without the agreement of local businesses.

  1. A plain English guide to the core components of the rate retention scheme was published alongside the consultation and is available here:

  2. The Government has today published its response to that consultation setting out a clear central proposition for the business rate scheme This document provides further detail on how the scheme will operate and next steps on delivering reform.

  3. The Government will today introduce into the House of Commons The Local Government Finance Bill which will make it possible for local authorities to retain business rates and will set out, in legislation, the structure of the business rates scheme.

  4. The Local Government Finance Bill will contain provisions for the establishment of localised council tax support schemes in England. The Government has today published its response to the consultation on the localisation of support for council tax in England The detail of the framework for local schemes will be set out in regulations, which the Government intends to publish in draft form for consultation while the Bill is in passage through Parliament. The Department for Communities and Local Government will also continue to engage with local authorities to support their work in preparing for the introduction of local schemes.
  5. The Bill will also provide for a number of technical reforms to council tax, including powers to reduce certain discounts and exemptions. Government has proposed a series of practical proposals which will help hard-working families and pensioners with their council tax bills. The reforms could allow councils to make up to a £20 reduction in the bill for a typical Band D property in England. These proposals are subject to consultation and the Government will if necessary introduce amendments to the Bill in line with final policy decisions.


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Published 19 December 2011