MPs have said that the plan to allow local authorities to retain 100% of business rates while cutting their central government grants could lead to an inability to get resources to councils in need.
Under the current system, the central government revenue support grant allows councils that generate less income from business rates and other means to continue to provide services.
The new plan will see that grant cut, in exchange for having the power to decrease business rates where they see fit.
However, a report from the House of Commons Communities and Local Government Committee published today says that there is “likely to be little or no correlation between changes in business rate revenue and changes in local authority needs”.
This means that those councils that currently rely on the revenue support grant are likely to suffer, with evidence to the committee’s inquiry suggesting that it would exacerbate the “winner takes all” approach to urban growth.
“Without the revenue support grant, there is no obvious way to shift resources in immediate response to councils affected differently by sudden increases in need,” the report stated.
“Redistribution between authorities more and less able to generate revenue will clearly be a crucial aspect of the reformed system.”
It recommends that government considers handing local authorities the more fiscal powers, including being able to increase their business rates multiplier and vary it according to business type, as well as greater control over council tax.
“This is critical for councils to be able to meet the continually increasing demands for services, such as social care, in the future,” the committee said, adding that this was “essential to genuine devolution”.
Another major issue with the plans that the committee said was raised repeatedly during its inquiry is the appeals system, which will see councils liable for 100% of the risk of appeals.
Councils told the committee that appeals were already a “massive problem”, and in some cases said growth in business rate revenue was being outweighed or “eradicated” by the impact of appeals.
Recommendations to tackle this include creating a system that deals with appeals outside the business rates retention system and funding them separately.
As part of the reforms, councils will be expected to take on extra responsibilities.
However, the committee stressed that councils needed “reassurance that, now or in the future, they will not be required to take on new responsibilities that are unaffordable or likely to become unaffordable over time”.
Commenting on the report, the Local Government Association said: “No matter which new services councils agree to take on, it is absolutely crucial that the amount of extra business rates income kept by councils matches the cost of them now and in the future.”
The government is consulting on the plans over the summer, and has not yet set out the timeline for the reforms, which are due to take effect in 2020.