Local government suppliers need to wake up to business rate reforms

Written by David Walker on 21 June 2016 in Opinion
Opinion

Whitehall is granting councils more and more freedom, but David Walker argues that they might be facing more than they have bargained – or budgeted - for.

David Walker says that council suppliers may be witness to a bloodbath  - Photo credit: David Walker

Be careful what you wish for. Over the next few years, councils in England may wake up to find they’ve got what they have long wanted – localism! – but at the cost of severe financial shortfalls, over and above the continuing effects of austerity and general cutbacks in public spending.

Those who supply councils with goods and services may find themselves onlookers to a bloodbath. Already squeezed capital budgets may contract further; upgrades and even routine maintenance of networks and equipment will fall under treasurers’ glacial glance.


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You want control, Conservative communities secretaries Eric Pickles and Greg Clarke told local authorities. Well, here it is: you keep the proceeds of business rates. What Margaret Thatcher removed from them in the 1980s fearing their profligacy, George Osborne has pledged to return.

In theory, councils already get to keep half the business rate takings. In his 2015 autumn budget, Osborne vowed to increase that to 100 per cent.

By 2020, councils will keep all the money raised from non-domestic property. That will generate a rates bonus if the local economic base and attendant property values grow.

But finance departments have been doing their sums and the results aren’t looking good.

And now even the House of Commons Communities and Local Government Committee has weighed in. Its chairman, Sheffield MP, Clive Betts, isn’t the only member representing poorer, northern and (generally) Labour areas. They are worried localism could end up penalising them.

The haves and the have-nots

Put simply, them that hath get to keep it; them that hath not no longer get transfers.

Expert number crunchers show spending is particularly greater than income in the northeast, while councils in the southeast collect far more in local taxes than they spend.

Areas with high social needs tend to have fewer successful businesses – as Peter Kenway of the New Policy Institue has commented: “There are no guarantees that ability to raise business rates will match needs in the most deprived areas.”

And the location of businesses don’t necessarily match population growth - something that worries even well-off Tory areas such as Essex. The county has identified what it describes as a potentially toxic combination of growing complex demand and rapidly shrinking revenue. By 2020, Essex, like other areas, will have significantly more older citizens.

Faced by the brute facts of regional disparity, the government has kept transfers going, at the price of making the system complicated.

Westminster collects £542 million in business rates (which is more than the total rateable value of all businesses in Sheffield), but hands over £465m of that to The Department of Communities and Local Government to redistribute to less affluent areas.

Birmingham, which collects £188m in business rates, gets grants and top up payments worth £353m. Sheffield gets £29m in business rate top up payments from DCLG.

Assets and debt

Technology suppliers to local government need not be unduly alarmed. IT forms only a small proportion of most authorities’ capital budgets – just slightly more than 7 per cent in, say, Bristol. And capital spending has done relatively better than revenue spending in the cuts.

However, the National Audit Office – which does acknowledge that councils in England now have more freedom to invest - remains worried about the increased share of revenues going to servicing debt.

A quarter of metropolitan councils now spend one pound in nine on debt service and most of them are now cutting capital outlays by considerable amounts. This is bound to hit IT.

The NAO also found that many councils have thrown asset management plans out of the window. They are, it said, simply not maintaining their assets - tangible and intangible – unless the spend can be directly linked to local economic growth, which in turn could help their revenue position.

Moreover, the auditors noted that councils usually did their own thing in making investment decisions, without looking at benchmarking data or even their neighbours.

Councils say that it is difficult to compare capital activities between places as these will be shaped by local and historical factors. If that’s true, contractors and suppliers might want to consider spending a few hours in the city archives and county records offices.

Rating suppliers

Of course companies doing business with councils are also themselves ratepayers. Broadband suppliers are up in arms about how their assets are valued, with claims that some companies get favourable treatment.

Meanwhile, small and medium enterprises qualify for various reliefs - but there’s an emerging problem here.

If councils encourage more SMEs, their rateable base could shrink. SMEs doing IT work often have very few staff and semi-domestic premises, which leads to complaints from SMEs with similar turnover in other business areas, as they end up paying more in rates than those working from home or a small office.

A sole trader website designer, occupying makeshift premises in a business centre could qualify for full relief. But a car repair workshop with a lower turnover could pay thousands more.

That leads to appeals, which hit council cash flow because they have to make provisions in case of loss.

The government, rightly, wants to build incentives into the system so councils promote business development and grow local economies. But differences in property values north and south, urban and rural are not going to disappear.

That means a continuing need for subsidies and transfers, thus thwarting the wishes of councillors and ministers for financial devolution.

About the author

David Walker is former managing director public reporting at the Audit Commission and co-author with Polly Toynbee of Cameron’s Coup. 

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