NAO report on Planning for 100% local retention of business rates

The Department for Communities and Local Government has made progress in designing the scheme for 100% retention of business rates by local authorities, but the scale of the remaining challenges presents clear risks both to the timely delivery of the initiative and to the achievement of its overall objectives, according to the National Audit Office.

The Department's core objectives for the scheme, due to start in 2019-20, are to drive local economic growth, and to promote financial self-sufficiency for English local government. Today’s report, however, raises questions as to whether the Department’s current planning approach is best configured to deliver a scheme capable of meeting those objectives fully. Furthermore, the report also highlights the substantial design and delivery challenges still facing the Department in the context of an increasingly tight timetable and reduced staffing levels in its core delivery team.

By allowing local authorities to retain 100% of business rates, the Department hopes that this will incentivise them to grow their tax bases by adopting pro-development planning practices which in turn will support economic growth. But tax base growth does not necessarily mean economic growth: new developments might lead to the relocation of existing economic activities rather than the creation of new ones, for instance. The Department needs to understand the link between business rates and economic growth to ensure that the scheme is configured to maximise economic growth rather than just growth in the tax base. Today’s report finds, however, that these issues have not been fully examined in the Department’s work to date. Crucially, the Department has not looked in detail at whether the current scheme, in which authorities retain 50% of business rates, has promoted pro-growth behaviour in authorities.

The Department is promoting financial self-sufficiency in the sector through the 100% local retention scheme in the context of a long-term reduction in local authority funding. Local authorities’ spending power (government grant, locally retained business rates and council tax) fell in real terms by 25.2% from 2010-11 to 2015-16 and will fall by a further 5.4% by 2019-20. The Department is reviewing the relative distribution of funding in the sector through a Fair Funding Review, but there is not scheduled to be a Spending Review in which the absolute level of funding in the sector is reviewed, until after the 100% scheme is operational. In this context, the report highlights the risk of implementing a 100% local rates retention scheme that might be technically sound but lacks sufficient funding for the sector to deliver its statutory functions.

Today’s report recognises that the Department has managed a complex project, involving extensive sector engagement, and made good progress. The Department has learnt from designing and implementing the 50% retention scheme. The NAO, however, found clear risks to the timely delivery of the 100% scheme. Many significant and challenging issues remain outstanding, such as delivering the Fair Funding Review. Some slippage on meeting milestones to date, constraints on the Department’s resources, and the Department’s intention to concentrate important decisions in a short space of time towards the end of the timetable create the potential for pressure in the late stages of the project. The NAO highlights the risk that the pressure to deliver by 2019-20 could result in a scheme that has not been fully tested. The experience of the 50% scheme, in which the operation of the appeals process has proved problematic, demonstrates the clear risk posed by unforeseen issues. Today’s report also stresses the need for the Department to assure itself that the scheme will deliver its core policy objectives and that these are not overlooked among the technical challenges of designing the scheme to a tight timetable.

Amyas Morse, head of the National Audit Office, said today:

“The Department faces a significant challenge in implementing 100% local retention of business rates by 2019-20. It has benefited from the experience of delivering the 50% local retention scheme and is using this experience effectively. 

“The key question is whether there is enough money in the system to let services be delivered on the right scale and for self-sufficiency to be seen to succeed.”