My Lords, the regulations before the House do a number of things, the most of significant of which are to give effect to the new 75% rates retention pilot authorities that we are creating for 2019-20, and to set out how we will share £180 million of the levy account surpluses between authorities. They also make a number of more minor changes to the administration of the business rates retention scheme, not least to reflect the changes to the structure of local government that will come into effect from
The regulations are highly technical, but what they do, as opposed to how they do it, can, I hope, be easily explained. The Government have a clear commitment to giving local authorities more control over the local tax income they raise. In 2013-14, for the first time since 1990, we allowed authorities to keep a proportion of locally collected business rates and to then benefit from the growth in their local tax base. Subsequently, we announced that we would increase the proportion of business rates kept by local government, and we have set out our intention that, from 2021, authorities should be able to keep 75% of local business rates.
Pre-shadowing that wider reform, as part of the recent local government finance settlement we announced that we would create 75% business rates retention pilots for 2019-20. We are creating these pilots in London and 15 other areas. In those areas, authorities will keep 75% of the local business rates they collect in 2019-20, instead of the 50% they would normally keep under the rates retention scheme. Based on authorities’ own estimates of the business rates income they expect in 2019-20, those 75% pilots—the GLA, the London boroughs and 122 authorities outside London—will have additional revenue of £490 million in 2019-20, compared to what they would have received under 50% rates retention.
For this to happen, however, we need to make changes to the regulations that govern the day-to-day administration of the business rates retention scheme. The regulations before the House today make the necessary amendments; principally, to the relevant percentages of business rates income due respectively to central and local government and to the percentages due to billing and major precepting authorities. The percentages set by the regulations for 2019-20 are those proposed by the pilot authorities themselves at the time they applied for pilot status in the autumn, and have been confirmed with them subsequently. They will ensure that the 75% pilots operate as we, and local authorities, intended. They reflect the budgets those authorities have set, on the strength of which they have set the level of council tax set out in the bills being sent to council tax payers.
Under the rates retention scheme, authorities are entitled to a safety net payment if their business rates income falls below a certain level. The cost of safety net payments is met by charging authorities a levy of up to 50% of any business rates growth they achieve. In the past, we have also top-sliced an amount from the settlement to supplement the levy income and ensure that there is sufficient funding from which to make safety net payments. Since 2013-14, we have top-sliced a total of £255 million that would otherwise have been distributed to authorities through the settlement.
The top-slice and all the levy and safety net payments are made into, or from, a levy account which is kept by central government. The primary legislation that provided for the levy account requires that any surplus in the account should be distributed to local government or carried over until the next year. At the end of 2018-19, the levy account will have a surplus of £188 million. We announced at the 2019 local government finance settlement that we would distribute £180 million of that surplus to the sector.
The legislation requires that we set out in regulations the basis on which any surplus will be distributed. The regulations provide that all authorities will get a share of the £180 million in line with their share of settlement funding in 2013-14—in other words, in line with need. We fully consulted local authorities on the proposed basis of distribution at the time of the provisional settlement in December: 93% of respondents agreed with what was proposed.
As your Lordships know, there will be alterations to the structure of local government in Dorset, Somerset, Suffolk and Northamptonshire from
The existing regulations that govern the day-to-day administration of the rates retention scheme need, therefore, to be changed to provide for the new authorities. The regulations before the House make those changes and ensure that the new authorities will, from
The regulations also make two more minor, but important, changes. First, they make changes to levy and safety net calculations. The existing calculations set out in regulations reflect the fact that we compensate authorities directly, through Section 31 grants, for the changes that the Government have made to the business rates system, including changes made to small business rates relief. Changes made to the small business rates relief scheme from 2017-18 have had the effect of increasing the relief available to ratepayers. In turn, this has increased authorities’ loss of income and, hence, increased the compensation paid to them through Section 31 grants. These higher amounts of compensation need to be recognised in the calculations of an authority’s levy and safety net payments to ensure that authorities receive, or pay, the safety net and levy amounts that are due to them. The regulations amend the calculation of levy and safety net payments to reflect the changes to small business rates relief.
Finally, the regulations increase the Isles of Scilly’s baseline funding level. This will ensure that, in the event that they lose significant business rates income, the safety net will protect them to a slightly greater extent. This is in line with decisions made by this House in the last two local government finance settlements.
These are highly technical but important regulations. They will ensure that the business rates retention scheme operates in 2019-20 as was intended and as local authorities expect. I beg to move.
The Minister will be grateful for paragraph 8.1 in the Explanatory Memorandum, which states:
“This instrument does not relate to withdrawal from the European Union”.
It is the first statutory instrument today that does not have that status. However, as the Minister said, it is technical but important.
I remind the House that I am a vice-president of the Local Government Association.
I understand that this statutory instrument has to be brought forward every year to enable the rolling 75% business rates retention pilots to take place, which are now being extended to new areas for 2019-20. In that respect the SI is fine. As the Minister stated, it also allows for the new authorities being created out of reorganisation, such as Dorset, to levy business rates. Obviously that is essential. It allows for the return to councils of money which had previously been levied by central government through the business rates account. The total sum amounts to £180 million, which means that the Government will make themselves popular with those receiving it.
Although this is a technical SI, we should reflect that the basis of business rates is under question and under stress, not least because of the pressures on the retail sector. No doubt we shall have opportunities in the future to discuss that issue in greater depth. However, as the Minister said, this is a technical but important statutory instrument and it has our support.
My Lords, I declare my local government interests as vice-president of the LGA and as a councillor in Newcastle.
The noble Lord, Lord Shipley, referred to the present situation in respect of business rates. There is a bland assumption by the Government that there is a uniform approach to what can be raised locally, either by domestic rates or business rates, but that is not the position. The amounts that can be generated vary considerably between authorities and the Government have paid little attention to that disparity, in terms of either council tax or business rates.
The Government are making much of the £180 million they are going to restore to authorities. That is £100 million less than the loss that Newcastle City Council alone has sustained in grants from central government since 2010. It is a pitifully small amount and will make little difference to the efforts of local councils—of all political characters—to maintain local services. This is not a substantial change in favour of local government and the Government have to look again at the wider issues of funding a sector of the economy which has been substantially underfunded for the last eight years.
My Lords, as the Minister said, the regulations are technical and in that sense I am happy to support them as they stand. I concur with the comments of the noble Lord, Lord Shipley, and my noble friend Lord Beecham and I am sure the Minister will respond to the points raised.
The only issue I want to raise concerns Northamptonshire being in the list of council areas that are involved in this scheme. I know the county council is the precept authority, or the collecting authority, but equally it is a council in crisis. The local government reorganisation is happening because the county council has effectively almost gone broke. Is the Minister confident that we should be doing this in this area, in view of the problems that have been widely reported over the past year? That said, I am very happy to support the regulations.
My Lords, I am grateful for the contributions of all three noble Lords. As the noble Lord, Lord Shipley, said, this is the first non-Brexit SI, although I noticed it emptied the House as I rose to my feet. He mentioned that the announcement of £180 million going back would be popular with local government. We are always seeking to court popularity with local government, although we do not always achieve it. I am grateful to hear that on this occasion, we have.
The noble Lords, Lord Shipley and Lord Beecham, raised slightly broader issues about the pressures confronting local authorities, which I recognise. We have had to take difficult decisions on public expenditure over recent years, and they have impacted on local authorities and government departments. There will be an opportunity to discuss that.
Finally, the noble Lord, Lord Kennedy, mentioned Northamptonshire. The change in Northamptonshire is relatively minor and switches responsibility for one service from A to B. I do not think it detracts from the more structural changes that are now having to take place in that county.
I, too, forgot to remind the House that I am a vice-president of the Local Government Association.
I was a vice-president of a preceding local government association, but I was expelled when I introduced rate capping.