The current 50% business rates retention scheme for local government is yielding strong results. Local authorities estimate that in 2017-18 they will keep around £1.3 billion in business rates growth, which we expect will be at least maintained into 2018-19 and 2019-20. On top of the 50% business rates retention scheme which is in place for all local authorities, in 2017-18 the Government established pilots of 100% business rates retention in five areas of England and extended business rates retention to 67% in London. The pilot programme will be expanded further in 2018-19 to cover an additional 10 areas.
My officials have worked through the necessary calculations to prepare for the extension of the piloting programme in 2018-19. In doing so, an historic error has been identified in the methodology used to calculate the sums due to pilots. An adjustment is therefore required to the methodology, which will reduce the amount due to these local authorities for participating in the pilot programme to the correct level. This adjustment does not affect the local government finance settlement nor the core spending power of the local authorities concerned. The relevant local authorities have been informed today.
Under the business rates retention system, local authorities retain a percentage of the business rates they raise locally. Since 2014-15, locally-raised business rates have been lower than they would have been because Government have under-indexed the business rates multiplier in each of 2014-15, 2015-6 and 2018-19. To compensate local authorities for their loss of income, therefore, the Government have calculated the extent of the loss caused by under-indexation and paid that amount as a grant under section 31 of the Local Government Act 2003.
The compensation to be paid to local authorities is paid on account during the course of a year, based on estimates made by authorities before the start of that year. It is then adjusted once outturn figures are available, following the end of the year.
When on account compensation payments were calculated for the six 2017-18 pilot areas, the methodology used to adjust tariffs and top-ups contained an error. This resulted in 27 local authorities and the Greater London Authority being over-compensated by £36 million.
These local authorities will have been operating on the understanding that this funding has already been secured and, at this this late stage in the year, a sudden reduction in their funding could potentially have an impact on the delivery of the objectives agreed as part of their devolution deals. Therefore, although the rules of “Managing Public Money” indicate that the Department should recover the overpayment, I have issued a direction requesting that the permanent secretary does not do so in this extraordinary circumstance. My correspondence with the permanent secretary will be published on the Department’s website.
In respect of the payments due to 2018-19 business rates retention pilot authorities, my Department will use the corrected methodology to calculate the section 31 grant compensation due to authorities. Local authorities will shortly be notified of these amounts.
In recognition of the importance of the business rates retention system to the sustainability of local government, I am also today announcing an independent review of the internal processes and procedures that underpin the Department’s oversight of business rates and related systems. This should include modelling and analytical work, how officials manage the interface with policy decision making, and resourcing and skills.