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Draft Non-Domestic Rating (Rates Retention and Levy and Safety Net) (Amendment) and (Levy Account: Basis of Distribution) Regulations 2019

Debated on Monday 18 March 2019

The Committee consisted of the following Members:

Chair: Sir Henry Bellingham

Ali, Rushanara (Bethnal Green and Bow) (Lab)

† Bebb, Guto (Aberconwy) (Con)

† Crabb, Stephen (Preseli Pembrokeshire) (Con)

† Crouch, Tracey (Chatham and Aylesford) (Con)

Cunningham, Mr Jim (Coventry South) (Lab)

† Elmore, Chris (Ogmore) (Lab)

† Freeman, George (Mid Norfolk) (Con)

† Gyimah, Mr Sam (East Surrey) (Con)

† Howell, John (Henley) (Con)

† Lefroy, Jeremy (Stafford) (Con)

† McMahon, Jim (Oldham West and Royton) (Lab/Co-op)

† Morgan, Stephen (Portsmouth South) (Lab)

† Quin, Jeremy (Lord Commissioner of Her Majesty's Treasury)

Sheerman, Mr Barry (Huddersfield) (Lab/Co-op)

Stevens, Jo (Cardiff Central) (Lab)

† Sunak, Rishi (Parliamentary Under-Secretary of State for Housing, Communities and Local Government)

† Twigg, Derek (Halton) (Lab)

Martyn Atkins, Committee Clerk

† attended the Committee

Thirteenth Delegated Legislation Committee

Monday 18 March 2019

[Sir Henry Bellingham in the Chair]

Draft Non-Domestic Rating (Rates Retention and Levy and Safety Net) (Amendment) and (Levy Account: Basis of Distribution) Regulations 2019

I beg to move,

That the Committee has considered the draft Non-Domestic Rating (Rates Retention and Levy and Safety Net) (Amendment) and (Levy Account: Basis of Distribution) Regulations 2019.

It is a pleasure to serve under your chairmanship, Sir Henry. I love being Minister for local government and I love local government finance, but no one ever wrote a sonnet about the business rates retention system. The technical nature of the draft regulations gives us a good idea why not; I pay tribute to my officials for preparing some very helpful explanatory notes to translate them into plain English.

The draft regulations will do two very simple things: provide the basis on which we will distribute the levy account surpluses, and make changes to the regulations that give effect to the business rates retention scheme—not least to create the 75% retention pilots in the forthcoming financial year. Let me take those matters in turn, beginning with the levy account surplus.

Under the rates retention scheme, authorities may be entitled to a safety net payment if their business rates income falls below a certain level. The cost of such safety net payments is met by charging authorities a levy of up to 50% of any business rates growth that they achieve. In the past, we have also top-sliced an amount from the settlement to supplement the levy income and ensure 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. Effectively, safety net payments are therefore paid for by the local government sector; central Government simply act as an agent to collect and distribute the sums between authorities.

The top-slice and all the levy and safety net payments are made into or from a levy account that is kept by central Government. In line with the legislation, any surplus in the levy account at the end of the year belongs to the sector and is to be distributed to local government or carried over to the next year. At the end of 2018-19, the levy account will show a surplus of £188 million. As we announced in the 2019 local government finance settlement, we have decided that £180 million of that surplus should be distributed back to the sector. Legislation requires us to set out in regulations the basis on which the surplus should be distributed. The draft regulations therefore provide that all authorities should get a share of the 2018-19 surplus, in line with their shares of settlement funding in 2013-14—the first year of the rates retention scheme, and the first year in which we top-sliced sums from the settlement.

I am pleased to tell the Committee that we fully consulted local authorities on the basis of the distribution at the time of the provisional settlement in December. Fully 93% of respondents supported the proposal, including all the relevant local government bodies, such as the Local Government Association, London Councils, the District Councils’ Network, SIGOMA—the Special Interest Group of Municipal Authorities—and the Society of County Treasurers.

Let me turn to the changes that we are making to the day-to-day administration of the rates retention scheme. The running of the scheme is dealt with by means of a number of sets of regulations, the most important of which are the Non-Domestic Rating (Rates Retention) Regulations 2013 and the Non-Domestic Rating (Levy and Safety Net) Regulations 2013. Those regulations provide, among other things, for the percentage shares of business rates to be paid by billing authorities to central Government and major precepting authorities, and for the way in which the levy and safety net payments are to be calculated.

The draft regulations will make a few changes. They will ensure that the relevant shares of business rates income and the calculation of levy and safety net payments for 2019-20 and beyond reflect the Government’s decisions to create 75% retention pilots for 2019-20; make changes to the structure of local government in Dorset, Suffolk, Somerset and Northamptonshire; change certain values for the Isles of Scilly used in connection with the scheme; and change the way in which levy and safety net payments are calculated to reflect the higher compensation given to local authorities as a result of improvements and changes made to the small business rate relief scheme.

This is a highly technical set of regulations but most of the provisions simply give effect to changes previously approved by this House, either in the settlement or in other regulations. They ensure that authorities get the sums from the rates retention scheme that they are due. I commend the regulations to the Committee.

It is a pleasure to serve under your chairmanship, Sir Henry. This is a very important issue. Although the regulations appear to be very technical, they are fundamentally about how we pay for local public services, and to what degree local areas raise their tax locally, retain it and then spend it in their locality, as opposed to returning it to central Government and then having it redistributed in a different way. The issues are important, and will materially affect the financial bases of the local authorities concerned.

The issues that the Labour party has with this set of proposals reflect our concerns about previous proposals. First, we are concerned about capacity within the Department. The National Audit Office report of March 2017 reported a reduction of nearly 40% in staffing capacity in the directorate responsible for delivering the programme; there was a 39.6% reduction in staff. We are also concerned about the viability of individual schemes where local authorities have to hold more in reserves pending the outcome of appeals. In 2017, that amounted to £2.8 billion. We are concerned about how much local authorities are being asked to keep in reserves pending appeals, when the national framework for business rates is decided by central Government, not local government.

However, we have a more fundamental problem with the direction in which the Government are taking local finance more broadly. The proposal is almost saying: “It’s survival of the fittest. If you can raise the money locally, you can retain it and spend it on public services. The measures by which you can raise it are usually outside of your control, such as your historical house price base, and your historical employment, industrial and commercial land supply base. If you can raise it through those measures, then good. If you can’t, you won’t be able to afford to fund basic public services in your area.” We see that with the reduction—indeed, now the almost entire removal—of revenue support grant.

With the shift towards business rate retention, what we are seeing is not new money or free money. Rather, there is a deal: things that are currently funded through central Government grants—for instance, the public health grant and the like—are being taken away and the money made up for, almost pound for pound, by business rate retention. The choice of areas is quite telling, because the effect on central Government coffers is broadly neutral. The amount being taken away in grants provided under the current scheme is broadly in line with the retention amounts being kept locally through the new powers. The question is: what happens when we talk to local authorities where there is a greater imbalance between the amount received through current grant funding and what they would receive under a move towards retention?

We share many of the concerns raised by the National Audit Office in its March 2017 report, on both capacity and the amount of money that councils are being expected to keep in reserves. The Government should step up and hold a more fundamental review of how councils are funded that goes beyond business rates and the fair funding review that is currently taking place. We have massive concerns about the removal of deprivation as a measure of funding need in a locality, as we know that it drives a lot of need in an area.

We do not support the Government’s proposed move towards a “survival of the fittest”, “sink or swim” settlement, but we recognise that they have been in discussions with Labour-controlled authorities and combined authorities. On that basis, we will not seek to divide the Committee. However, we are getting to the end of the road. I fear that some councils will really struggle to make ends meet, and not just those where the control of the council is questionable, as we have seen in some Conservative-controlled councils. The demand for services massively outstrips the amount of money that the council has for those services. The Government need to find a more sustainable solution to funding—not just taking it from the needy and giving it to the less needy. We need more money for our basic public services.

As always, I welcome the comments of the hon. Member for Oldham West and Royton, which are always thoughtful and well informed. On this matter, however, I disagree with him. We will, of course, have more general debates on the right way to fund local government as we approach the spending review. I look forward to those discussions, which are slightly out of the scope of these regulations.

The crux of what the Committee is talking about today is the creation of 15 new business rate retention pilots. That is 15 new parts of the country where local authorities can keep 75% of the growth in the business income that they generate, rather than 50%, as in the normal system. That is central Government empowering local government to drive growth in their areas and to be rewarded for their efforts by keeping the proceeds of that growth.

Some 122 local authorities will benefit, including those of many Members present. Cumulatively, the extra money that local government will be able to keep will be around £490 million, when the 15 pilot areas in London are added together. Add that to the five existing 100% devolution areas that the Government have already created, and that is an additional £143 million. That is £633 million of incremental funding that the local government system is keeping as a result of driving growth in their areas.

That is what we are about on this side of the House: empowering local government to make decisions, to keep the proceeds of that activity and, in doing so, to provide a better community for their local residents. We are here today to implement that. I am pleased that the hon. Gentleman will not divide the Committee, and I thank him for his thoughtful comments.

Question put and agreed to.

Committee rose.