Chancellor George Osborne has revealed plans to scrap the uniform business rates system in a radical shake-up that will allow local authorities to set taxation of local businesses and keep all the money they raise.
In what he described as “the biggest transfer of power to our local government in living memory”, Osborne said the government planned to pass the decision making over the future of the £26bn tax to local politicians.
The move has sparked fears that cash-strapped local authorities, already suffering from a massive financial squeeze, may use the new powers to increase business rates, rather than lower them.
The coalition government announced a major review of business rates before the last election and has already trialled allowing cities to keep additional rates revenue from commercial growth, in pilots in Manchester and Cambridge.
However, in scrapping the centralised rate setting altogether, Osborne has put the future of the system in the hands of local decision makers and said it would be down to them to decide if they could afford to reduce rates, in the face of growing calls from retailers.
“Right now we have the merry-go-round of clawing back local taxes into the Treasury and handing them out again in the form of a grant,” he said.
“In my view, proud cities and counties should not be forced to come to national government with a begging bowl. Today I am embarking on the biggest transfer of power to our local government in living memory. We’re going to allow local government to keep the rates they collect from business.”
He said the changes were part of a “devolution revolution”.
“We’re going to abolish the uniform business rate entirely. That’s the single, national tax rate we impose on every council. Any local area will be able to cut business rates as much as they like to win new jobs and generate wealth. It’s up to them to judge whether they can afford it. It’s called having power and taking responsibility,” he added.
Osborne claimed the move would provide extra incentives to local authorities to rejuvenate their high streets and create jobs.
However, the ACS warned that the plans risked creating a postcode lottery under which businesses could see bills rise.
“The Chancellor’s decision to devolve business rate setting powers comes as government is supposed to be considering responses to a large-scale review of the business rates system, of which we have heard nothing yet,” said chief executive James Lowman.
“One of the consequences of locally set business rates will be that local authorities under financial pressure may be tempted to increase business rates to foot the bill, which is why business owners need certainty through a clear national framework. We urgently need to see more details of the Chancellor’s plans, and we need reassurance that local shops and other businesses will not see higher rates bills as a result of this policy.”
Melanie Leech, chief executive of the British Property Federation, also warned the plans could backfire on retailers.
“This is a bold step by the Chancellor, and one that we are keen to see more detail on quickly.
The business rates system as it stands has myriad problems and needs dramatic reform, and we would not want this move to exacerbate those issues. The fact that some local authorities have a much higher tax intake than others could lead to rate distortion across the country and have knock-on effect on growth, leaving some local authorities struggling to keep up.
“It will be imperative for Treasury to engage with industry to ensure that this does not lead to a proliferation of different rates of tax across the country, which businesses will find difficult to negotiate and which could lead to uneven growth across the country.”
A BRC spokesperson said:
‘We look forward to learning more about the Chancellor’s plans to fundamentally reform the business rates system in the autumn. Today’s announcement only highlights the urgency of reforming this outmoded tax which acts as a drag on the economy.
‘We will now look closely at the detail as it emerges but it’s worth remembering that there is a widespread consensus that any package of reform to the system must address head on the need to reduce the burden of a tax that discourages investment in jobs and growth.
‘The national business rates multiplier needs to be frozen, and then reduced to encourage local and national growth.
‘The detail of the Chancellor’s plan and on-going review is now absolutely essential.’