Concern over local authorities keeping business rates

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A rush toward ill-thought out development to generate quick revenue will damage regions in the long run, the Federation of Small Businesses (FSB) has said in its consultation response to a government review.

The Local Government Resource Review, which looks at the way local authorities in England are financed, proposes that councils will be able to keep the additional business rates they generate through economic growth. More businesses would mean a greater amount of income for the region.

While the FSB is supportive of a system which incentivises local councils to prioritise business growth, it is imperative any incentive encourages small business growth, not just large-scale developments especially out of town developments.

However, the FSB is concerned that the incentive system could actually deter local authorities from promoting and utilising the reliefs available to small businesses such as small business rate relief, rural rate relief and hardship relief.

The current proposal suggests benchmarking the amount of relief a local authority currently grants at the start of the scheme, with councils then receiving the same amount each year after until the system is reset, regardless of how much extra they award to help small businesses.

It would mean that a local authority would lose out on income if it increased the proportion of businesses that received rate relief or would make money if the number of businesses able to get relief fell. 

To avoid this, FSB has proposed that there should be an annual rebate process, where the amount awarded would be reconciled with the year one baseline figure. The local authority would then either receive payment for the additional relief it has awarded, or have to pay back any excess to the Treasury if it awarded less.

Councils should also be rewarded for increasing the number of small businesses in their area by creating a small business bonus scheme – similar to the proposed new homes bonus. This could be funded out of the business rates revenue surplus projected to emerge from 2012.

John Walker, national chairman of the FSB, said: “The whole focus of this scheme should be to encourage councils to promote long term sustainable economic growth. This can only be done if it is built upon a bedrock of stronger small businesses and through encouraging the creation of new firms.”