In recent days, the Institute of Fiscal Studies (IFS) has voiced concerns that the Government’s business rates retention scheme will fail to achieve its intended goal of promoting growth.
First unveiled in 2015, the business rates retention scheme will see that local Government as a sector is able to retain all business rates raised locally.
Under existing plans, the share of business rates retained by councils will rise from 50 to 75 per cent in 2020 – while some locations will trial a pilot scheme for 100 per cent retention.
The general idea of the scheme is that retaining rates will increase the number of incentives councils have to grow and therefore benefit local economies.
However, in a report entitled Spending Needs, Tax Revenue Capacity and the Business Rates Retention Scheme published in recent days, the IFS has warned that the initiative “also risks growing divergences between the funding available to different councils.”
In the report, the IFS has said that if 100 per cent retention were applied generally, councils which bring in the greatest amount of revenue might not necessarily be those with the greatest spending needs.
“This implies that central and local Government face a difficult trade off when moving to 75 per cent or 100 per cent rates retention,” the report said.
“More frequent and fuller periodic redistributions of revenues could limit the scale of funding divergences. But they would also dampen the incentives for councils to grow revenues and tackle spending needs.”
Claire Kober, of the Local Government Association, said that “a fairer system” of distributing funding between councils was “urgently needed.”
“The new system of business rates retention… should take into account issues such as those identified in the IFS report,” she said.
The IFS’ report can be accessed here.