My Lords, these regulations put in place the last elements needed for the operation of the rates retention scheme in 2013-14. That scheme, as we have discussed previously, is designed to deliver the Government’s objective of returning an element of business rates to local control in a way that incentivises authorities to work with their local business communities to improve economic conditions in their local areas. It does so through a partial redistribution of business rate resources, taking account of the individual authority’s needs, in order to provide a fair starting point for each local authority. That starting point is fixed until the next reset of the scheme in 2020, and any growth in business rates above this starting position is shared between central and local government and can be used by authorities to support local services and stimulate further growth.
As the Committee will appreciate from looking at these, and earlier, regulations, while the principle of the rates retention scheme can be explained simply enough, the mechanics needed to deliver it are both complex and technical. Therefore, before turning to the detail of the regulations, it may be helpful to the Committee if I first remind noble Lords of the technicalities of the scheme and the mechanics of establishing authorities’ starting positions.
The key to the scheme is the establishment for each authority of two numbers: its baseline funding level and its business rates baseline. Its baseline funding level reflects the level of resources that the authority should have under the rates retention scheme, taking
account of its needs and the availability of other resources such as council tax. Its baseline funding level, together with the level of revenue support grant that it will receive, the RSG, represents the authority’s share of general government funding—the 2013-14 equivalent of its formula grant entitlement.
The second number, its business rates baseline, is the estimate of each billing authority’s business rates income in 2013-14, apportioned between that authority, central government and major precepting authorities in accordance with the shares approved by Parliament in the local government finance report. If the authority’s business rates baseline is more than its baseline funding level, it is required to pay the difference to the Government in the form of a tariff. Tariffs are then used to provide top-up funding to those authorities whose business rates baselines are less than their baseline funding levels. Because of the way in which the scheme is set-up, tariffs and top-ups sum to zero and, moreover, are fixed for the duration of the scheme. This provides the fixed starting position against which future growth can be measured and retained.
However, as we discussed during the passage of the Local Government Act 2012, while incentivising growth is vitally important, we all recognise that business rates at the local level are, by their nature, subject to a fair degree of volatility. This is a key issue. As a result, if we did nothing else, in any year authorities could see their resources fall, perhaps quite considerably, and this could leave them with less money than implied by their starting position. Reductions in income could be because of changes to commercial property. To take an example that has recently been in the news, one need only think of the impact on North Warwickshire’s business rates of the closure of Daw Mill colliery to understand the impact of such changes. I know that this is a challenge for local authorities that find themselves in similar situations. It could also be because of successful appeals against rateable values, which lead to an authority having to refund rates in respect of a number of previous years. For whatever reason, we quickly concluded that the scheme needed some way of mitigating the effect of local volatility. Having looked at this and discussed it with the local government sector, we concluded that the best way to do this was through a safety net.
Overall, the rates retention scheme provides authorities with about one-fifth of the general funding available to them through business rates, council tax and revenue support grant. The safety net works by ensuring that the one-fifth available through business rates can never fall by more than 7.5% before the authority receives assistance. The safety net is financed from a levy charged on the most highly resourced local authorities when they see growth in their business rates.
With that preamble, I turn to the regulations themselves. These give effect to the levy and safety net by reference to baseline funding levels and business rates baselines that have already been set out in the local government finance report, and which are set out for each authority in Schedule 2. Importantly, Regulation 5 provides that the baseline funding level is indexed every year so that the level of protection available through the safety net keeps pace with inflation.
The regulations provide for the calculation of levy rates and safety net thresholds in Regulation 6. The safety net threshold is set so that no local authority can see more than a 7.5% reduction from its baseline funding levels. This gives force to the policy that I have just described and ensures that authorities will have reasonable stability of income from which to deliver important local services.
The way that the levy is calculated means that only those authorities that pay a tariff—that is, those that, at the start of the scheme, have more business rates than their baseline funding levels—will ever be levied. Authorities with relatively small business rates bases will never be levied, and will be allowed to keep all of the growth that they achieve.
Regulation 7 means that authorities are able to receive a safety net payment on account during the course of the year. The payment will be based on the authority’s own estimates of the business rates income that it seeks to collect. This provision ensures that authorities do not have to wait for the final outturn figures before receiving safety net assistance, and therefore do not suffer cash flow problems through having to wait for funding.
I do not pretend for a moment that these regulations are not complex; indeed, I said that at the start. However, they have been developed with the working group that we set up to help us work through the finer details of the implementation. They have therefore benefited from the practical help and advice of those in local government finance departments who will have to work with the scheme and with the detailed regulations. We are confident that, with their input and the consultation that has taken place, the regulations will deliver the policy to which the Government are fully committed. I commend them to the Committee.