Councils urged to seize "historic opportunity" to shape funding reforms

Councils have been urged to take an "historic opportunity" to help shape radical reforms of how they are financed, including full retention of business rates, as local government secretary Greg Clark launched the Government's Fair Funding Review.

Speaking at the LGA's annual conference in Bournemouth, Clark said the move towards town halls keeping 100 per cent of locally raised business rates could see them retain an extra £12.5bn on top of existing rates.

In exchange for greater freedom, councils could be expected to take on a number of additional responsibilities, including funding for public health.

The secretary of state asked councils for their views on proposed changes, including ensuring the system rewards areas that promote growth, that it redistributes funding to recognise different needs and demands, and that there are measures to manage risk, including improve management of appeals.

The review will also look at giving councils greater flexibility to reduce business rates to attract business and, where there is a combined authority with an elected mayor, to raise them to pay for infrastructure projects.

Elements of the current system of local government funding are expected to remain, including redistribution through mechanisms similar to top-ups and tariffs, measures designed to insulate councils from shocks and sudden drops in income, and Enterprise Zones keeping 100 per cent of growth in business rates for 25 years.

The New Burdens Doctrine, which requires that Whitehall departments assess and fund the impact of new policies and responsibilities on councils, will also remain in place.

"For years, councils have been calling for central government to give them the power to retain local taxes, including business rates," Clark said.

"Today, we set out the first steps towards making that ambition a reality, transforming the relationship between Whitehall and town halls and putting local government at the heart of delivering strong economic growth for their communities.

"These next few weeks offer councils an historic opportunity to play their part in these radical reforms and to shape their financial futures for decades to come."

Cllr Nick Forbes, senior vice-chair of the Local Government Association, welcomed the Fair Funding Review.

"It is important for the new system to be implemented in a way which balances rewarding councils for growing their local economies but avoids areas less able to generate business rates income suffering as a result," he said.

"Decisions over which grants and responsibilities councils will have to pay for from any extra business rates income are also crucial. As well as consideration of the grants and services listed in this consultation, councils are keen that any new responsibility they agree to take should support their vital role in driving economic growth. Handing over responsibility for skills and transport services is the most logical fit as it would allow local areas to close skills gaps, improve public transport and boost local economies.

"We are pleased the Government has committed to funding existing responsibilities and any new responsibilities devolved. Government also needs to allow councils to use some of the extra business rates income to plug existing funding gaps and give the power to increase business rates to all areas and not just to those with directly elected mayors.

"Councils have been forced to divert at least £1.75bn from stretched local services in the past three years to cover the risk of backdated appeals – of which they have to cover half the cost at present. Under localised business rates, local government could be liable for 100 per cent of the cost of successful appeals. Improvements to the appeals system are also essential to avoid the need for them to divert such significant sums of money that could otherwise be invested into local services."

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Government must address "massive problems" with business rates appeals, says MPs