Consultation outcome

Technical adjustment to the Business Rates Retention system - summary of responses and government response

Updated 19 December 2022

Introduction

1. The government ran a technical consultation in September 2022, outlining its proposals to make a technical adjustment to the business rates retention system in 2023-24, in response to the 2023 business rates revaluation, and the transfers of properties from local lists to the central list.

2. This document summarises the responses to that consultation and gives the government’s response.

Background

3. The next business rates revaluation is due to take effect from 1 April 2023, affecting business rates income retained locally. Further, a number of large telecom networks and the Channel Tunnel Rail Link will transfer from local authority rating lists into the central rating list from 1 April 2023. Moving properties to the central list will reduce income at local authority level.

4. It is government policy that retained business rates income from the BRR system should, as far as practicable, be unaffected by either business rates revaluations or the announced movement of ratepayers from local lists to the central rating list at the 2023 revaluation.

5. The consultation set out government proposals to make minor updates to the technical adjustment made to the business rates retention system for the 2017 revaluation to better account for changes in income, and compensation for central list transfers.

Overview

6. The government received 43 responses to the consultation. Responses were received from across the local government sector, from 37 individual local authorities of different classes and geographical spread, 4 local authority associations or special interest groups, 2 combined local authority responses and 1 from a consultancy.

7. A summary of the responses and the government’s response is given below. A handful of respondents asked for further clarity on the treatment of income in designated areas/enterprise zones (EZs) at the revaluation, and whether the baselines for these areas will be adjusted at the revaluation; this was not explicitly set out in the consultation. The government can confirm that designated area baselines will be adjusted at the revaluation, as was done in 2017. Local authorities will be asked to provide these values via the national non-domestic rates 1 (NNDR1) form.

Summary of responses

8. The consultation sought views on 6 questions. Overall, the response was positive, with high levels of agreement (80%+) on the main questions asked, including starting from the 2017 technical adjustment, not taking into account reliefs at this stage (subject to review in future) and that the technical adjustment should be modified for local authorities where transfers to the central list are taking place.

9. The majority of those responding also agreed with the government’s proposed approach to the revision of the technical adjustment to take into account outstanding appeals, and that the modification of the revaluation adjustment will safeguard LAs with property transferring to the central list.

Question 1: Do you consider that the 2017 technical adjustment to the business rates retention system for the Revaluation is the right place to start? If not, please give your reasoning. 

10. There was a large consensus that the 2017 adjustment was the right place to start (86% agreed) and only 3 respondents (7%) disagreed. Given the positive response and no fundamental issues raised, the government intends to proceed with the 2017 methodology as the basis for the revaluation adjustment in 2023.

11. There were several key themes raised by respondents, these are highlighted and addressed below.

Does the adjustment adequately factor in reliefs?

12. 10 respondents mentioned concerns with reliefs. Most of these stated that there is an issue with reliefs where the change in rateable value (RV) for properties which attract relief differs significantly from (in this case higher than) the average RV change for the wider LA area.

Response

13. We agree there may be a discrepancy where properties attract relief and change above or below the revaluation effect seen in an area, or where the amount of relief changes across lists in response to revaluation dictated effects. Some of these effects will cancel out on aggregate in an LA area and the overall effects may be quite small for individual authorities. The size of the effect will depend on local circumstances including the effect of the revaluation on individual LAs, which cannot be predicted.

14. We do not have granular data on the effect of the revaluation on rate bills after reliefs for individual properties, and cannot predict, nor do anything to solve, such a granular issue without significant burden on LAs and the department. We do not propose to make any adjustments at this stage for reliefs but will keep this under review.

The calculation of steady state provisions

15. 7 respondents said that when apportioning provisions made for appeals over the course of the list, that not all provisions included in the figures used for the proxy dated from 2017. A few respondents also mentioned concerns surrounding the potential to influence or game provisions to gain a more favourable adjustment.

Response

16. The steady state appeals calculation provides the best possible estimate of the amount of outstanding appeals loss per year. We acknowledge that not all appeals will go all the way back to 2017 as some are for shorter periods of time. The calculation made is the best proxy to assess the outstanding appeal amounts with the data available.

17. Local authorities are best placed to estimate the provisions required to anticipate and manage list changes in their areas. We do not have sufficiently granular data to do this, and it is unlikely to produce a material change which is sufficient to warrant the increase in complexity and burden on authorities.

18. The government relies on authorities making accurate and timely estimates of figures in order to make payments, run the BRR system and for policy development. Authorities’ s.151 officers have a responsibility to ensure the proper administration of their financial affairs and they must certify their end of year business rates income as in line with the regulations and with their audited accounts. Further, the CIPFA accounting code of practice requires authorities to give a true and fair view of their financial position and transactions, when preparing and certifying their accounts.

Inclusion of designated area figures within reliefs and provisions

19. A couple of respondents highlighted that EZ figures are included within the provision and relief figures used for the calculation, but that EZ income is more generally excluded from the revaluation adjustment.

Response

20. It will not be possible without further data collection to separate provision in respect of growth in designated areas from that under the normal scheme. Any further data collection would increase the burden on all authorities and is not likely to provide a material impact for most authorities

21. However, it is possible to ensure that reliefs in designated areas are not taken into account in the value of C. The government will ensure that values of funded relief in designated areas are excluded from the calculation of C by adding-back any funded relief in designated areas. This excludes this relief from the calculation.

Question 2: Do you support the proposed change to the formula? If not, please give your reasoning.

22. The majority of respondents to this question (51%) supported the proposed change to the formula, adjusting for outstanding appeals as measured by ongoing provisions. Fewer than a quarter of respondents did not support it.

23. The response to this question is positive, and the government considers that the methodology is improved by the further adjustment to take into account outstanding appeals, using the measure of ongoing provisions as a proxy. The government therefore intends to proceed with the updated adjustment of ‘B’ by a proxy for outstanding appeals.

24. The main issues respondents mentioned are given below, along with the government’s response.

Measure of outstanding appeals

25. Whilst 16% of respondents did not agree with the method of factoring in outstanding appeals, they agreed with the principle to do so. 30% of respondents either did not agree with mixing local data with data provided by the VOA, thought a national measure should be used or did not agree that authorities’ estimates should be used. 21% of respondents thought that given differences in providing for appeals, the figures reported may not be an accurate reflection of each authority’s position.

26. 3 respondents suggested that the figure used for provisions does not fully capture the effect of outstanding appeals as they are net of reliefs, and one suggested using a gross-rates payable figure instead.

Response

27. Local authority outturn data is the best available estimate of the provision authorities require and therefore the right data on which to make an estimate of outstanding appeals; there is no adequate, equivalent nationally derived data available. Combining this local authority data with VOA revaluation data should better strip out the effects of outstanding appeals and the government does not consider it necessary to change the proposed adjustment to avoid the mixing of VOA and local data.

28. Ideally, the adjustment for outstanding appeals would be made using provisions based on gross rate payable figure, however this kind of data is not available. The reality is that the provisions figures are estimated net of reliefs by authorities given that this is the amount of potential loss they are exposed to. The impact of the update to the methodology is dampened by using figures net of reliefs, meaning LAs actually benefit from a smaller revaluation effect.

Question 3: Do you agree that we should not further amend the adjustment to take into account changes in reliefs at this stage but rather keep this under review as changes in reliefs become clearer? If not, please give your reasoning. 

Question 4: If you disagreed with question 3, what are your suggestions for updating the technical adjustment to better take into account changes in reliefs? 

29. There was overall agreement from respondents that this was the right position to take (81% agreed and only 5% disagreed). Given this, and that it is not possible to make any additional adjustment based on reliefs at this time as 2023-24 data on reliefs is not yet available, the government does not intend to make any further adjustment for reliefs within the revaluation adjustment at this time. The government will, however, keep this approach to reliefs under review as the relevant data becomes available.

30. The key themes raised by respondents are given below, and the government response.

Key themes

31. There were concerns over how reliefs could distort income, as was raised in the response to question 1. There was concern around introducing more complexity and increasing burdens on local authorities. Some respondents felt that the government had not sufficiently made its case or had not taken the same approach to reliefs as to the outstanding appeals. 2 respondents thought the government should take reliefs into account in future, 1 respondent thought further data collection would be too onerous. 3 respondents asked for the government to define a level of materiality.

32. 2 suggestions for taking into account reliefs were mentioned – one, to use a different measure of rates income, which would not take into account growth or changes in reliefs since set up of the system in 2013-14, and one to use specific mechanisms such as those used for compensation of small business rates relief, to make further adjustment for reliefs.

Response

33. The government does not intend to make any further adjustment for reliefs at this point but will keep its approach under review. It may be appropriate to do an additional data collection in future, however this would need to be weighed up against the increased burden this would place on authorities.

Question 5: Do you agree that the standard technical adjustment should be adjusted to safeguard, as far as practicable, the financial position of those authorities who will see property transferred to the Central List at the Revaluation?  

34. The response to this question was overwhelmingly positive, with 95% agreement. 1 respondent was not sure and 1 made no comment.

Question 6: Do you agree that the proposed modification will adequately safeguard the position of local authorities who will see property transferred to the central list? If not, please give your reasoning and what you would do differently. 

35. Most respondents to this question agreed that the proposed modification would safeguard the position of LAs with property transferring to the central list (65%); 2 respondents disagreed, with 8 unsure.

36. The response to the question was positive and the government believes that the modified adjustment better safeguards the financial position of local authorities with properties transferring from local lists to the central list. It therefore intends to proceed with the modification to the main revaluation adjustment.

Key themes

37. A quarter of respondents were keen to make sure that reliefs, bad debts and provisions were either not in place for the properties moving, or that these were sorted out so that they did not affect the relevant LAs.

Response

38. The government ran a data collection recently, ensuring that affected authorities could submit figures on any reliefs and provisions on properties transferring from local lists to the central list, for 2022-23. These figures will be used to ensure that, as far as practicable, authorities are no worse off from transfers of properties to the central list from 1 April 2023, than had this not occurred.