Consultation outcome

Technical adjustments to the Business Rates Retention System in response to the Non-Domestic Rating Act: outcome and response

Updated 13 December 2023

Introduction

1. The government ran a technical consultation in September 2023, outlining its proposals to make adjustments to the business rates retention system in 2024-25, in response to the changes introduced by the Non-Domestic Rating Act 2023 to the way that business rates multipliers are calculated and applied.

2. In the government’s view, as explained in the consultation document, the 2023 Act changes necessitate technical amendments to how we administer the Business Rates Retention System (BRRS), in order to maintain the future accuracy of levy and safety net payments and the compensation payments made to local authorities.

3. This document summarises the responses to that consultation and gives the government’s reply.

Background

4. The Non-Domestic Rating Act has decoupled non-domestic rating multipliers.  Previously the standard multiplier was derived by adding a supplement (1.3p in 2022/23) to the small multiplier.  In future, the small and standard multipliers will be set independently of each other.  The 2023 Act requires both multipliers to rise in line with the annual change in the Consumer Price Index (CPI), unless the government chooses to under-index one, or both multipliers.

5. At the Autumn Statement on the 22 November 2023, the Chancellor announced that for 2024/25 the small multiplier will be frozen at 49.9p for the fourth consecutive year, and that the standard multiplier will be uprated in line with September CPI from 51.2p to 54.6p.

6. This decision increases the gap between the two multipliers.  It has consequences for the business rates retention system under which local authorities retain a portion of the rates they collect locally.

7. Critically, the 4.7p absolute gap between the small and standard multipliers means that it is questionable whether the annual uprating of key elements of the business rates retention system should continue to be linked to the change in the small multiplier only.

Overview

8. The government received 52 responses to the consultation. Responses were received from across the local government sector, from 45 individual local authorities of different classes and geographical spread and 7 local authority associations or other special interest groups.  A summary of the responses submitted and the government’s response is given below.

9. This document summarises the responses submitted to the consultation, as well as setting out the government’s reply.  It includes confirmation and details of how government plans to implement the technical changes proposed in the consultation.  In addition to this response, further detail on the planned changes will be included with NNDR data form guidance, and through the provisional local government finance settlement documentation.

Summary of responses

10. The consultation sought views on 6 questions.  Overall, the majority of respondents agreed that there would need to be changes to the BRRS to deal with the de-coupling of business rates multipliers introduced by the 2023 Act.

11. Whilst recognising the need for changes, however, some respondents expressed concern over the complexity that they would introduce into the system, and the speed at which the proposed changes were being worked up.  A number of respondents mentioned that the BRRS should be reset to reduce some of the complexity that has been built up within the system.  Whilst recognising the potential for a reset to simplify the operation of the BRRS, the government reconfirms its previous position that a reset of the business rates retention system will not happen before 2025-26.  The government remains committed to improving the local government finance landscape in the next Parliament.

12. Other respondents called on the government to delay the introduction of changes either to business rates multipliers, or to the business rates retention system. However, while the uprating of the standard multiplier will allow the government to prioritise policies that support growth and investment, the small business multiplier freeze will protect over a million ratepayers from the impacts of inflation.

13. Given the two business rates multipliers will be separated by 4.7p in 2024-25, the government does not believe that it would be desirable to delay the introduction of the technical BRRS amendments beyond 2024-25, because without them, we cannot ensure the accuracy of income compensation to local authorities, or the integrity of the safety net and levy.

14. Some respondents also flagged the new power the Non-Domestic Rating Act introduces which allows the government to tailor who is subject to each of the two business rates multipliers, not only by RV, but also by geographical location, use, sector, and/or occupier.  Whilst the government is obliged to use this power to maintain the RV threshold at the same level as previous years, £51,000 for the financial year 2024/25, there are currently no plans to make changes to the criteria for which properties are eligible for each multiplier.

15. There were 3 areas which we consulted on proposed amendments to BRRS administration.  For each area below is a summary of the responses received, and the government’s response and plans for implementing these amendments.

Section 31 under-indexation payments and NNDR forms

Question 1: Do you agree that a more sophisticated calculation will be required to ensure that future under-indexation grant compensation remains accurate?

Question 2: Do you agree that more dis-aggregated data will be required from NNDR forms to make a more sophisticated under-indexation compensation calculation?

Question 3: Do you agree that the government will need to introduce an interim workaround measure to estimate the calculation of under-indexation grant compensation if local authorities are initially unable to complete NNDR forms with more granular data?

16. There was broad consensus that a more sophisticated calculation would be required to ensure that future under-indexation remains accurate (87% of respondents agreed), and that the government would need to collect more dis-aggregated data through NNDR forms to make that calculation (83% agreed).

17. A significant number of respondents were concerned about the additional complexity that a more sophisticated calculation would introduce to a system which is already very complex.  Linked to this, a number of specific concerns were raised. Respondents were concerned about the increased administrative burden that would be imposed on authorities, both in respect of the completion of NNDR returns, and in relation to the increased complexity of in-year monitoring and forecasting of compensation amounts.

18. A number of respondents questioned why, in NNDR returns, Government proposed to ask that accounting adjustments be apportioned between each multiplier in the same way it is proposed that other transactions should be split.  Concerns were raised about local authorities’ ability to apportion these amounts accurately, and it was suggested that these amounts might  continue to be entered  as one figure without significantly affecting the accuracy of the compensation calculation.

19. Concerns were also raised about whether changes to the software that local authorities use could be delivered on time ahead of the completion of NNDR1 forms for 2024-25 which will launch in mid-December and will need to be completed by 31st January 2024.  Some respondents urged the government to delay the introduction of these changes, but many acknowledged the need for them if business rates multipliers were to be subject to separate indexations in 2024-25.

20. The majority of respondents also agreed (71% agreed) that DLUHC should incorporate a temporary solution into the NNDR form to allow any billing authority to continue to complete NNDR forms with local data if their software systems are not updated in time.  Respondents were firmly of the view that local authorities shouldn’t lose out financially if a work-around option was needed.

Response

21. As mentioned at the beginning of this response, the government has now announced that business rates multipliers will be indexed at different rates for 2024-25, in order to protect the majority of ratepayers from a 6.6% increase in their bills while ensuring that the government can take action on policies to support growth and investment.  In the circumstances, government believes that it should not delay the implementation of a more sophisticated calculation of under-indexation compensation but should introduce the new calculations for 2024-25 in order to ensure the accuracy of compensation payments.

22. As a result, NNDR1 and NNDR3 forms that relate to the 2024-25 financial year onwards will need to collect more granular data split by revenue raised on each multiplier.  This information will be needed on gross rates payable, net rates payable and collectible rates. However, the 2023-24 NNDR3 form, to be released in Spring 2024, will continue to collect data on the old, aggregated basis.

23. Given the two independent business rates multipliers will be indexed separately, we will need to calculate two under-indexation factors (UIFs) and these will be applied to the collectible rates subject to the small multiplier, and collectible rates subject to the standard multiplier.  These two amounts will then be added together to form a local authority’s overall under-indexation compensation.  To help local authorities with their financial planning, we have set out the two under-indexation factors for 2024-25 below:

	2024/25
Small UIF	124/499
Standard UIF	91/546

24. In the consultation we proposed that local authorities should apportion accounting adjustments between those properties subject, respectively, to the small and standard multipliers thereby allowing the accurate calculation  of under-indexation compensation given that these amounts are included in the calculation of collectible rates.  However, having considered the representations of respondents to the consultation – see paragraph 18 above -  we will not now be asking local authorities to do this.  Instead, we will continue to collect a single amount from billing authorities for accounting adjustments (still split between BA Area and Designated Areas).  DLUHC will then apportion that amount for the purposes of calculating under-indexation compensation using net rates payable to make the split.  For the avoidance of doubt, the lines we will treat this way will be:

Data form	Lines to be filled out with one figure
NNDR1	Part 3: Estimated bad debts Part 3: Estimated repayments
NNDR3	Part 2: Interest paid on refunds to ratepayers Part 2: Losses on collection Part 2: Provision for alteration of lists and appeals

25. Recognising the increased administrative burden on authorities – see paragraph 17 above – the original consultation document had noted that we were considering the need for additional funding. The Autumn Statement on 22 November confirmed that new burdens funding will be paid to billing authorities to acknowledge the additional administrative and IT costs associated with these changes.

26. The consultation paper had acknowledged the challenges of introducing changes to software systems to collect more granular data and asked whether an interim workaround measure should be introduced in the event that some authorities were unable to provide dis-aggregated data.  As noted in paragraph 20 above, the overwhelming majority of respondents agreed that it would be prudent to create the capacity for a workaround measure so that the NNDR process can still be administered with or without the software updates that will be required to complete NNDR forms on a dis-aggregated basis.

27. The government therefore proposes to put in place a workaround measure that will allow authorities to provide aggregated data in much the same way as they do now.   The work-around measure will collect two collectible rates numbers, and this split in income will then be used, along with the two separate under-indexation factors, to generate a compensation payment.  A detailed explanation of how the work-around measure will work is set out below.  This explanation is designed to speak to the NNDR1 changes given that this is the first NNDR data collection which will include the workaround measure.

Firstly, when opening part 2 of the NNDR1 form, there will be a drop-down menu to ask billing authorities whether they are able to provide data on a disaggregated basis.  This box will be set to ‘yes’, but local authorities will need to switch this to ‘no’ if they cannot provide disaggregated data.

Clicking ‘no’ will grey out Part 2 columns 4, 5 and 6 from rows 6 to 42 and local authorities will not need to fill out data in these cells.  Instead, local authorities will only need to enter total amounts in columns 1 and 2.

However, Part 2, columns 4 and 5 from rows 1 to 3 will remain ungreyed and will still need to be completed by billing authorities.  To do this, authorities can calculate the additional yield generated from all properties who are charged the standard multiplier as they have done prior to 2024/25.  Once calculated, the additional yield figure can be used to derive the total RV that will be subject to the standard multiplier.  The calculation is: “additional yield” divided by 0.047 (i.e. the difference between the small and standard multipliers). This figure will become the value in row 1, column 6.  Authorities will need to provide a breakdown of the figure between Designated Areas (in column 5) and the rest of an authority’s area (in column 4).  the figures entered by authorities in columns 4 and 5 will automatically be summed in column 6.  By deducting the column 6 figure from their total rateable value, authorities will be able to generate the figure that is to be the value in row 1 column 3.  As above, authorities will need to provide a breakdown of this figure between their Designated Areas and the rest of their area in columns 1 and 2.  The figures in columns 1 and 2 will be automatically summed in column 3.  Authorities will need to check that the sum of columns 3 and 6, which will form the “Grand Total” in column 7 agree with the RV figure in their rating list.

Accounting adjustments in Part 3 will be filled out in column 1 and 2 only.  These amounts will be apportioned by DLUHC for the purposes of deducing collectible rates for the small and standard multiplier (as set out in paragraph 24) to calculate under-indexation compensation.

This will mean two collectible rates figures are calculated in the NNDR form, splitting collectible rates between the small multiplier and the standard multiplier:

• collectible rates for the small multiplier, all reliefs which will be netted off of gross rates, and an apportionment of accounting adjustments
• gross collectible rates for the standard multiplier and an apportionment of accounting adjustments

Both figures will have separate under-indexation factors (UIFs) applied, these are set out in a table below paragraph 23.  Both amounts will then be added together to form a total compensation amount shown in Part 1C of the form.

28. We plan to build prompts into the NNDR form to assist local authorities complete this process.  If local authorities utilise the work-around measure in the NNDR1 form for 2024-25 we will assess whether the work-around measure is also needed for the 2024-25 NNDR3, scheduled to be released in Spring 2025.

29. This workaround option should be considered a last resort by local authorities who are not able to access software updates to complete an NNDR form on a more granular basis by the required deadline.  The government has continued to engage with local authority representatives over the course of the consultation, and we are increasingly confident that local authorities will be able to access software updates which will enable to them to complete the NNDR1 form for 2024-25 on the new, disaggregated basis.

30. Filling out NNDR data forms with accurate disaggregated data will be important to continue to ensure accurate compensation is calculated and paid to local authorities.  Any local authority who needs to utilise the workaround measure at NNDR1 24-25 should be reassured that their under-indexation compensation will be reconciled at NNDR3 stage (Spring 2025), assuming software changes have fully bedded in at that point.

Baseline funding levels and tariffs/top-ups

Question 4: Do you agree that the proposed changes to indexing Baseline Funding Levels and Tariffs/Top-Ups are required, and if so that a weighted average should be used to index Baseline Funding Levels and Tariffs/Top-Ups from 2024/25?

Question 5:Do you agree that the weighted average should initially be delivered by a proxy based on existing business rates data, and it should be fixed until the next revaluation?

31. Over 70% of respondents agreed that the government should use a weighted average of the change in the small business rating multiplier and the standard multiplier to index Baseline Funding Levels (BFLs), Tariffs and Top Ups, and implicitly Business Rates Baselines (BRBs).

32. Around 20% of respondents stated that BFLs should be indexed using an England wide weighted average, whereas BRBs should be indexed by a local authority specific weighting.  Other respondents took the view that the weighted average should be applied at a local authority level rather than at a regional or national level.

33. A number of respondents noted that there needs to be transparency in demonstrating how a weighted average approach to indexation is calculated.

34. 65% of respondents agreed that the weighted average calculation should be applied via a proxy, at least initially.  A number of respondents felt that the use of a proxy should be kept under review to ensure its accuracy, particularly as, over time, the government will have more dis-aggregated data from local authorities, via NNDR forms, on which to make a comparison.

35. Some respondents thought that the weighted average should be fixed until the next Revaluation.  However, others  disagreed, citing concerns over a proxy’s accuracy if it is not updated each year.

Response

36. There will be a difference of 4.7p between the small and standard multipliers in 2024-25.  This will impact retained rates income collected by local authorities.  We will need to amend the approach we take to uprating Baseline Funding Levels (BFL), Tariffs and Top-ups (T/TU), and (implicitly) Business Rates Baselines (BRB) to ensure that the element of retained rates income represented by BFLs grows in line with inflation. Uprating BFLs, T/TUs and BRBs by the change in the small multiplier alone, as we have done in the past, will no longer achieve this because whilst there is no change in the small multiplier, the standard multiplier is increasing by 6.6%.

37. In future, a weighted average, specific to each authority, will be used to index BFLs, T/TUs and (implicitly) BRBs, accounting for the fact that authorities have different shares of gross rates attributable to the small and standard multipliers.  This will aim to ensure that the element of retained rates income represented by BFLs grows in line with inflation so that, as far as is practicable, each local authority will keep an inflation adjusted amount of income that is not subject to a BRRS levy.  Uprating BFLs also ensures that, as far as is practicable, the point at which help is available through the safety net is inflation adjusted too.  This approach will be first set out in the draft Local Government Finance Report (LGFR) which will be published alongside the provisional local government settlement consultation for 2024-25.

38. Some local authorities commented that BFLs should be indexed using an England level weighted average so that every local authority received the same inflationary impact in BFLs, as reported through the annual Local Government Finance Settlement.  However, we believe that doing this would introduce and element of arbitrariness into the BRRS.  It would mean that two otherwise identical authorities will pay, or receive, more or less levy or safety net depending on whether the national weighted index used to uprate BFLs is higher or lower than the proportion of an authorities’ income that is subject to either the small or standard multiplier.

39. Therefore, we intend to proceed with our plans to index BFLs, T/TUs and BRBs at the individual local authority level reflecting each authority’s specific weighted average of gross rates income from each multiplier.  Core Spending Power also includes an illustrative amount for under-indexation of the multiplier, reflecting the government’s policy to compensate authorities for income lost due to decisions to limit increases to the business rates multipliers. The actual amounts of under-indexation to be paid will be determined through the department’s National Non-Domestic Rates statistical returns.

40. For 2024-25 the weighted average approach to indexing BFLs and T/TUs will be based on rateable value data from the Valuation Office Agency’s local rating list published on 3 April 2023.  The weighted average proxies for each local authority that the government plans to use for 2024-25 will be set out set out in the draft LGFR which is published alongside the provisional local government finance settlement consultation.

41. In the consultation, some local authorities expressed concern over a proxy which uses rateable values, given that reliefs can have a material impact on the proportion of  non-domestic rating income collected under each of the small and standard multipliers.  The government is mindful of this impact, and we will therefore keep the planned proxy approach under review.  We will review dis-aggregated NNDR data as it becomes available to assess the perceived accuracy of the proxy.  We will also keep under review our proposal to fix weighted averages (via the proxy) until the next Revaluation.  Once disaggregated outturn data becomes available we will discuss with authorities how to proceed balancing the need for indexation to be accurate and the desirability of limiting  further complexity  in the administration of the system for government and local authorities.

42. Finally, a few respondents flagged that we can help local authorities in their financial planning by re-starting the publication of levy and safety net calculators.  We agree that this would be helpful to local authorities and we will prioritise publishing calculators to assist local authorities in their calculation of levy and safety net payments for 2024-25.  We will also look to publish calculators for 2022-23 and 2023-24 to help local authorities in reconciling their business rates transactions for these years.

Disregarded amounts 

Question 6: Do you agree that the approach to indexing designated area baselines needs to be reviewed to ensure that growth is still measured and retained locally in real terms?

43. The majority of respondents (75%) agreed that the government would need to review the method to index designated area baselines to ensure that growth is still measured and retained locally in real terms.  Fewer respondents to the consultation responded to this question, which is to be expected given that not all local authorities have designated areas within their boundaries.

44. Several respondents stated that a revised method for indexing should only apply to new designated areas that are introduced after 1 April 2024, and that existing designated areas that the government has introduced since 2013 should continue to be indexed by the increase in the small business rating multiplier.

45. A number of respondents suggested that designated areas should be indexed in the same way as other parts of the Business Rates Retention System.  However, some respondents to this question flagged that additional local data collection would be needed to tailor the indexation of baselines to the proportional make up of hereditaments within each designated area.

Response

46. The government does not intend to alter the method by which existing designated area baselines are indexed as they have already been approved by Parliament and include a number of prohibited amendments.  Therefore, all areas designated before 1 April 2024 will have their baselines uprated as set out in the Relevant Regulations.  The government is mindful that attempting to change the basis on which existing designated area baselines are uprated may have detrimental impacts to local authorities who had relied on the arrangements set out in Regulation in their long-term financial planning.

47. However, to ensure that our long-standing policy intention of measuring and awarding growth in real terms is maintained as far as is practicable, we plan to index future designated areas, introduced from 1 April 2024 onwards, by the change in both the small and the standard multipliers.

48. We will collect data from local authorities on what portion of their original baselines is subject to the small multiplier, and what portion is subject to the standard multiplier.  This will mean a weighted average split of a billing authority’s baseline subject to the small and standard multiplier will be used for the purposes of uprating it annually by the change in the small and standard multiplier separately.

49. The indexation of baselines will continue to be calculated automatically through NNDR forms each year as set out in future Regulations.  The weighted average will be fixed between revaluation cycles, but will need to be updated when future revaluations occur.  This will be done in a similar way to how we have previously asked local authorities to recalibrate their baselines in previous revaluation years. The method for calculating this will also continue to be set out in relevant Regulations.

50. This split of the baseline will be collected when a designated area is first introduced, in the same way that local authorities are already asked to return their baselines to DLUHC when designated areas are being introduced.  The method for calculating the baseline amount in specified years will be set out in a Schedule within the Regulations which will be introduced to formally give effect to new designated areas from 1 April 2024 onwards.