Department for Transport,
Local Government and the Regions

Modernising Local Government Finance: A Green Paper

Part 5:
Taxes and charges

Introduction

5.1 The aims of a good local government finance system (see paragraph 1.3) apply equally to the taxes which support local government expenditure (the council tax and business rate) and to fees and charges. They must be fair and should be understood by those who pay them. There should be clear accountability for the tax or charge, and proper consultation when significant increases are proposed. Predictability and stability of yield are important to authorities funded from the taxes and charges; they are equally important to those who foot the bills.

5.2 Taxes and charges are not just a way of raising revenue. For example, car park charges may be a key tool in a local transport plan. In the same way, business rates could be used to promote regeneration. But when considering options for using taxes in this way, it is important to avoid over-complicating the tax system or introducing new unfairness.

Council tax

5.3 The council tax was introduced in 1993. It replaced the community charge, which in turn replaced the domestic rate. The council tax combines the features of the earlier taxes. Like the domestic rate, it is a tax on houses, flats and other dwellings. For council tax purposes, properties are placed in one of eight valuation bands, based on their value in 1991.

5.4 In the white paper Modern Local Government: In Touch with the People, we said that the council tax is working well as a local tax. It has been widely accepted by taxpayers and is generally very well understood. The banding system makes tax bills predictable and stable. While there are always opportunities for improvement, there are no fundamental problems that need urgent attention. The Government has no plans to change the council tax system in this Parliament but one issue that can be considered now to improve the fairness of the tax is the introduction of a fixed cycle for council tax revaluation.

5.5 Properties are revalued for business rates every five years, but there is no fixed revaluation cycle for domestic properties. In Modern Local Government: In Touch with the People we concluded that the current council tax valuation base remained broadly acceptable and was likely to remain so for the next few years. However, we are interested in views on whether there should be a statutory revaluation cycle for council tax as well as for business rates. This could make the tax fairer and more predictable. Revaluations might take place every six, eight or ten years to complement the business rate revaluation cycle (see paragraph 5.37).

5.6 Council tax levels should largely be a matter for local authorities as they have to answer to their voters. That is why the Government abolished crude and universal capping – a heavy-handed tool for telling councils how much they could spend. In its place, we have introduced reserve powers to protect council taxpayers from excessive increases. The Government has no plans to remove or amend these powers.

5.7 Most local authorities have responded well to the new freedom and responsibility. Consultation of local taxpayers about local tax and spending decisions has increased. The Government wishes to encourage this and will work with the local authority associations to devise guidance on good practice in consulting taxpayers.

5.8 In shire areas, county councils account for about 80 per cent of the council tax bill. But bills are issued by district councils. Taxpayers may blame steep increases on the district council, rather than the county council. If so, this seriously undermines accountability. The solution could be to make county councils responsible for billing and collecting council tax. If this happens, they should probably also take responsibility for collecting the business rate. The Government invites views on the advantages and disadvantages of these reforms, including the likely costs of the changes and their implications for administering housing and council tax benefits. We would also welcome suggestions for other ways to make council tax bills more transparent to the taxpayer.

5.9 The national taxpayer bears part of the cost of council tax increases in the form of higher council tax benefit payments. Council tax benefit subsidy limitation (CTBSL) was introduced so that local authorities making steep council tax increases should meet part of the escalating benefit bill resulting from their decisions. The Government sets a guideline increase in council tax, which is currently 41/2 per cent or (if greater) the authority’s SSA increase.

5.10 The Government is satisfied that CTBSL is justified in terms of accountability, but it is a complicated system and its purpose is widely misunderstood. Some authorities appear genuinely to believe that CTBSL is ‘capping by the backdoor’, rather than a mechanism for sharing the costs of council tax increases sensibly between national and local taxpayers. If grant is distributed by formula, there is no practical reason why CTBSL should not be retained in broadly its present form. CTBSL would need to change under a plan-based grant distribution system, and we would need to reconsider the case for retaining it.

Power to vary the business rate

5.11 The business rate is paid by those who occupy business and other non-domestic property. Each property has a rateable value, which represents its assumed annual rental value. The amount paid is based on a national rate per pound of rateable value, which currently stands at 41.6 pence in England (this is known as the ‘national rate multiplier’). Legislation says that neither the multiplier nor revaluation can be used to increase the total yield from the tax by more than inflation.

5.12 In the white paper, Modern Local Government: In Touch with the People, we said we would give local authorities limited freedom to vary the business rate in their areas. They could offer rebates on the national rate, provided they fund the difference. They could also set a supplementary rate, to be used in agreement with local businesses. We have consulted business organisations and local government on how to implement these proposals. Annex C sets out the detail.

5.13 The annual increase in the supplementary rate will not exceed 1 per cent of the national rate paid by the businesses affected. The maximum supplement will be 5 per cent, though we propose to review this after 5 years. If the scheme has worked well, Parliament can be asked to extend it, by raising the maximum level of the supplement, though not the 1 per cent annual limit. If it needs fine-tuning to make it work better, it can be amended. If it has not worked well, it will lapse. The onus is very much on local government to demonstrate that the supplementary rate is mutually beneficial.

5.14 The supplementary rate may be restricted to part of a local authority or to a specific group of ratepayers. So may the local rebate. High-performing authorities might be permitted to levy a higher supplementary rate in specific areas, provided the businesses concerned agree. The freedom to vary the business rate in parts of a local authority could be helpful in dealing with urban renewal. The supplementary rate could fund town improvement schemes – see paragraph 5.30 below. The rate rebate could help attract firms into deprived areas.

5.15 The supplementary rate is not intended to substitute for council tax, but to fund additional expenditure, agreed with local business. To give effect to these principles, we need to establish a formal link between the supplementary rate and council tax, and we invite views on how this should be constructed. We also need a mechanism for securing the agreement of business. Our proposals on this are:

5.16 The Partnership Arrangement should be as simple and flexible as possible, placing minimal burdens on both local firms and local authorities. But it should also be fully representative of all the different business interests within each area. Our proposals in annex C aim to do this, but we would welcome comments on how to simplify the mechanism while keeping it fully representative.

5.17 The Partnership Arrangement provides a means of consulting business on a wider range of issues, beyond agreeing how the supplementary rate should be spent. It also creates a forum for discussing the budget-setting process, community planning, Best Value and the modernisation agenda. Recent DTLR research confirms that there is considerable scope for improving relations between local authorities and businesses. The Partnership Arrangement should facilitate this. We would therefore encourage authorities to establish informal Partnership Arrangements in advance of the legislation needed to introduce the supplementary rate.

5.18 The Partnership Arrangement should involve police or fire authorities and local councils where appropriate. In two-tier areas (the counties and Greater London), there would be a single Partnership Arrangement (covering the district council or borough) to agree a shared supplementary rate.

5.19 For the sake of fairness, we propose that an average of all supplementary rates across England should be levied in respect of properties on the central rating list (mainly utility and communications networks). This would be paid into the national pool for redistribution to all authorities in the same way as the national rate.

5.20 We also propose to take reserve powers under which we could require ‘rate-rich’ authorities (those which collect considerably more in business rates than in council tax) to pay a proportion of their supplementary rate income into the national pool for redistribution among all authorities.

Rate reliefs

5.21 The following paragraphs deal with rate reliefs for small firms, for businesses in rural areas and for non-profit making bodies. Rate reliefs can help ensure that the business rate is fair, because it is a larger burden (as a proportion of turnover or profit) for small firms than for large ones. They can also further other goals, such as helping businesses vital to local communities.

5.22 However, rate reliefs complicate the tax system and make it harder to understand. The benefit of the rate relief may also be eroded over time, if rents rise to offset the reduced rates bill. Rate reliefs also have a cost. Mandatory reliefs, which are given automatically to all qualifying ratepayers, are funded by the national taxpayer. For discretionary reliefs, granted by local authorities, the national taxpayer bears 75 per cent of the cost and council tax payers the remaining 25 per cent.

5.23 So we would monitor any new rate reliefs, to ensure that they are properly targeted, deliver real benefit and do not place undue burdens on those who pay for them.

5.24 We said we would consider introducing rate relief for small firms at the same time as the supplementary rate. We propose that there should be relief of 50 per cent for all properties with rateable values up to £3,000. This should be gradually reduced for properties with higher values. There would be no relief for properties with rateable values above £8,000. Annex D provides more detail.

5.25 It is sensible to target the relief at small firms (as opposed to small properties), but without making the rules too complicated. Some types of property (e.g. advertising hoardings and telecommunications masts) could be excluded from the scheme altogether, since they are clearly not small firms. In other cases, we might take into account whether the company occupied a single property, or look at its turnover or number of employees. We would welcome views on the effectiveness of such tests and on how firms should demonstrate that they meet the criteria (e.g. by reapplying annually to local authorities).

5.26 Unlike other rate reliefs, we propose that other ratepayers, rather than the general taxpayer, should fund this scheme. We estimate that such a scheme would add less than a penny to the national rate multiplier (see paragraph 5.11) for other businesses.

5.27 In rural areas, an existing scheme provides 50 per cent mandatory rate relief for the sole village shop or post office in a designated rural settlement, with rateable values of up to £6,000. It gives councils discretionary powers to top this up to 100 per cent. It also allows authorities to grant 100 per cent discretionary relief for other small businesses in such areas, with rateable values up to £12,000. We should welcome views on whether certain other village businesses should be eligible for mandatory relief, on the same terms as the sole shop or post office. Candidates include other food stores, village pubs and petrol stations, particularly where they provide other community services such as cashpoints or access to internet links. In August we issued a consultation paper on relief for horse enterprises on farms. Annex F gives more detail on rural rate relief.

5.28 Lastly, we seek views on whether:

Local taxes in urban areas

5.29 The Urban Task Force report recommended that rate relief should be granted to small retailers in deprived urban areas. The proposed small business relief will apply throughout England, including deprived urban areas. We would welcome views on whether anything more is needed in such areas.

5.30 The Urban Task Force also recommended that town improvement schemes (see paragraph 5.14) should be placed on a statutory footing, to enable local businesses to work with councils to fund improvements in urban areas. Voluntary schemes already exist, but businesses that choose not to contribute can also benefit from the improvements. The supplementary rate would provide one mechanism for funding such schemes, ensuring that all ratepayers in the area contributed. Other funding mechanisms for town improvement schemes are also possible, such as a free-standing statutory scheme, separate from the rates, which would allow more flexibility, involving contributions from other players such as property owners. However, it would risk duplication of effort if a supplementary rate scheme were also in place. We would welcome views on alternative ways of funding town improvement schemes.

5.31 The Urban Task Force reportalso recommended that we allow a system of tax increment financing in deprived urban areas. This would allow authorities to retain additional council tax and business rate income resulting from successful regeneration. The funds raised would be used to maintain the quality of the area. This would provide councils with an incentive to encourage regeneration in these areas. The Government is interested in the proposal that a local tax re-investment programme could be set up, perhaps limited to a number of small areas for a specified period. Annex F presents a possible scheme. We would welcome views on it.

5.32 Annex F gives more detail on urban local taxes.

Review of revaluation

5.33 Every non-domestic property is assigned a rateable value based on its assumed annual rental value. To keep tax bills fair and up-to-date, properties are revalued every five years. The last revaluation took effect on 1 April 2000, based on 1 April 1998 values. While the total amount collected remained broadly constant in real terms, some individual rate bills increased or decreased significantly. Since predictability and stability are important to business ratepayers, the Government has implemented a self-financing transitional relief scheme. This sets ceilings on the amount by which business rate bills may increase, the cost of which is borne by setting similar limits on the amount by which business rate bills may reduce.

5.34 We have recently reviewed the basis on which revaluations take place. The full report of the review of revaluation, which involved officials from central and local government and business representatives, is at annex G. We accept the recommendations of the review of revaluation that there would be no great advantages in pursuing banding or blunting for rates. We propose, as the review recommended, to bring forward the announcement of the outcome of the future rate revaluations, so ratepayers have more time to prepare for their new liability. They will also be more involved in the valuation process, through ratepayer panels. We intend to decriminalise the penalty for non-return of statutory forms requesting rental and other information. We will also consider extending the period allowed for completion of these forms to 56 days. We would welcome views on these proposals, which complement the conclusions of the recent five-yearly review of the Valuation Office Agency. This recommended that the Agency should take the lead in moving away from the current practice of relying on appeals to arrive at acceptable valuations by taking steps to ensure that its valuations are ‘right first time’.

5.35 There are a number of points on which the review did not reach firm conclusions, but which need to be settled. On these, we conclude that it is essential to start by establishing the principle that there should be no subsidy from taxpayers generally. This means that transitional relief (TR) schemes should be self-financing. The Government does not see a good case for asking ordinary taxpayers to subsidise business ratepayers. There are various mechanisms that can be used to make TR self-financing – a supplement on the multiplier, or the equal phasing of decreases in bills as well as increases. There is also the option of not having any TR scheme, so all businesses bear the costs of their own rate liabilities. We are attracted to a TR scheme that ensures all ratepayers are paying their full liability by the end of the scheme, though this will mean higher annual increases for some ratepayers than the present English TR scheme. We welcome views on the possible structure of a fully self-financing TR scheme.

5.36 On the same principle that non-domestic ratepayers should not be subsidised by other taxpayers, we propose that the multiplier should be adjusted to take account of actual losses on appeal. Current legislation provides limited flexibility, requiring an estimate of future losses to be made at the time of revaluation, but no scope for recovering any additional losses if this estimate is too low. This can result in permanent loss of yield, as happened during the 1990 rating list, though the estimate of losses from the 1995 list has so far proved to be accurate. We therefore propose amending the legislation to allow further adjustments to the multiplier in subsequent years, if the initial estimate of losses proves to be incorrect.

5.37 As for revaluation cycles, we have invited the views on the possibility of having a fixed cycle for council tax (see paragraph 5.5). If this were introduced, there would be advantages in aligning this with the cycle for business rate revaluations. This could be achieved by a cycle of six, eight or ten years for each, with one or the other being revalued every three, four or five years. Since the Government bears the cost of revaluations, it is ultimately for Government to decide how frequent they should be. Nevertheless, views are invited on what the cycle should be.

5.38 There is a lot of secondary legislation on non-domestic rating. Many regulations take the form of amendments to previous ones. This can make the legislation difficult to follow for ratepayers and their professional advisers. We therefore intend to consider the consolidation of these regulations.

5.39 Most ratepayers have their rateable values assessed by the Valuation Office Agency of the Inland Revenue using conventional methods. However, certain industries – in the transport and utility sectors – have their rateable values prescribed by the Secretary of State. We intend to end prescribed assessment by the time of the next revaluation. Considerable progress has already been made toward using conventional methods to assess the valuations that were prescribed for the last revaluation.

Valuation tribunals

5.40 Valuation tribunals (VTs) provide an essential service, hearing appeals against valuations for business rates and against valuations and liability for council tax. The administration of VTs is being rationalised in line with recommendations by the financial management and policy review of the service, which reported in March 1999. This has involved the establishment of a non-statutory management board and 14 administrative units to support the 56 independent VTs in England.

5.41 While these changes have the general support of the VTs, some are concerned that there is no specific statutory backing for the reorganisation. Establishing the management board and the 14 administrative units as separate non-departmental public bodies (NDPBs) would be a cumbersome arrangement, so the Government believes that establishing a single NDPB is the best way to formalise the new and more independent administrative structure. Under such an arrangement, the individual VTs’ judicial roles could continue to be protected in legislation. Our detailed consideration of this issue can be found at annex H.

Fees and charges

5.42 Local authorities in England currently raise £6.2 billion through fees and charges, including sales. This amounts to 11 per cent of income from all sources. In its report last year, The Price is Right?, the Audit Commission drew attention to the importance of fees and charges both as a source of revenue for local authorities and as an instrument of policy. It identified some examples of good practice, but found that in general local authorities rarely managed their charges well. There was little evidence that policy priorities or systematic planning drove charging policies.

5.43 Under Best Value, charging is an important option which authorities should explore when reviewing discretionary services. They should therefore develop corporate charging policies, consult on them locally and keep them under review. We also intend to make regulations under section 150 of the Local Government and Housing Act 1989 to enable authorities to charge for discretionary services provided under statutory powers, including those to promote the well-being of their areas. We will consider in the light of consultation whether additional powers are needed to issue statutory guidance on charging, taking into account what can be done using Best Value and well-being provisions. In the longer term, the Government will review its policy on charges for mandatory services.

5.44 Congestion charging is a good example of charges being used as an instrument of policy. Local authorities will have the option of introducing road user charges and a levy on workplace parking where new charges can help to tackle traffic congestion as part of a Local Transport Plan. Every penny of the net proceeds will be retained locally and ring-fenced for improving local transport for at least 10 years. We expect the necessary enabling legislation to receive Royal Assent in autumn 2000. The Government is already working with local authorities that are interested in making use of these new charging powers. We will issue guidance in due course.

5.45 Annex I sets out in more detail the Government’s proposals for dealing with the deficiencies that the Audit Commission identified both in local authorities’ use of their existing powers to charge and in their freedom to charge.

[ Part4 ] [ Contents ] [ Part6 ]

Published 19 September 2000
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