What is…South Tyneside Council?

In this series, we're going to be looking at South Tyneside Council - what it is, how it works, how it's funded and so on. This edition: how STC is funded (part 2)

As a UK government department, they set the rateable value of premises. Since 2017, rateable value has been based on the valuation date of 1^st April 2015 – the next revaluation will be applied from 1^st April 2023, based on rateable values from 1^st April 2021.

STC has no control over which businesses must pay business rates or which are entitled to a discount or business rate relief as this is also set at national level. In effect, this means that the local authority cannot use the rates (or relief) as incentives to support particular types of businesses or ‘encourage’ progressive business practices which would benefit local people, for example, paying the living wage.

So, how does the system work?

Up until 2013, each local authority (LA) collected the business rates in their area on behalf of the UK Treasury - each area’s needs were calculated using the Formula Grant Distribution System and money was then allocated back to each council. In 2013, the business rate system was overhauled and the Business Rates Retention Scheme (BRRS) came into operation. Using the BRRS, LAs keep 50% of the income from business rates. The Treasury receives the other 50% which they then apportion back as core grants (see June newsletter). The total given to each LA is subject to either a reduction (a tariff) or an additional payment (a top up) – these are dependent on the Treasury’s estimation of the ability of the LA to generate business rates based on their local economic circumstances. For example, LAs with greater number of businesses with high property values will collect more in business rates than ones with fewer, therefore the former will be subject to additional tariffs, which go towards funding the top-ups of the latter.

Sounds fair, so what’s the problem with the BRRS?

The BRRS recognises that all LAs have different funding requirements, which the tariff and top-up system attempts to offset. The scheme was designed to increase overall council ‘self-sufficiency’ by increasing the incentives for LAs to boost their local economies as they keep a greater share of the locally generated taxation income.

However, there are several factors which mean the link between business rates and ‘reaping the rewards’ of growth is weak in practice:

• The amount each local council can retain in business rates is still fixed at the original 2013 assessment level – LA circumstances have not been re-evaluated since then, which means that there hasn’t been an opportunity for any council to move towards the stated aim of ‘self-sufficiency’ in practice.
• The fact that limited relief is available for vacant property means that a number of properties are left empty when they could otherwise be in use. On the other hand, the danger of having no relief is that it provides an incentive to demolish the building. Such issues highlight why it would be much better to have a tax on the value of the land on which the business sits rather than the rental value of the property.
• Using the value of business premises as a substitute for economic activity is not a particularly accurate measure as it doesn’t denote productive economic value, only the floor space of premises. For example, a large warehouse which pays most of its workers minimum wage would generate a significant amount of business rates. Alternatively, a small, highly productive company based in a single-floor office, employs a skilled workforce and supports a wider local supply chain would generate a much smaller amount of business rates. From this point of view, there are other taxes which would make better determiners for ‘good’ economic activity, income tax (based on wages) or VAT (based on transactions) for example.

The reality of the current system is all important. Business rates bring in billions every year and they represent a fairly easy, dependable revenue stream - this is not something a cash-strapped Treasury is going to jeopardise.

SERIES CONTINUES HERE: How STC is funded (3 - Council Tax)