What Osborne’s business rates devolution means for charities

Yesterday the Chancellor announced his plans for local authorities retain all their income from business rates by 2020.

Before we delve into the detail, the two key points for charities to take away are that we don’t yet know what this means for business rate reliefs, and that the most direct effect on charities will be via local authority finances. Specifically, local authorities with less business activity (typically in poorer areas) will collect less in business rates, with knock-on consequences for their spending.

So, what did the chancellor actually say?

Devolving the multiplier

Business rates are currently calculated by multiplying a business property’s ‘rateable value’ (set by the Valuation Office Agency) by a centrally decided ‘business rates multiplier’. It’s this latter element that is set to change as a result of today’s announcement. Instead of setting a single multiplier for all local authorities, central government will instead publish a benchmark multiplier that local authorities can deviate from. Local authorities will be able to lower their multiplier as much as desired, effectively lowering the rates in their area (and notionally attracting more businesses as a consequence).

Where cities have elected mayors, they will also be able to raise their multiplier above the central benchmark to raise funds for infrastructure projects, provided they have the agreement of the Local Enterprise Partnership – effectively creating a levy on businesses to fund investment.

This change, taken at face value, will not necessarily affect charities. As they currently benefit from at least 80% relief from business rates, they are largely protected from increases, and could in theory see a reduction in the remaining rates they pay. However, the other half of Osborne’s announcement could well affect charities negatively.

100% local retention from 2020

Since 2013, local authorities have kept half of all business rates they collect, with the remainder going into a central pot and redistributed to local authorities via the Revenue Support Grant. By 2020, all money raised via business rates will now stay with the local authority that collects them, meaning there will no longer be any central redistributive mechanism.

Local authorities with less economic activity will therefore receive less income than they do now, as they will no longer be ‘topped up’ by central government. Theoretically, local authorities will be able to lower their rates to attract more business, but in practice would have to sacrifice business rates income first to do so, and would also be competing with areas that have larger incomes (and more room to manoeuvre) as a result of the same changes.

The most direct effect for charities will be that local authorities with less business activity are likely to have less income as the changes are phased in, with consequent reductions in their spending. As others have noted, this will have an impact on the services provided in those areas, many of which have already seen significant cuts. For charities, you guessed it, this could mean higher needs locally but less funding available.

No sign of relief

Business rates relief is the largest charitable relief, worth around £1.4bn to the sector in 2013/14, and it is key to supporting 80-90,000 organisations across the country, the vast majority of which are small or medium in size. Maintaining this relief is critical to the survival of many of them.

There was no announcement today on what the ongoing business rates review holds for charitable reliefs – but with all revenue from business rates being retained locally, the cost of providing reliefs is likely to fall entirely on local authorities. Without further safeguards, this could certainly create pressure on them to offer less discretionary rate relief.

The business rates review is ongoing, and is not expected to report until the Autumn Statement on 25 November. NCVO is working closely with others across the sector to ensure that charities continue to receive mandatory relief, and to address the many issues that surround discretionary relief. Watch this space for further updates when we know more.

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Michael Birtwistle Michael is our senior policy officer, covering issues around charity tax and finance (including social investment) and the impact of the economy on the sector.

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