Business rates retention and TIF brought forward by the Local Government Finance Bill

The Bill promotes the implementation of local business rates retention, which would enable local authorities to retain a proportion of the business rates generated in their area. It also sets out a framework for tax incremental financing, to allow councils to borrow against predicted future business rates.

The Local Government Finance Bill will start to implement the proposals contained in the Government's resource review, which was consulted on over the summer.

Under the current system, all business rates that are generated by councils are centrally collected by the Treasury. The money is then redistributed to councils through a grant system, where councils are invited to bid for grants for different projects.

Under the local retention of business rates proposals, councils would be able to retain a percentage increase in the business rates that they generate. It is hoped that the proposals would create incentives for councils to promote local economic growth as they will directly benefit from any increase in rates.

The British Property Federation (BPF) has supported the proposals and has lobbied the Government to introduce the proposals quickly. "It's absolutely vital local authorities adopt a more pro-growth approach," said Liz Peace, chief executive of the British Property Federation.

“Allowing them to keep a substantial amount of the business rate revenue arising from new development will finally see local authorities benefit from new business rather than watching it go straight into central government coffers," said Peace.

The proposals are hoped to simplify what Pickles has said is the "most complex and centralised [local Government finance system] in the world".

The framework includes a safeguard against authorities with large amounts of business property who "stand to gain disproportionate amounts". A "levy" would be imposed on those authorities and the proceeds would be redistributed to councils who have suffered a drop in business rates or to fund regeneration programmes.

The Bill also sets out a framework to allow councils to use tax incremental financing (TIF). This would allow councils to borrow against a predicted increase in business rates. It is hoped that this system could be used to support major development and infrastructure improvements – the council could borrow the money to fund the project against the anticipated uplift in business rates that the project would generate.

"Local authorities could use the extra money to help fund projects that would otherwise be out of reach, such as a town centre improvement scheme, or could pass on benefits to council tax payers," said Peace.

The Bill also proposes changes that would give councils more flexibility over the amount of council tax that is charged. Any amendments to council tax rules would be subject to further consultation.

The proposed changes set out in the Local Government Finance Bill are planned to be implemented from April 2013.