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Business rate changes in England may create uncertainty, says expert

UPDATED: Local government in England will be able to keep the money they raise through business rates to spend on local government services, under plans announced by UK chancellor George Osborne. 06 Oct 2015

The government will also abolish the uniform business rate and allow local authorities to cut rates to attract businesses to their area, the government said in a statement.

This could create uncertainty over businesses' rates liability, said property expert Stuart McCann of Pinsent Masons, the law firm behind Out-Law.com.

"Under the chancellor’s plan, businesses who own properties in several authorities could find it hard to set budgets if the multiplier is to vary in each region. There are also the possibilities of rates distortion and uneven growth where faster growing authorities benefit from the reforms, whilst those growing at a slower rate might suffer significant disadvantages. It will be interesting to see what safeguards are to be put in place for struggling councils when further information is provided in next month’s spending review," McCann said.

The distribution of rates will also change. Currently, local business rates are collected locally but transferred to central government to be redistributed to local areas as a grant. This core grant will be phased out, and new responsibilities passed to local government, the government said.

Since 2013, local councils have been allowed to keep 50% of the proceeds from rates. This will reach 100% by 2020, the statement said.

Areas with elected mayors will have greater powers, including the ability to increase business rates by up to 2p in the pound, "so long as they win the support of local business," the government said.

Retail expert Andrea McIlroy-Rose, also of Pinsent Masons said that the announcement is a move in the right direction, as it gives councils flexibility and the ability to attract businesses to their areas. 

"However, it still does not address the main issue facing retailers which is that the current system of business rates is based on historic values and needs to be modernised to address the changes in shopping habits within the UK and the difficult market conditions faced by retailers still wishing to invest in the high street. We await the detail of the chancellor’s plans for the business rates review announced in March," McIlroy-Rose said.

The Local Government Association (LGA) welcomed the news and said it shows that the chancellor has listened to local government.

"The LGA has long-argued that the current system of business rates needed reform so councils could effectively support small businesses and boost high streets," it said.

"Councils have been hugely restricted in their ability to introduce local discounts with government setting the charge and keeping half of business rates income. With greater local control, councils will have flexibility to reduce business rates for the types of shops and businesses that residents want in their high streets and neighbourhoods," the LGA said.

In his budget speech in March, Osborne said that the government had already reached "provisional agreement" to allow the Greater Manchester city area to retain local business rates revenue as part of the 'Northern Powerhouse' initiative and that other areas would be able to apply for the same deal.

The government also said in March that it will consider structural changes to the way in which business rates payable on commercial properties across England are calculated as part of a "radical review" of the current system. 

Editor's Note 07/10/2015: This article has been updated to include comments by property expert Stuart McCann and retail expert Andrea McIlroy-Rose.

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