DD1290 Project to Maximise Business Rates Income In LB Islington

Type of decision: 
Director's decision
Code: 
DD1290
Date signed: 
19 November 2015
Decision by: 
Martin Clarke, Executive Director, Resources

Executive summary

Under the business rates retention scheme introduced in April 2013 the GLA receives 20% of all business rates income – 40% of the locally retained share - collectable by the 33 London billing authorities and benefits proportionately from any real terms incremental growth in the taxbase. In 2015-16 it is forecast to receive an estimated £30.2m from the London Borough of Islington under the scheme and a further £4.5 million through the separate Crossrail Business Rate Supplement.

The Borough Council has approached the GLA to seek a contribution towards a business rates income maximisation project which has been procured from a recognised contractor in this field. This work has identified up to £10.7 million worth of assessments by rateable value which have been omitted from or are undervalued in the rating list.

In Mayoral Decision 1553 the Mayor agreed that the GLA should support borough business rates maximisation projects in principle and delegated authority to the Executive Director Resources to approve these on the condition that they should be self financing and result in additional rates income on an ongoing basis.  This decision seeks approval for the GLA to contribute 40 per cent of the one off costs - up to £320,000 – for this Islington project. This project is forecast to deliver estimated additional rates income annually for the GLA of just around £680,000.

Decision

The Executive Director Resources approve up to £320,000 as a contribution in 2015-16 towards a project by the London Borough of Islington to maximise business rates income locally. The costs would be charged to the Mayors Resilience Reserve initially – and reimbursed via an estimated ongoing uplift in NNDR income in respect of the GLA’s 20 per cent share of up to £680,000 annually on 2015-16 prices. 

Part 1: Non-confidential facts and advice

Introduction and background

1.1    In 2015-16 the GLA is forecast to receive £30.2 million of income through business rates retention scheme in respect of non domestic ratepayers in the London Borough of Islington. This is in line with the 20 per cent share of total business rates income – or 40 per cent of the locally retained share – which accrues to the GLA under the scheme. If there is net growth in the rates base each year in real terms this accrues to the GLA on the same percentage basis. The GLA also receives around £4.5m in Crossrail BRS revenues annually from the Islington borough.

1.2    The London Borough of Islington has asked the Greater London to make a contribution towards a project which will seek to maximise business rates income by identifying additional hereditaments which are either not currently included on the Valuation Office’s rating list or alternatively have an allocated rateable value which is understated. 

1.3    The borough council has already procured specific software for a small one off charge and the GLA’s contribution will be used to finance the rateable value finder project work undertaken with the support of the contractors. The finder fee payable to the contractor is in proportion to the additional rateable value added to the Valuation Office’s rating list which would result in additional business rates being payable.

1.4    The aggregate sums payable by Islington to its contractor equates to 7.5 per cent of the rateable value uplift to the rating list – of which 40 per cent would be payable by the GLA. As the sum payable by the GLA is conditional on and proportionate to the rateable value added to the rating list there should be no cost to it should the project not deliver additional rates income. The contract which Islington has entered into with its contractor also permits in certain circumstances a refund of payments made on a pro rata basis by the contractor should the uplift in rating income not be sustained. The GLA would under the terms of its agreement with Islington receive 40 per cent of any refund made by the latter’s contractor.

1.5    This is a legitimate request as billing authorities do not explicitly receive additional funding central government to fund the costs of business rates maximisation and any investment they make which increases the size of the rating list benefits the GLA financially on a proportionate basis. The funding will not be used to resource the borough council’s normal collection and enforcement work in respect of business rates.

1.6    Any additional rateable value added to the rating list in the current financial year will be transferred to the GLA in cash terms through the collection fund surplus or deficit forecast prepared in January through an adjustment to the instalments by the Council during the 2016-17 financial year. This will include any backdated sums due for prior years in addition to the sum collectable for 2015-16. The aggregate additional rateable value identified and secured will then form part of the rating list in future years and will accrue to the GLA from 2016-17 onwards in line with its 20 per cent share on an ongoing basis.

Objectives and expected outcomes

2.1    Islington has contracted a recognised rating expert to review its rating list in order to identify hereditaments which have been omitted from the local rating list or were incorrectly valued through its tailored software and project management tools.

2.2    The Council has already procured the licence for the interrogation software required for a small one off fee which is required to undertake the project.  The project tools within the software bring together a wide range of commercial property data into a flexible and sophisticated case management system and provide key calculation and estimation of potential increases in yield.

2.3    The contractor’s project management tools and the council’s own analysis has identified up to £10.7 million of rateable value comprising assessments either omitted from the rating list entirely or undervalued. On 2015-16 prices this equates to potential additional rates income over and above what would have been in place had the project not been undertaken of around £10.4 million of which up to an estimated £680,000 would notionally accrue to the GLA on an ongoing basis via its 20 per cent share. This assumes a 35% loss due to business rates reliefs. In practice a proportion of the amendments to the rating list would be backdated if the alteration were made by the Valuation Office prior to 1 April 2016 so there may also be an additional one off gain for periods prior to 1 April 2015.

2.4    Under the terms of the agreement between Islington and its contractor the latter would receive 7.5% of the additional rateable value identified as a one off payment after it was confirmed that these assessments/amendments was added to the Valuation List.  If the assessments added or amendment were subsequently reduced or removed due to rating appeals which resulted in backdated adjustments to the incremental increases arising from the project for 2015-16 or prior years only - the payment to the contractor would be recoverable on a pro rata basis. 

2.5    In light of the shared benefits Islington has requested that the GLA contribute 40% of the cost of the one off payment to the contractor i.e. our share of the 50% local retention share. If the consultant’s work does not generate any additional rates revenues in respect of the assessments identified – the cost is in effect zero to the GLA. Any contribution payable will vary depending on the additional rateable value identified by the project and added to the rating list by the Valuation Office – and will be repayable on a pro rata basis if it is subsequently removed from the list or appealed successfully over the next five years but only in respect of any incremental rates income repayable in respect of 2015-16 and prior years only.

2.6    In summary therefore

•    The contractors have identified up to £10.7m of additional rateable value which could be added to the rating list in Islington – for which they would receive a total payment of up to £800,000 (7.5% of the rateable value identified) of which the GLA would contribute up to £320,000  (i.e. 40%) if the VOA amended the list to reflect these assessments. If the sums added to the rating list were subsequently lower the GLA payment would be reduced accordingly on a pro rata basis.
•    It is estimated the GLA would benefit an ongoing annual increase in rates income of around £680,000 based on the GLA’s 20% share with potential additional sums backdated prior relating to sums owed in respect of periods prior to April 2015. The ongoing element would be uplifted to the baseline for 2016-17 onwards and potentially through the 2015-16 outturn depending on when the changes to the list were made
•    Potentially up to an additional £214,000 of Crossrail BRS income could also be generated annually – assuming the assessments affected have rateable values above the threshold of £55,000.

Equality comments

3.1    There are no direct equality implications for the GLA as the project will be managed by the London Borough of Islington and any staff employed on the project will be recruited by it under its terms and conditions and any contract it enters into will be under the terms of its procurement code.  The Council should have regard to appropriate equality considerations in its role as a public authority under relevant legislation. 

Other considerations

4.1    The project will be self financing with any up front costs being offset by additional non domestic rating income generated. If no net additional non domestic rating is generated through additions to the local rating list no payment will be made.  Any sums paid to LB Islington may also be recoverable on a pro rata basis in certain circumstances where the uplift in rateable value is not sustained. This is on the basis that LB Islington’s agreement with its contactor includes a recovery mechanism in such circumstances. 

4.2    There is a marginal risk that the Council’s contractor ceases operations and/or goes into administration or liquidation and therefore is unable to refund any project sums overpaid – resulting in the possibility that the GLA will also be unable to recover these sums. The contractor is a large rating agent and commercial property specialist and therefore this is considered unlikely. However it is considered unlikely that the residual ongoing retained business rates income (after and refunds due to ratepayers were the additions/amendments to be partially reversed) will more than double the GLA’s maximum one off £320,000 contribution.

Financial comments

5.1    In 2015-16 the GLA is forecast to receive an estimated £30.2m from the London Borough of Islington under the business rates retention scheme and a further £4.5 million through the Crossrail Business Rate Supplement.

5.2    The Council collects non domestic rates and Crossrail Business Rate supplement revenues on behalf of the GLA in respect of its relevant share (20% and 100% respectively) but does not receive discrete additional funding to support work which maximises the size of the rating list – and therefore the level of rating income. Its funding – via the respective cost of collection allowances – is purely for its billing and enforcement duties. It is therefore reasonable for the GLA to be asked to contribute towards efforts to maximise the size of the rating list and address undervaluations of particular assessments relative to their correct market value.

5.3    The GLA has been asked therefore to contribute towards 40% of the costs of the rates finder maximisation project in line with its locally retained share. Its contribution is conditional on the omitted/undervalued hereditaments being amended on the rating list. The sums paid would be recoverable if the revised assessments were subsequently removed or were subject to successful appeal on a pro rata basis but only in respect of any incremental uplifts reversed or reduced in respect of changes for 2015-16 and prior years only. Islington would recover any sums due from the contractor and repay 40% of this to the GLA. 

5.4    It is estimated that up to £10.7 million by rateable value could be added to the rating list in Islington from this project – equating to potential rates income after a 35% allowance for reliefs of £3.4 million. It is estimated the GLA would benefit from an ongoing gain in rates income of up to £680,000 per annum based on the GLA’s 20% share with additional sums potentially receivable on a one off basis in respect of alterations affecting periods prior to 1 April 2015. The ongoing element would be uplifted to the rates income baseline on a full year basis from 2016-17 onwards.

5.5    In Mayoral Decision 1553 the Mayor agreed that the GLA should support borough business rates maximisation projects in principle and delegated authority to the Executive Director Resources to approve these on the condition that they should be self financing and result in additional rates income on an ongoing basis.  This project meets these criteria and therefore this decision may be approved by the Executive Director Resources under the powers delegated to him.

Investment and Performance Board

7.1       The planned project delivery is set out below:

Activity

Timeline

Procurement of contract

Autumn 2015

Confirmation of assessments omitted from or undervalued in rating list

Autumn 2015

Negotiations to add assessments to rating list with Valuation Office

Autumn/winter 2015

2015-16 collection fund surplus deficit forecasts submitted by Islington via 2016-17 NNDR 1 return

31 January 2016

Assessments/amendments added to rating list

31 March 2016

Latest date by which revenues would start to be received by GLA as a result of uplift in cash terms (via an adjustment to instalments)

1 April 2016

2015-16 collection fund outturn and NNDR3 reflecting uplift which would be incorporated in the GLA’s accounts on a pro rata basis

30 September 2016

Latest date by which revenues would start to be received by GLA as a result of uplift in cash terms (via an adjustment to instalments)

1 April 2016

Latest date by which GLA could recover its pro rata share of its project contribution – if the amendments/additions to the rating list were reversed in full or in part resulting in changes in respect of valuations for 2015-16 and prior years only compared to the valuations prior to the project and as a result Islington’s contractor were required to repay part or all of its payment for the project costs

31 March 2020