DD1425 Maximise Business Rates Income in LB Lambeth

Type of decision: 
Director's decision
Code: 
DD1425
Date signed: 
26 April 2016
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 2016-17 the GLA is forecast to receive an estimated £21.8m from the London Borough of Lambeth (LB Lambeth) under the scheme and a further £3.6 million through the separate Crossrail Business Rate Supplement (BRS).

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 will seek to identify assessments by rateable value which have been omitted from or are undervalued in the rating list. Subject to these changes being successfully added to or amended on the rating list by the Valuation Office it is estimated the GLA could receive additional ongoing rates income from the date the rating list is amended and potentially - if the adjustments are backdated - a one off sum for prior years. 

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 £66,600 – for this Lambeth project. This is forecast to deliver an increase in rateable value of at least £2.2 million and estimated additional rates income annually for the GLA of around £200,000.
 

Decision

The Executive Director Resources approve up to £66,600 as a contribution towards a project by the London Borough of Lambeth to increase business rates income locally. The one off contribution would be charged to the Mayor’s Resilience Reserve initially – and reimbursed via an expected £200,000 annual ongoing uplift in business rates income for the GLA. The actual contribution will be proportional to the rateable value added to the borough’s local non domestic rating list by the Valuation Office Agency arising directly from the project. 

 

Part 1: Non-confidential facts and advice

Introduction and background

1.1    In 2016-17 the GLA is forecast to receive an estimated £21.8 million from the London Borough of Lambeth (LB Lambeth) under the scheme and a further £3.6 million through the separate Crossrail Business Rate Supplement (BRS). This is in line with the existing 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. 

1.2    The London Borough of Lambeth 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 employed. The finder’s 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 on the assessments affected.

1.4    The aggregate sums payable by Lambeth to its contractor will be up to 10 per cent of the rateable value uplift made to the rating list as a result of the project work – of which 40 per cent would be payable by the GLA. The sum payable by the GLA would be capped at a maximum of £66,600. It is anticipated that the GLA will make this contribution during 2016-17 but it could be later than this depending on when the related adjustments are made by the Valuation Office Agency to the non domestic rating list. 

1.5    It is forecast that the amendments to the rating list resulting from the project will deliver an uplift of at least £2,200,000 in rateable value which potentially would deliver an estimated £1,025,000 of ongoing additional income based on the 2016-17 NNDR multiplier. Of this around £300,000 would accrue to LB Lambeth and £200,000 to the GLA based on existing rates retention shares with the balance accruing to the Government – albeit its share will decline to zero following the introduction of 100% retention by 2019-20. Over five years therefore for a one off investment of up to £66,600 the GLA would potentially secure additional rates income of at least £1 million i.e. a net surplus of at least £933,000 on the GLA’s contribution. If – as anticipated – the GLA’s business rates share increases following the introduction of 100% rates retention the actual gains could be significantly greater.

1.6    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 net cost to it should the project not deliver additional rates income. The contract which Lambeth has entered into with its contractor also permits a refund of payments made on a pro rata basis by the contractor should the uplift in rating income not be sustained and/or the changes to the rating list be successfully appealed where this does not arise from a change in circumstances in the assessments affected after the project is completed. The GLA would, under the terms of its planned agreement with LB Lambeth, receive 40 per cent of any refund made by the latter’s contractor.

1.7    Lambeth is making a legitimate request for GLA support as billing authorities do not explicitly receive additional funding central government to fund the costs of business rates maximisation projects 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 which is financed through its cost of collection allowance. Without the GLA’s support the borough would be required to pay 100% of the cost of its rates maximisation projects but only receive 30% of the additional income which results with the remaining gains being apportioned between the GLA (20%) and the Secretary of State (50%).

1.8    Any additional rateable value added to the rating list in the 2016-17 financial year in year would be transferred to the GLA in cash terms through the collection fund surplus or deficit forecast prepared in January 2017 or if identified after that month in January 2017. This would be payable through an adjustment to the 2017-18 (or 2018-19) instalments made under the rates retention scheme. Similar arrangements would apply should any in year adjustments be made in subsequent years.  This will include any backdated sums due for prior years in addition to any extra sum collectable in year if applicable. The aggregate additional rateable value identified and secured will then form part of the baseline rating list in future years and any benefit will accrue to the GLA in line with its 20 per cent share on an ongoing basis – or whatever percentage share may apply in future years arising from the move towards 100% retention of business rates income announced by the Chancellor of the Exchequer on 5 October 2016.
 

Objectives and expected outcomes

2.1    Lambeth 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 project interrogation tool used by the contractor will seek to identify assessments either omitted from the non domestic rating list entirely or undervalued. 

2.4    Under the terms of the agreement between Lambeth and its contractor the latter would receive an estimated 7.5 per cent of the additional rateable value identified as a one off payment after it is confirmed that these assessments/amendments have been adjusted on the Valuation List. If the assessments added or amendments made to existing valuations were subsequently reduced or removed following a successful rating appeal the payment to the contractor would be recoverable on a pro rata basis. This repayment would not apply where any subsequent amendments to the rating list are made as a result of a change in circumstance relating to the assessments concerned.

2.5    In light of the shared benefits Lambeth has requested that the GLA contribute 40% of the cost of the one off payment to the contractor up to a maximum of £66,600 i.e. its share of the 50% local retention share under the business rates retention scheme pre this cap. 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.

2.6    In summary therefore

•    The contractors will identify additional rateable value which could be added to the rating list in Lambeth – for which they would receive a total payment equating to 7.5% of the rateable value identified. Of this the GLA would contribute up to £66,600 (i.e. 40% of the total contractor payments) 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;

•    Based on the maximum one off £66,600 contribution estimated additional rates income of around £200,000 per annum is expected to be generated – or 20% of the estimated total additional rates income of £1,025,000. At least £1,025,000 of additional income would therefore be expected to be secured over five years for the GLA in line with its existing 20% share;

•    Potentially additional Crossrail BRS income could also be generated annually up to a maximum of £44,400 (i.e. 2% of the £2.2 million rateable value expected to be added to the list) – assuming the assessments affected have rateable values above the qualifying 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 Lambeth and any staff employed on the project in addition to those working for the contractor 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. This is due to the fact that the GLA receives 20% of any rateable value growth but is only required to make a one off contribution to the contractor via LB Lambeth equivalent to a maximum of 3% of any rateable uplift made to the rating list. If no net additional non domestic rating is generated through additions or uplifts to the local rating list made by the Valuation Office no payment will be made.  Any sums paid to LB Lambeth are recoverable on a pro rata basis in certain circumstances where the amendments made to the rating list are not sustained. This is on the basis, as the GLA has been advised, that LB Lambeth’ 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 also considered unlikely that the residual retained business rates income (after any refunds due to ratepayers were the additions/amendments to be partially reversed) will be lower than the GLA’s £66,600 maximum contribution.  It is also possible of course that if the occupiers of the properties added to or amended on the rating list become eligible for rates relief the increase in rates income could be lower than forecast. Overall however these risks are considered marginal compared to the potential gains.
 

Financial comments

5.1    In 2015-16 the GLA is forecast to receive an estimated £21.8 million from the London Borough of Lambeth under the business rates retention scheme and a further £3.7 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 rateable value.

5.3    The GLA has been asked therefore to contribute towards 40% of the costs of a proposed rates maximisation project up to a maximum of £66,600 in line with its locally retained share. Its contribution is conditional on the omitted/undervalued hereditaments being amended on the rating list by the Valuation Office Agency. The sums paid would be recoverable in certain cases if the revised/amended valuations were subsequently removed from or reversed on the rating list following a successful appeal. Lambeth would recover any sums due from the contractor and repay 40% of this to the GLA. No repayment would apply where the amendment arose due to a change of circumstance in respect of the hereditament(s) affected following the original change to the rating list.

5.4    It is estimated that any additional revenues generated in year would be transferred to the GLA in cash terms through the estimated collection fund surplus/deficit adjustment made to instalments in the following year and on an ongoing basis through the uplift in the rates income basis. The ongoing impact would result in an uplift in annual rates income baseline thereafter. Overall it is anticipated that the GLA will generate a surplus on its one off contribution of at least £933,000 over five years – this benefit could potentially double following the introduction of 100% retention.

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.

 

Planned delivery approach and next steps

The planned project delivery is set out below:

Activity

Timeline

Procurement of contract

Spring 2016

Confirmation of assessments omitted from or undervalued in rating list

By October 2016 as target date but this could be extended.

Negotiations to add assessments to rating list with Valuation Office

By October 2016 as target date but this could be extended.

Payment made by LB Lambeth to contractor and by GLA to LB Lambeth based on its 40 per cent share

Expected by October 2016 but could be later – no payment is triggered until rating list uplift/amendments are made

Amendments made by Valuation Office to non domestic rating list – resulting in adjustments to ratepayer bills

Expected to start from April 2016 continuing throughout 2016-17

Earliest date by which revenues would start to be received by GLA as a result of uplift in cash terms to 2017-18 instalments through the estimated collection fund surplus/deficit for LB Lambeth in respect of 2016-17 calculated in January 2017 and in terms of the ongoing uplift to the base via the 2017-18 instalments forecast

1 April 2017

2016-17 collection fund outturn and NNDR3 outturn returns for LB Lambeth reflecting audited uplift which would be incorporated in the GLA’s accounts on a pro rata basis

30 September 2017

Latest date by which GLA could recover its pro rata share of the project contribution – if the amendments/additions to the rating list were reversed in full or in part providing this did not arise due to a change of circumstance in respect of the assessments affected.

31 March 2020