MD2217 100% London Business Rates Retention Pilot

Type of decision: 
Mayoral decision
Code: 
MD2217
Date signed: 
18 December 2017
Decision by: 
Sadiq Khan, Mayor of London

Executive summary

In the Spring Budget 2017 the London Devolution Memorandum of Understanding included a commitment by the Government to support the voluntary pooling of business rates in London. The Government confirmed in the 2017 Budget on 22 November that it had accepted the proposal for a 100% business rates retention pilot for the 2018-19 financial year which had been submitted by London Councils and the Mayor of London covering the GLA and the 33 London local authorities. This was based on a prospectus agreed by the London Congress of Leaders on 10 October. The pilot will allow London to retain 100% of the growth in business rates income in 2018-19 excluding revaluation growth. 

This Decision seeks formal approval for the GLA to participate in the 100% retention pilot in 2018-19 and enter into a Memorandum of Understanding with the 33 local authorities as set out at Annex B which sets out the administrative and governance arrangements for the pool and the share of business rates income and growth which will be allocated to the GLA. It also delegates authority to the Executive Director Resources to enter into an agreement with the proposed Lead Authority for the pool – the Corporation of London - in relation to the financial administration and treasury management arrangements.
 

Decision

The Mayor:
•    approves and accepts the designation by the Secretary of State of the Greater London Authority as an authority within the London Business Rates Pilot Pool pursuant to 34(7)(1) of Schedule 7B Local Government Finance Act 1988 in line with the Memorandum of Understanding at Annex A which has been signed with the Government; 
•    agrees formally that the Greater London Authority shall participate in the London Business Rates Pilot Pool for the 2018-19 financial year and enter into a Memorandum of Understanding with the 32 London Boroughs and the City of London Corporation which specifies the governance and distribution arrangements for the pool as out at Annex B;
•    agrees to delegate the GLA’s administrative functions as a major precepting authority pursuant to s39(1)(aa) of the Local Government Finance Act 1992 to the City of London Corporation ("COLC") which will act as the Lead Authority for the pool; and
•    authorises the Executive Director Resources to enter into an agreement with the Lead Authority  for the GLA to undertake certain ancillary administrative functions regarding the financial transactions and treasury management arrangements for the pool.
 

Part 1: Non-confidential facts and advice

Introduction and background

1.1    In 2017-18 it is estimated that London business ratepayers will pay nearly £8 billion in business rates in respect of the 302,000 non domestic properties in the capital. Of this just under £3 billion is payable to the GLA of which £720 million will be paid over to central government with the balance being available to support GLA group services. In 2018-19 business rates will fund all former general government revenue grant funding for TfL, the GLA and LFEPA and prior year council tax freeze grant funding for MOPAC. Business rates income is therefore the GLA group’s second largest source of revenue after transport fares.

1.2    Since the introduction of the business rates retention system in April 2013 local authorities have been able retain a proportion of the real terms growth in business rates income in their local area. From 2013-14 to 2016-17 the locally retained share was 50% - split 20% between GLA and 30% for London billing authorities in the capital. The funding streams rolled in for the GLA included 50% of its former general grant and fire and rescue funding as well as 50% of TfL’s operating grant based on 2013-14 funding levels.

1.3    In October 2015 the Chancellor of the Exchequer announced that by the end of that parliament 100 per cent of business rates income would be devolved to local government and core grant funding via revenue support grant would end. As part of a partial pilot of 100% retention the GLA’s retention share was increased to 37% in 2017-18 alongside the rolling in of the GLA’s £148 million revenue support grant and the £960 million TfL capital investment grant. This increased the locally retained share in London to 67 per cent as no changes were made to the retention shares for the 32 boroughs and the City of London.  Five other local authority areas – four combined authorities and Cornwall – also agreed to pilot 100% retention. 

1.4    The London Devolution deal signed by the Government with the Mayor and Chair of London Councils in March 2017 committed the Government to supporting the voluntary pooling of business rates across the whole of London government subject to satisfactory governance arrangements being agreed. The Secretary of State for Communities and Local Government confirmed in September 2017 that the Government remained committed to introducing 100 per cent retention subject to enacting the necessary legislation and invited groups of authorities to submit proposals to pilot 100 per cent retention in 2018-19.

1.5    At the London Congress meeting on 10 October the Mayor and the Leaders of the 33 London local authorities agreed a prospectus for a 100 per cent pilot in London. The Chancellor announced in the Budget on 22 November that the Government had endorsed this proposal and would introduce the necessary secondary legislation alongside the 2018-19 local government finance settlement to implement this.  This was agreed through a memorandum of understanding (MOU) signed by the Chair of London Councils, the Mayor of London, the Minister for London and the Secretary of State for Communities and Local Government - the text of which is set out at Annex A.

1.6    It is considered that a quasi-contractual approach involving a lead authority in consultation with participating authorities is the most suitable mechanism for administering the pool. The proposed governance arrangements have therefore been documented in a separate non-legally binding Memorandum of Understanding which is set out at Annex B. 

1.7    It is necessary for each participating authority under the MOU with the Government to agree within 28 days of the announcement of the provisional local government settlement finance settlement (i.e. mid January 2018) that it will:

•    participate in the pool and accept the Secretary of State’s designation;
•    enter into the memorandum of understanding set out in Annex B (the ‘local MOU’); and
•    delegate its administrative functions under the  Non-Domestic Rating (Rates Retention) Regulations 2013 (as amended) to the City of London as the lead authority. 

1.8    It is also proposed that the City of London delegate certain administrative functions such as the transfer of payments between pool members and treasury management of pooled funds to the GLA. This decision asks the Mayor to delegate authority to the Executive Director Resources to enter into an agreement with the City of London Corporation to facilitate this.

1.9    The memorandum of understanding also sets out the arrangements for distributing the growth arising from the pool including the 15 per cent proportion which will be used for a strategic investment pot – the use of which will be determined collectively by the Mayor and the other participating authorities albeit with the Lead Authority taking the legal decisions. The GLA will receive 36 per cent of the remaining incremental growth arising from the pool and it will be for the Mayor to determine how this will be applied subject to an overarching commitment set out in the local MOU that it will be used for strategic infrastructure projects. 
 

Objectives and expected outcomes

MOU with Government
2.1    The MOU between London Councils, the Mayor of London and the Government on the London 100% business rates retention pilot set out at Annex A agrees that that: 
•    The 100% business rates retention pilot in London will be voluntary, but will be a pool comprising all 32 London boroughs, the Corporation of the City of London and the Greater London Authority. Authorities will be required to confirm they have legally approved their participation once 28 days have elapsed from the announcement of the 2018-19 provisional local government finance settlement (i.e. deadline expected to be between 10th and 17th of January);
•    From 1 April 2018 the London authorities will retain 100% of their non-domestic rating income. London will not retain 100% of total rates collected, as it will continue to pay an aggregate tariff to government which is estimated to be around 36 per cent or just under £3 billion of the total business rates revenues collected in London. The overall level of collected rates that will be retained therefore is around 64 per cent after the tariff is paid;
•    London authorities will also receive section 31 grants in respect of Government changes to the business rates system which reduce the level of business rates income such as the decision to change the annual uprating of the NNDR multiplier from RPI to CPI from April 2018. Section 31 grant will amount to 100% of the value of the lost income. Tariffs and top-ups will be adjusted to ensure cost neutrality;
•    In moving to 100% rates retention, the Department for Communities and Local Government will no longer pay Revenue Support Grant (RSG) to the 33 London local authorities in 2018-19. Funding baselines will be increased by the equivalent amount to reflect this transfer of RSG, which overall amounts to £775 million in 2018-19. No additional GLA grants will be rolled in to the GLA’s funding baseline for the rates retention system beyond the amounts already in its funding baseline in 2017-18 – which already includes its RSG allocation;

•    The London pool will retain 100% of any growth in business rate income above baselines, and will pay no levy on that growth. This is a significant benefit to the GLA which currently pays over 25 per cent of its growth against baseline to the Government. The GLA’s levy payment for 2016-17 was £13.7 million and is forecast to be just under £30 million in 2017-18;
•    London authorities will not be subject to more onerous rules or constraints under the 100% rates retention pilot, than they would have been if they had remained subject to the existing “67 per cent scheme” in place in 2017-18;
•    No “new burdens” will be transferred to London and participation in the pilot will not affect the development or implementation of the Fair Funding Review scheduled for 2020-21;
•    In the event that London’s business rates income fell, the pool will have a higher “safety net” threshold – 97% rather than 92.5% of the overall baseline funding level – than in the existing system, reflecting the greater reliance local authorities will have on business rates; and
•    The piloted approach is to be without detriment to the resources that would have been available collectively to the 34 London authorities under the current local government finance regime, over the four year settlement period taking into account the GLA’s existing 37 per cent share and any enterprise zones and designated areas established in London (i.e. the Royal Docks, Battersea/Nine Elms, Brent Cross and Croydon). This “no detriment” guarantee will ensure that the pool, as a whole, cannot be worse off than the participating authorities would have been collectively if they had not entered the pilot pool. In the unlikely event of this arising, the government would intervene to provide additional resources. 
MOU between Participating Authorities
2.2    The MOU with the Government establishes the terms of the 100% retention pilot, but the London business rates pool must be set up following the same process as all other business rates pools. Following legal advice, the detailed pooling agreement that establishes the terms by which the pool will operate will be an MOU between the 34 pooling authorities.

2.3    The key principles that underpin the pooling agreement as set out in Annex B are that:
•    No authority can be worse off as a result of participating - where authorities anticipate a decline in business rates, the first call on any additional resources generated by the pool would be used to ensure each borough and the GLA receives at least the same amount as it would have without entering the pool (this would include the equivalent of a safety net payment were it eligible for one individually under the current 67% system). Where authorities expect to grow, they will continue to retain at least as much of that income as they would under the current system, plus a potential share of the aggregate benefits of pooling assuming the pool grows. Where the pool overall has less income than would have been available collectively under the 67% system, the funding provided by the Government as part of the “no detriment” guarantee would be used to ensure that no individual authority is worse off than it would have been otherwise. Existing agreed Enterprise Zones and “designated areas” (i.e. the Royal Docks, Battersea/Nine Elms, Brent Cross and Croydon), along with the statutory provision to reflect the unique circumstances of the City of London Corporation, will be taken into account in calculating the level of resources below which the guarantee would operate. For boroughs in an existing pool with authorities outside London – the London Boroughs of Barking and Dagenham, Croydon and Havering - DCLG have also indicated that the basis of comparison would include the income due from that pool;

•    The pool in 2018-19 would not bind boroughs or the Mayor indefinitely – the founding agreement includes notice provisions for authorities to withdraw provided notice is given by 30 September in the previous financial year. Were the pool to continue beyond 2018-19, unanimous agreement would be required to reconfirm a pool from 2020-21 onwards (the expected year in which funding baselines will be updated as a result of the Government’s Fair Funding Review which is expected to be implemented in that year). 
•    All members will receive some share of any net benefits arising from the pilot pool – recognising that growing London’s economy is a collective endeavour in which all boroughs make some contribution to the success of the whole, all members of the pool will receive at least some financial benefit, were the pool to generate additional resources. 

Role of Lead Authority
2.4    It is a statutory requirement that a ‘lead authority’ acts as the accountable body to government and is responsible for the administration of the pooled fund. The City of London – the accountable body for London Councils - has agreed to be the lead authority for the London business rates pool. The lead authority’s standard responsibilities will include, but not be limited, to: 

•    all accounting for the finances of the pool including payments to and from the Government;
•    management of the pool's collection fund;
•    all audit requirements in relation to the pool;
•    production of an annual report of the pool's activity following final allocation of funds for the year;
•    the administration of the dissolution of the pool; 
•    all communications with the DCLG including year-end reconciliations; and
•    the collation and submission of information required for planning and monitoring purposes. 

2.5    It will be for the Lead Authority for the pool to determine the distribution of revenues between members of the pool and also pay the net tariff payment to the Government during the year. In practice, this will mean some authorities will receive net payments from the pool in instalments during the 2018-19 financial year and others will make net payments into the pool depending on their top up and tariff positions and estimated business rates income. These transfers through the pool will also incorporate the GLA’s share. Reconciliation payments will be undertaken after the financial year end to reflect the actual business rates outturn.

2.6    Under a delegation arrangement, it is proposed that the GLA will manage treasury management issues and undertake all monetary transfers between billing authorities including the GLA’s share on behalf of the lead authority. This reflects the fact that the GLA already has the systems in place to manage payment flows to and from billing authorities for business rates retention as well as council tax and the Crossrail Business Rate Supplement. This Decision asks the Mayor to delegate authority to the Executive Director Resources to enter into a delegation agreement with the City of London.

2.7    It is likely that the resources required to perform this function would be 1 FTE post, which would likely be a senior accountant with considerable experience and understanding of collection fund accounting and the business rates retention scheme. Funding for this work will be apportioned between the GLA and the City of London under the delegation agreement and the costs charged to the pool.

2.8    In the case of the London pilot pool, the lead authority will have an additional role in formally taking decisions over the allocation of the Strategic Investment Pot following consultation with all participating authorities.

    Net Financial Benefit from Pool
2.9    The net financial benefit to participating in the pool in 2018-19 was estimated at the date the MOU with the Government was signed to be in the region of £240 million, based on modelling using borough forecasts. A more accurate forecast will be expected in February 2018 following the completion of individual forecasts for 2018-19 supplied by 31 January 2018. The actual level of growth will not however be known until the summer of 2019 once the business rates outturn for 2018-19 is confirmed and as a result it would not be prudent to apply all of the estimated growth prior to that date.

2.10    The local pooling agreement between participating authorities at Annex B sets out the principles and method for distributing any net financial benefits that may be generated. The principles are based on four objectives agreed by Leaders and the Mayor: 

•    incentivising growth (by allowing those boroughs where growth occurs to keep some proportion of the additional resources retained as a result of the pool)
•    recognising the contribution of all boroughs (through a per capita allocation)
•    recognising need (through the needs assessment formula); and 
•    facilitating collective investment (through an investment pot designed to promote economic growth and lever additional investment funding from other sources). 

2.11    The final agreed distribution method recognises all four of these objectives with 15 per cent of any net financial benefit set aside as a ‘Strategic Investment Pot’; and the resources not top-sliced for the investment pot being shared between the GLA and the 33 billing authorities (the 32 boroughs and the Corporation of London) in the ratio 36:64, in accordance with the apportionment principle reflecting relative baseline funding shares as previously agreed by London Councils and the GLA in the joint business rate devolution proposals to Government in September 2016.  The residual borough shares would then be apportioned between the 33 local authorities using a combination of the latter three apportionment bases above.

2.12    The MOU commits the Mayor to apply the GLA’s share of any additional net financial benefit from the pilot for use on strategic investment projects. It will be for the Mayor to determine what those projects are. This restriction does not apply to the share of growth it receives on its existing share and therefore the levels of core general funding already in place to fund the GLA and functional bodies. Decisions on the allocation of the GLA’s share of pool gains will therefore be made by the Mayor of London subject to the GLA’s normal decision making processes. 

    

    Strategic investment pot and pool governance
2.13    The joint Strategic Investment Pot (SIP) - representing 15 per cent of the total additional net benefit -  will be spent on projects that meet each of the following requirements:
•    contribute to the sustainable growth of London’s economy and an increase in business rates income either directly or as a result of the wider economic benefits anticipated; 
•    leverage additional investment funding from other private or public sources; and
•    have broad support across London government in accordance with the proposed governance process.
2.14    For these purposes, “strategic investment" is defined as projects that will contribute to the sustainable growth of London's economy which lead to an increase in London’s overall business rate income.  Including the London wide strategic investment pot and the Mayor’s share approximately 50% of net additional benefits arising from the pilot pool will be therefore be spent on strategic investment projects. Proposals will be brought forward for the use of the SIP during the 2018-19 financial year.

2.15    Following legal advice regarding the form of the governance mechanism for taking decisions regarding the SIP, decisions will be taken formally by the City of London - as the lead authority - in consultation with all member authorities, reflecting voting principles designed to protect Mayoral, borough and sub-regional interests, previously endorsed by Leaders and the Mayor in the London Finance Commission (both 2013 and 2017), and set out in London Government’s detailed proposition on 100% business rates in September 2016. These are that:

•    both the Mayor and a clear majority of the boroughs would have to agree;
•    a majority would be defined as two-thirds of the 33 billing authorities (the 32 boroughs and the City of London), subject to the caveat that where all boroughs in a given sub-region disagreed, the decision would not be approved; and
•    if no decisions on allocation can be reached, the available resources would be rolled forward within the pot for future consideration at the next decision making round.

    Future of the pilot post 2018-19 and Withdrawal Arrangements
2.16    The Government has stated it will undertake a qualitative evaluation of the progress of the pilot based on the current research programme for the existing business rate retention pilots, with additional focus on the governance mechanism and decision making process, and the scale of resources dedicated to strategic investment.

2.17    The MOU between London Government and the Government only commits to the pilot operating for one year. However, subject to the evaluation of the pilot, it also commits the Government to working with London authorities to explore: future options for grants including, but not limited to, Public Health Grant and the Improved Better Care Fund; the potential for transferring properties on the central list in London to the local list where appropriate which could potentially include TfL’s operational assessments such as the London Underground network and DLR; and legislative changes needed to develop a Joint Committee model for future governance of a London pool. 

2.18    If the pilot were to continue in 2019-20, the Pool will be assumed to continue. Under the local MOU once the pool has been established if one or more Participating Authorities wish to leave the pool at the end of a financial year they will be required to notify the other authorities by 30 September in that financial year. The pool would then be dissolved at the end of that financial year (i.e. 31 March). The 30 September deadline in intended to allow sufficient time for the remaining Participating Authorities to seek the designation of a new pool (excluding the departing authorities) for the following year. 
 

Equality comments

3.1    The Mayor must comply with the public sector equality duty under section 149 of the Equality Act 2010, which requires the Mayor to have ‘due regard’ to the need to (i) eliminate unlawful discrimination, harassment and victimisation; (ii) advance equality of opportunity between people who share a relevant protected characteristic and those who do not; and (iii) foster good relations between people who share a relevant protected characteristic and those who do not.

3.2    Protected characteristics under section 149 of the Equality Act are age, disability, gender re-assignment, pregnancy and maternity, race, religion or belief, sex, sexual orientation, and marriage or civil partnership status (all except the last being ‘relevant’ protected characteristics). The duty may involve, in particular, removing or minimising any disadvantage suffered by those who have a relevant protected characteristic, taking steps to meet the needs of such people, and encouraging them to participate in public life or in any other activity where their participation is disproportionately low, including tackling prejudice and promoting understanding. Compliance with the public sector equality duty may involve treating people with a protected characteristic more favourably than those without the characteristic.

3.3    There are no direct equality implications for the GLA arising from this Decision as this is purely a mechanism to increase the level of revenues available to the GLA and London government without affecting the bills paid by business ratepayers. The Mayor’s budget and subsequent decisions on the application of the Mayor’s share of growth from the pool will have regard to equality implications.
 

Other considerations

Links to Mayoral Strategies and Priorities
4.1    Business rates are the largest single source of revenue for the GLA group - excluding Transport for London fares income - and support the delivery of Mayoral strategies and priorities. Seeking to maximise the level of business rates income the GLA receives through entering into the proposed pool is therefore in line with delivering these.

Key Risks
4.2    The no detriment commitment provided by central government in the MOU signed with the Secretary of State and Minister for London at Annex A guarantees that the GLA and other participating authorities can be no worse off than they would have been had they not entered into the pilot in 2018-19. This guarantee may not necessarily continue to apply in future and such risks would be identified through a future Mayoral Decision if it were decided to extend it for a further 12 months or indeed indefinitely. Wider risks relating to business rates retention are managed through the Business Rates Reserve and are addressed through the Mayor’s annual budget process and financial monitoring during the year.
 

Financial comments

5.1    The GLA currently receives around £3 billion in business rates revenues under the existing 67 per cent retention system of which around £2.2 billion is applied to fund GLA services. The proposed business rates pool guarantees through the no detriment guarantee that the GLA can be no worse off as a result of participating in the pool and therefore there can only be upside or a net neutral financial impact. 

5.2    The net financial benefit to participating in the pool in 2018-19 was estimated at the date the MOU with Government was signed to be in region of £240 million, based on modelling using borough forecasts of which around £74 million would be allocated to the GLA directly and £36 million to the London wide strategic investment pot in line with the methodology set out in the MOU at Annex B.

5.3    The actual level of growth will not however be known until the summer of 2019 once the business rates outturn for 2018-19 is confirmed and as a result it would not be prudent to apply all of the estimated growth prior to that date. The distribution of the GLA’s share will be addressed in the Mayor’s 2018-19 budget with final decisions on its use being made during the course of that financial year.
 

Planned delivery approach and next steps

 

Memorandum of understanding signed with Government

22 November 2017

Government publishes draft baseline figures in the provisional settlement for the pilot

 

By 20 December 2017

Member authorities take formal decisions to participate in the pool and the framework for its operation within 28 days of the Provisional Settlement

Mid January 2018

Final baselines published in final LGF Settlement

 

February 2018

Pool commences

1 April 2018

 

Appendices and supporting papers

Annex A     MOU signed with central government on 22 November by the Mayor and Chair of London Councils

Annex B    Proposed MOU for GLA and 33 London billing authorities to sign setting out governance arrangements for the pool for Mayor to approve