MD2407 75% London Business Rates Retention Pilot

Type of decision: 
Mayoral decision
Code: 
MD2407
Date signed: 
14 January 2019
Decision by: 
Sadiq Khan, Mayor of London

Executive summary

In MD2217 the Mayor approved the participation of the Greater London Authority in a London wide 100 per cent business rates retention pilot for the 2018-19 financial year. The Government confirmed in the 2019-20 provisional local government finance settlement on 13 December that it would continue the London pilot for a further year albeit at a lower retention rate of 75 per cent. The pilot will allow London to retain 75 per cent of the growth in business rates income in 2019-20 excluding revaluation growth. It will otherwise operate on the same basis as in 2018-19 albeit without the Government ‘no detriment’ guarantee that no authority can be worse off as a result of participating in the pilot.

This Decision seeks formal approval for the GLA to participate in the 75 per cent pilot in 2019-20 under the terms agreed with MHCLG (Annex A) and for the GLA to enter into a Memorandum of Understanding with the 33 London billing authorities which sets out the administrative and governance arrangements for the pool and the distribution of business rates income and growth It also delegates authority to the Executive Director, Resources to continue to undertake key financial administration and the treasury management arrangements for the pool on behalf of the Corporation of London (the lead authority).

Decision

The Mayor:

1. 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;

2. Agrees that the Greater London Authority shall continue to participate in the London Business Rates Pilot for the 2019-20 financial year and authorises the Executive Director Resources to sign a separate ‘local’ Memorandum of Understanding with the 32 London Boroughs and the City of London Corporation which will specify the governance and distribution arrangements;

3. 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 which will act as the Lead Authority for the pool; and

4. Authorises the Executive Director, Resources to make arrangements 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

In 2018-19 it is estimated that London business ratepayers will pay around £8.5 billion in business rates in respect of the 315,000 non domestic assessments on the local valuation list in the capital. Business rates now fund all former general government revenue grant funding for Transport for London (TfL), the GLA and London Fire Commissioner, TfL’s former capital investment grant and prior year council tax freeze grant funding for MOPAC. Business rates income is now the GLA group’s second largest source of revenue after transport fares.

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 per cent - split 20 per cent between GLA and 30 per cent for the 33 billing authorities (the 32 London Boroughs and the City of London Corporation) in the capital.

As part of a partial pilot of 100 per cent retention the GLA’s retention share was increased to 37 per cent in 2017-18 alongside the rolling in of the GLA’s then £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 100 per cent pilot areas were created across England – mostly covering combined authority areas.

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. At the London Congress meeting in October 2017 the Mayor on behalf of the GLA and the Leaders of the 33 London local authorities (the ‘34 London pooling authorities’) agreed a prospectus for a 100 per cent pilot in London. The Chancellor announced in the 2017 Budget that the Government had endorsed this proposal and the Mayor, Chair of London Councils, the Secretary of State and the Minister for London signed a joint memorandum of understanding in December 2017 setting out the terms on which the pilot would operate. A further ten 100 per cent pilots were approved nationally for 2018-19 in addition to the five continuing ones from 2017-18.

The Mayor agreed in MD2217 that the GLA would participate in the 2018-19 London pilot. The pilot was established on a legal setting through each participating authority signing a joint memorandum of understanding (MoU) in January 2018 which set out how the administrative and governance arrangements would operate. It was considered that a quasi-contractual approach involving a lead authority in consultation with participating authorities was the most suitable mechanism for administering the pool.

In July 2018 the Government announced that it was inviting bids for authorities to pilot 75 per cent retention in 2019-20. It was stated any pilot arrangements in London would be negotiated separately and a joint proposal was submitted to Government by London Councils and the GLA in September 2018. It was confirmed alongside the provisional settlement on 13 December by the Government that London would be awarded a 75 per cent retention pilot in 2019-20. This would otherwise operate on the same basis as the 2018-19 pilot except that in common with the fifteen other proposed 75 per cent pilots the Government would not provide a financial guarantee that authorities could not be worse off by participating.

It is now necessary for each participating authority under the MoU with the Government to agree that it will:

• Participate in the pool and accept the Secretary of State’s designation;
• Enter into a local memorandum of understanding (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.

The City of London will again delegate certain administrative functions such as the transfer of payments between pool members and treasury management of pool funds to the GLA in recognition of the systems and processes it already has in place. This decision asks the Mayor to delegate authority to the Executive Director Resources to continue the arrangements already in place for this purpose in 2018-19 with the Corporation of London.

The proposed governance arrangements will be documented in a separate non-legally binding Memorandum of Understanding to be signed by the 33 local authorities and the GLA. This is being prepared by the lead authority and this Decision asks the Mayor to delegate authority to the Executive Director Resources to sign this MoU on behalf of the GLA.

Objectives and expected outcomes

Memorandum of Understanding (MoU) with Government

The MoU signed by London Councils, the GLA and the Government on the London 75 per cent business rates retention pilot set out at Annex A agrees that that:

• The 75 per cent 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 assumed to be participating if they do not withdraw within 28 days from the announcement of the 2019-20 provisional local government finance settlement (i.e. mid January 2019);
• From 1 April 2019 the 34 London pooling authorities will initially retain 75 per cent of their non-domestic rating income and a central share payment to MHCLG to support services in the rest of England will be reinstated at a rate of 25 per cent for the remaining revenues. Of the 75 per cent locally retained share the GLA will nominally retain 27 per cent and billing authorities 48 per cent for statutory purposes. This is before adjusting for the agreed pool redistribution arrangements and the internal guarantee which will ensure that no authority can be worse off from participating compared to the 67 per cent retention scheme in place in 2017-18 - which are explained below;
• London government will not retain 75 per cent of total rates collected, as it will continue to pay an aggregate tariff to government which is estimated to be around £1.13 billion. This represents the difference between London’s total baseline funding (£4.9 billion including £2.2 billion for the GLA) and its aggregate business rates baseline (£6.0 billion) in addition to the 25 per cent central share payment;
• London authorities will also receive section 31 grants in respect of Government supported changes to the business rates system which reduce the level of income such as the decision to move the annual uprating of the NNDR multiplier from RPI to CPI from April 2018 and the retail relief scheme announced in the 2018 Budget on 29 October. Section 31 grant will amount to 75 per cent of the value of the lost income and apportioned in line with the 27 per cent GLA and 48 per cent billing authority agreed shares;
• The Ministry of Housing Communities and Local Government (MHCLG) will as in 2018-19 not pay Revenue Support Grant (RSG) to the 33 London local authorities or the GLA. The funding baselines for each authority have been adjusted by the equivalent amount to reflect this transfer of RSG at the levels agreed for 2019-20 as part of the four year settlement published in 2016-17. No additional GLA or borough grants will be rolled in to the funding baseline for the rates retention system beyond the amounts in their funding baselines in 2017-18 and 2018-19 – adjusted to reflect the 2019-20 local individual allocations of these revenue streams. The TfL capital investment grant allocation within the overall funding baseline has been increased by £17 million to £993 million compared to 2018-19 in line with the agreed 2015 Spending Review settlement;
• The London pool will retain 75 per cent of any growth in business rate income above funding baselines (excluding growth in revenues arising from the 2017 business rates revaluation), and will pay no levy on that growth. This is a significant financial benefit. For example in 2017-18 London authorities collectively paid levies on their share of business rates growth to MHCLG of just under £90 million including over £36 million which was payable by the GLA;
• London authorities will not be subject to more onerous rules or constraints under the pilot, than they would have been if they had remained subject to the “67 per cent scheme” in place in 2017-18 – the year prior to the creation of the London business rates pool;
• 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 – 95 per cent rather than 92.5 per cent of the overall baseline funding level – than in the default 50 per cent retention scheme, reflecting the greater reliance local authorities will have on business rates;
• Any enterprise zones and designated areas established in London (i.e. the Royal Docks, Battersea/Nine Elms, Brent Cross and Croydon) will continue to operate outside the 75 per cent pilot; and
• Unlike in the 2018-19 pilot the Government will not provide a funding guarantee to ensure no authority – or the pool collectively – can be worse off from participating in the pilot. However as London’s share of actual business rates income is well above its baseline this guarantee would be unlikely to have been called on anyway. However, the London pilot will provide an internal guarantee – applied before any further growth is allocated – to ensure that no authority is worse off that would have been the case under the pre-pilot position (i.e. the 67 per cent retention scheme applying in 2017-18) as a result of the change in shares of retained income.

Memorandum of Understanding (MoU) between 34 Participating Authorities

A separate local MoU will be signed between the 34 pooling authorities and this Decision delegates authority to the Executive Director, Resources to sign this on behalf of the GLA. This MoU will be similar to that for 2018-19. This is being drafted by the Corporation of London and this Decision asks the Mayor to delegate authority to the Executive Director, Resources to sign this MoU on behalf of the GLA once it is finalised.

The key principles that will underpin this pooling agreement are that:

• No authority can be worse off as a result of participating - where authorities anticipate a decline in business rates or receive a lower retention share 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 (i.e. compared to the default 67 per cent retention scheme in place in 2017-18). 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. Unlike in 2018-19 no funding will be provided from Government to underpin this guarantee – so it will represent an internal guarantee provided locally - but in practice as business rates income is well above baseline for London as a whole it is highly unlikely this Government support would ever have been triggered anyway;
• The pool in 2019-20 will not bind boroughs or the Mayor indefinitely – the agreement includes notice provisions for authorities to withdraw provided notice is given by 30 September in the previous financial year. Unanimous agreement would in any case 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 and the planned reset of business rates baselines and potentially other reforms to the business rates retention system are expected to occur); and
• 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

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 – which is also the accountable body for London Councils – will as in 2018-19 be the lead authority for the London business rates pool. The lead authority’s standard responsibilities include, but are not 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 MHCLG including year-end reconciliations; and
• The collation and submission of information required for planning and monitoring purposes.

It will be for the Lead Authority working with the GLA and London Councils to calculate the distribution of revenues between members of the pool using the mechanism agreed by the Mayor of London and the Leaders/elected Mayors of the 33 billing authorities in Autumn 2017. It will also pay the net £1.1 billion tariff payment to the Government during the year. In practice, the distribution arrangements will mean some authorities will receive net payments from the pool in instalments during the 2019-20 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 of income and collection fund surpluses. Payments to or from MHCLG with the exception of the pool tariff payment (e.g. section 31 grants for rates reliefs and the Government’s share of prior year surpluses or deficits) will continue to be transferred directly to/from billing authorities and the GLA outside the pool. Reconciliation payments between pool members will be undertaken after the financial year end to reflect the actual business rates outturn.

Under a delegation arrangement, it is proposed that the GLA will again 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 continue the existing delegation agreement with the City of London already in place for 2018-19.

Any agreed 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.

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

The net additional financial benefit for London Government from participating in the pool in 2019-20 is estimated to be around £200 million based on the most recent income forecasts uprated for inflation. A more accurate forecast will be expected in February 2019 following the completion of individual forecasts for 2019-20 supplied by 31 January 2019. The actual level of growth will not however be known until the summer of 2020 once the business rates outturn for 2019-20 is confirmed and as a result it would not be prudent to apply all of the estimated growth prior to that date.

The principles for distributing this additional growth after applying the GLA’s share are based on four objectives agreed by Leaders and the Mayor in October 2017 i.e.:

• Incentivising growth (by allowing those boroughs where growth occurs to keep some proportion of the additional resources retained as a result of the pool) – 15 per cent;
• Recognising the contribution of all boroughs (through a per capita allocation) – 35 per cent;
• Recognising need (through the needs assessment formula) – 35 per cent; and
• Facilitating collective investment (through an investment pot designed to promote economic growth and lever additional investment funding from other sources) – 15 per cent.

The 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 (the same share in 2018-19 and 2019-20), in accordance with the apportionment principle reflecting relative baseline funding shares as previously agreed by participating authorities in 2017. The residual borough shares would then be apportioned between the 33 local authorities using the apportionment basis described above.

Mayor’s Strategic investment fund

The MoU with Government again 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.

On the basis of the assumed £200 million benefit from the pilot the GLA share available for strategic investment is estimated to be around £62.1 million i.e. approximately 36 per cent of £200 million.

London wide Strategic investment pot and pool governance

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.

For these purposes, “strategic investment" is defined as projects that will contribute to the sustainable growth of London's economy or support the delivery of new infrastructure, housing or employment, which lead directly to or are expected to facilitate an increase in London’s overall business rates income. Including the London wide strategic investment pot and the Mayor’s share around 50 per cent 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 by the lead authority during the 2019-20 financial year. 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.

As in 2018-19 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 2019-20 and Withdrawal Arrangements

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.

The MoU between London Government and the Government only commits to this new 2019-20 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 legislative changes:

(a) Needed to develop a Joint Committee model for future governance of a London pool; and
(b) Regarding the re-listing of central list assessments located wholly or primarily in the Greater London area, such as London Underground and Docklands Light Railway, in an ‘area’ list. This would allow London government to benefit directly from the additional growth in business rates revenues generated from any future expansion of the London transport network.

Equality comments

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.

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.

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

Retained 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

The internal no detriment commitment agreed for the London pilot is intended to ensure 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 2019-20. This guarantee is possible because existing business rates income is above the collective business rates baseline. This may not necessarily continue to apply should the pool continue beyond 2019-20 and such risks would be identified through a future Mayoral Decision if it were decided to extend the pool for a further 12 months into 2020-21 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

The Mayor has allocated around £2.3 billion of retained business rates to fund GLA services in his 2019-20 consultation budget.

The overall net financial benefit to London Government from participating in the pool in 2019-20 is estimated to be in the region of £200 million, based on modelling using the most recently available borough forecasts. Of this around £62.1 million would be allocated to the GLA directly in line with its agreed 36 per cent pool retention share and £30 million (15 per cent) to the London wide strategic investment pot in line with the agreed methodology approved by the Mayor and Leaders/Mayors of the 33 London billing authorities. This figure and the sum allocated for core GLA services will be updated in the Mayor’s final draft budget to reflect the actual borough forecasts for 2019-20 which are due to be received by 31 January 2019.

The actual level of growth will not however be known until the summer of 2020 once the business rates outturn for 2019-20 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 2019-20 budget with final decisions on its use being made during the course of that financial year.

Activity table

Memorandum of understanding signed with Government

13 December 2018

Provisional 2019-20 settlement published

 

13 December 2018

Final baselines published in final LGF Settlement

 

February 2019

2019-20 pilot commences

1 April 2019


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