The Chancellor of the Exchequer, George Osborne, has unveiled plans for local councils across England to be able to keep all proceeds from business rates raised in their area. The move will see £26bn diverted from central government to local government.

Richard Farr, rating and regeneration partner, Sanderson Weatherall, Newcastle, said:

“This is a radical change for local authorities as it gives them the ability to influence their local economy. It is good news in many ways, leading to a level of devolution and regionalisation which many councils have been calling for.

“Yet it also raises some tricky issues as the plans allow authorities to reduce rates in a bid to stimulate growth in an area. It really is about ‘how low do you go?’

“Authorities may choose to significantly cut rates as part of a long term strategy so that the area becomes attractive to businesses looking to relocate. Whilst the returns would not be immediate, ultimately the money would roll in but how would councils manage with a lower return from business rates in the interim?

“The changes will require sophisticated economic planning and management on the part of local authorities.

“The fairness of the plans also has to be considered. Not all local authorities will be able to afford to lower business rates as the tax provides vital income for other services and facilities. Councils which are struggling currently will find it tough to implement cuts even if the long term objective is to maximise income.

“In the North East we have seen Nissan and Hitachi choose to locate in the region. Should councils look to cut rates in a bid to attract big businesses like this? Most businesses are not footloose and are tied to their locations. It is unlikely that it will be commercially viable for a business to move simply to save business rates. This raises the question of just how beneficial the plans are when it comes to stimulating economic growth in an area.

“Those local authorities with elected mayors will, with support from the business community, be permitted to levy surcharge likely to be capped at 2p to fund infrastructure improvements. It is vital that existing businesses are not held to ransom by a mayoral structure intent on improving their city region by raising taxes at all cost.

“If the government truly wishes to promote economic activity and growth, they should implement more frequent rebasing of the rateable value revaluations. Current rateable values are based on 2008 rental values and are not due to be reassessed until 2017. The regime of transitional phasing, which limits the percentage a business rates bill can be increased or decreased each year following revaluation, should also be abolished. Embrace these changes and ratepayers of some categories of properties particularly on the high street could see reductions of 30-40 per cent in their tax.

“Whilst these plans will promote significant housekeeping within local authorities by balancing costs and income more carefully, the business benefits could be quite limited. It is important that robust safeguards are provided within the legislation to ensure the system is fair.”