Business Rates Update July Business Rates Steering Group 19 July 2016 Item 3 - Appendix A

Context The government has committed to delivering 100% Business Rates retention for local authorities in England by the end of this Parliament. This does not represent additional funding for local government. They will pilot the approach in Greater Manchester, Liverpool City Region and Greater London. For Greater Manchester assurance has been given that Authorities will be collectively no worse off as a result in taking part in the pilot. The pilots will help to develop the mechanisms that will be needed to manage risk and reward. The approach may include financing from additional business rates new responsibilities and/or existing funding streams, including those that support economic growth at district or regional level. 2

Areas of focus for the GM Business Rates Retention Pilot There are four areas of focus for the GM pilot as follows: Incentivising economic growth  How growth can be incentivised and headroom for investment created  Mayoral supplement (ability to do this from 2018)  Flexibility on mandatory reliefs Transfer of Functions Services to devolve – and how this aligns with functions already devolved in Devolution Deals and future aspirations – linked to both growth and public sector reform Creating a stable funding stream  Changes in how risk is dealt with  Changes to safety net regime  Impact of levy abolition  Implications for pooling and role of CA Redistribution of business rates income  Will need to develop an understanding about how resets and revaluations work  Role of CA – both in retaining share of business rates, but also in ‘distributing’ growth ie ensuring that ‘growth’ benefits the whole of GM and leads to authorities co-operating, instead of competing, for business, housing etc 3

Incentivising Economic Growth Objective to support productivity and growth in a way that is fiscally neutral to HMT and GM. Must be underpinned by the ability to retain savings achieved through successfully reducing demand and growing the business rates base. Aim to create a revenue stream of £15m to £20m per annum to create a platform for a sustainable investment fund which would be used to unlock development through funding remediation and infrastructure costs. Areas to be explored:  How growth can be incentivised and headroom for investment created  How the Mayoral supplement (ability to do this from 2018) could be utilised  Exploring the potential for flexibility on mandatory reliefs  Alignment of the spatial strategy with the impact on revenues such as business rates and council tax Work is underway to produce case studies to illustrate the above and better develop an understanding of what drives business rates growth and limiting factors – demonstrating link between investment and future income Note the impact of the changes in SBRR – SMEs may no longer pay business rates 4

Transfer of Functions Danger that the functions that can transfer driven purely by headroom within the business rates system. Tension between those seeking stability of funding and functions previously funded by specific grant and testing more potentially risky areas linked to devolution deals that will drive growth and reform. GM Principles:  Functions must be relevant to supporting productivity and growth in a way that is fiscally neutral to HMT and GM  Transfer of growth related functions needs to be accompanied by the ability to generate an investment capacity  This is not a one size fits all approach – different local authorities and city regions / CAs should be able to have different arrangements  Should avoid the transfer of demand-led budgets purely as a means of capping demand  The pilot should support the testing of more innovative ideas in a ‘safe environment’ to inform the proposals for full devolution  The transfer of functions should be tested at both CA and individual local authority level  Functions transferred should not have any ring-fencing constraints and there needs to be the ability to shape / influence / redesign those functions at a locality level – this could include co-commissioning arrangements with central government  GM should still be able to access any additional funding streams that may be announced during the SR period that relate to those functions or any relevant new burdens funding RSG and Public Health likely to transfer. Areas to explore that align with the priorities for GM could include:  Growth and Infrastructure Development – including future devolution asks to underpin a Local Growth Deal  Transport related revenue and potentially capital funding – including in the context of being a bus franchise area and the need to support more bus operations  Education and skills including functions that link with the leadership of schools and PSR such as the remaining elements of ESG and the high needs / early years block of DSG; careers guidance, vocational skills funding from the EFA in line with the forthcoming Skills White Paper and Adults skills funding (19+)  Funding that is relevant to the scope of the Better Life Chances fund  Funding streams linked to the devolution deal relating to the criminal justice system  There is also a potential to pilot some form of bespoke ‘growth fund’ accessed through deals via an offer in return for reform, and to develop this into a bespoke growth deal. These areas should be explored further with CLG and links with the work outlined on how to capture headroom in investment to create future growth Is there an appetite also to test some more risk areas that promote reform, eg linked to welfare reforms and incentives to support people into work? 5

Stable Funding Stream and Redistribution of Resources Need to consider:  Further discussions to test appetite for a different definition of fiscal neutrality and how we use this to create some headroom for investment in infrastructure and other areas that support growth  Some shared thinking on the role of the CA in this and how this leads us to consider how business rates are distributed across a CA/LEP area  Involvement in the Fairer Funding formula work and the issues we want to raise  Technical work – agree with CLG programme of work which would include:  What baseline are we measuring our 'no worse off' guarantee against?  How 100% devolution and abolition of the levy will operate in practice  Work to understand the impact of the revaluation and the potential impact that might have and the potential shift of resource to London / South East  Further work on appeals and management of risk – issues being discussed at the moment which we need to influence around the role of the VoA, what should be on the central v national list etc 6

Work Underway 1. City Region View on the needs based formula – now looking to view as ‘cost drivers’ rather than needs based We are concerned that the development of the replacement formula with potential focus on being simple and per capita driven will not reflect the reality in city regions. Must ensure retain narrative of reform and not rewarding failure whilst ensuring that the baseline spend requirement is equitable and reflects the different drivers of spend. These are both needs based and reflect the costs of being an urban centre. Will consider some high level principles and identification of key needs based and economic drivers to be completed by September and longer term piece of work with the more detailed modelling. 2. Impact of revaluation Will use the macro level data on the reval potentially due to be published by the VoA in July. Timescale driven by availability of data. 3. More in-depth case for the functions to be transferred Need a more detailed analysis behind the current high level areas identified. Agreed we should seek further areas that align with our devolution aspirations. It remains a priority to try and carve out some headroom for investment to generate further growth. Discussion around fiscal neutrality and seeking fiscal neutrality across public spend at place level rather than a more narrow definition. Analysis on relevant funding streams, how they support objectives, pros and cons. 7

Work Underway – Technical Methodology around how to calculate business rate percentage shares – discussion Discussion around how to set the most appropriate baseline, taking into account growing inflationary and demand pressures in adult social care in particular which will probably grow at faster rate than business rates At what level to set the safety net? Under review by systems design technical working group. To note that the current level of the safety net is 7.5% Central list – Systems design group is also looking at this. Key question – what is the intended purpose of the central list in the future business rates retention system? Is it to insure against appeals risk? Fundamental review of rationale for which types of hereditament to retain on the central list. No chance of changing the purpose of the list before 2018/19, but feasible to move hereditaments to/from central list. As part of its devolution deal, GMCA wants some of the allocations to central list challenging eg railway stations in its area to be transferred to the local list in return for the capital investment CLG to send illustrative figures and methodology for exchange of grants in return for higher BR %, using RSG only How do we define ‘no detriment’ – looking to seek agreement CLG to advise how ‘no detriment’ would work. GM could measure the outcome of the pilot on a ‘shadow’ basis, with any upside from a local authority point of view being paid directly to each local authority via section 31 grant Timeline and key milestones – progress updates CLG noted that the pilot propositions will need to be finalised by September 2016 at the latest to allow sufficient time to reflect in the provisional local government finance settlement 8