Non-Domestic Rating (Levy and Safety Net) (Amendment) Regulations 2025

Considered in Grand Committee

15:45:00

Moved by

That the Grand Committee do consider the Non-Domestic Rating (Levy and Safety Net) (Amendment) Regulations 2025.

My Lords, the Government are currently working to strengthen the local government finance system, a task that I am sure many noble Lords will agree is an essential course of action. However, as we do this, we must also enable councils to set budgets and provide essential services now by providing them with the financial certainty they need. The business rates retention system is a cornerstone of the local government finance system, through which councils in England retain a fixed proportion of the business rates they raise locally. This enables them to benefit when business rates income increases in their local areas. Despite the system’s simple premise, the administrative arrangements that underpin it are unavoidably complex. This results from not just the arrangements between local councils and central government to operate the system but changes that have been implemented over time to honour the system’s original commitments. As the Committee may remember, the rates retention system was set up, and is run, according to a suite of legislation, with the day-to-day arrangements covered by several sets of regulations. For the system to continue to run as it should, and so that councils pay or receive the correct amounts, the regulations that govern these arrangements must be regularly updated. The amendment regulations before the Committee this afternoon make updates that are needed this year and, while the changes they bring about may be technical, the reasons for making them are straightforward. Today, we need to make changes only to the levy and safety net regulations. These regulations set out within the system a safety net that protects councils from decreases in business rates income below 92.5% of their need assessment funded through the rates retention system, and how this mechanism is partially paid for via a levy on the growth in their business rates income. I will now explain the changes that the amendment regulations make and why we need to make them. Within the rates retention system, several councils benefit from what are known as enhanced rates retention arrangements, which, simply put, mean that they retain more than 50% of the growth in their business rates income. To prevent councils that run at the standard 50% level being disadvantaged by any additional safety net arrangements that enhanced retention councils may receive, levy and safety net calculations for all councils must be made at the standard 50% rates retention level. The amendment regulations will make sure this happens by substituting the figures of enhanced retention councils in the local government finance report with the figures those councils would have had if they were operating at the 50% rates retention level. Secondly, each year we need to reflect in the rates retention system newly introduced measures that change business rates as a tax. Where changes amend the bills of businesses, such as reliefs, there is a consequential impact on the income that councils collect locally. This year, the only such change needed to the regulations for this purpose is to ensure that major precepting authorities—which for these purposes are primarily county councils and fire authorities—are not doubly compensated via the levy and safety net for business rates reliefs announced for 2025-26 which reduced their income. We are making this change because major precepting authorities already receive compensation for their share of the loss of income due to the awarding of these reliefs via a grant from government. However, this does not show up in their retained rates income, which, resultantly, would appear too low in levy and safety net calculations. The amendment regulations quite simply add the value of the new business rates reliefs back to major precepting authorities’ retained rates income, therefore ensuring that the compensation they receive is accounted for and that a more accurate measure of each council’s income is fed into levy and safety net calculations. The last change the amendment regulations make is to put right an erroneous figure, originally set out in the Non-Domestic Rating (Levy and Safety Net) (Amendment) Regulations 2022. This figure will be used as part of calculations to ascertain how much small business rates relief to add back to North Northamptonshire’s retained rates income, on which levy and safety net calculations will be made. I confirm that we are taking the first opportunity to rectify the error, having discovered it only recently. We are yet to perform the relevant statutory end-of-year levy and safety net calculations required by the regulations based on certified—or audited—data, as we have not yet received this data. Once we have received it, we will make these calculations. Noble Lords will understand that in cases such as these, where the required data from councils is outstanding, we carry out interim calculations while the relevant councils are waiting for their accounts to be audited. This is sensible to ensure that councils do not lose out or end up needing to provide for future payments of levy. For North Northamptonshire, the correction of this error will not affect its levy and safety net calculation or, therefore, its payments for 2021-22 or 2022-23. This is because no levy payment is due, and it is not eligible for any safety net in respect of those years—a situation that will not change as a result of the amendment of this figure. However, due to the increase in income in the local area that North Northamptonshire has seen following the 2023 revaluation, it became a tariff authority from 2023-24. This means that from 2023-24 it is due to start paying levy on its growth, which in turn also means that adjusting the figure will have a small impact on the amount of levy paid going forward. The amendment regulations make this change, correcting the figure from 67.4% to 67.8%. My officials have engaged with the council so that it is aware of this change. In conclusion, these amendment regulations update the administration of the business rates retention scheme and are required to ensure that councils receive the amount of business rates income they are anticipating and on which they have budgeted. I hope that noble Lords will join me in supporting these regulations. I beg to move.

My Lords, I declare that I have relevant interests in local government, as recorded in the register. I hope the Minister has understood every bit of what he has read out, because it is very complicated—that is not meant as anything more than a statement—particularly as there are no examples in front of us as to what the impact of the changes will be. This statutory instrument needs to be understood in relation to the Non-Domestic Rating (Multipliers and Private Schools) Bill, which has just completed its Committee stage. That Bill, if enacted without amendments, will change the norms for business rates income, on which local government absolutely depends for a significant part of its income. The changed multipliers that the Bill envisages will, obviously, also alter the amount that different businesses will pay in non-domestic rates. This, in turn, will alter the income that different local authorities will receive as part of the 50% business rates retention scheme. That impact will affect local authorities in very different ways. Local authorities with many properties that exceed the £500,000 rateable value boundary set in the Bill will gain in income. These businesses are primarily in major cities and include, for example, office blocks, hotels and major premises of that sort. Local authorities that are more reliant for income from retail, hospitality and leisure businesses will see their income in the 50% retained element decrease. During the passage of the non-domestic rating Bill, I sought—and was granted—an assurance that local authorities will not be penalised as a result of the changes. However, that is on the national, global level. This statutory instrument is, I guess, the attempt to deal with these changes so that individual local authorities do not lose income or, conversely, gain too much income. The key question is whether that can be achieved in full. Is it possible under the new system that is going to come into effect in a year, whereby the Covid relief will gradually slip away and the new multipliers implemented will change the balance of income from businesses across the country? I have been assured that the national figure of income will not change. Will individual local authorities have assurance from the Minister that they will not lose out as a consequence of the changes? I accept that this is a very complicated set of calculations, so it would be absolutely fine if the Minister would prefer to write to me. As the Minister will know, 43% of local authorities are on the verge of issuing 114 notices, so in this instance every penny will count. That is why I am asking the question. The lack of hard examples in the Explanatory Memorandum and the Minister’s introduction makes it really difficult to judge the implications of this instrument, so any further evidence will be extremely helpful for folk like me to understand what is going on. My other point is about the changes to the 100% retention authorities; I want to know how that is worked out and I think it needs a bit more explanation. If those with 100% retention are no longer going to be able to retain 100%, how is it going to be worked out? Those authorities will expect to retain 100%. Again, I understand if the answer needs to be in writing, because this is not obviously easy or straightforward. Finally, the issue that these changes bring to the fore is the current inability of councils to raise local income—be that in a small tourist tax, as the Manchester combined authority is now doing, or by any other means. A bit more flexibility for local authorities in raising their own small amounts of additional income would be of enormous benefit to many councils as they struggle to make ends meet. It would be worth knowing why flexibility in raising income does not seem to be in the Government’s agenda, because it would help to stem the enormous downward pressure on local public services. I look forward to what the Minister has to say, and a written response if needed.

My Lords, I mention my interests as a councillor in Central Bedfordshire. I thank the Minister for clearly outlining the essence of this SI. While these are technical adjustments that may sound reasonable on paper, it is useful to consider the wider impact of government actions in relation to the business rates system, particularly as it pertains to our small and medium-sized enterprises alongside larger businesses. As the noble Baroness, Lady Pinnock, mentioned, this is a very complex system, so when we make changes to it there tend to be unintended and uncertain changes. That is the whole reason we have this SI in the first place. I would like some assurance on that, which I will raise in a moment. I turn to the regulations themselves. The primary change is to adjust how the levy and safety net payments are calculated for authorities that retain a greater share of business rates. The most notable change is ensuring that these authorities, sometimes referred to as 100% authorities, do not have to bear the brunt of additional payments that should, in fairness, be a central government responsibility.

16:00:00

Secondly, the regulations aim to address the proper accounting of new business rates relief announced in the 2025-26 financial year. This new relief, targeting specific sectors, aims to ease the burden on businesses, but it must be properly accounted for in the levy and safety net calculation to avoid situations where local authorities are compensated twice for the same relief.

Lastly, the regulations correct a technical error in the calculation of small business relief for North Northamptonshire. The correction addresses a mistake made when the authority was created in 2021, and it will ensure the accuracy of calculation going forward.

In short, the goal of these changes is to ensure fairness and transparency in how business rates are calculated and redistributed between central and local government. These technical adjustments are necessary to align the system with current policy. However, it is important to consider whether these measures will genuinely benefit the businesses they aim to support, especially small businesses and those in particular strained sectors.

I have a few questions. First, the Government claim that these changes will prevent 100% authorities being unfairly burdened with additional payments. However, can the Government guarantee that these changes will not result in unintended consequences? Will they inadvertently create a scenario where certain local authorities are better protected than others, exacerbating regional discrepancies? I think that was the point raised by the noble Baroness, Lady Pinnock—I was going to say “my noble friend”, and she is a friend.

Secondly, while the new business rates relief for 2025-26 is designed to prevent double compensation, how will the Government ensure that the reliefs are effectively targeting businesses in need? Small and medium-sized enterprises in particular face increasing financial pressure. Will these new measures translate into meaningful support for those businesses, or are they primarily for the benefit of local authorities?

In conclusion, although the levy and safety net amendments may indeed improve the technical accuracy of the business rates system, the Government must be cautious not to lose sight of the broader impact on business. His Majesty’s Opposition do not oppose these amendments, but we urge the Government to reflect more deeply on the implications for the wider business community, particularly smaller businesses, in sectors such as hospitality, retail and leisure, which face their own unique and often severe challenges.

In particular, can I have an assurance from the Minister that the other proposed NDR changes that we discussed last week will not have these unintended consequences, which would mean we would be here again in six months or a year with SIs to rectify something the Government are putting through at the moment? It would be nice to get it right the first time.

My Lords, I thank noble Lords for their very interesting contributions, their broad support for what the Government intend to do, and their interest in this subject. I will first summarise what we are trying to do here. We make several changes to the regulations each year, so what we are doing this year is not out of the pattern. We make these changes to ensure that we update the legislative framework that underpins the business rates retention system. This is to reflect policy announcements already made that affect the business rates retention system, such as the introduction of new reliefs or the modification of existing ones. These changes usually adjust council income or the values that underpin redistribution within the system. These changes are generally uncontroversial, meaning that they are put in place practically—the result of policy decisions already taken. All current region-wide enhanced business rates retention arrangements, including those in place in authorities in Greater Manchester and the West Midlands, will continue for 2025-26. The current patchwork of business rates retention arrangements allows only certain areas to benefit from enhanced retention of growth in business rates. The Government will consider how a new model of business rates retention could be better and could more consistently support strategic authorities to drive growth, as part of the Government’s reform of funding for local government through a multiyear settlement from 2026-27. I turn the points raised by the noble Baroness, Lady Pinnock. These are technical regulations providing for the current operation of the system. Next year, the Government will reset the amount of income by remeasuring how much income there is. This will take into account the changes in the multipliers and the revaluation in 2026—a point on which the noble Lord, Lord Jamieson, also touched. Both noble Lords touched on the top-ups and tariffs for 100% authorities’ calculations at the 50% level. The tariffs and top-ups, including the levy and the safety net calculations for 100% retention authorities, are simply the tariffs or top-ups that each authority would have paid or received if it had been operating under the normal 50% retention arrangements. By using this proxy, we ensure that any safety net payment to an authority is the same as it would have been if it had not been a 100% retention authority. We then carry out a separate calculation for the amount that is due under the 100% arrangements. If this is greater than the safety net payment calculated under 50% rates retention, we pay them the difference via a grant. In his way, central government—not the rest of local government—picks up the cost of any increased risk under the 100% arrangements. This approach was agreed with the relevant areas when these arrangements were set up. On the changes, I want to touch on what we are trying to do. We use a measure of council business rates income, called retained rates income, to calculate levy and safety net payments for a year. Retained rates income is based on an authority’s measurement of income in that system and includes the authority’s top-up or tariff for that particular year. If we simply used 100% top-up or tariff figures, it would mean that councils that retain 50% of the growth in their business rates might end up paying for the increased safety net arrangements—a point that I have made before. For the purpose of making the levy and safety net calculations, to ensure that that does not happen, we substitute the top-up and tariff figures of councils that have enhanced retention arrangements in place for 2025-26 for the figures that they would have if they were operating at 50% business rates retention. On the related changes to tax measures, the Government support businesses in England by providing business rates reliefs and exemptions. This year, the discretionary business rates measures that we are adjusting in relation to the calculation of small business rates relief are also for rental, hospitality and leisure relief. This has been a point of discussion and debate across two days in Committee. As I said in Committee—I say it to the noble Baroness, Lady Pinnock, now—analysis on the impact of the policy will be done only when the rates are set by the Treasury at Budget. It would be remiss of me to try to give any assurances, particularly in terms of assessments and analysis of the impact, when—

I thank the Minister for seeking to respond to my question about whether any local authorities will lose as a consequence of these changes, alongside the other changes that were made in the non-domestic rates multiplier Bill. So far, the Minister has not said that the Government are not able to give an absolute assurance that local authorities will not lose. Is that right? Is that what I am hearing?

No. As far as we understand it, we are moving towards a system where business rates are the first part of the overview, and changing the whole system includes the non-domestic rates multiplier Bill—the NDR business rates Bill—to which we have referred. We have that as part of a process to make sure that the system is sustainable and continues in a fair way. Of course, we are working to ensure that we support local authorities, as far as is possible. At this stage, we think that the system and the way in which it will work will provide sustainable and fair practice where we have put in higher multipliers for a rateable value of £500,000 and, elsewhere, where we have put in lower multipliers. In that way, we are working closely with local councils and we will continue to work with them to ensure that local authorities do not lose out as part of this process. We are watching this closely. However, we—not my department but the Treasury—will publish an impact analysis when the multipliers are set. If anything, I have not picked up on the noble Baroness’s detailed and specific questions. We will write to her, as she has invited me to write to her; it would only be kind to write back if somebody wants a letter. I thank noble Lords for their valuable contributions to the debate. In closing, while the changes made by the regulations are few and technical, they are important to make sure that the business rates retention system continues to operate correctly, so that authorities receive what they should. I hope that noble Lords join me in supporting them.

Motion agreed.