Subject: POOLING OF BUSINESS RATES

Meeting and Date: Cabinet – 8 September 2014

Report of: Director of Finance, Housing and Community

Portfolio Holder: Portfolio Holder for Performance and Resources

Decision Type: Non-Key

Classification: UNRESTRICTED

Purpose of the report: To enable DDC to negotiate with KCC and other Kent districts to form a Business Rates (BR) “pool” for 2015/16 and subsequent years, to be progressed only if that would significantly increase the proportion of BR growth that would be retained by DDC.

Recommendation: That Cabinet delegate to the Director of Finance, Housing and Communities, in consultation with the Portfolio Holder for Performance and Resources, the decision to participate in a Kent based Business Rates Pool in 2015/16 and in subsequent years.

1. Summary

1.1 The localisation of BR means that DDC will retain £200k (or 20%) of every additional £1m in BR collected, above the council’s “baseline” level. However, by working with an upper tier authority (such as Kent County Council), to set up a BR pool, this retention rate can be increased significantly.

1.2 If DDC joins the Kent pool, then the proportion of growth retained by DDC is expected to increase by around 5% or £51k from £200k to around £251k every additional £1m in BR collected, with a further £51k retained by KCC, and an additional £51k spent jointly by KCC and DDC in the Dover district.

1.3 DDC could seek to join pools outside the Kent area, but given the need to understand the position of all partners in the pool, and build working relationships, the only practical option is to seek to join the Kent pool. This currently comprises just KCC and Maidstone Borough Council (MBC), but other districts are also exploring this option, so DDC will need to enter into detailed discussions with KCC, MBC and other districts seeking to join, in order to protect DDC from risks and ensure an equitable and beneficial arrangement.

1.4 The deadline for submitting the pool proposals to the DCLG is the end of October 2014, so it is not practical to repeatedly report the latest developments to Cabinet during the short time available for negotiations. Accordingly, it is proposed to delegate the decision to the Director of Finance, Housing and Community in consultation with the Portfolio Holder for Performance and Resources.

1.5 It should be noted that if any partner withdraws from the pool after October 2014, then the DCLG will not allow the pool to operate for 2015/16, and the opportunity will be lost to all prospective partners, for the year. Therefore no authority, including DDC, should seek to join the pool unless it is fully committed, and all partners will need to understand the position of the other partners with regard to BR before committing themselves.

Dover District Council

1.6 The Kent pool has been designed (see Annex 1 for the current governance arrangements) to ensure that no authority will be worse off in the pool, than they would have been if they hadn’t joined it, therefore joining the pool should not carry any negative risks for the Council1.

1.7 To put the overall values into perspective DDC has billed an average of circa £32m per annum in BR, with around 32% of this coming from just 3 sites, the Channel Tunnel (17%), Discovery Park (9%) and Dover Harbour (6%). So an overall increase in BR of 3% (after adjusting for changes in the multiplier and inflation) would yield around £1m.

2. Background

2.1 Business Rates has been “localised”, and district councils retain their own “baseline” funding level (for DDC this is £3.3m in 2014/15). 2

2.2 If districts collect less than their target level then, after accepting the initial loss themselves (for DDC this is £247k in 2014/15), they receive a “safety net” payment.

2.3 However, if districts exceed their target level, the first 50% goes straight to the DCLG. The remainder is treated as follows:

• 50% of the remainder (ie 25% of the total) is paid to the DCLG as a tariff (used to pay the safety net to other authorities)

• 9% is paid to KCC

• 1% is paid to the Kent Fire and Rescue Service (KFR)

• 40% is retained by the district.

2.4 Because KCC only receives about 9% of business rates, it is a “top-up” authority and would not pay a tariff on any BR growth. In a pool, all the partners are treated as “one authority”. Therefore, by pooling with KCC, we can average out the tariff rate that KCC and the districts would separately pay on the growth, thus diluting the tariff rate for DDC and the other districts.

2.5 So, at no cost (other than staff time for the administration of the pool arrangements) to DDC or KCC, we can reduce the tariff rate paid by DDC from around 50% to around 15 – 20%. KCC, KFR and MBC have already formed a pool for 2014/15, so the most practical approach would be to take this as a starting position and enter into discussions with KCC, KFR, MBC and other Kent districts to join an expanded pool, based principally on the existing governance arrangements, as set out in Appendix 1.

2.6 It is important to emphasize that it is not yet clear how the detailed calculations for an expanded Kent pool would work. However, in order to assist Members, it is instructive to compare an illustrative example of the position without a pool, and possible arrangements within a pool.

1 This is based on the assumption that partners are not in the safety net. The pool cannot guarantee to recompense participants whose performance is poor enough to drop them back into the “safety net”. 2 This is explained in more detail in paragraphs 71 – 106 of the Budget 2014/15 and Medium Term Financial Plan, as approved by Council in March 2014 and as shown in the extract at Annex 2.

2.7 This example is based on a scenario where BR collected by DDC is £1m above the baseline. Without a pool the outcome would be:

1. £1m additional BR collected by DDC

2. 50% or £500k paid to DCLG

3. 50% of the remainder, or £250k paid to DCLG as levy

4. 9% of the remainder, or £45k, paid to KCC

5. 1% of the remainder or £5k paid to Fire.

6. 40% of the remainder, or £200k retained by DDC.

2.8 In contrast, with a pool in place, the position would be:

1. £1m additional BR collected by DDC

2. 50% or £500k paid to DCLG

3. 16% (indicative) of the remainder, or £80k paid to DCLG as levy

4. 9% of the remainder, or £45k, paid to KCC

5. 1% of the remainder or £5k paid to the Fire

6. 74% (indicative) of the remainder, or £370k, retained by DDC. This is an increase of £170k.

7. The pooling partners expect to benefit from this, so the additional £170k is then shared on the basis of

(i) 30% (in this example 30% of £170k), or £51k is passed direct to KCC for their own uses.

(ii) 30% is paid into a jointly managed regeneration pot to be used for growth initiatives in the district from which it came – so DDC and KCC would manage the use of £51k for regeneration purposes, in the Dover district.

(iii) 10% (£17k) is put into a contingency pot.

(iv) 30% is retained by the district for their own purposes.

2.9 So, by pooling, for every extra £1m BR collected, in addition to the basic £200k retained, DDC retains circa an additional £51k or 5%, directly with a further £51k spent in the district on regeneration, by KCC (this is set out more fully in Annex 3).

3. Risks

3.1 Although it is assumed that authorities will pool with neighbours and upper tier authorities for their area, authorities could, in theory, choose to pool with other willing authorities.

3.2 In practice, the practicalities of meeting, establishing both political and working relationships, and setting up the required processes, mean that the Kent based pool is the only realistic option. One of the key principles of the Kent pool is that no authority will be worse off as a result of joining the pool, than they would have been if they had remained outside of it.

3.3 Therefore, because we would only contribute to the pool the excess that we have retained above the amount we would have retained without a pool in place, there are only three “downside” risks or costs to participating in the pool.

3.4 First, there are administrative costs (mostly staff time) in setting up the pool. This has to be done on an annual basis, and, once a pool is accepted by DCLG, if a partner subsequently withdraws, the pool will automatically collapse and no “plan B” is permitted, so we must have a good understanding of our partners’ situation and intentions. There is no further mitigation for this risk.

3.5 Second, if we join a pool we will no longer be entitled to safety net payments from DCLG. Therefore we must be confident we will be out of the safety net for the year, since the pool could not make up for this loss. The mitigation for this is that we have a robust projection of business rates, we have made significant allowances for both bad debts and appeals and we also have an equalisation reserve that can cover an in-year fluctuation. In addition, the pool itself also has a 10% contingency to assist with this – but that would be exhausted quickly.

3.6 Third, we need to understand what risks there are of our partners falling back into the safety net, and the pool needs to be set up in such a way that if any of the partners do fall into the safety net, they cannot call on the contributions of others, such as DDC, to compensate them, other than through the use of the contingency fund within the pool. This is to be addressed in the process of negotiations with our partners.

3.7 There is, in addition, a longer term risk. The DCLG advises that :

“In order to maximise the growth incentive, it is intended that the next reset will occur in 2020.”

3.8 It is not yet clear how this “re-set” will be done, and whether there will be any transitional arrangements. There is a history of postponed or cancelled revaluations and changes to local government finance. However, if the current local finance regime is still in place, then, in theory, the reset will put DDC back to the position it was in at the start of the localisation of BR, and any growth achieved and retained in recent years, will not continue after 2019/20. Therefore we have recognised this possibility when considering our financial plans.

3.9 In the meantime,

“The baseline funding level, on which the safety net payments are based, and tariffs and top-ups, will therefore simply be uprated by the Retail Price Index.”

4. Variables and Uncertainties

4.1 The system for the localisation of BR is extremely complex, with a number of BR reliefs and grants which cloud the issue further – so much so that CIPFA are still working with the DCLG to clarify and resolve some issues.

4.2 This complexity is increased for DDC by the presence of an Enterprise Zone (EZ) within the district.

4.3 Nonetheless, the main variables and uncertainties can be reduced to the following:

1. The level of BR tax base growth (or reduction) within the district

2. The level of BR growth and relief, and the patterns of occupancy at the EZ

3. The impact of BR appeals

4. BR collection rates

5. The level of bad debt provision

6. The position and intentions of our pooling partners

5. The Level of BR Tax Base Growth Within the District

5.1 It is not possible to project future BR growth within the district with precision. The main factors are the net tax base arising from the level of building and the level of any demolition, and the valuations given by the Valuation Office (VO)3.

5.2 All three factors are, largely, out of the Council’s hands. However, we have made prudent estimates of the net growth, and rateable values, expected from developments at DTIZ, Sandwich, the EZ and at Whitfield.

5.3 The final outcome for 2015/16 will also be influenced by the dates of completion and occupancy and the valuations by the VO. BR for DDC in 2014/15 are expected to be just about on the baseline, and are projected to grow by £800k - £1m in 2015/16 after adjusting for inflation.

5.4 On this basis, joining the pool would lead to the retention of an extra £170k for the pool. As more detailed work is undertaken the projections will become more robust. We will only proceed with the pool if we are clearly expecting to be outside of the safety net, and the projected increased income for DDC outweighs the time and cost of participation.

6. The Level of BR growth and relief at the EZ

6.1 The main elements of potential growth at the EZ in 2015/16 are the upgrading of existing facilities leading to an increase in rateable value (RV), any changes in the pattern of units occupied (overall bigger units would equate to a lower, pro rata, rateable value) and any potential new build.

6.2 As completion of significant new build in 2015/16 is not certain, and the improvement in facilities is likely to be offset, to some degree, by aggregation of units for some of the bigger occupiers, a cautious approach has been taken and no assumption of growth has been made for the EZ in 2015/16.

6.3 In the longer term, the EZ has the potential to drive significant increases in BR, but this report is focused upon 2015/16.

7. The impact of BR appeals

7.1 RVs are set by the VO based upon the notional comparative rental value of premises. This value can be influenced by a range of factors that influence the

3 The VO is a Government agency responsible for setting the rateable value of commercial and business premises. This is a complex calculation and is not something DDC can influence.

commercial value of a property including the start-up, or closure, or neighbouring businesses, the level of footfall and passing trade, ease of communications etc.

7.2 It is also difficult to predict the RV for unusual facilities (for example power stations), where a change to the valuation method for a power station in one area, can establish a precedent that can lead to a change in valuations across the country.

7.3 Finally, on a square foot basis, small units have a higher RV than large units, so breaking units up can increase the aggregate value. Combining them can reduce it.

7.4 It is the default position of many businesses to appeal against their rateable value. Consequently, although the number of outstanding appeals has reduced significantly in the last 12 months, nonetheless, for the DDC area there are still around 150 appeals outstanding, the majority dating from 2010, and a small number from 2005.

7.5 Therefore DDC (and the majority of other billing authorities) work with the VO to review the outstanding appeals and make a reasonable estimate of their overall impact on the tax base and potential refunds – since they are a direct charge against the BR collected in the year.

7.6 The data available cannot give a detailed projection of outcomes on a property by property basis. However, specific forecasts are made for the major heriditaments4, with a % assumption for the success rate of all the other appeals.

8. BR collection rates

8.1 Collection rates are relatively stable at circa 98%. Overall the level of economic activity in the economy is increasing and it is therefore reasonable to assume that, as a minimum, current collection rates will continue to be achieved.

9. The Level of Bad Debt provision

9.1 DDC have made robust estimates of the potential levels of bad debts, so that significant write-offs are not expected to have an impact on estimated BR collection in the year.

10. The position and intentions of our pooling partners

10.1 It is anticipated that the pool will have to be in place and approved by Government, by the end of October (although the DCLG did slip this timetable back to December for 2014/15, and it is possible they will do so again). This is likely to entail a series of meetings with the proposed pooling partners to understand their assumptions around prospects for growth, level of appeals, bad debt provision etc, so that DDC can decide whether to form a pool with them.

10.2 This process is likely to take some time, but with a deadline of the end of October, it will not be possible to repeatedly seek Cabinet approval for proposals. Therefore it is recommended that Cabinet delegate the decision to join a pool to the Director of Finance, Housing and Community, in consultation with the portfolio holder for Performance and Resources, on the understanding that any pooling arrangement that the Council joins will be set up so that, at the worst, the Council will be no worse off than before it joined the pool.

11. Identification of Options

4 This is the term for an individual unit for BR.

11.1 The Council has two options:

1. Option 1 - seek to join an expanded Kent BR pool.

2. Option 2 - stay out of the Kent pool.

12. Evaluation of Options

12.1 Option 1 – by joining the pool if the appropriate arrangements can be agreed, then for every additional £1m of BR collected, it is estimated that DDC will retain circa an additional £51k, thus increasing the retention rate from 20% to 25%, and can also ensure circa a further £51k is spent in the district. DDC can also minimise the likelihood that it will fall back into the safety net, and with the appropriate pooling arrangements, can ensure its position is not adversely impacted by the BR collection in other Kent districts. For these reasons, this is the preferred option.

12.2 Option 2 – by staying out of the Kent pool, DDC does avoid the administrative costs of the pooling arrangements, but would only achieve a retention rate of 20%. If BR increase, this could lead to a loss of potential additional income for DDC. For this reason, this is not the preferred option.

13. Corporate Implications

13.1 Comment from the Section 151 Officer: The Director of Finance, Housing and Communities has been involved in the production of this report and has no additional comments to make (MD).

13.2 Comment from the Solicitor to the Council: The Solicitor to the Council has been consulted in the preparation of this report and has no further comments to make

13.3 Comment from the Equalities Officer: This report does not specifically highlight any equalities implications however, in discharging their responsibilities members are required to comply with the public sector equality duty as set out in section 149 of the Equality Act 2010 http://www.legislation.gov.uk/ukpga/2010/15

14. Appendices

Appendix 1 – The current pool between KCC and MBC

Appendix 2 - Simplified Illustration of Localised Business Rates (extract from the Budget 2014/15 and Medium Term Financial Plan 2014/15 – 2016/17

Appendix 3 - Illustrative Projection of Business Rates Growth and Retention

15. Background Papers

Business Rates Retention Pooling Prospectus 2015-16, Department for Communities and Local Government

Contact Officer: Mike Davis, Director of Finance, Housing and Community

I:\accountancy\Budgets\2015-16\Rates and Precepts\Business Rates Pooling\Cabinet Report on Pooling v2.doc

Annex 1

Annex 2

Simplified Illustration of Localised Business Rates Ref Element Notes Illustrative

Figures 1 2013/14 Start-up

Funding Assessment

Revenue Support Grant £3.481m Baseline BR Requirement (A) £3.237m Total £6.718m

2 Business Rates

Baseline BR Total for Dover District area £33.396mm Central Share to DCLG = 50% £16.698m Local Share = 50% £16.698m KCC BR Baseline 20% of Local Share £3.339m Dover’s BR Baseline (B) £13.359m

3 Dover’s Tariff (A) BR Baseline £13.359m

(B) Baseline Requirement £3.237m (C) Tariff = (A) (B) £10.122m

4 Effect of Under

Recovery Collect £1m less £32.396m Pay 50% to DCLG as Govt Share (£16.198m) Allocate 20% to KCC (£3.239m) Tariff (does not reduce when collection falls) (£10.122m) Balance retained by DDC £2.837m Shortfall borne by DDC (but see safety net below)

£0.400m

So any loss in total collection of BR, against baseline, is borne 40% by DDC, up to the safety net.

5 Dover’s Safety Net Loss capped at 7.5% of Baseline Funding £0.243m

Equated to loss in BR £0.607m So after the first £607k loss in total BR collected, there is no further loss to DDC.

6 Sensitivity Analysis Safety Net Impact on DDC of reduction 1% in BR (loss

of £334k) £134k

2% (£668k) £243k 3% (£1,002k) £243k DDC will bear 40% of losses, up to the safety net.

7 Levy Impact on DDC of growth 1% in BR (gain of

£334k) £67k

2% (£668k) £133k 3% (£1,002k) £200k DDC will keep 20% of gains.

Note – the figures in the table above are indicative, but they demonstrate the process and show the order of magnitude. (The table above has been taken from paragraph 82 of the Budget 2014/15 and Medium Term Financial Plan 2014/15 – 2016/17)

Dover District Council

Annex 3

Illustrative Projection of Business Rates Growth and Retention

Without a pool

£k

With a pool

£k

1 Illustrative £1m BR growth above baseline 1,000 1,000

2 Paid to DCLG as 50% share of Business Rates 500 500

3 Retained local share 500 500

4 Local share of growth paid to DCLG as a levy (50% or 16% (illustrative))

250 80

5 Local share balance retained 250 420

6 9% of local share paid to KCC 45 45

7 1% of local share paid to FRA 5 5

8 40% (or 74% (indicative) if we are in a pool) of local share retained by DDC

200 370

9 Additional amount retained due to pooling N/A 170

10 Re-Allocation of extra £170k retained by DDC into the pool:

11 30% KCC share N/A 51

12 30% Jointly managed regeneration pot to be spent in the Dover district

N/A 51

13 10% contingency N/A 17

14 30% DDC N/A 51

15 Total Retained by DDC 200 251

16 Total benefit to the DDC area (ie DDC’s share and the regeneration pot).

200 302

Dover District Council