Business rates retention and why it could damage the sustainability of the built environment

Allowing local authorities to retain business rates sounds like a win-win. But the current system is flawed and changes are needed to avoid undermining sustainable development goals, warns Kevin Muldoon-Smith

In recent decades there has been a systematic effort to integrate sustainable development principles into government land and property policy in England. A notable example is the 2011 presumption in favour of sustainable development in the National Planning Policy Framework (NPPF), which influences both plan making and decision taking.

In the NPPF delivering sustainable development means:

• Planning for prosperity (an economic role) – use the planning system to build a strong, responsive and competitive economy, by ensuring that sufficient land of the right type, and in the right places, is available to allow growth and innovation
• Planning for people (a social role) – use the planning system to promote
  strong, vibrant and healthy communities, by providing an increased supply of
  housing to meet the needs of present and future generations
• Planning for places (an environmental role) – use the planning system to
  protect and enhance our natural, built and historic environment, to use natural
  resources prudently and to mitigate and adapt to climate change.

This has been reinforced by the adoption of energy performance certificates and display energy certificates and the impending minimum energy performance standards due to come into effect in 2018.

However, research conducted by myself and Paul Greenhalgh at Northumbria University indicates the principles of sustainable development are largely absent from the recently introduced fiscal decentralisation agenda. Not only does this contradict the sustainable development principles in NPPF, it is also a potential threat to significant parts of the built environment.

The recent announcements in relation to the devolution of financial powers from central to local government are giving local areas direct access to income streams previously only available through a Westminster based funding reallocation exercise. These announcements, most notably the business rate retention scheme (BRRS), have been broadly welcomed by government, politicians, the media and local communities alike. According to the rhetoric, these new fiscal powers give local government, and the locations they represent, the opportunity to stand on their own two feet and control their own affairs.

Sustaining momentum

Fiscal devolution has gained considerable momentum – so much so that by 2020 all local governments in England will have access to, and the ability to control, 100% of local business rate income through the BRRS. The central grant will be phased out by the same date.

So far, so good in terms of potentially enhanced local power at the local scale. However, these recent changes have considerable implications for the sustainable future of the urban built environment. The BRRS harnesses and exploits existing and new local property tax to pay for local welfare requirements, infrastructure provision, economic development and regeneration. In other words, in large part the economic performance of existing commercial properties, and more importantly the construction of new commercial stock, underpins the future of local public services in England.

This leads to the central crux of our argument; traditionally there are two methods of extracting value from the commercial built environment in order to generate ‘growth’ (new money) in urban finance. The first involves building new properties in order to create ‘new’ business rates. The second involves investment in the current property stock, and its surrounding area, in order to increase the value of existing assets (both approaches are popularised in tax increment finance projects in North America).

However, the reality is that local authorities in England are only really able to benefit from the former because any uplift in existing property value is stripped out of the BRRS during the national revaluation of commercial property that usually takes place every five years. The next revaluation will be published in 2017 – two years later than its scheduled publication date.

[Under the BRSS] it makes more sense for underperforming commercial buildings to remain vacant. Clearly this has the potential to increase dereliction and blight and undermines the planning imperative for economic growth and innovation in the NPPF

In effect, the only way a local authority can grow the value of its business rate portfolio is by creating net new floor space via new construction or the repurposing of existing floor space. This ignores the value of existing commercial real estate – any location reliant on its existing property assets faces an uncertain future. This means that any potential tax value uplift fashioned through urban regeneration activity and infrastructure improvement is not rewarded. Furthermore, the planning for places objective in the NPPF – the environmental component of national planning policy noted earlier – is compromised as there is no incentive to protect the built and historic environment.

This situation is exacerbated by a little known quirk in the existing BRRS that rewards commercial inactivity ahead of economic productivity in English towns and cities. Under business rate retention, the higher rate of empty property liability means that local authorities are not rewarded with any additional income from attracting new businesses into existing vacant premises. For example, small businesses pay a lower rate of business rate taxation than the higher empty property rate. It makes more sense for underperforming commercial buildings to remain vacant. Clearly this has the potential to increase dereliction and blight and undermines the planning imperative for economic growth and innovation in the NPPF noted earlier in the article.

The urban dilemma

The devolution and fiscal decentralisation agenda was largely the brainchild of former chancellor George Osborne. It is unclear whether or not Theresa May’s government will continue all of his policies or whether they will change direction. In reality, it is difficult to countenance a reversal of devolution and fiscal decentralisation as too much change has already taken place. Contesting the dogmatic insistence on economic growth and the current brand of entrepreneurialism in the government’s devolution agenda is therefore vital if we are to challenge the sustainability deficit in the government’s BRRS.

If we do not, the current emphasis on net new floor space construction will place certain parts of the urban built environment – for instance those locations already built-up and reliant on existing resources for welfare provision – in peril because there will be no fiscal basis to invest precious resources in these assets. There are redistribution mechanisms in the BRRS, such as the current system of top-ups and tariff authorities and the safety net (both planned to continue in some form after 2020), which protect local authorities from disproportionate loss. However, these systems that are designed to protect local authority solvency will not encourage investment in the urban built environment. Rather, councils that cannot construct new commercial floor space in order to expand their local business rate base are more likely to increase their financial reserves to mitigate the threat of any potential shock.

The current BRRS methodology is reminiscent of the prisoner’s dilemma first popularised in Game Theory many years ago, which shows how a narrowly self-interested strategy may benefit one party over a rival but to the detriment of the whole. In this case, a selective view of the urban built environment centred on new floor space construction may benefit a minority of premium locations that have the ability to construct new property but undermine more numerous areas that are already built-out. At the same time the wider commercial built environment could be undermined by construction bubbles and uneven investment.

However, recognising and accepting the absurdity of this situation is not enough. We should find a way to demonstrate some of the inconsistencies in the government’s BRRS and how it could be improved. For instance, if the scheme was reformed there are two new areas of the urban built environment that could be exploited in order to enhance sustainability.

First of all, local authorities should be rewarded for investing in the existing commercial built environment. The BRSS is weighted toward new construction and this undermines any effort to maximise the embodied energy – and value – already present in the existing built and historic environment. Second, all councils should be rewarded for filling vacant premises rather than penalised. This will encourage investment in vacant and derelict properties. Failure to take account of empty property rates in business rate retention is a missed opportunity and one that contributes toward vacancy and dereliction.

If the government abolished this charge, or if local authorities had the power to alter the empty property tax rate, councils would be incentivised to promote indigenous economic growth by being rewarded for creating conditions whereby vacant space is reoccupied and brought back into productive use. This would encourage them to tackle ingrained conditions of vacancy and inertia – rather than solidifying them – and conceivably increase the rate of take up and absorption of commercial property in these locations. Without change, it is very difficult to create productive economic growth out of existing commercial real estate assets.

Photo by stacey.cavanagh