The Localism Act 2011 introduced a new power for local authorities to be able to grant discounts on business rates as they think fit provided that they are funded locally. Previously, councils could grant discretionary relief only in specified circumstances, for example in individual cases of hardship or in topping up mandatory relief for charitable organisations.

A business rates retention scheme was introduced in England from April 2013. The government’s idea is to provide a direct link between business rates growth and the amount of money councils have to spend on local people and local services. Councils are now able to keep a proportion of the business rates revenue as well as growth on the revenue that is generated in their area.

In October 2015, the Department for Communities and Local Government issued the following press release on Business Rates Reform:

"Last week the Chancellor announced the Government's intention to make significant reforms to the way in which local government is funded while taking a major step forward in our plans to place more power in the hands of local communities.

Since 2013, local councils have retained 50% of the proceeds of business rates, to ensure that when local areas take steps to boost business growth in their area, they see the benefit. The Government now intends to go further, with plans to move 100% retention of business rates by the end of the Parliament.

All income from local taxes will fund local services, giving local people more control over how their money is spent and providing incentives for growth. Specifically, by 2020:

  • Local government will retain 100% of local taxes - including all £26 billion of revenue from business rates - to spend on local government services. This means the Government will no longer take business rates income into Whitehall for redistribution as grant;
  • Local authorities will have the power to cut business rates to boost enterprise and economic activity in their areas. This will complement existing powers to grant reliefs to individual businesses and will allow authorities more discretion to reflect local circumstances in their local tax regimes;
  • Directly elected metro mayors will be able to add a premium to business rates to pay for new infrastructure. They will need to have support of local business leaders through the Local Enterprise Partnership and the power will be limited by a cap; and,
  • As well as phasing out the local government grant from Whitehall, these new powers will come with new responsibilities to ensure the reforms are fiscally neutral. The Government will set out further details in the Spending Review.

Redistribution between councils will remain important, to reflect the different need of different authorities. In developing the reforms, we will consider the responsiveness of the system to future changes in relative needs and resources, whilst maintaining a strong incentive for authorities to grow their local economies. We will also consider how risk and business rates volatility can be better managed and how to protect authorities against significant falls in income.

Over the coming months the Government will work with local government, businesses and other interested parties on the detailed design of these reforms."

In the 2016 Budget the government announced it will pilot the approach to 100% business rates retention in Greater Manchester and Liverpool City Region and will increase the share of business rates retained in London from 1 April 2017 – three years ahead of the original plan. This offer is also available to other city regions that have ratified their devolution deals.

The government has announced a further consultation on the implementation of 100% business rate retention in summer 2017. This consultation will seek further views on the implementation of the Government’s commitment to allow local government to retain 100% of business rates raised locally.