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BRIEF GUIDE TO LOCAL
GOVERNMENT FINANCE
REFORM
CIPFA, May 2012
BRIEF GUIDE TO LOCAL GOVERNMENT FINANCE REFORM
LG funding is changing, instead of receiving a large proportion of their revenue in fixed
funding from government, from next year local authorities will have to experience the high
and lows of greater self-funding. The changes announced in respect of non-domestic rates
and support for council tax will bring a degree of risk and variability to local government
funding that has not been experienced for decades.
This guide gives the reader a brief introduction to the changes and answers some of the
key questions that local government officers and councillors may have. At the time of
writing all of the guidance and legislation has yet to be published so the guide represents
the latest known position. CIPFA will publish more detailed guidance once all the detail
becomes known.
LOCALISATION OF SUPPORT FOR COUNCILTAX
What is the Government proposing?
Council tax benefit provided support for groups with low incomes towards the payment of
their council tax bills. The benefit was administered by local authorities but funded by
central government. At the 2010 spending review the government announced that it would
localise support for council tax from 2013/14, reducing expenditure by 10%. On 17
February 2011 the government published the Welfare Reform Bill, containing provisions for
the abolition of council tax benefit, paving the way for new localised schemes.
Individual schemes will need to be developed within broad parameters set by the
government, including:


the framework for support for eligible pensioners
the importance of supporting incentives to work.
Local authorities will be free to collaborate to reduce costs, develop schemes that support
priorities that are shared by a number of neighbouring authorities, and manage financial
risks. In addition local authorities will be encouraged to consider how the process of
establishing eligibility for working age claimants can be simplified.
Local authorities will need to integrate arrangements for providing support within the
council tax system, and will continue to provide support to households as a reduction in
the amount of council tax payable, rather than a cash payment.
The new schemes will result in a reduction in the council tax base for an area once
discounts are taken into account. As council tax is calculated by dividing an authority’s
budget requirement, after deducting formula grant and business rates, by the council tax
base, this would increase the level of council tax. To avoid an increase in council tax the
government will pay a new grant to local authorities to reduce their budget requirement,
although the funding will be reduced to achieve the 10% cost reduction.
Are all local authorities affected?
Billing Authorities, i.e. district, unitary and metropolitan council and London boroughs will
administer the new schemes. These are the same authorities that currently administer
council tax benefit. Major preceptors, including county councils and police and fire
authorities, will receive less council tax under the scheme offset by a share of the
government grant.
There will be an impact on parish councils and potentially levying authorities but the
Government has yet to indicate how and if this will be mitigated.
How will pensioners be protected?
The Government will publish advice on the definition of pensioners that are to be protected
to fit in with both current definitions and to reflect changes to pension ages and the
introduction of universal credit. It is expected that the discount these pensioners receive
under the new scheme will be equivalent to the benefit received under the old scheme.
How will schemes be expected to provide work incentives?
The Government has stated its intention to ensure that people will be better off in work
that out of it. It is expected that guidance here will be less prescriptive and it will be left
to individual local authorities to determine how their local schemes meet this objective.
What will a local scheme involve?
Councils are able to set their own local schemes that can vary the amount of council tax
discount, different groups of claimants receive. CLG and DWP are working together to
ensure that local authorities have access to DWP data on claimants to avoid them having
to collect separate data from individual claimants. Local authorities are free to design
schemes that reduce the amount of discount given to achieve the 10% saving provided
that they protect those groups specified by Government.
Local authorities will be expected to consult widely on their proposals for local schemes.
The form and timing of consultation will leave to local authorities to determine, the
Governments code of practice on consultation states that a period of 12 weeks is
appropriate although local authorities can vary this.
Under the Act billing authorities have a duty to consult with major preceptors.
Local schemes must be approved by 31 January in the preceding year to which they apply,
for example schemes for 2012/13 will need to be approved by 31 January 2012.
What happens if a local authority fails to agree a local scheme?
If a local authority fails to agree a local scheme then it will be required to implement the
default scheme. The default scheme will be published by the Government and will be
based upon the previous council tax benefit scheme. As a result, the default scheme will
not achieve the 10% savings and the additional cost above the grant will fall to be met
either from other council taxpayers through the council tax or by savings from other
expenditure.
How will the discount be funded?
Billing authorities and major preceptors will receive a share of government grant, based on
previous council tax benefit expenditure, to make up the shortfall in council tax. The level
of grant received will incorporate the 10% reduction in costs.
How will the discount affect the setting of council tax?
The impact of council tax discounts will be taken into account when setting the council tax
base. Councils will need to estimate what next year’s council tax bills and hence discounts
will be in order to forecast the total cost of discounts. These discounts will then need to be
converted to a percentage discount to the council base. As the discount is applied to the
council taxbase it is automatically shared between billing authorities and preceptors.
Annex A gives a simplified version of the calculation.
What happens if the level of claims changes during the year?
If the level of claimants changes during the year the additional cost or saving from council
tax support will fall initially on the collection fund and feed through into a deficit or surplus
on the collection fund that will be shared between the billing and precepting authorities.
Currently the deficit or surplus on the collection fund is estimated at the same time as the
following year’s collection base and accounted for in the next year.
CLG are considering proposals for deficits and surpluses to be shared in year under the
new arrangements.
The actual council tax will remain fixed for the financial year for which it is set as is
currently the case.
BUSINESS RATE RETENTION
What is the Government proposing?
The Coalition: Our Programme for Government (May 2010) set out the need for a review
of local government finance. The White Paper Local Growth: Realising Every Place’s
Potential, which followed in October 2010, highlighted the Local Government Resource
Review. The terms of reference for phase 1 were published in March 2011, focusing on the
retention of business rates and council tax benefit localisation.
The proposals focus on the distribution of business rate tax revenues, rather than changes
to the system of business rate taxation. Businesses will see no difference in the way they
pay tax or the way the tax is set. Rate setting powers will remain under the control of
central government and the revaluation process will be unchanged.
On 18 July 2011, CLG published proposals for business rates retention, as part of the Local
Government Resource Review, for consultation. This was followed by a series of eight
technical papers, published on 19 August 2011, which provided further detail. The
government’s response to the consultation was published on 19 December 2011.
Under the proposals fifty percent of business rates will be localised through a system of
top-ups and tariffs that fix an amount to be paid by high yield authorities that will be
distributed to low yield authorities – this amount will be increased with inflation. Local
authorities will be able to retain a proportion of all business rate growth or conversely will
experience a fall in resources if the business rate base declines.
The remaing fifty percent of business rates will be distributed in a similar way as currently
through the formula grant process. This also allows the Government to retain a proportion
of business rates centrally to meet public expenditure targets.
In addition there will be a levy on “disproportionate growth” which will be used to provide
a safety net for those authorities experiencing little or negative growth and allow the
Treasury to top-slice business rates income. A reset mechanism will be in place with a
period of ten years between resets but with flexibility for more frequent resets in
exceptional circumstances. “Economic Action Zones” and large pre-agreed tax increment
financing schemes are to be excluded from the reset mechanism and the levy.
What are the top-up and tariffs and how do these work?
Top-up and tariffs are set so that all other things being equal a local authority will start
with the same resources under the new system as it had under the old. Thus if an
authority collects £100 in non-domestic rates and previously received £50 through the
formula grant system it will pay a tariff of £50. If however the same authority collecting
£100 previously received £120 it will receive a top up under the new system of £20.
Will top-ups and tariffs be increased for inflation?
The top ups and tariffs will automatically increase for inflation. This gives top-up
authorities a guaranteed increase in part of their resources and means that a tariff
authority will lose resources unless it ensures its NDR growth keeps pace with inflation.
Annex B provides a much simplified example of this effect.
How will the starting point be determined?
The Government has said that the starting point will be based upon 2012/13 levels of
support received through the formula grant system. It is however possible for the
government to adjust the 2012/13 figures for technical changes or changes in functions as
it does under the formula grant system.
How does the levy work?
The Government has stated that each local authority will be set a bespoke levy
arrangement such that for every 1% increase in business rates base, an authority would
see no more than a corresponding 1% increase in income as measured against its
spending baseline, i.e. a 10% increase in non-domestic rates will give a 10% increase in
retained NDR. For an authority that collect £100 in business rates, pays a tariff of £50 and
retains £50, the increase of £10 would be split £5 to the authority and £5 to the levy.
An example of the levy is contained at Annex C.
What is pooling and how will it work?
Local authorities are free to come together to form pools for NDR purposes. Where local
authorities enter into pooling arrangement individual top-ups and tariffs will be combined
as will levy arrangements. Authorities in pooling arrangements will need to agree how they
will share risks and potential rewards between the individual.
Annex C contains an example of pooling.
How will rate reliefs and discounts work?
Existing rate reliefs and discounts are likely to be included in the baseline assessment,
what is less clear is how these will be treated moving forward. For those authorities
thinking about using charitable trusts to deliver services this will be an important
consideration as the savings to service costs from NDR discounts may translate directly
into lost NDR income.
Academies are also treated differently for NDR purposes than local authority schools so the
transfer of schools to academies may also have an impact depending upon how rate reliefs
and discounts are treated in the final scheme.
Will there be a safety net?
The Government has indicated that a safety net will apply to protect local authorities
experiencing low rates of business rate growth or reductions in the level of business rates
collected. The safety net will be triggered when a local authorities income falls by a figure
equivalent to a fixed percentage of it expenditure and will be funded from the levy.
What about appeals?
Currently the value of Appeals is 3.6% of the total value of the valuation list. The details
around the arrangements for this are currently still being discussed. Appeals will however
have an impact on the level of business rates collected.
What is the impact on council tax?
The current formula grant system takes into account an authority’s ability to raise council
tax. If all other things were left the same but the council tax base increased then the
authority would lose formula grant, based on a notional Band D council tax, to leave it in
the same position as before. It is assumed that remaining element of formula grant will
continue to provide for equalisation.
New Homes Bonus allows authorities to keep some of the increase in council tax yield from
new homes but under the new system.
THE OVERALL IMPACT OF THE CHANGES
How will the changes affect financial planning?
Local authorities are used to forecasting expenditure and income such as fees and
charges. The changes will increase the level of instability in the forecast of resources and
the interaction of both with economic growth will increase the associated risks. As an
example the decline of a major industry could result in both a decline in the business rate
base and an increase in council tax support demand.
Local authorities will need to take account of national growth assumptions, local area
characteristics and local forecasts to estimate potential future business rates growth and
demand for council tax support.
What about the collection fund?
Any changes during the year in the level of business rates or council tax benefit will fall
initially upon the collection fund. There is likely to be increased instability within the
collection fund as a result of the changes and the level of surpluses and deficits is likely to
rise. The government is looking at the cash flow implications for billing authorities and
may introduce an ability to share and cash flow shortfalls with major preceptors at fixed
points during the year.
Will the changes have an impact on reserves?
The additional instability in resources may have an impact upon reserves and should be
considered when deciding upon the overall level of reserves needed. In taking into the
risks associated with changes in resource levels local authorities need to consider the basis
of estimation of receipts and the level of confidence they have in achieving any underlying
growth or collection rates and managing demand.
Annex A
Council tax support example
This example is highly simplified to assist in understanding the principles and impact; it
should not be used as a basis for the actual calculation of the tax base.
The example is based upon a tax base of three properties (A, B and C) one of which
receives council tax support. It is based on a single council with no precepting authorities
that will receive council tax support grant of £500.
At the time of setting the tax base the estimated Band D council tax is £1,000. At this
level of council tax the claimant in Property A should be paying £500 a discount of £500.
Council tax base
Property A discount = £500/£1000 = 50%
Council tax base
= Property A (less discount) + Property B + Property C
= 0.5 + 1+ 1
= 2.5
Council tax calculation
Budget requirement
Non domestic rates
Council Tax Support Grant
Divided by council tax base
Band D council tax
£5,000
-£2,000
-£500
£2,500
 2.5
£1,000
If when the budget is finally set, expenditure is actually £5,250 then the final council tax
will actually be:
Budget requirement
Non domestic rates
Council Tax Support Grant
Divided by council tax base
Band D council tax
£5,250
-£2,000
-£500
£2,750
 2.5
£1,100
In this example the increase in expenditure is spread across the reduced council tax base.
However, the council tax support calculation has assessed claimant A as being liable for
paying £500 council tax the discount would now be £600 and additional cost of £100. This
would fall as a deficit on the collection fund.
Annex B
Non domestic rates – Top ups and tariffs
This example is highly simplified to assist in understanding the principles and impact; it
should not be used as a basis for the actual calculation of NDR.
Year 0
Year 0 gives the baseline position for the new system. This may not be identical to the
final year of the old system if the government decides to make technical changes to the
baseline position.
Authority
Expenditure
Non
domestic
rates
Top up/
tariff (-)
Retained
NDR
Council
tax
A
1,000
600
400
B
1,000
600
400
Year 1
In order to ensure that authority remains in the same position as the baseline the top-up
and tariff are calculated to leave the retained NDR figure identical to the baseline. In this
case based on the same expenditure level of £1,000 its council tax yield figure would
remain unchanged at £400.
Authority Expenditure Non
domestic
rates
Top up/
tariff (-)
Retained Council
NDR
tax
A
1,000
1,000
-400
600
400
B
1,000
500
100
600
400
In this example Authority A pays a tariff of £400 and Authority B receives a top up of
£100.
Year 2
The first table shows the overall position of the authority in year 2 based upon an inflation
level of 10%. The top-up and tariff increase automatically by inflation figure of 10%. For
the purposes of the illustration NDR has increased exactly by the inflation figure as well as
the authorities’ expenditure.
Authority Expenditure Non
domestic
rates
Top up/
tariff (-)
Retained Council
NDR
tax
A
1,100
1,100
-440
660
440
B
1,100
550
110
660
440
In the case where all elements increase by inflation the retained NDR figure is also higher
and the council tax, assuming the council tax base remains unchanged would also increase
by 10%.
If however the increase in NDR was only 5%, the outcome would be different dependent
upon whether the authority was a top-up or tariff authority. This is illustrated by the
following table.
Authority Expenditure Non
domestic
rates
Top up/
tariff (-)
Retained Council
NDR
tax
A
1,100
1,050
-440
610
490
B
1,100
525
110
635
465
In this case Authority A’s retained NDR only increases by less than 2% as it still has to
fund the 10% increase in the tariff. As a result its council tax increase would be more than
20%.
For Authority B the impact is much less severe as it still receives a 10% increase on its
top-up giving a 6% increase in retained NDR and 16% increase in council tax.
In reality council tax increases are likely to be restrained by the referenda system so the
relative reduction in retained NDR is likely to translate into cuts in expenditure, as set out
in the table below:
Authority Expenditure Non
domestic
rates
Top up/
tariff (-)
Retained Council
NDR
tax
A
1,050
1,200
-440
610
440
B
1,075
525
110
635
440
In this example Authority A has a £50 cut in expenditure and Authority B £25.
Annex C
Non domestic rates – levy
This example is highly simplified to assist in understanding the principles and impact; it
should not be used as a basis for the actual calculation of NDR.
The example is based upon the year 1 figures from Annex B repeated below for
completeness.
Year 1
Authority Expenditure Non
Top Up/ Retained Council
Domestic Tariff (-) NDR
Tax
Rates
A
1,000
1,000
-400
600
400
B
1,000
500
100
600
400
Year 2
In year 2 both Authority A and Authority B experience an increase in NDR of 20%.
Inflation is 10% and the top-up and tariff rise automatically by this amount. Based on a
straight one-to-one relationship each authority would be allowed to keep a maximum of a
20% increase in NDR equivalent to £720.
Authority Non
Top Up/ Retained Levy
Domestic Tariff (-) NDR
Rates
A
1,200
-440
720
40
B
600
110
710
nil
In this example Authority A would have to pay £40 to the levy. However, if the two
authorities were part of a pooling arrangement for NDR purposes the amount of levy paid
across the area would be reduced. The table below shows the combined levy position:
Authority Non
domestic
rates
Top up/
tariff (-)
Retained Levy
NDR
A+B
-330
1440
1,800
30
FURTHER SUPPORT
CIPFA Benefits and Revenues Service
The network supports benefits and revenues managers and practitioners in billing
authorities and, increasingly, in outsourced and shared services. We effectively brief and
advise subscribers and provide guidance on best practice and legislation.
http://www.cipfanetworks.net/cbrs/
CIPFA Finance Advisory Network
The FAN supports, briefs and advises subscribers on finance best practice, new legislation
and other professional and financial developments.
http://www.cipfanetworks.net/fan/
A Brief Guide to Local Government Finance for Councillors (2012 Edition) (2012)
The Guide provides a valuable introduction to all aspects of local government finance. The
guide will give those who are new to local government a thorough grounding in the
essentials and offer everybody a single source summary of the latest developments.
http://secure.cipfa.org.uk/cgi-bin/CIPFA.storefront/EN/product/PUBLG079H
CIPFA Consultancy
CIPFA Consultancy will work with you to understand your current situation and future
needs and aspirations, create innovative and practical solutions that will work for you,
support implementation, maximising the benefits you gain and build your capacity to
manage future change
http://www.cipfa.org.uk/business/consultancy.cfm
CIPFA Information Services
Our statistics and research provide accurate and timely information on a range of issues
such as service usage, service costs, customer satisfaction and policy development. These
are used as an invaluable resource across the public sector by managers to make
decisions, compare performance, identify trends, review processes and outputs, and to
manage their resources more effectively.
http://www.cipfastats.net/
TISonline Information Streams
TISonline provides a wealth of important information and guidance for all public services
managers on a range of topics that matter; from social housing to funding to education to
taxation.
http://www.tisonline.net/
Coming Soon….
CIPFA is planning to publish in the autumn a Comprehenve Guide to the
Collection Fund which will act as a single source of reference for practitioners
for the implementation of the changes contained within the Local Finance Bill and
their implications for the Collection Fund.
CIPFA is also planning a major coneference in the early autumn aimed at
Directors of Finance, other senior officers and councillors. The conference will
provide an in depth look at the implications of council tax support and non
domestic rate reform and what it might mean for individual local authorities.
Using the extensive range of statistics and data available to us, CIPFA is
developing a full resources forecasting modelling services that will assist local
authorities in projecting their future resources and understanding the risks and
sensitivity of the forecast to potential fluctuations in external driven factors.
Published: May 2012
© CIPFA
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