This radical new idea would overhaul the current nationalised business tax regime whereby central government sets the rate of tax and the revenue collected goes into a central pool for England which is reallocated to local authorities and other services by the government department ‘Communities and Local Government’.

Ian Pitt, partner at Bruton Knowles’ Birmingham office, sets this in context for Birmingham and the wider region: “This may not sound like a tremendous increase but when you bear in mind that just a 1p increase in business rates would raise over £400m per annum, you can appreciate that businesses are potentially facing another substantial tax burden.  Thankfully, Sir Michael fully recognises this in his report and his proposal is laced with caveats about consultation with the local business community, tying the levy directly to local projects and maintaining transparency to build mutual confidence between local authorities and the business community.

“If this works the additional new taxation could raise substantial amounts of revenue for local projects.  Birmingham would be one of the biggest winners under this new system securing for example with just a 1p in the pound, a levy over £7.7m from its business community, with Solihull netting just under £2m and Wolverhampton raising just under £1.5m.  If this rose to 4p you could see authorities like Birmingham being able to meaningfully contribute to major infrastructure projects as it would secure nearly £31m.

“With Sir Michael rejecting the idea of localising business rates at the current time due to the inequity it could cause for certain local authorities, Birmingham businesses can heave a huge sigh of relief that they are only facing a minor increase at this time as the other issue in the report was to localise the business rate once again. If this happened, local authorities would have the ability to raise business taxes ahead of inflation whereas at the moment nationally, it is pegged to the Retail Price Index (RPI). For example, under the current system Birmingham and Wolverhampton upper tier authorities face a deficit of around 30% in income compared to their budget requirements for 2006/07, while neighbouring Solihull faces a surplus of around 28%. The argument is that localisation would struggle to iron out these differences without an elaborate new redistribution system.

Ian Pitt concludes, “At this stage the business rate supplement is just a recommendation by Sir Michael, but the report does go on at length about the success of other similar localised tax initiatives like Business Improvement Districts (BIDS) and believes on that basis that this levy could be made at the least tolerable, if not workable, for the business community.  I think there is a real possibility that this levy could appear during this Labour administration, particularly if the business community can be convinced that it will see very local and tangible improvements as a direct result of the new taxation.”