LG Futures – assessing the financial impact of COVID-19 on tax collection

Both council tax and business rates income are collected by billing authorities and placed into a separate pot called the Collection Fund. Councils and other authorities are paid fixed amounts from the Collection Fund on the basis of the billing authorities’ forecast business rates income as at the start of the financial year. The timings or amounts of these payments cannot be revised within the year according to current regulations.


Background and context

Both council tax and business rates income are collected by billing authorities and placed into a separate pot called the Collection Fund. Councils and other authorities are paid fixed amounts from the Collection Fund on the basis of the billing authorities’ forecast business rates income as at the start of the financial year. The timings or amounts of these payments cannot be revised within the year according to current regulations.

This means that, if there is under- or over-collection of local taxes in a given year against budgeted amounts, this loss hits councils’ general funds in the following financial year when future drawdowns of the Collection Fund are adjusted downward or upward to reflect last year’s actual collected amounts.

In the interim period between the loss occurring and the adjustment of future drawdowns, billing authorities are in charge of keeping the Collection Fund as a ringfenced pot, topping it up with cash flow if needed for the Fund to make the payments. Central government is also party to the Collection Fund mechanism via the ‘50 per cent central share’ of business rates.

As a result of the way the Collection Fund works, when discussing non-collectd council tax and business rates, it is necessary to distinguish between the immediate cash flow pressures effects on billing authority bank accounts due to having to service the underperforming Collection Fund (later referred to as ‘cash flow’) and the actual residual impact on budgets after payments from the collection fund to the general funds to billing authorities, other councils and Government) as well as any collectable arrears (later referred to as ‘impact on resources’).

On the basis of MHCLG June survey returns, LG Futures find that the cash flow challenge amounts to  £1.6 billion for business rates and £1.8 billion for council tax in 2020/21.

However, for both business rates and council tax, the way the Collection Fund works means that, aside from cash flow issues as mentioned above, the impact in 2020/21 does not cause an ‘impact on resources’ until the following year.

Given the different problems posed by business rates and council tax LG Futures propose different solutions to each. The solutions work for any given level of loss so figures are purely illustrative based on the June returns and can be adjusted as figures are refined in subsequent returns.

Business rates: including proposed solution to deal with the shortfall

With business rates, the added complexity is around fitting into the existing business rates retention system (50 per cent in most areas) where authorities retain growth over a baseline, which was originally set in 2013/14 and is updated for inflation each year and where there is a system of tariffs and top-ups to equalise before any growth is taken into account. This has usually produced growth for most authorities since 2013.

The LG Futures’ proposed solution involves the Government adjusting business rates baselines for 2020/21 by a figure based on the projected total of irrecoverable losses (so that authorities would pay a lower tariff or receive a higher top up). When the workings of the 50 per cent system are taken into account, including the payment to the Government of the central share and the levy and safety net, for there to be a net financial effect of nil to councils, authorities would need support to a total of £1.044 billion.

It would of course be possible to adjust the baseline by less than the total losses, with the remaining losses contributing towards the collection fund deficit which would be spread over three years.

The figures also do not take into account any collection of arrears which could reduce the shortfall in the long term but are difficult to predict.

Council tax: including proposed solution to deal with the shortfall

MHCLG collected information, through the financial management information returns, on council tax losses divides the losses into three categories with the following being the latest figures:

  • Payment failure (for example cancelled direct debits) - £1.073 billion
  • Increased local council tax support costs - £586 million
  • ‘Other’ - £190 million.Assuming that the collection of arrears follows past patterns, the arrears of £1.8 billion could reduce to £844 million over four years.

LG Futures propose two possible solutions; the first would spread the £844 million losses (based on the June returns) over three years in the same way as MHCLG propose. The second would involve MHCLG adding additional resources (£844 million based on June returns) to collection funds in 2020/21. Of course, it would again be possible for the Government to inject less than 100 per cent of the losses into the collection fund with the balance of the losses spread over three years. However, our proposal would be for full funding of irrecoverable losses.

It should be noted that both these solutions for Government to deliver £844 million of funding would cover projected additional Local Council Tax Support (LCTS) costs of £586 million for 2020/21. However, they would not cover possible LCTS costs due to higher caseload in future years.

Final note

When speaking at the LGA conference on 2 July 2020, Robert Jenrick said that at the Spending Review the Government would announce a ‘fair apportionment’ of irrecoverable council tax and business rates losses, between central and local government, for 2020/21.

The LG Futures work will be aimed at providing a justification for full compensation by Government, as well as designing mechanisms for delivery of Government support on this issue.