Business rates: Key questions answered

Deputy First Minister John Swinney is to give councils the power to cut business rates from the end of this month. Local government correspondent Jamie McIvor answers some key questions.

How do business rates currently work?

For many years, they have been set at one level across Scotland although an interesting administrative change was made a few years ago. The money from all 32 councils used to go into one national pot then get distributed back to councils. Inevitably, some paid in more than they got out while others were effectively subsidised. Now the business rate revenue is kept by each council, but in many ways that was something of a technical change.

Critics of the government say the amount they raised in business rates had big implications for the amount of grant funding they received from government, so keeping business rate money did not make any meaningful difference to their budget.

Any reaction yet from local government?

The move has been welcomed by Cosla, which represents the collective interests of most councils. While it is unlikely that many in local government would actively oppose the return of a power to a council, a big question is whether this may amount to a theoretical power, at least in the current financial climate when councils continue to look for savings. In the short term, cutting business rates would lead to a drop in income, so any council which did not actually want this to happen would be gambling that the drop would lead to a boost in the local economy which would lead to it taking in more revenue over time. Some on the right of centre may argue that cutting taxes and overall council income would be no bad thing in itself and could stimulate economic growth but, of course, the dominant forces in Scottish local government are the SNP and Labour who both say they are trying to protect local services from austerity.

What reaction has there been from business groups?

Scottish Chambers of Commerce supports the move which it says could help reduce the costs of doing business in Scotland. It hopes that local authorities will make use of these new levers and it will monitor the situation closely. But the group still believes the current system of business rates is not serving businesses well. For the past five years, rates have been based on notional rental values at the peak of the pre-recession market in 2008 and the revenues raised by rates in Scotland have increased by 40% since 2010. It believes a fundamental review of the rating system is needed.

The Scottish Retail Consortium gave a cautious reaction - it said there was a missed opportunity to arrest the cost pressures and structural deficiencies in the system which undermine existing businesses and hold back new investment.

Would locally-set business rates lead to "a race to the bottom"?

This is the possibility that councils would end up competing against each other in a sort of reverse auction to offer the cheapest business rates. Again, some would not consider this to be a bad thing but it is unlikely that many in Scottish local government would welcome the thought of a race to the bottom. In central Scotland especially, council areas are relatively small geographically. A question would be whether a rate cut would simply lead to businesses moving a few miles up the road to seek tax advantages. If that happened, would the council which had lost out cut rates even further to try to stop other business moving?

Is cutting taxes unprecedented in Scottish local government?

No - in 2012 the Labour and Conservative groups on Stirling Council pushed through a cut in the council tax. One of their arguments was that the area's council tax was too high compared to some other places.

How does giving councils more control of business rates fit into the bigger debate over just how local authorities should be financed?

Last year, the Scottish government announced a commission on what it described as "fairer alternatives" to the council tax. It is likely to report soon. Many in local government argue the question of the council tax should not be considered in isolation as it only accounts for a modest proportion of their budgets, typically around 15%. Instead, some have been looking for greater control over their finance more generally - maybe the offer of a suite of financial powers to reduce dependency on central government.