What do the changes to business rates mean for charities?

http://www.theguardian.com/voluntary-sector-network/2015/oct/07/what-do-the-changes-to-business-rates-mean-for-charities

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On Monday, George Osborne announced that local government will keep the money raised by business rates – the local taxes that businesses, charities and social enterprises pay for the property they rent or own.

While this change might appear to be good news for councils, I believe it poses considerable risks for charities and local communities.

Related: London council to offer 'largest' package of support to voluntary sector

There are concerns that the money, which in the past has been sent to central government and then redistributed to councils, will replace existing funding. This could force local authorities – in areas where there are few businesses and charities to pay this tax – to introduce additional cuts to make up for the shortfall. As many charities across the UK are commissioned by local authorities to deliver public services, this is worrying.

In March 2015, a report from the Joseph Rowntree Foundation found that in wealthy areas, such as London boroughs Camden and Kensington and Chelsea, councils have seen income from these taxes rise to hundreds of pounds per person. But poorer cities, such as Manchester, Southampton and Nottingham, have seen their income fall. This could force cash-strapped councils in deprived areas without strong business tax bases to make additional cuts, threatening charity-delivered services.

There is also the question of the charity sector’s business rate discount. Under current legislation, charities receive an 80% reduction on the tax. This is extremely valuable: last year it was worth around £1.7bn to charities according to HMRC. Some charities receive an additional discount to make up for the other 20%. But this idea of passing the control back to local authorities has not been accompanied by a promise that the discounts will be protected. Without this discount, many charities will struggle to deliver their services, as costs would increase substantially for organisations that own a property or even those which rent it from another charity, as the costs would be likely to be passed on.

Related: UK charities may face a £4.6bn black hole in income, report finds

This year, we at Charity Finance Group (CFG) released a briefing which looked at the impact of the first phase of devolution of business rate income (the business rates retention scheme) on charities. It found that, some charities with a national or international reach or those that did not have their head office in the local area, had their tax relief reduced.

In one case study, a medium-sized international development charity lost its discount because it didn’t directly benefit local residents. This increased its costs by £2,000 a year and many other charities are in a similar situation. If the tax relief for charities is now at the discretion of local authorities, given the current funding environment, it is likely that charities would see big cuts in the discount, costing organisations thousands of pounds a year.

However, there is an opportunity to reform the system for charities and make it work fairly across the country. Charity Finance Group, alongside NCVO, the Institute of Fundraising and Charity Tax Group, wrote a response to the previous government’s consultation on business rates earlier in the year. We highlighted how the current system was complicated, inefficient and unfair for those charities that worked in deprived communities. We called for the relief for charities to be increased to 100% and paid for out of central funds to avoid disadvantaging deprived communities. This simplifies the system for local authorities and removes barriers for charities that want to work in disadvantaged communities.

This devolution of tax funds really is revolutionary, and it’s possible that it could create opportunities. With more control over how they raise and spend their money, local governments can form more partnerships with local charities to reduce pressure on stretched services and save money in the long-term. Perhaps there is even an opportunity to develop a longer-term funding model – following in the footsteps of Camden council and its seven-year contracts for voluntary sector organisations.

Whatever the future holds, one thing is certain: these changes make it even more important for charities to engage with devolution and reach out at a local level.

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