UK: The Need For TIF Legislation

Last Updated: 13 May 2011
Article by Nick Maltby


TIF has been the great hope of the regeneration industry for almost as long as people can remember. Under Labour, expressions of interest were invited, only for progress to stall after 84 local authorities had submitted 124 bids. Birmingham, Leeds, London (for the Northern Line Extension) and Sheffield submitted the largest pilot proposals. The total funding sought ran to £2.33bn, with the highest bid being for £400m and the lowest for £750000.

Once the Coalition came into power, the prospects for TIF at first looked bleak until Nick Clegg's announcement of 20 September 2010 at the Liberal Democrat Party Conference, "[And] I can announce today that we will be giving local authorities the freedom to borrow against those extra business rates to help pay for additional new developments."

Nick Clegg's announcement was followed in October's Comprehensive Spending Review with statements to the effect that, "New Powers to implement Tax Increment Financing will also be detailed in the coming white paper on local regional growth" (Para 1.81 at page 33) and "Further detail on Tax Increment Financing and the future incentives and planning powers open to local authorities to support growth will be provided in a White Paper on local growth later this year"(Para 2.39 at page 50).

The Local Growth White Paper expanded on the CSR stating, at paras 3.38 - 3.41,"3.39 We will introduce new borrowing powers to enable authorities to carry out Tax Increment Financing. This will require legislation. In determining the affordability of borrowing for capital purposes, local authorities take account of their current income streams and forecast future income. Currently, this does not factor in the full benefit of growth in local business rates income. TIF will enable them to borrow against future additional uplift within their business rates base. Councils can use that borrowing to fund key infrastructure and other capital projects, which will further support locally driven economic development and growth. They will need to manage the costs and risk of this borrowing alongside wider borrowing under the prudential code.

"3.40... We anticipate that TIF would, at least initially, be introduced under a bid-based process. Lessons from an initial set of projects will inform future use of the power."

It is understood that HM Treasury, while warming to the idea of TIF notwithstanding its effect on the balance sheet as a form of Government borrowing, is more focussed on the wider issues of the Local Government Resource Review, which will provide the opportunity to look at TIF and also to bring about the repatriation of business rate receipts to local authorities, which for many is a bigger prize. Both HM Treasury and CLG believe legislation is required.

Meanwhile in Scotland

While English Ministers were simply talking about TIF, on 5 November 2010, the Scottish Government published its Tax Incremental Finance Administration Pilot Scheme document and shortly afterwards approved the first scheme in Leith where £84m will be borrowed under a TIF. The document describes how the Scottish Government will allow up to six TIF pilots and the basis on which they will proceed. In the Scottish scheme local authorities take the risk of any borrowing associated with the scheme. The document covers the application of the "But for" test; what ministers are looking for from schemes; the requirement for a business case; governance; the period of individual projects; the area of individual projects; displacement; the borrowing and repayment of debt; and monitoring and evaluation.

At the same time as publishing the TIF Pilot Scheme, Scottish Ministers published the Non-Domestic Ratings Contributions (Scotland) Amendment Regulations 2010 (SI 2010/391) (the 2010 regulations) pursuant to powers conferred on them under sections 113 and 116(1) and paragraphs 10 and 11(5)(a) of Schedule 12 of the Local Government Finance Act 1992 (the 1992 Act), which sets out the basis on which rating contributions are pooled in Scotland.

While the Scottish rating system is different in many ways from the English system, its collection and pooling arrangements in the 1992 Act resemble closely the English provisions set out in the Local Government Finance Act 1988, Part III (the 1988 Act). Under both regimes local authorities collect business rates and then remit them to Central Government, which then distributes them. Rates are calculated, as in England and Wales, by the application of a uniform multiplier. Schedule 12 was implemented by The Non-Domestic Ratings Contributions (Scotland) Regulations 1996 (SI 1996/3070) and as the 2010 Regulations published alongside the TIF Pilot Scheme amend these 1996 Regulations it is worth considering for a moment what these do.

Schedule 1 of the 1996 Regulations sets out how the non-domestic rating contribution for each local authority is calculated. Essentially, authorities calculate the amount payable in respect of non-domestic rates without any apportionment, remissions or reductions and then work out each such apportionment, remission or reduction and subtract or add to the basic figure. The 2010 Regulations fit into this framework and insert a new deduction into paragraph 8B. What this allows local authorities with a TIF scheme to do is to retain monies collected in respect of a TIF scheme.

As it may be relevant to England, it is worth spending some time on paragraph 8B, which is also described in the TIF Pilot Scheme document. Under para (1)(a), where an authority operates a TIF Project, it is permitted to deduct the amount in that year by which the collected amount exceeds the collectable amount. A "TIF project" is a project approved by Scottish Ministers in terms of the Pilot Scheme document, which enables an authority to meet the costs of borrowing for construction and development works from the non-domestic rate income expected to result from the project. The "collectable amount" is the baseline amount without the scheme. The "collected amount" is the amount of business rates paid to the authority after deduction of any amount caused by displacement. "Displacement" is an important concept and is defined as the extent to which the non-domestic rates paid to the authority for the area of the TIF project result from the relocation of those who are required to make the payments and would have been made to the authority or another authority even if the TIF project not been in operation. Authorities pursuing a TIF project must also apply for a "consent to borrow" as the money will be advanced to the project rather than applied to the local authority's own purposes.

The Scottish approach is very straightforward. The regulations work by allowing authorities not to pay over business rates. It has its weaknesses, particularly, in its failure to give authorities the ability to pursue TIF without central government approval and the way it puts the risk on local authorities rather than the private sector. For a pilot scheme, however, which is, after all, where Scotland is, it is sufficient.

Before moving on to consider whether such an approach is feasible in England, it is worth noting that under the Scotland Act 1998, business rates are a devolved matter. However, it only follows from this that Scotland has the power to introduce TIF without primary legislation. It does not follow that England does not.

The need for legislation in England

Having seen the Scottish implementation, which has happened essentially under amendment regulations, we now have to consider whether a similar approach might work in England or whether primary legislation is in fact needed. As with Scotland, Part III of the Local Government Finance Act 1988 Act is the legislation that sets up the current business rates structure. Schedule 8 sets out the rules for contributions, which are fairly similar to the 1992 Act discussed earlier.

Schedule 8 of the 1988 Act was implemented in England through the Non-Domestic Rating Contributions (England) Regulations 1992 (SI 1992/3082) (the 1992 Regulations). Regulation 1992/3082 is in very similar terms to 1996 Regulations, subject to one minor difference: paragraph 11(5)(a) of the Scottish Schedule allows the Secretary of State (now Scottish Ministers) to prescribe the method of calculating the contribution. Paragraph 5(5) of the English version simply requires billing authorities to calculate it; no Secretary of State power exists. The same basic approach to calculation applies although the mathematics in England is rather more complicated.

The remaining question then is whether the 1988 Act including Schedule 8 confers sufficient powers to make regulations along the same lines as those in Scotland. While Paragraph 4(1) provides that the Secretary of State may make regulations containing rules for the calculation of an amount for chargeable year in relation to each billing authority and pursuant to which regulations in England and Wales might be made, the better view is that the as yet unimplemented Paragraph 4(4A) of Schedule 8, which was inserted by s 71 of the 2003 Act and provides that, "The rules may include provision for such deductions as the maker of the rules thinks fit for the purpose of enabling an authority to retain part, or all, of so much of the total payable to it in respect of the year under sections 43 and 45 above as exceeds an amount determined for the authority by or under the rules" and paragraph 5 provides that, "The Secretary of State may incorporate in the rules provision for deductions (of such extent as he thinks fit) as regards...(c) such other matters (if any) as he thinks fit", prevents reliance upon the general power in Paragraph 4(1). However, this does not mean that primary legislation is required. A simple fix would be a commencement order bringing Paragraph 4(4A) into force and thereby enabling TIF Regulations to be made in England and Wales. In any event, the primary legislation fix for a Scottish style TIF is not a complicated one and there would appear to be no reason why this could not be dealt with in the Localism Bill rather than in separate legislation to follow at least a year later.

One further potential objection to the ability of the Government to proceed with TIF now that should be dealt with is that a TIF scheme involves the fettering of either the Secretary of State's or the relevant local authority's discretion as it constitutes a long term arrangement and/or that the powers under which the regulations above might be made are "discretionary". It should be noted that both central government and local authorities have for many years been entering into long term arrangements, whether in the form of PPPs or as property transactions and there is little doubt that they have power to do so, assuming that there will be some form of agreement between central government and the local authority with regard to an individual TIF scheme rather than simply the approval of a business case.

The remaining question is whether local authorities in England have power to borrow under existing legislation or would need a "Consent to borrow" like their Scottish counterparts. While the scope of the Prudential Borrowing power under section 1 of the Local Government Act 2003 is uncertain, the general view is that the well-being power under section 2 of the Local Government Act 2000 is sufficiently wide to underpin such borrowing (and without the need for the General Power of Competence in the Localism Bill). It is also submitted that the restriction in section 3(2) of the 2003 Act on raising finance does not apply as retaining locally collected business rates cannot be said to be "raising finance". It would seem to follow that local authorities have the necessary powers to borrow under existing legislation.

TIF Bill?

So do we need a Bill? While the Scottish approach leaves something to be desired, it has the merit of launching pilots now rather than wait until the end of 2012 (assuming the legislation is enacted by then). Given what can be achieved now, if this course is not to be taken, then we would need to understand how the scheme in England might differ from that in Scotland and what the benefits might be. The weakness/strength of the Scottish approach is that it defines a TIF project as one approved by ministers rather than giving any sort of primary right to do TIF and that it leaves local authorities in the lead rather than providing for a private sector led TIF as is possible in the US. While one might understand this for the pilots, a more robust position might be desirable if the pilots are considered a success.

As noted earlier, the English approach is now routed around the Local Government Resource Review, the idea being that Treasury will see how a scheme to repatriate business rate receipts might look and then consider where TIF fits in this rather than the other way round. The recently announced Enterprise Zones have an element of TIF in them given that they can retain additional business rates for 25 years and borrow against them but it is by no means clear that the Enterprise Zones will be ideal places for TIF and there will of course be areas suitable for TIF outside the Enterprise Zones. The date for this TIF Bill is thought to be early autumn but given the complexities of the Local Government Resource Review, some slippage may take place.


In summary, we can do TIF now (if we bring Paragraph 4(4A) into force) and we do not need to wait for a Local Government Finance Act at some unspecified date in the future. We would, of course, have to follow the Scottish model with its understandable weaknesses but it would give us the chance to learn more about the model and its place in our regeneration armoury. However, if we want a developer led TIF then we will need legislation. For some the prize of business rate repatriation will be worth the wait, but be assured there will be winners and losers in that debate too.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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