UK: Tax Increment Finance - After The Local Government Resource Review

Last Updated: 17 October 2011
Article by Nick Maltby

Introduction

TIF has been the great hope of the regeneration industry for almost as long as people can remember. Under the last government, 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.

'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.'

In January, CLG Ministers announced a Local Government Resource Review to consider among other things how TIF might be introduced. In mid July, CLG published a consultation document, 'Local Government Resource Review: Proposals for Business Rate Retention'. The consultation period lasts until Monday 24 October. It is the purpose of this article to consider where this document leaves English TIF and what the prospects are for the future.

Scotland

Before considering the position in England, it is worth recalling how TIF is being progressed in Scotland. 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. As will be seen below the Scottish scheme shares many features of Option 2 of the Consultation Document.

Consultation Document

The wider context of the Consultation Document is a radical realignment of the business rate collection system in England so that authorities get to retain business rates collected by them with a top up for those authorities who are considered to collect too little and a tariff deduction against those who otherwise would retain too much. Authorities will get to retain additional business rates generated in their areas above an agreed baseline (subject to a levy for disproportionate gains) and will therefore be encouraged to pursue policies which encourage rather than stifle growth. However, the business rate multiplier will continue to be set centrally so there will be no adverse impact on business through the change. The new system would, as at present, be adjusted to reflect the five yearly business rate revaluations and there would be an option to reset the system for an authority if it was felt that resources no longer matched service pressures. The new system will be in place by 1 April 2013.

The new system creates both opportunities and challenges for authorities. The opportunity is that authorities will get to keep the proceeds of growth above the baseline and can either use these funds or borrow against them under the prudential borrowing system. The challenge is that where business rate income falls there will be no automatic reset (other than at ten year intervals potentially) and services will need to be cut. Authorities subject to a top up will have their top up indexed which will give some relief but the non-top up amount will still be subject to the issue that it may change adversely. Authorities who are subject to a tariff face a tougher regime insofar that not only is the non-top up amount liable to change adversely but the tariff will be indexed so it will be necessary to achieve growth that matches the indexation rate simply to stay still. The Consultation Document suggests that authorities may wish to pool their risk by way of mitigation. This is a more uncertain climate for local authorities than they have faced before and it remains to be seen how they will cope especially given the direction of travel indicated in the Government's 'Open Public Services' White Paper.

Consultation Document: TIF Proposals

The Consultation Document sets out two ways that TIF could be operated within the business rates retention system detailed above. The first (Option 1) would allow authorities to determine for themselves whether to invest in a TIF scheme but would provide no special treatment. Under this system authorities would benefit from any uplift in business rates in the manner described above subject to any top up, tariff or levy and could decide to borrow against these additional rates if they wished. It would appear that authorities would be able to ascertain the impact of any levy in advance which would reduce any uncertainty. It would be up to the local authority to determine how such funds are invested. If a local authority were in a pool then the pool would determine how the additional business rates were allocated. This could give rise to the exciting possibility of projects being prioritised across for instance the whole of London. However, if a reset is to happen every ten years then it would be difficult to plan beyond this horizon (in contrast to the 25 year horizon of an Enterprise Zone).

Under Option 2 there would be a fund based system run by central government but free from the risk of loss to the levy or reset process. This could be similar to the Scottish system (we await 8 Technical Documents setting out the detail) and would give local authorities and developers the certainty of revenues against which to borrow. Under this system, the amount available would be rationed. Hence, while offering greater certainty, Option 2 runs the risk that it will be constrained. It remains to be seen the size of funds that might be available and how the competition would be organised.

Enterprise Zones

For completeness, it should be noted that TIFs will also occur within each Enterprise Zone. Enterprise Zones were announced in the 2011 Budget in March and there will be one Enterprise Zone per Local Enterprise Partnership. The London Enterprise Zone will be in the Royal Docks. In an Enterprise Zone any business rates above the current baseline can be retained for 25 years from April 2013 to support the priorities of the LEP. This is a longer period than is envisaged under Options 1 and 2.

Next Steps

As noted above, there will be a consultation period until 24 October 2011 and a Bill is likely to follow in December. The Bill can be expected to become law by 1 April 2013. Given the need to encourage growth now this is somewhat disappointing. As we have indicated elsewhere, it is our view that it would have been possible for the Government to bring forward a TIF scheme on the Scottish lines without the need for primary legislation but by implementing Paragraph 4(4A) of Schedule 8 to the Local Government Finance Act 1988. This would have allowed a number of pilots to commence in 2012.

The wider question is whether the arrangements set out in the Consultation Document represent the sort of implementation of TIF that the industry had hoped for. Insofar that the proposals give local authorities primary TIF powers (albeit through a combination of the business rate retention system and the prudential borrowing regime) they transcend the weakness of the Scottish system in its failure to give authorities the ability to pursue TIF without central government approval. Under Option 1 it will be open to local authorities to enter into private arrangements with developers under which developers underwrite the prudential borrowing undertaken by local authorities on their behalf on appropriate terms, as is the case in the US. However, whether this happens will depend on individual local authorities' appetite for risk and it is a pity that the Government has not framed a version of 'pay as you go' or developer-led TIF. There is also little here for upper tier authorities in a two-tier system or other organs of local government, such as Integrated Transport Authorities and Passenger Transport Executives. The key questions that need to be answered therefore revolve around the certainty of any levy under Option 1 and the timeframe of the reset as 10 year money may be less useful in pump priming regeneration than the 25 year money in an Enterprise Zone.

Conclusion

In summary, the proposals in the Consultation Document are broadly welcome but leave some unanswered questions, which may be clarified by the Technical Documents. However, it remains a shame, given the nature of Option 1, that the Government is not introducing pilot schemes now (if Paragraph 4(4A) is brought into force) rather than in 2013. This would give us the chance to learn more about the model and its place in our regeneration armoury now.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.