Business rates revaluation 'will see extra £800m a year taken out of London'

The controversial business rates revaluation will see an additional £800 million a year taken out of London to subsidise other parts of the country, according to a new report.

This "tax" on the capital is part of a "more general trend towards greater reliance on London and its stronger economy" to provide Government with revenue to fund services elsewhere, said the report by the Institute for Fiscal Studies (IFS).

Businesses in London are facing rate rises of about 11% above inflation over the next five years because of the revaluation which comes into effect in England in April, while rates in the North will fall by 10%.

Because revenues from the rates are redistributed between local authorities according to need, this will result in a massive outflow of funds from London.

Following the revaluation, which updates rateable values to take account of property price rises over the last seven years, the total amount taken from London in this way is expected to increase by £400 million to £730 million a year, said the IFS. And ratepayers in the capital will also have to pay a further £400 million into the central pot retained by Government.

London councils are also facing the prospect of additional financial burdens from the cost of appeals, which are expected to be mounted in large numbers by businesses furious over above-inflation hikes.

Government has added 4.6% to rates to cover the cost of appeals. But with the bulk of cases expected to be concentrated in areas like London and the South - as well as other major city centres - where rises are highest, the IFS warned that may not be enough for some councils.

Authorities with high levels of appeals face a "significant risk" of finding themselves bearing the cost, said the report.

In the longer term, London is likely to benefit from changes to the rates system, as councils are allowed to keep 100% of additional business rates arising from new developments in their areas.

The revaluation means that the value of new developments will be greater in the capital than the North, with London authorities enjoying "a positive effect from this growth in their tax base", said the IFS.

"Revaluation will mean rates bills will go up, and revenues become more concentrated in London," said the report's co-author, IFS researcher Neil Amin-Smith.

"This is part of a more general trend of greater reliance on the capital for revenues.

"While some ratepayers' bills will rise, in the long-run revaluation will cut average bills in the other regions of England, and especially the North.

"Bills will generally fall more in the suburbs and smaller cities than in both the central areas of major cities like Manchester and more rural areas."

A Government spokesman said: "As this report makes clear, the revaluation is designed to bring business rates into line with changes in the rental property market so that all businesses get a fair deal.

"From next month, businesses in London will benefit from £1 billion in transitional relief and ministers are looking at how best to provide further support to businesses facing the steepest increases. They expect to be in a position to make an announcement at the Budget next week.

"Our fair funding review will also ensure councils get their fair share of the funding as we move towards 100% business rates retention."