Recent plans unveiled by George Osborne have revealed that councils will keep up to £26bn worth of Business Rates by 2020.

Councils are currently only instructed to collect rates from businesses operating within their area, these are then handled by central government’s treasury and redistributed as a means of ensuring that areas with lower incomes from Business Rates due to a lower concentration of businesses operating within them do not miss out.

Councils currently receive about 50% of what they collect and the rest goes to Westminster, this is soon to not be the case. Under new rulings set out by George Osborne on Monday, councils will be able to keep what they collect without the involvement of central government.

Councils will also be able to cut the rates that they charge businesses for the local authority services they make use of – these are currently set at either the standard rate of 49.5pence multiplied by the rental value of the property or at a reduced rate of 48pence, which is still not to be exceeded. Mr Osborne has said councils are to hold on to £26bn, calling it the “biggest transfer of power” in recent history – the Local Government Association (LGA) said the move was “good news”. Local authorities will not be allowed to exceed 49.5 pence and will only be given the opportunity to cut rates unless the authority belongs to a major city such as London or Manchester where increases of 2pence to the pound will be allowed to finance infrastructure.

The Labour party have warned that this new ruling could spark a “race to the bottom” with councils competing to cut their rates the furthest, which may not necessarily be beneficial to the businesses and residents of an area in terms of the provision of services. And TUC general secretary Frances O’Grady warned “regional inequalities will get wider”, unless safeguards are introduced for councils in disadvantaged areas with low business growth.

George Osborne said that the change, due to be in place by 2020, will mean that the more regeneration a council undertakes, the more attractive an area will become to  new businesses. This means that Local Authorities will need to speculate to accumulate, cutting business rates and regenerating areas in the short term in order to draw in businesses and trade further into the future.

Elected mayors in big cities such as London, Manchester and Sheffield will be allowed to add a premium – expected to be capped at 2p – to pay for major infrastructure projects. A system of tariffs and top-ups designed to support areas with lower levels of business activity will be maintained in its present state.

This turnaround in approach has been criticised as not being a comprehensive decentralisation of tax-raising and spending powers. That said, it does put local authorities in competition with each other to attract businesses – by easing planning restrictions for example – and thereby increase their revenues.

Andy Platt, director at Focus Insolvency group said : “As a company we have regularly  seen ‘excessive’ levels of business rates as a problem for struggling business over the last few years, therefore I see this proposal as a chance to incentivise local government to promote business recovery and growth for the greater success of the local economy. However, local government must resist the temptation of raising rates to make up for deficits in other areas.”

If you have a client whose business is suffering financial difficulty as a result of steep overheads and fixed costs, Focus Insolvency are here to help. Our friendly and professional IPs will be happy to assist business owners in taking the right steps to staying afloat.