Treasury opposes business levy for London

The Treasury is resisting a far-reaching proposal for a business levy which could provide much needed investment for London Underground and other public transport projects.

The idea for a levy on all but the smallest businesses, were a majority of companies to vote in favour to pay for urban investment, is already spreading in the US after being successfully pioneered in Houston, Texas, and has some backing in Whitehall.

The levy proposal - which is backed by the City of London corporation and many of the capital's leading business figures - would allow big increases in transport investment without relying on central government grants or increases in council tax. Businesses throughout a given area, for example Greater London, would vote on a levy to be raised as a supplement to the national non-domestic rate. If a majority voted for the levy the minority would have to pay, but there would be an exemption for the smallest businesses, such as corner shops.

A mere 1p in the pound added to business rates in London would make up a pounds 100m-a-year shortfall in London Underground's investment, according to two local government experts, Tony Travers and Stephen Glaister, of the London School of Economics.

Differences within Whitehall over the idea are reflected in a new Department of Transport document, A Transport Strategy For London. The document says: "The idea is an interesting one, which would have considerable attractions if it could be made to work on a genuinely voluntary basis. However ... the current proposal is a tax and the expenditure which it supported would be public expenditure."

But that reasoning is challenged by supporters of the levy including London First, the private-public body for the capital.

The Treasury has so far taken the orthodox line that since such a levy would have to be paid by the minority of businesses who vote against it, it contains an element of compulsion and therefore constitutes a tax.

But that is dismissed by supporters of the levy who point out that housing associations and universities, for example, are allowed to borrow without affecting public spending totals and that the element of choice in the levy make it an essentially private sector project.