Councils seek direct payment of business rate cash

Companies will be forced to hand over billions of pounds in business rates directly to their local councils if ministers adopt plans for reforms to be published this week.

The cross-party Local Government Association (LGA) will call on Thursday for the "re-localisation" of business rates from Whitehall to individual authorities across the country, The Independent has learnt.

The proposal, which will be opposed bitterly by businesses, would mean that areas which attract the biggest firms will receive huge cash windfalls. At present, town halls merely collect the uniform business rate (UBR) on the Government's behalf. The money is then redistributed in line with other funding needs. Before 1990, rates were set by local authorities and varied widely. The UBR was introduced to ensure that businesses with properties of an identical rateable value paid the same bills, whatever their location. Following the changes, big city councils such as Manchester, Leeds and Birmingham were left out of pocket to the tune of millions a year.

As part of the Government's review of local government financing, Nick Raynsford, the Local Government minister, is currently looking at the idea of relocalisation of the rate. Although no decisions have been made, ministers have long been under pressure to ensure a more direct link between councils and businesses, and the LGA's support for the idea is bound to increase the chances of its success. A panel of councillors, academics and ministers set up by John Prescott, the Deputy Prime Minister, to look into the matter will report in the spring.

The LGA will also make recommendations for a replacement for council tax, suggesting a basket of measures to include a form of property tax, "assigned revenue" from income tax and an equalisation scheme to ensure councils are dealt with fairly. The Office of the Deputy Prime Minister yesterday distanced itself from reports that it planned to introduce regional council tax bands to reflect local property values.

In a separate move, the Liberal Democrats announced more details of their own proposal for a local income tax. In order to raise the same amount as the council tax, a local income tax would be levied at an average rate of 3.75p. It would not be levied on the first £5,000 or on incomes above £100,000.