Business faces 45% shock tax rise

SMALL firms and sole traders face a huge rise of 45% in the amount of tax paid they pay to local authorities. The move would add £6.75bn to the £15bn they already pay every year to town and county halls in England.

A Whitehall report into local government finance on Tuesday will call for an immediate increase in business rates. It will argue that since 1991, the proportion of local authority costs shouldered by business has dropped from 29% to 20%.

That compares with the 27% covered by the council tax levied on individual households.

The report, from Deputy Prime Minister John Prescott's office, will argue that the contribution from business should return to previous levels. But Financial Mail understands that his office will resist calls to return control of business rate levels to local councils, as recommended on Friday by a committee of MPs.

Until 1991, local authorities set their own rates for commercial premises, which often triggered acrimonious rows between councillors and business leaders.

Since then, Whitehall has set a national Uniform Business Rate (UBR), which is collected centrally and distributed by the Government to municipal councils.

One senior local government finance source said: 'This system gives local authorities little incentive to work with business and thus reap the rewards of gathering more rates from successful firms in their areas.'

Councils, he added, would be less likely to refuse planning permission to booming businesses if they knew they could keep the resulting taxes.

But the Confederation of British Industry has fiercely opposed returning business rates to local control. 'Local authorities would see the business rate as a way of reducing the pressure on households,' it said. 'There would be far more pressure to push the burden on to business.'

Business rates are paying a smaller share of local government costs because UBR rises only in line with inflation, while increases in council tax and grants from Whitehall have outstripped the cost of living.

Friday's select committee report said that business rates should be returned to councils no later than April, 2006.