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new tax scheme to kick-start regeneration

13 July 2009

Local authorities struggling to fund regeneration may be able to kick-start projects through a new scheme based on lending secured against predicted increases in tax revenue. The scheme, known as Tax Increment Financing (TIF), would allow councils to borrow money from private sector investors and secure the loans against the expected increase in business rates generated by improving the local area.

Why do we need a new way to fund projects?

Constraints on public spending due to the recession and the downturn in the property market have significantly reduced the amount of money available for regeneration. Local councils are shelving projects and traditional funding sources are no longer readily available. MPs on the all-party Urban Development Group have therefore recommended the TIF scheme as a way to ensure that redevelopments can still go ahead.

How will the new TIF scheme help?

Tax Increment Financing allows local authorities to grant bonds to private investors which are secured against anticipated increases in business rates tax revenue as a way to secure investment in public projects. This avoids the need for councils themselves to find the money upfront to fund regeneration.

Revenue from business rates tends to increase as a result of redevelopments. This is because housing developments and urban renewal make the local area more attractive, leading to an increase in the rateable value of commercial property. The extra tax generated is the tax increment and is used to pay back loans from investors. Currently, business rates are paid direct to the Treasury, but under the TIF scheme the additional tax revenue from designated local areas would be ring-fenced and paid back to investors. The interest on loans paid to investors is likely to be tax exempt.

What are the advantages?

Local councils favour TIF schemes because they make projects possible which would otherwise have stalled due to lack of public funding. TIF promotes regeneration without councils having to fork out upfront, and money can be raised without having to use general revenues, capital reserves or funding from central government with conditions attached.

Private sector partners are also more likely to invest in TIF projects because they can secure their investment against tax recouped and claim a tax exemption on loan interest. Local residents are likely to see a rise in the value of their properties after redevelopment and local businesses will benefit from increased trade as more people move into the area.

What are the disadvantages?

TIFs are not without their risks. If the predicted additional tax revenue is not as high as expected, investors will not be able to recover the full amount of the loan they made. It may also take up to 25 years for enough tax to be generated to pay off loans.

There is also concern that TIF schemes may be used for areas where redevelopment would happen anyway, such as those on the edge of central business districts. This would mean that the extra tax generated is used up paying off loans, rather than being available as revenue.

The TIF method has also been accused of encouraging favouritism for politically connected developers and other associated parties whom some people believe are more likely to be granted bonds by local councils.

What else is in the pipeline?

The new Business Rates Supplement Act passed earlier this month has given local authorities the power to levy higher business rates on certain properties to raise money for public projects. Under the Act, councils can charge up to 2p more per £1 of business rates to pay for new housing and infrastructure schemes. The levy would apply to commercial property with a rateable value of over £50,000 and local business would be able to vote on whether or not to accept the proposed supplements. The CBI says that the right to vote is important to ensure that the extra tax is applied to projects that are economically sound. The London Crossrail is one project that will be funded by supplemental business rates, but businesses will not be allowed a vote on this scheme.

Conclusion

The TIF scheme has its advantages and disadvantages. However, in a recession it is vital that regeneration continues and new funding streams are found. The parliamentary Urban Development Group wants the Government to pilot the new TIF programme in England in up to six local authority areas, with a view to introducing a national scheme in 2011. Local councils across the UK, including Birmingham, Leeds and Manchester, recently submitted proposals for TIF schemes to the Treasury. Wandsworth Borough Council has also requested a TIF scheme to develop Battersea Power Station. The Chancellor is expected to announce which programmes will get the go-ahead in the pre-budget report in November.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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