Local government taxation

Reforms to local government taxation have been the subject of debate in the UK in the late 2010s and early 2020s. This has occurred in the context of concerns regarding local authority financial resilience and low levels, in historical terms, of central government financial support.

This briefing paper explains the distinction between different types of local authority income, including taxes, transfer grants, fees and charges, and commercial income. Sections 2, 3 and 4 describe the main revenue raising powers available to local authorities in England: council tax, business rates and transport levies. They describe the degree of local control over the tax base, tax rate, and reliefs in each case, and the degree (if any) to which revenue is redistributed between authorities. Figures for revenues obtained from these taxes are provided where available.

Section 5 provides details about existing approaches to land value capture, including planning obligations (section 106 contributions), the Community Infrastructure Levy (CIL), and its proposed replacement, the Infrastructure Levy. It also includes proposals for alternative mechanisms, such as reforms to the treatment of ‘hope value’, development rights auction models, and transport premiums.

Section 6 provides information about proposals for a ‘tourism tax’ or ‘transient visitor levy’. These are used in many other states. The paper describes recent developments in Scotland and Wales.

Section 7 provides a number of examples of existing national taxes which, in other states, are subject to ‘sharing’ arrangements with regional or local authorities. This can mean that local authorities obtain a proportion of the relevant tax that is raised in their area; or that a proportion of the national revenue from the tax is set aside for local government as a whole, but it is distributed according to some measure of need. The taxes covered in this section include income tax, VAT, payroll taxes, stamp duty, and vehicle excise duty. This section also briefly addresses land value taxation.

Local government finance is devolved to Scotland, Wales and Northern Ireland. Where this paper describes the operation of local government taxation, this principally concerns how it operates in England. Council tax and business rates operate in Scotland and Wales, each featuring a small number of differences from the English system. A system of domestic and non-domestic rating operates in Northern Ireland.