Local government finance circular 4/2024: Green Freeports Non-Domestic Rates relief and income retention

Non-Domestic Rates income retention

Introduction

1. As set out in the Green Freeports in Scotland: bidding prospectus, there is a retention policy for GFs: “the local authority or local authorities in which the GF tax sites are located will retain the non-domestic rates growth for that area above an agreed baseline. This will be guaranteed for 25 years, giving local authorities the certainty they need to borrow to invest in regeneration and infrastructure that will support further growth.” Income from retained non-domestic rates growth should, as detailed in the Green Freeports Set Up Phase Guidance, primarily be used to fund:

• Green Freeport operating costs;
• physical and/or digital infrastructure that will facilitate investment in the Green Freeport area;
• land assembly and/or site remediation works that will facilitate investment in the Green Freeport area;
• skills and workforce development;
• innovation initiatives;
• regeneration and/or the development of ‘live work play’ assets within the Green Freeport Travel to Work Area;
• mitigating any displacement and/or negative externalities associated with the Green Freeport;
• activity in support of the Green Freeport’s Net Zero ambitions;
• the delivery of Green Freeport-specific planning measures.

2. The policy provides up to 100% NDR income retention within the designated tax sites over an established baseline and subject to a displacement factor. The initial Baseline Income, for the delineated area within which retention is to take place will be set through an Initial Baseline Income return.
3. The properties included in the Initial Baseline will be those on the valuation roll in the GF tax site(s) as at the day prior to tax site designation, with rateable values as at the same day. In the case of the tax site for Falkirk, two Initial Baseline returns will be required: one which details the properties within the area where GF tax site and Tax Incremental Financing overlap, and one which details the properties within the GF tax site only.
4. The Baseline Income, as well as the amount of income to be retained will be calculated annually using the GF annual return, which councils will provide in the June after the end of the financial year. Councils with a GF will report their GF NDR retentions as part of the standard process part of NDR income returns.
5. The income to be retained by the council in the tax sites (“additional GF Income”) will be determined by the amount that the NDR Income (“net GF income”) exceeds the Baseline Income. This will be derived from NDR paid on new buildings, extensions/improvements of existing buildings, and rebuilds of existing buildings resulting in higher rateable values and higher income, and will also include the value of GF relief awards and any BGA relief award where the property was also eligible for GF relief, but not BGA relief awards where the property was not also eligible for GF relief, and no other relief(s) whether or not the property was concurrently eligible for GF relief.
6. This will work in a similar fashion to Tax Incremental Financing (TIF) insofar as GF income will be retained in the year in which it is realised, i.e. retained for the year in which activities take place. It will differ from TIF in that GF retention will include the value of GF relief awards and any BGA relief awards where these awards are made where the property was also concurrently eligible for GF relief.

Interactions with other NDR Income Retention Schemes

7. Both rateable value and NDR income growth in GFs will be excluded from NDR Incentivisation Scheme (previously known as the Business Rates Incentivisation Scheme) calculations as monies cannot be retained twice.
8. Annex A sets out how NDR retention would work in an instance where TIF and GF tax sites overlap.

The ‘but-for’ test

9. As set out in the bidding prospectus, GFs are based upon four main objectives:

• promote regeneration and high-quality job creation;
• promote decarbonisation and a just transition to a net zero economy;
• establish hubs for global trade and investment; and
• foster an innovative environment.

10. GF income retention will not include projects that would have come about in any case, without GF incentives, but have been built within the delineated area.
11. In order for new properties to contribute to additional GF income, they must meet a ‘but-for’ test in a similar manner to the way Tax Incremental Financing operates. Local authorities must be capable of showing on request that:

• without the GF the necessary infrastructure investment would not take place; and
• the project meets one or more of the stated objectives set out above.

12. The Scottish Government may query or review GF properties to determine if they have met this test. Where the Scottish Government is not satisfied that they have, it may request amended returns with backdating effect. The set-up phase guidance notes that GFs must set out a suitably robust strategy for managing their tax sites, including providing confidence that investment is new economic activity is created, rather than displacing it from elsewhere and would not otherwise have invested. It is expected that the adoption of this strategy will allow councils to ensure in a straightforward manner that NDR income listed for retention in the returns can be evidenced to be the result of ‘but for’ growth, should any such queries arise.
13. Projects built within a delineated area, that do not meet this test, will instead contribute to Baseline Income, rather than retained GF income.

Completion of the GF Annual Return

14. The Annual GF Return is divided into three columns and three sections. Column 1 (‘Updated Baseline’) should reflect the Baseline Income figures, column 2 (‘Additional Income’) should reflect the GF Additional Income, and column 3 (‘Total for GF Area’) is the total NDR income for the GF area, the sum of column 1 and column 2.
15. Where there is a GF/TIF overlap, the GF Annual Return covers only the area that does not form part of TIF. Areas with a TIF/GF overlap should not be included in this return, but should be included in the TIF Annual Return instead (except for lines C1a and C1b, see paragraph 27 and 28, and Annex A paragraph 5).

Section A – Changes to Gross Amount Payable

16. Section A of the return is designed to show the changes to the gross NDR Income from the previous year, to the gross income payable in respect of the relevant year.
17. Row A1 is the starting position, the gross amount payable in the previous rating year. It should be taken from row A6 of the previous Annual GF Return (or line 4 of the Initial Baseline Income return for the first Annual GF Return);
18. Rows A2 to A5 record the movements in and out of the valuation roll that resulted in a change to the total gross income payable for the relevant year. The amounts entered should be based on the relevant poundage/property rate (Basic, Intermediate, and Higher Property, or any other supplement where relevant).
    • A2: Demolitions or reductions in RV – record the reduction in gross income resulting from demolitions or reductions in RV. This will be recorded in column 1 for properties or parts of properties which were existing properties and part of the Baseline Income, or column 2 for new GF properties, or parts of properties, forming part of the Additional Income.
    • A3: Additions – record the gross income from properties added to the valuation roll within the GF area. This will include gross income from:
      1. New properties contributing to Baseline Income, i.e. that do not meet the but-for test (add to columns 1 and 3);
      2. New properties contributing to the Additional Income (add to columns 2 and 3);
      3. Improved or extended properties resulting in additional income (add only the additional income to columns 2 and 3);
      4. Re-built properties (add only the additional income to columns 2 and 3, see line A5 for adding the original pre-demolition income to column 1).
    • A4: Other changes in gross income – record any other changes to gross income, such as reductions due to appeals (revaluation or material change of circumstance), the change in the poundage, or the change in rateable values due to revaluation;
    • A5: The pre-demolition income added back into the baseline for any properties previously demolished, but now rebuilt. The pre-demolition income should be adjusted for any change in the poundage and will then carry forward as part of the gross NDR income for future years.
19. Where there is a revaluation, causing the rateable value of a re-built property to change, the difference between baselined and additional income should be the same proportionate split as there was pre-revaluation, but applied to the new rateable value.
20. In the rare circumstance that a revaluation takes place after a demolition, but before a re-build, there will be no reference rateable value to determine a split of baseline or additional income for that new revaluation cycle. In these cases, the pre-revaluation (pre-demolition) rateable value should be adjusted (increase/decreased) by the average change in rateable value which took place within the GF area. This adjusted rateable value will be treated as the pre-demolition rateable value for the purpose determining the split.
21. Row A6, the sum of rows A1 to A5, should be the gross amount payable for the financial year, calculated using the properties’ rateable values multiplied by the relevant poundage/property rate (Basic, Intermediate, and Higher Property, or any other supplement where relevant).
22. Further detail on recording extensions, demolitions, new builds, and rebuilds, is provided below.

Section B – Calculation of NDR income received in rating year

23. This section broadly follows the structure of the Notified NDRI return for the relevant year. For line-by-line guidance, please refer to the guidance for Notified NDRI returns at: https://www.gov.scot/publications/non-domestic-rates-income-ndri-returns/
24. Prior-year adjustments are one-off costs and therefore only impact on the baseline and delineated area income in the year in which the adjustment is accounted for. Therefore, prior year adjustments (e.g. rates written-off, bad or doubtful debts) should be included in the relevant row and column of the return. Where the adjustment is for a property in the baseline, it will appear in both column 1 and column 3. Where the adjustment is relating to a new GF property, it will appear in column 2 and 3, and will therefore correctly amend the calculation of GF Revenue for the relevant year.
25. In addition to the amounts deducted from the contributable amount in Notified NDRI returns, this return also deducts local reliefs and locally-funded elements of discretionary reliefs in the GF area. Awards of GF relief, or BGA relief awards (and only BGA reliefs awards) where (and only where) the property is concurrently eligible for GF relief, will be deducted in this section, and added to the retained amount in Section C. This maintains consistency across NDRI forms, while making sure that the retained GF revenue reflects the actual amounts paid by ratepayers, as well as the amounts that would have been paid by ratepayers had GF relief (or BGA relief where the property is concurrently eligible for GF relief) not been awarded. 

Section C – Calculation of GF revenue

26. Section C calculates the GF Revenue which is the amount by which Net GF Income (net non-domestic rates income in the GF area) exceeds the Baseline Income (income from properties predating the GF project), adjusted for the agreed displacement factor.
27. All GF Revenue is retained by the council for a period of 25 years from the point at which GF retention begins.
28. Row C1: NDR income arising as a result of the operation of the GF project (Additional GF Income) less local reliefs and locally funded elements of discretionary reliefs– this is the income from new builds, pro-rated amounts from extensions, and properties previously demolished that have been re-built. It is equal to the last row of column 2 in Section A. Local reliefs are removed to avoid their award affecting the contributable amount in NDRI returns. Values relating to GF relief, and BGA relief where the property is eligible for GF relief, are added in rows C1a and C1b.
    1. Row C1a: This is the value of the Green Freeport relief awarded in the Green Freeport area, re-stated here to be added to the retained amount. Any amounts awarded as GF relief in the TIF/GF overlap area should be manually added to this line;
    2. Row C1b: This is the value of BGA relief awarded in the Green Freeport area, to properties which would also be eligible for GF relief. This must be equal to or lower than the amount of BGA relief stated in Section B. Any amounts awarded as BGA relief to properties eligible for GF relief in the TIF/GF overlap area should be manually added to this line.
29. Row C2: Total retention before displacement – this is the total amount actually paid by ratepayers in the GF area (C1), plus the amounts awarded in GF relief (C1a) and BGA relief where the property is eligible for GF relief (C1b).
30. Row C3: Displacement Factor – this is the displacement factor (%) as agreed between the Council and Scottish Government.
31. Row C4: Displacement Adjustment – calculates the amount of Additional GF Income arising from displacement. It is equal to the displacement factor (C3) * Additional GF Income (C2).
32. Row C5: GF Revenue – this is the Additional GF Income (C2) less the  Displacement Adjustment (C4).

Recording changes to the tax base

33. Changes to the tax base (demolitions, new builds, extensions, and re-builds) are likely to happen throughout the year, and may therefore span across two financial years (two returns).
34. In the return for the year in which the change takes place, the change will only be recorded to the extent to which it affects income in that year, i.e. from the change until the end of the financial year. This will then be carried into the following (and subsequent) years as the gross income in the previous year.
35. In the return for the year following the change, the remaining adjustment to gross income (i.e. from the start of the year until the date when the change took place in the previous year) should be recorded.

Demolitions

36. In the year in which a property is demolished, it should continue to be reflected in the total GF income for the part of the year for which rates were payable. The gross income for that part of the year, and any reliefs or adjustments, should be reflected in columns 1 or 2 (for properties forming baseline income or additional GF income respectively), and column 3.
37. For the part of the year for which rates are not payable, the reduction in gross income compared to the previous year (row A1) should be reflected in row A2. Any reliefs or adjustments relating to that part of the year should not be reflected in section B. This adjustment should be made in columns 1 or 2, as appropriate, and column 3.
38. In the year following demolition, the same adjustment is made for the part of rates which was not removed in the previous year (i.e. the period in the previous year before demolition). In columns 1 or 2, and column 3, any income from the portion of rates collected in the previous year will be removed from the gross amount payable in row A2, with any corresponding reliefs excluded from the relevant relief rows in section B. Income from demolitions will then not appear on the GF Return until a property is re-built in its place.

New builds and extensions

39. Where a newly built property is added to the valuation roll in the GF area, or an existing property is extended or improved (resulting in an increased rateable value), the new gross income should be reflected in row A2. In most cases this will be reflected in columns 2 and 3, but where the new build or extension is added to the baseline, use columns 1 and 3 instead.
40. In the year of construction or extension/improvement, enter in row A2 the additional gross rates income for the part of the year for which rates were payable (the part of the year after construction or extension). Enter any reliefs or adjustments for that part of the year in section B.
41. In the year following reconstruction or extension/improvement, enter in row A2 the additional gross rates income which was not reflected in the previous year (i.e. the additional gross rates income for the period for which, in the previous year, rates were not payable). Enter any reliefs or adjustments in section B.
42. For extensions and improvements of properties which formed part of the Baseline Income, the part of total gross income, reliefs, and adjustments reflected in column 2 should be proportional to the part of the rateable value attributed to the extension or improvement (e.g. if a property’s rateable value is increased from £75 to £100 after extension, 75% of the income should be reflected in column 1, and 25% in column 2).
43. If changes to the rateable value of an extended or improved property occur without physical changes to the property (e.g. as a result of revaluation), the proportion of income allocated to column 2 should remain the same as before the change.

Re-built properties

44. This section describes the process for adding properties which were demolished (and fully removed from the GF income), and are then re-built.
45. When there is a re-build, the pre-demolition income of the demolished property is added back to column 1 (if the demolished property was part of the baseline), or column 2 if the demolished property was a new GF property. The additional income arising from the re-build is fully treated as a new GF property. The difference in NDR income between the re-build and the pre-demolition income (if the RV of the rebuild is greater than the old property) is treated as additional GF income. 
46. The pre-demolition income for the demolished property is the gross NDR income payable for the property when demolished, net of the minimum relief percentage awarded to the property in the three years prior to demolition (provided the relief was available for a period of six months or more),[1] and adjusted for the poundage for the relevant rating year.
47. As with new builds, in the year of re-build enter in row A2 the additional gross rates income for the part of the year for which rates were payable (the part of the year after the property was re-built). In row A5, column 1, enter the pre-demolition income for the demolished property, pro-rated for the part of the year for which rates were payable on the re-built property. Enter any reliefs or adjustments for that part of the year in section B.
48. In the year following re-build, enter in row A2 the additional gross rates income which was not reflected in the previous year (i.e. the additional gross rates income for the period for which, in the previous year, rates were not payable). In row A5, column 1, enter the pre-demolition income for the demolished property, pro-rated for the part of the year for which rates became payable on the re-built property in this year (i.e. the pre-demolition income which was not already added to baseline income in the previous year). Enter any reliefs or adjustments in section B.
49. If changes to the rateable value of re-built occur without physical changes to the property (e.g. as a result of revaluation), the proportion of income allocated to column 2 should remain the same as before the change.

Contacts and submission of returns

Comments

50. Please use the comments box to provide explanations of any special factors affecting the figures given in this return and any additional notes on items in the return.

Director of Finance Approval

51. Entries must be certified by the Council’s Director of Finance, being the best estimates which could be made on the basis of information available at the time of the calculation.

Submission

52. Returns should be submitted to the Scottish Government GF Unit mailbox (greenfreeports@gov.scot) and the Local Government Finance Statistics mailbox (lgfstats@gov.scot) within 5 business days of 30 June.