Nursery rates relief: evaluation

4. Possible impacts of removing Nursery Rates Relief

Removing the NRR would not necessarily imply a saving that is equivalent to the full cost of providing the relief highlighted in Figure 9. Some nurseries will continue to be entitled to other types of relief such as Rural Rate Relief, the Small Business Bonus Scheme or Charitable Rate Relief i.e. there would be displacement of some of the value of NRR. In addition, direct savings from the removal of NRR may be offset to some extent by an increase in the cost of providing funded ELC. As set out the Sustainable Rates Guidance, rates should reflect the cost of delivery which would need to include the costs associated with paying business rates were the NRR removed (where these are not reflected in the current rates paid to services delivering funded ELC). Finally, if increased costs associated with the removal of NRR lead to higher childcare costs for parents or a reduction in the number of viable childcare services, there may be additional costs associated with lower rates of work or study amongst parents and carers.

The potential impact of removing NRR will vary across depending on their circumstances.

The main factors which will determine impact are:

1. Value of the relief to the setting – clearly, the higher the value of the relief, the larger the financial impact. However, the scale of this impact would also be influenced by the size of the setting. If the setting is a large organisation with a high rateable value, this will have a smaller percentage impact than if a small organisation had the same high rateable value (for example because they were in an area with high property values).

2. Ability to claim another relief – if settings are able to claim an alternative relief, if NRR were removed, then this could reduce the overall financial impact (or have no impact if 100% relief were available through an alternative). However, discretionary reliefs such as Rural Rate Relief are dependent on Local Authorities agreeing that the organisation operating from the premise is offering a 'benefit to the community' and the local authority would fund part of this relief, rather than the Scottish Government funding the whole relief as happens with NRR. There are also limits which apply to some other reliefs (meaning than some premises, even if they are eligible for another relief, may not receive 100% rates relief in the event of NRR being removed).

3. Funding mechanisms for that setting

• For providers not offering funded hours – these providers will have to choose between increasing their prices and/or absorbing the increased costs into their business model.
• For providers of funded hours– it is possible that Local Authorities may adjust the rates they pay childcare providers to reflect the increase in costs associated with the removal of NRR. Even in this scenario, it is unlikely that any adjustments to rates paid will offset the new liabilities entirely due both to the reliance of most settings on a mix of income streams^[17] and the variation in the rates which different providers would be liable for. Therefore, providers offering funded hours will likely face similar choices to those who don't offer funded hours in the majority of cases. The extent to which they would have to adapt, however, (such as the scale of adjustments to prices or profit margins) might be reduced if local authorities increase the rates they pay to address increased costs associated with the removal of NRR.

4. Elasticity of demand for services – the extent to which services feel that they are able to raise their prices will depend on the price elasticity of demand for their service. This is the extent to which demand for their service falls due to an increase in price. Elasticity of demand will depend on factors such as availability of other providers, cost of other providers and whether the setting offers a unique service (for example, extended opening hours). Price elasticity of demand in the sector may also be affected by the desire of families and carers to keep children with the same service for the sake of continuity.

The third point above tackles what options settings faced with higher costs would have. Below we attempt to cover the possible impacts of these choices:

• Impact of settings increasing costs to parents. As mentioned in section one, the UK is currently experiencing large decreases in real household disposable income – meaning that any increase in costs of childcare in the short to medium term future is likely to impact households more than would otherwise have been the case. Overall the impact which an increase in costs had on parents and carers would depend on a number of factors.
  • Parents with a higher disposable income may be able to experience a rise in prices with no impact on their childcare behaviours (i.e. no change to hours, setting etc.). Instead they may reduce their savings, increase their hours worked or decrease their spending on other things (such as leisure).
  • Parents for whom an increase in costs is not easily affordable may feel forced to cut spend on other essential items; to change their childcare arrangements (perhaps to make more use of informal childcare); or to decrease their hours of work or study to reduce their need for childcare.

The impact on parents/carers will also vary geographically, as some areas will have more childcare settings to choose from which may lead to lower average prices due to competition, and may mean that parents/carers are more able to move setting if prices become unaffordable. However this may not be the case for parents in more rural areas or for parents with specific requirements from their setting (certain opening hours etc.).

• Impact of settings absorbing increased costs – in this case the impact on the business and service users will depend on whether the setting is able to absorb the costs into their existing profit margin or whether or not they will need to cut other spend (for example, investment in staff training, pay increases for staff, new facilities etc.).

4.1 Data from 2016 Ipsos Mori Survey

Assessing the impact of an increase in NDR on the overall cost of delivering funded ELC in private and third sector funded provider services is complicated for two reasons: we do not know exactly how many of the settings currently benefitting from the relief are providers of funded ELC, and we do not have up to date data for the scale of what NDR costs would be in relation to all ELC costs, if the NRR were to be removed. However, in 2016, to inform the expansion of ELC within Scotland, the Scottish Government commissioned Ipsos MORI to produce Costs of Early Learning and Childcare Provision in Partner Provider Settings, and it may be helpful to consider the data on costs collected as part of this exercise.

Ipsos Mori reported that, on average (mean), business rates made up 1.64% of per hour costs for private sector ELC settings^[18]. Business rates as a percentage of per hour costs also varied by other provider characteristics:

• when considered by urban/rural classification, those providers in 'other urban' areas had the highest business rates costs as a percentage of per hour costs (1.47%) and those in "remote rural" areas the lowest (0.33%);
• when considered by size, large providers had the highest business rates cost per hour (1.72%) and small providers had the lowest (0.56%);
• when considered by SIMD Quintile, those providers operating in SIMD Quintile 2 had the highest business rate costs per hour (1.68%) while those operating in SIMD Quintile 3 had the lowest (0.74%), and;
• when considered by area of Scotland, providers in Eastern Scotland had the highest per hour business cost and those in North Eastern Scotland had the lowest (0.63%).

Per hour business rate costs are likely to be determined by the rateable value and the likelihood of being eligible for reliefs associated with the above characteristics.