Suffolk County Council has embarked of a tax avoidance scheme which will cost central government revenues more than £300,000 a year.
The avoidance of business rates is at the heart of the plan to save money by handing libraries over to an Industrial Provident Society in April.
Last month the Prime Minister, David Cameron, promised a tougher approach to businesses and individuals avoiding tax by using fancy lawyers (BBC).
The report on which Suffolk County council based its decision to pass the running of libraries on to an independent IPS says it will cost less than a directly run service for two reasons: the 80% rebate on business rates for charities, and lower corporate overheads.
According to the report business rates in the current financial year are £381,750, which means that a little over £300,000 will be saved.
This is tax which is collected by district and borough councils on behalf of the government and goes into the pool from which local authorities get grants from Whitehall.
So while there is an advantage for Suffolk county council, the overall national effect is neutral.
But the system of distributing business rates is changing and the libraries report identified a risk in the Government’s plans to reform its distribution. It said:
A significant proportion of the identified savings would come from business rate relief due to the charitable status of the IPS. There is a risk that after 2013/14 these business rate savings will become cost neutral to local councils depending on the outcome of the Government review on local retention of business rates. The proposals on this review are currently not clear whether charitable rate relief would be reimbursed by Government to local authorities or not.
Just before Christmas the Communities Department announced more detailed plans for reforming business rates which have become one of the most centralised local tax systems in the world.
A press release said:
The reforms will establish a direct link between the effort that councils put into growing local economies, supporting jobs and infrastructure and the amount of money that they have to spend on local services and local people.
Council tax payers and business rate payers stand to benefit from additional income that rate retention could bring authorities, through better services and more investment.
Charity relief will remain.
At best the libraries scheme is taking money out of a national pocket and putting into a local one. But it remains a way of avoiding paying tax and the long-term effect on the county remains unclear.
The complex impact on shire counties of the current business rate reforms has been examined by Simon Parker, director of the New Local Government Network, for the Municipal Journal.