The government needs to refine its plans for discounted business rates in Enterprise Zones in order to avoid creating the wrong incentives.

The plan to create 21 Enterprise Zones, announced by Chancellor Osborne in the 2011 Budget, sits at the heart of the government’s growth agenda and has generally received an enthusiastic welcome from business leaders.

Utilising rate exceptions to encourage growth

The zones hope to attract investors, developers and occupiers by offering simplified planning rules and discounted business rates for the first five years of occupancy, while enabling the local authority to retain and reinvest the growth in business rates generated within each zone for a period of at least 25 years. It is an enticing package all round which will attract many businesses.

Preventing nearby businesses moving to zones for short-term gain

There will be a number of administrative challenges. Chief amongst them will be ensuring that the investments being made, particularly by way of business rate exemptions, support the growth of new businesses, new employers and new jobs. The temptation for businesses located just outside of each zone to relocate to a rates free location will be high. This would be both counterproductive and unnecessary if the local authorities act wisely.

Local authorities can create enterprise friendly environments outside Zones

The Localism Act, which was enacted last November, provides local authorities with the tools to limit, if not remove entirely, the temptation to relocate a business inside an Enterprise Zone for short term financial gain. In conjunction with the proposals described in the Local Government Resource Review, the Localism Act provides local authorities with the powers to create enterprise friendly environments outside the official Enterprise Zone offering a similar range of attractive benefits.