George Osborne announced that by the end of the parliament, local government will be able to retain 100%, including all £26bn of revenue from business rates.

The government will also abolish the Uniform Business Rate and give local authorities the power to cut business rates to boost enterprise and economic activity in their areas. Local areas which successfully promote growth and attract businesses will keep all of the benefit from increased business rate revenues. At the same time, the core grant from Whitehall will be phased out, and local government will take on new responsibilities.

Those areas which choose to have city-wide elected mayors will also be given the power to increase rates for spending on local infrastructure projects, as long as they win the support of local business, through a majority vote of the business members of the Local Enterprise Partnership. The power to add a premium to pay for new infrastructure will be limited by a cap, likely to be set at 2p on the rate.

The reform will mean local government retaining all revenue from business rates for the first time since 1990. Since 2013, local councils have been enabled to retain 50% of the proceeds of rates, but the latest reforms go further, moving to 100% retention of the full stock of business rates by 2020. James Thompson, head of business rates at Deloitte Real Estate, said: ‘There will be some very big winners and losers here unless there is some equalisation mechanism put in place.

‘For example, the City of London and Westminster currently collect far more rates than they receive back from government. These boroughs will be able to cut their rates, whilst some councils currently that receive far more than they collect could be forced to increase rates substantially.’

Thompson said the move was taking the business rates back to the situation which prevailed pre the ‘poll tax’ of the early 1990s.

‘One important check and balance that used to exist pre 1990 was the link to domestic rates paid by voters. Very few business ratepayers have a vote, so the temptation may now be for the most cash-strapped councils to increase the business rates. This could trigger a downward spiral if it drives out business and drives down values,’ he said.

The devolution will benefit councils and local authorities with strategic plans to attract new business and retail to their areas, but there are concerns that less affluent areas could be disadvantaged while councils could be tempted to raise rates to offset cuts in central government subsidies and grants.

TUC general secretary Frances O’Grady said: ‘We all want more decisions to be made locally. But by devolving business rates without any national safeguards, regional inequalities will get wider. The communities that most need investment are often those with the weakest business revenue base, so it is vital that the Treasury retains a significant role in regional economic development.’

Business groups also issued a note of caution. John Cridland, CBI director-general, said: ‘We welcome the opportunities outlined by the Chancellor for boosting local growth, as long as they don't push up costs for businesses.

‘If this bold announcement on business rates is a way to cut them, then it will spur councils to take a pro-growth approach, and has the CBI's support. But this must not be a way to increase rates without the consent of the local business community.’

Additional reporting by Sara White

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