Two-thirds of councils will see their income fall in real terms by 2025 due business rates reforms, research has found today.

The analysis by the New Economics Foundation warns the Government's proposed changes to the Business Rates Retention System will increase geographic inequalities in the UK.

The report says the changes will make the system 'unfit for purpose' as councils have very little control over the level and eligibility for business rates. It will also expose councils to risk as the safety net is set well below the level the council needs to deliver services, the report argued.

Sarah Arnold, senior economist at the New Economics Foundation, said: 'While the Business Rates Retention System was intended to give councils more control over their money and incentives to improve the local job market, in reality it has introduced uncertainty and instability into the local government finance system and is biased against more deprived communities in the UK.

'With seriously limited additional support now coming in the form of grants, councils are likely to be faced with hard choices in the event of a bad year or two of business rates revenue. We need a more just and equitable system that keeps meaningful local control, while protecting poorer local authorities from risk and volatility.'

The report calls for the safety net to be raised to 100% to protect councils from large losses, and for local authorities to be rewarded based on growth to their business rates revenue proportionate to their level of need.

Joanne Pitt, local government policy Manager at CIPFA, said: 'Councils’ reliance on council tax and business rates are inadequate to sustain local services as demand continues to increase, and we believe that radical, long term change is needed.

Action must be taken to alleviate the fiscal pressures faced by councils through local and more equitable tax raising powers.'