Councils have been forced to set aside at least £1.75bn to cover the cost of business rate appeals, the Local Government Association (LGA) has warned.

As part of the Local Growth and Jobs Bill, announced in yesterday’s Queen’s Speech, local authorities will be able to retain 100% of their business rates income by 2020. Mayoral authorities will also have the power to raise additional funding for infrastructure.

The LGA said it welcomed the move, but has called for an ‘urgent’ reform of the business rates appeals system. It also wants any extra income received by councils should match any new responsibilities or transferred grants they agree to take on.

Cllr Claire Kober, the LGA’s resources portfolio holder, said: ‘Almost 900,000 businesses have challenged their business rates bill since 2010. Councils have been forced to divert at least £1.75bn from stretched local services in the past three years to cover the risk of these appeals and backdated refunds - of which they have to cover half the cost of at present.

‘The sheer scale of appeals suggests that too many businesses are not happy with what they are being charged or are simply taking advantage of the fact that it is too easy to appeal, meaning they think they have nothing to lose. By 2020 local government could be liable for 100% of refunds.

‘As every penny will count in giving councils the best chance of protecting services over the next few years, we also need urgent reform of the appeals system so councils can use the money set aside to cover the risk of these appeals to invest in vital local services.’

Cllr David Borrow, finance spokesman for the County Councils Network, said: ‘Our members are clear that they want a system which funds areas based on the needs of their communities. Counties have been historically underfunded through the Revenue Support Grant (RSG), and unless this is addressed now there is a risk this unfairness is embedded into the new Business Rates system from 2020.

‘The Government has agreed to a needs-based review of the RSG following CCN advocacy. Getting the needs-based review of funding right, and properly accounting for counties’ current and future needs, pressures, and growth, will set the template for a sustainable rates retention system.’

Cllr Neil Clarke MBE, chairman of the District Councils’ Network (DCN), added: ‘DCN welcomes the Local Growth and Jobs Bill and would also welcome an acceleration of the timetable for the local retention of business rates, to further incentivise district councils to continue to stimulate growth in their economies.

‘However, with all these things, the devil is in the detail. The DCN is committed to working with the wider local government family to ensure the new scheme contributes to drive growth and support the 86 services districts deliver close to their communities.

‘In relation to combined authority mayors having powers to levy business rates supplements, the DCN feels the structure and governance of local government should be determined by what works best for local areas. As with proposals for combined authorities, the redesign of public services is best determined by localities themselves; one size does not fit all.’