Local government finance circular 9/2026: Investment Zones Non-Domestic Rates relief and income retention

Investment Zones Non-Domestic Rates income retention

Introduction

1. As set out in the Investment Zones in Scotland: Technical document, the Regional Partnerships (RPs) may choose to opt in to non-domestic rates retention in Investment Zones. Retained receipts should be used to cover borrowing costs (where relevant); or re-invest in the Investment Zone to generate further growth.
2. NDR retention applies to the agreed NDR retention sites and designated tax sites where the tax site is also an NDR retention site.
3. The policy provides up to 100% NDR income retention within the NDR income retention sites over an established baseline and subject to a displacement factor. The initial Baseline Income, for the delineated area within which retention is to take place, will be set through an Initial Baseline Income return as at 25 February 2026, the day before tax site designation.
4. The properties included in the Initial Baseline will be those on the valuation roll in the IZ NDR retention site(s) as at the day prior to tax site designation, with rateable values as at the same day.
5. The Baseline Income, as well as the amount of income to be retained will be calculated annually using the IZ annual return, which councils will provide in the June after the end of the financial year. Councils with an IZ will report their IZ NDR retention as part of the standard process for NDR income returns.
6. The income to be retained by the council in the NDR retention site(s) (“additional IZ Income”) will be determined by the amount that the NDR Income (“net IZ income”) exceeds the Baseline Income. This will be derived from NDR paid on new buildings, extensions/improvements of existing buildings, and rebuilds of existing buildings resulting in higher rateable values and higher income, and will also include the value of IZ relief awards and any BGA relief award where the property was also eligible for IZ relief, but not BGA relief awards where the property was not also eligible for IZ relief, and no other relief(s) whether or not the property was concurrently eligible for IZ relief.
7. This will work in a similar fashion to Tax Incremental Financing (TIF) insofar as IZ income will be retained in the year in which it is realised, i.e. retained for the year in which activities take place. It will differ from TIF in that IZ retention will include the value of IZ relief awards and any BGA relief awards where these awards are made where the property was also concurrently eligible for IZ relief.

Interactions with other NDR Income Retention Schemes

8. Both rateable value and NDR income growth in IZs will be excluded from NDR Incentivisation Scheme (previously known as the Business Rates Incentivisation Scheme) calculations as monies cannot be retained twice.
9. As noted in the Investment Zones in Scotland: Technical Guidance, IZ NDR retention sites should not overlap with other retention schemes such as Green Freeports or Tax Incremental Financing.

The ‘but-for’ test

10. Retention of non-domestic rates is a direct consequence of Investment Zone status and therefore the governments expect all non-domestic rates retained on Investment Zone NDR retention  sites to be used solely for purposes associated with the Investment Zone.
11. To demonstrate local agreement around the use of retained NDR, the local authority and accountable body, as part of the Regional Partnership, must work together to develop a reinvestment strategy for NDR retained by the relevant local authorities detailing how the retained NDR income (above the baseline and subject to the displacement factor) will be invested back into the programme in line with the overall Investment Zone objectives, and the decision-making process associated with this. The accountable body are also required to enter a Memorandum of Understanding with the relevant local authorities that sets the principles and arrangements for the administration of the retained non-domestic rates.
12. Retained non-domestic rates should be used to promote the Investment Zone’s objectives and for activity that: would not otherwise occur; demonstrably requires public funding; and is most appropriately funded from retained non-domestic rates, rather than other public funding pots.
13. Income from retained non-domestic rates growth should primarily be used to fund:
    1. Investment Zone operating costs
    2. physical and/or digital infrastructure that will facilitate investment in the Investment Zone area
    3. land assembly and/or site remediation works that will facilitate investment in the Investment Zone area
    4. skills and workforce development
    5. innovation initiatives
    6. mitigating any displacement and/or negative externalities associated with the Investment Zone
    7. activity in support of the Investment Zone Net Zero ambitions
    8. the delivery of Investment Zone - specific planning measures
14. The pooling of retained non-domestic rates from Investment Zone NDR retention sites to Regional Partnership level is considered, by the governments, to be the approach most likely to enable the policy objectives to be realised. Pooling of retained non-domestic rates across local authorities can enable expenditure to be made where it is most impactful, which may not be in the local authority or authorities in which the revenue has been raised. Where alternative arrangements are proposed, these should be fully justified in terms of the policy objectives.
15. In order for new properties to contribute to additional IZ income (e.g. to be eligible for NDR retention), they must meet a ‘but-for’ test in a similar manner to the way Tax Incremental Financing operates. Local authorities must be capable of showing on request that:

• Without the IZ, the necessary infrastructure investment would not take place; and
• The project meets one or more of the stated objectives set out (at para 12) above.

16. The Scottish Government may query or review IZ properties to determine if they have met this test. Where the Scottish Government is not satisfied that they have, it may request amended returns with backdated effect. As set out in Investment Zones in Scotland: Technical Guidance, if proposing tax or NDR income retention sites, RPs will include specific details on their planned future management as part of their Gateway Three (Governance) proposals. At Gateway Four (Interventions), RPs will also set out how planned activity will genuinely boost the supply capacity of the regional economy, to ensure that improvements are additive and do not simply displace economic activity from elsewhere in the region or elsewhere in the UK.  It is expected that the adoption of this strategy will allow councils to ensure in a straightforward manner that NDR income listed for retention in the returns can be evidenced to be the result of ‘but-for’ growth, should any such queries arise.
17. Projects built within a delineated area that do not meet this test will contribute to Baseline Income, rather than retained IZ income.

Completion of the IZ Annual Return

18. The Annual IZ Return is divided into three columns and three sections. Column 1 (‘Updated Baseline’) should reflect the Baseline Income figures, column 2 (‘Additional Income’) should reflect the IZ Additional Income, and column 3 (‘Total for IZ Area’) is the total NDR income for the IZ area, the sum of column 1 and column 2.

Section A – Changes to Gross Amount Payable

19. Section A of the return is designed to show the changes to the gross NDR Income from the previous year, to the gross income payable in respect of the relevant year.
20. Row A1 is the starting position, the gross amount payable in the previous rating year. It should be taken from row A6 of the previous Annual IZ Return (or line 4 of the Initial Baseline Income return for the first Annual IZ Return).
21. Rows A2 to A5 record the movements in and out of the valuation roll that resulted in a change to the total gross income payable for the relevant year. The amounts entered should be based on the relevant poundage/property rate (Basic, Intermediate, and Higher Property Rate, or any other supplement where relevant).

• A2: Demolitions or reductions in RV – record the reduction in gross income resulting from demolitions or reductions in RV. This will be recorded in column 1 for properties or parts of properties which were existing properties and part of the Baseline Income, or column 2 for new IZ properties, or parts of properties, forming part of the Additional Income.
• A3: Additions – record the gross income from properties added to the valuation roll within the IZ area. This will include gross income from:

1. New properties contributing to Baseline Income, i.e. that do not meet the but-for test (add to columns 2 and 3);
2. New properties contributing to the Additional Income (add to columns 2 and 3);
3. Improved or extended properties resulting in additional income (add only the additional income to columns 2 and 3);
4. Re-built properties (add only the additional income to columns 2 and 3, see line A5 for adding the original pre-demolition income to column 1).

• A4: Other changes in gross income: record any other changes to gross income, such as reductions due to appeals (revaluation or material change of circumstance), the change in property rates, or the change in rateable values due to revaluation;
• A5: The pre-demolition income added back into the baseline for any properties previously demolished, but now rebuilt. The pre-demolition income should be adjusted for any change in property rates, and will then carry forward as part of the gross NDR income for future years.

22. Where there is a revaluation, causing the rateable value of a re-built property to change, the difference between baselined and additional income should be the same proportionate split as there was pre-revaluation, but applied to the new rateable value.
23. In the rare circumstance that a revaluation takes place after demolition, but before a re-build, there will be no reference to rateable value to determine a split of baseline or additional income for that new revaluation cycle. In these cases, the pre-revaluation (pre-demolition) rateable value should be adjusted (increased/decreased) by the average change in rateable value which took place within the IZ area. This adjusted rateable value will be treated as the pre-demolition rateable value for the purpose of determining the split.
24. Row A6, the sum of rows A1 to A5, should be the gross amount payable for the financial year, calculated using the properties’ rateable values multiplied by the relevant poundage/property rate (Basic, Intermediate, and Higher Property Rate, or any other supplement where relevant).
25. Further detail on recoding extensions, demolitions, new builds, and rebuilds, is provided below.

Section B – Calculation of NDR income received in rating year

26. This section broadly follows the structure of the Notified NDRI return for the relevant year. For line-by-line guidance, please refer to the guidance for Notified NDRI returns at: https://www.gov.scot/publications/non-domestic-rates-income-ndri-returns/.
27. Prior-year adjustments are one-off costs and therefore only impact on the baseline and delineated area income in the year in which the adjustment is accounted for. Therefore, prior year adjustments (e.g., rates written off, bad or doubtful debts) should be included in the relevant row and column of the return. Where the adjustment is for a property in the baseline, it will appear in both column 1 and 3. Where the adjustment is relating to a new IZ property, it will appear in column 2 and 3, and will therefore correctly amend the calculation of IZ Revenue for the relevant year.
28. In addition to the amounts deducted from the contributable amount in Notified NDRI returns, this return also deducts local reliefs and locally-funded elements of discretionary reliefs in the IZ area. Awards of IZ relief, or BGA awards (and only BGA awards) where (and only where) the property is concurrently eligible for IZ relief, will be deducted in this section, and added to the retained amount in Section C. This maintains consistency across NDRI forms, while making sure that the retained IZ revenue, reflects the actual amounts paid by ratepayers, as well as the amounts that would have been paid by ratepayers had IZ relief (or BGA relief where the property is concurrently eligible for IZ relief) not been awarded.

Section C – Calculation of IZ revenue

29. Section C calculates the IZ Revenue which is the amount by which Net IZ Income (net non-domestic rates income in the IZ area) exceeds the Baseline Income (income from properties predating the IZ project), adjusted for the agreed displacement factor.
30. All IZ Revenue is retained by the council for a period of 25 years from the point at which IZ retention begins, which corresponds to the date of tax site designation.
31. Row C1: NDR income arising as a result of the operation of the IZ project (Additional IZ Income) less local reliefs and locally funded elements of discretionary reliefs – this is the income from new builds, pro-rated amounts from extensions, and properties previously demolished that have been re-built. It is equal to the last row of column 2 in Section A. Local reliefs are removed to avoid their award affecting the contributable amount in NDRI returns. Values relating to IZ relief, and BGA relief where the property is eligible for IZ relief, are added in rows C1a and C1b.

• Row C1a: This is the value of the Investment Zone relief awarded in the Investment Zone area, restated here to be added to the retained amount.
• Row C1b: This is the value of BGA relief awarded in the Investment Zone area, to properties which would also be eligible for IZ relief. This must be equal to or lower than the amount of BGA relief stated in Section B.

32. Row C2: Total retention before displacement – this is the total amount actually paid by ratepayers in the IZ area (C1), plus the amounts awarded in IZ relief (C1a) and BGA relief where the property is eligible for IZ relief (C1b).
33. Row C3: Displacement Factor – this is the displacement factor (%) as agreed between the Council and Scottish Government.
34. Row C4: Displacement Adjustment – calculates the amount of Additional IZ Income arising from displacement. It is equal to the displacement factor C3 * Additional IZ Income (C2).
35. Row C5: IZ Revenue – this is the Additional IZ Income (C2) less the Displacement Adjustment (C4).

Recording changes to the tax base

36. Changes to the tax base (demolitions, new builds, extensions, and re-builds) are likely to happen throughout the year, and may therefore span across two financial years (two returns).
37. In the return for the year in which the change takes place, the change will only be recorded to the extent to which it affects income in that year, i.e. from the change until the end of the financial year. This will then be carried into the following (and subsequent) years as the gross income in the previous year.
38. In the return for the year following the change, the remaining adjustment to gross income (i.e. from the start of the year until the date when the change took place in the previous year) should be recorded.

Demolitions

39. In the year in which a property is demolished, it should continue to be reflected in the total IZ income for the part of the year for which rates were payable. The gross income for that part of the year, and any reliefs or adjustments, should be reflected in columns 1 or 2 (for properties forming baseline income or additional IZ income respectively), and column 3.
40. For the part of the year for which rates are not payable, the reduction in gross income compared to the previous year (row A1) should be reflected in row A2. Any reliefs or adjustments relating to that part of the year should not be reflected in section B. This adjustment should be made in columns 1 or 2, as appropriate, and column 3.
41. In the year following demolition, the same adjustment is made for the part of rates which was not removed in the previous year (i.e. the period in the previous year before demolition). In columns 1 or 2, and column 3, any income from the portion of rates collected in the previous year will be removed from the gross amount payable in row A2, with any corresponding reliefs excluded from the relevant relief rows in section B. Income from demolitions will then not appear on the IZ Return until a property is re-built in its place.

New builds and extensions

42. Where a newly built property is added to the valuation roll in the IZ area, or an existing property is extended or improved (resulting in an increased rateable value), the new gross income should be reflected in row A2. In most cases this will be reflected in columns 2 and 3, but where the new build or extension is added to the baseline, use columns 1 and 3 instead.
43. In the year of construction or extension/improvement, enter in row A2 the additional gross rates income for the part of the year for which rates were payable (the part of the year after construction or extension). Enter any reliefs or adjustments for that part of the year in section B.
44. In the year following reconstruction or extension/improvement, enter in row A2 the additional gross rates income which was not reflected in the previous year (i.e. the additional gross rates income for the period for which, in the previous year, rates were not payable). Enter any reliefs or adjustments in section B.
45. For extensions and improvements of properties which formed part of the Baseline Income, the part of the total gross income, reliefs, and adjustments reflected in column 2 should be proportional to the part of the rateable value attributed to the extension or improvement (e.g., if a property’s rateable value is increased from £75 to £100 after extension, 75% of the income should be reflected in column 1, and 25% in column 2).
46. If changes to the rateable value of an extended or improved property occur without physical changes to the property (e.g., as a result of revaluation), the proportion of income allocated to column 2 should remain the same as before the change.

Re-built properties

47. This section describes the process for adding properties which were demolished (and fully removed from the IZ income), and are then re-built.
48. When there is a re-build, the pre-demolition income of the demolished property is added back to column 1 (if the demolished property was part of the baseline), or column 2 if the demolished property was a new IZ property. The additional income arising from the re-build is fully treated as a new IZ property. The difference in NDR income between the re-build and the pre-demolition income (if the RV of the rebuild is greater than the old property) is treated as additional IZ income.
49. The pre-demolition income for the demolished property is the gross NDR income payable for the property when demolished, net of the minimum relief percentage awarded to the property in the three years prior to demolition (provided the relief was available for a period of six months or more[1]), and adjusted for the poundage for the relevant rating year.
50. As with new builds, in the year of re-build enter in row A2 the additional gross rates income for the part of the year for which rates were payable (the part of the year after the property was re-built). In row A5, column 1, enter the pre-demolition income for the demolished property, pro-rated for the part of the year for which rates were payable on the re-built property. Enter any reliefs or adjustments for that part of the year in section B.
51. In the year following re-build, enter in row A2 the additional gross rates income which was not reflected in the previous year (i.e. the additional gross rates income for the period for which, in the previous year, rates were not payable). In row A5, column 1, enter the pre-demolition income for the demolished property, pro-rated for the part of the year for which rates became payable on the re-built property in this year (i.e. the pre-demolition income which was not already added to baseline income in the previous year). Enter any reliefs or adjustments in section B.
52. If changes to the rateable value of rebuilds occur without physical changes to the property (e.g., as a result of revaluation), the proportion of income allocated to column 2 should remain the same as before the change.

Contacts and submission of returns

Comments

53. Please use the comments box to provide explanations of any special factors affecting the figures given in this return and any additional notes on items in the return.

Director of Finance Approval

54. Entries must be certified by the Council’s Director of Finance, being the best estimates which could be made on the basis of information available at the time of the calculation.

Submission

55. Returns should be submitted to the Scottish Government’s IZ Unit (fiona.wilson@gov.scot) and the Local Government Finance Statistics mailbox (lgfstats@gov.scot) within 5 business days of 30 June.