Plans to create thriving communities will allow councils to keep money from business rates where there is increased economic growth in their area.

The move to reward councils for encouraging business means that local authorities in England could gain up to £1 billion over the next three years. The scheme should start in April 2005.

Deputy Prime Minister John Prescott and Chancellor Gordon Brown have launched a consultation on the plans.

The Deputy Prime Minister said, "This scheme should give councils a real incentive to work together with business to create enterprising and thriving communities. We want to create a win-win situation where flourishing businesses will benefit everyone in the community."

Gordon Brown said, "For the first time, all of us in partnership can each secure financial benefits from creating new businesses. Based on historical data, we estimate that, as a result of this measure, local authorities could gain up to £1 billion over the next three years - showing that the next stage of our employment and growth strategy for Britain can only succeed with greater initiative and engagement by local areas. Further reforms in the Pre-Budget Report will reflect this."

The Chancellor first announced the Business Growth Incentives scheme in the Pre-Budget Report in November 2002. The necessary powers to introduce the scheme are contained in the Local Government Bill, currently going through Parliament.

Speaking at the Local Government Association annual conference in Harrogate, the chancellor elaborated on the plans to allow councils to keep a share of the business rates generated by the formation of new businesses.

Mr Brown said councils will be free to spend the proceeds however they choose and revealed by way of example that if it had been introduced three years ago, Harrogate District Council would have received an extra £875,000, Peterborough £7m more and Stockport £10.5m.

Views on the proposals - including opinions on how the revenue should be distributed - are welcome. The consultation will run until the end of October.