A Successful Business Rate Appeal in Milton Keynes!
Acting on behalf of the owner of a substantial warehouse building in Milton Keynes, Louch Shacklock and Partners have successfully completed an appeal against the rating assessment in the 2010 Rating List. A 30% reduction in Rateable Value was negotiated which will produce a saving in terms of rates payable over the life of the 2010 Rating List of over £670,000.
David Louch, who was responsible for the appeal commend that rating appeals of this nature are highly technical requiring expert knowledge of rating law and valuation, together with detailed knowledge of the local property market in which the premises are situated.
Background to Business Rates in England
Business Rates is the commonly used name of non-domestic rates, a tax on the occupation of non-domestic property. Rates are a property tax with ancient roots that was formerly used to fund local services that was formalised with the Poor Laws of 1572 and 1601. The Local Government Finance Act 1988 introduced business rates in England and Wales from 1990, repealing its immediate predecessor, the General Rate Act 1967. The act also introduced business rates in Scotland, but as an amendment to the existing system which had evolved separately to that in the rest of Great Britain. Since the establishment in 1997 of the Welsh Assembly Government able to pass secondary legislation, the English and Welsh systems have diverged.
The Local Government Finance Act 1988 (as amended) provided an administrative framework for assessing and billing, but did not redefine the legal unit of property, the hereditament, that had been developed through rating case law. Properties are assessed in a Rating List with a Rateable Value, a valuation of their annual rental value on a fixed valuation date using assumptions defined by statute. Rating lists are created and maintained by the Valuation Office Agency, a UK Government Executive Agency. Rating lists can be altered either to reflect changes in properties, or as valuations are appealed against. Since 1990 new rating lists are normally created every five years, however, the 2015 revaluation has been postponed until 2017. Revaluation does not raise extra money for Government but is a means by which changes in property values geographically and between use sectors are fairly reflected in individual ratepayers’ liabilities.
Billing and collection is the responsibility of the local authorities who are funded by the tax, but rather than receipts being retained directly, they are pooled centrally and then are redistributed. The rateable value is multiplied by a centrally set fraction (the Universal Business Rate or UBR) to produce the annual bill which is indexed to retail prices. There are a number of reliefs are available, such as those for charities, agricultural properties and small businesses.
Rateable Value is an estimate of the annual rent that would be paid for the property at a fixed date two years prior to the beginning of the list, known as the Antecedent Valuation Date (”AVD”), incorporating certain assumptions laid down in the legislation. Economic conditions are considered at the Antecedent Valuation Date, and physical properties are considered on the Material Day (the day on which matters affecting the physical state of the property are taken into account – e.g. when an extension to a property is completed). The valuation assumes that a year to year (that is, ongoing) lease is being agreed, where the tenant pays all repairs and insurance, and that the property “is in a state of reasonable repair”.
The current 2010 Rating List came into force on 1 April 2010 with an Antecedent Valuation Date of April 2008. A successful appeal on an assessment in the 2010 List, if based on valuation/economic grounds, will be backdated to the commencement of the valuation list.
Whilst the 2010 revaluation will not increase the amount of rates collected nationally, within this overall picture, over a million properties will saw their business rate liabilities reduced and some ratepayers experienced significant increases.
For those that would otherwise see significant increases in their rates liability, the Government has put in place a transitional relief scheme to limit and phase in changes in rate bills as a result of the 2010 revaluation. To pay for the limits on increases in bills, there also limits to the reductions in bills. Under the transition scheme, limits continue to apply to yearly real (after inflation) increases and decreases until the full amount is due (Rateable Value times the UBR). The scheme applies only to the bills based on a property at the time of the revaluation. If there are any changes to the property after 1 April 2010, transitional arrangements will not normally apply to the part of a bill that relates to any increase in Rateable Value due to those changes. Changes to billed liabilities as a result of other reasons (such as because of changes to the amount of small business rate relief) are not covered by the transitional arrangements.
Calculating transitional adjustment is quite complicated but the basic limits to any real increase or decrease is shown in the tables below. A small property is a property with a 2010 Rateable Value below £18,000 (£25,500 within Greater London). All other properties are large properties.
The application of transition may have the effect of negating, or delaying the benefit of a successful Rateable Value appeal.
The Bases on which Valuations are Undertaken
The 2010 List is the fifth modern revaluation and the Valuation Office Agency (“VO”) has streamlined its computer programmes to enable bulk valuations and appeals to be administered. Similar properties (generally defined in terms of location, use age and size) have been aggregated into ‘Valuation Schemes’ with co-ordinated approaches to valuation.
All occupiers of commercial properties are legally obliged to complete a Rent Return notice which is issued by the VO. These returns require disclosure of the commercial terms and rent payable for any leased property. The VO’s analysis of this data enables basic prices to be calculated for each Valuation Scheme with a menu of adjustments for such factors as eaves height, sprinklers, return frontages (for retail property), air conditioning (for offices) etc. Accommodation within a single building (or hereditament) having differing characteristics is often valued as a percentage of the basic price or the main price rate to produce an aggregate ‘in terms of main space’ (ITMS), e.g. for an industrial building the office accommodation would be assessed at, say, 125% of the basic industrial price.
The VO has a rolling process for the inspection and referencing of all commercial property to determine physical factors such as areas, eaves heights and specifications. Properties are commonly reinspected when subject to an appeal or if there have been alterations. The areas and physical characteristics of many properties are often not subject to challenge on appeal having been agreed (as a matter of fact) following appeals made in earlier valuation lists.
The application of the valuation scale, adjustments, ITMS relativities and property reference data is computerised by the VO to produce the majority of the Rateable Values in the list for so called bulk properties, although specialist hereditaments, e.g. power stations, harbours and some hotels, are assessed individually.
The Appeal Processes
All ratepayers (and their agents) are entitled to challenge their 2010 Rating List assessments on one or more of certain specified grounds, most commonly that the Rateable Value specified as at 1 April 2010 is inaccurate, but are required to state the basis upon which the appeal (or ‘proposal’) has been made. The VO has a duty to maintain an accurate valuation list and will register bone-fide appeals. The VO has refused to register some appeals, notably in cases where the rent payable for the hereditament is significantly in excess of the Rateable Value.
The VO has strict procedures for dealing with appeals according to is system of programming whereby appellants are in effect given a set period in which negotiations may be undertaken (otherwise known as the ‘target date’). Programmes often comprise groups of the same type of cases. It is often difficult to accelerate consideration of individual appeals outside this process, save in the case of manifest hardship, and the time period for completing an appeal will be over months, if not years.
The vast majority of appeals are settled by negotiation with the VO on the simple process of completing an Agreement Form. Many appellants simply withdraw their proposals at this stage.
In the event that it is not possible to reach an agreement with the VO, the case is referred to the Valuation Tribunal (“VT”) which is an independent appeals tribunal, funded by Parliament to handle council tax and rating appeals in England. It provides a free service with local hearings and the members who hear appeals are volunteers. It has no power to make awards on costs. All appeals which have been placed in a programme by the VO will normally be listed by the VT for a hearing after the target date has been reached. It is the intention of the VT, wherever possible, to arrange for the first hearing of an appeal within 12 weeks of the programmed target date. Appellants are required to deliver to the VT a Statement of Case not later than 6 weeks prior to the hearing date as otherwise the appeal is struck-off. There is a limited basis for hearing dates to be postponed.
An appellant and the VO may within four weeks of the publication of the VT’s decision appeal further to the The Upper Tribunal, Lands Tribunal (“LT”). Appeals to the LT are relatively rare and generally involve disputes on technical issue rather than valuation per-se.
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Business Rate Reform Update: Business Rates Administration Review
On 13 February 2014 government published terms of reference for the review of business rates which has been reproduced below.
Terms of reference – Business rates administration review
The Exchequer Secretary to the Treasury (David Gauke): The Parliamentary Under-Secretary of State for Communities and Local Government (Brandon Lewis) and I have today published the terms of reference for the government’s review of business rates administration. This follows the Chancellor of the Exchequer’s Autumn Statement, where he announced a £1 billion package of business rates measures which benefits all 1.8 million ratepayers and means that around 360,000 small businesses pay no rates at all, and committed to discuss with business options for longer-term administrative reform of business rates post-2017. The terms of reference are set out below.
Terms of reference
Business rates are a tax based on property values. In England they raise around £23 billion each year, which helps fund services provided by local government. The review will consider the way in which the business rates system in England is administered by the Valuation Office Agency and local authorities, with a view to strengthening its responsiveness to changes in property values and its simplicity and transparency to business ratepayers.
The review will include consideration of the:
1.) Administration of billing and collection by local authorities, including the application of reliefs and exemptions; and of valuation by the Valuation Office Agency, including the scope for improvements in communication and the exchange of information between ratepayers and public bodies;
2.) The circumstances under which liability can be backdated;
3.) Changes to valuation methods, consistent with the principle that business rates are based on rental property values and that the rates retention system rewards local government for growth in values; and
4.)Frequency of revaluations to enable tax assessments to be based on up-to-date property values.
In considering possible changes to the business rates system to be made post-2017, the review will balance the need for any system to deliver fairness, stability and predictability to ratepayers. Any changes will need to maintain the aggregate tax yield from which to fund local services, preserve the same level of financial autonomy to authorities and the local incentives to promote growth that were delivered through the implementation of the business rates retention scheme introduced on 1 April 2013.
The proposed review will deal only with the refinement of the extant rating system and will not depart from the process of assessing Rateable Values by reference to open market rents. It will not encompass the wider concerns expressed by the business community and calls for alternative bases of local taxation.
Louch Shacklock notes that the outcome of this review will “need to maintain the aggregate tax yield from which to fund local services” so it will not be likely to be an aggregate saving in terms of the overall tax take.
Consultation on the Process for Checking and Challenging the Rateable Value of Business Premises
In December 2013 Department for Communities and Local Government commenced consultation on the process for checking and challenging the Rateable Value of business premises. The consultation lasts for 12 weeks until 3 March 2014 and will aim reform the existing appeal procedure to.
1.) Improve the transparency of the valuation process (including disclosure of more information on rental evidence). This will allow ratepayers to check their rateable value without having to make a formal challenge, improve confidence in rateable values and overall confidence in the rating system,
2.) Bring business rates into line with the way official decisions are normally challenged by requiring ratepayers to provide with their challenge an explanation of why they think the rateable value is wrong, an
3.) Enshrine in law a more formal separation in the challenge process between the Valuation Office Agency and the Valuation Tribunal for England by more clearly separating the administrative “proposal” stage in the Valuation Office Agency from the independent judicial “appeal” stage in the Valuation Tribunal for England.
Louch Shacklock broadly welcomes DCLC’s proposals. We believe that the open provision of rental data by the Valuation Office will improve the transparency of the valuation process and enable the ground for challenge to be more clearly identified. We believe that challenges should only be made after research and when the grounds for appeal have been identified. All too often some rating consultants submit speculative or blanket appeals which only have the effect of raising client expectations, clogging up the system and ultimately failing to produce tangible benefits.
We question why two separate consultation review and processes have been established for ostensibly related matters.
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Business Rate Reform: Be Careful What You Wish For
In his autumn statement, George Osborne announced that business rate rises will be limited to 2% in England and Wales next year instead of being linked to inflation (3.2%) and that all retailers on the High Street (including pubs, cafes and restaurants) with a rateable bill of up to £50,000 in England will receive a discount on business rates worth £1,000 off their bills in 2014-15 and 2015-2016. He will also extend a scheme that offers rate relief to small businesses which will mean more than £300m of revenue is lost in the 2014/15 year.
Included in the Chancellor’s package of measures is an inventive scheme for temporary “reoccupation relief”, which will grant a 50% rates discount for new occupants of previously empty retail premises, for a period of 18 months. The initiative, which is intended “to help reduce the number of boarded-up shops on English high streets”, will be granted to businesses moving into long-term empty retail properties on or after 1 April 2014 and on or before 31 March 2016.
In the meantime the politicians are fighting for the high ground of the short term fix. In Scotland, First Minister Alex Salmond is understood to be considering a cut in business rates and Chuka Umunna, the shadow business secretary has promised to freeze business rates in 2015 and 2016.
These are small but welcome gestures to the growing chorus of business rate payers calling for more radical reform of the non-domestic rating system including the British Retail Consortium (‘BRC’), the CBI, the Federation of Small Businesses, the British Chambers of Commerce, the British Council of Shopping Centres and even Kirstie Allsopp. The storm of protest is reflected in media coverage typified by The Daily Telegraph’s “Fix the Rates” campaign.
The grounds of complaint are twofold – that the business rate tax take has grown out of proportion to other means of taxation; and secondly, the rating system itself is fundamentally unfair, outdated and outmoded.
So, what are the facts?
The Extent of the Business Rate Tax.
First the annual indexation of business rate payments to Retail Price Index will generate £26.7bn in this financial year, taking it ahead of fuel duties for the first time, according to official forecasts from the Office of Budget Responsibility. The income from the tax will then increase another 11pc to £29.6bn by 2015 to 2016, when it will also be larger than council tax and become the Treasury’s fifth biggest source of income behind only income tax, National Insurance, VAT, and corporation tax.
While our corporation tax rates are looking competitive compared with other countries, UK commercial property taxes have somehow been allowed to end up becoming the highest in Europe. Business rates revenue is the equivalent to 1.6pc of UK GDP – the highest share in Europe. Compare that to Germany at 0.3pc and France at 0.5pc. The BRC claims this will mean that for every £1 paid by retailers in corporation tax, £3.44 is paid in business rates. In 2005, this ratio was £2.48 in business rates for every £1 of corporation tax.
Ratepayer lobbyists say that these statistics do not support the Government’s pro-business mantra and send a confusing message about its devotion to improving the business environment – particularly when council tax bills have been frozen for years. They accuse the Government of allowing business rates to become “an anti-business tax” and an impediment to investment.
The essential issue here is that business rates are a fixed levy, albeit geared to RPI, and not a variable tax on income or sales. The harsh truth is that if Government is to adhere to its deficit reduction strategy amelioration of business rate liabilities can only be achieved if the proportionate contribution of other taxes increases. As always, there will be winners and losers.
Alternatively, but more controversially, the range of property for which business rates are payable could be extended, or the extent of relief granted to some ratepayers could be reduced, so that the rate in the £ (Uniform Business Rate) is lower for all ratepayers.
The main types of property that are currently exempt from business rates are agricultural land and buildings, including fish farms, and buildings registered for public religious worship. Widening the tax base for business rates to include these user classes will not be popular, or even politically acceptable, but if there is to be a root and branch review of the rating system the established tenets of the system have to be challenged.
Perhaps the levy of rates on undeveloped land with planning consent would be more palatable? After all, rates are payable on empty commercial buildings, so why not unused development land?
Relief from part or all business rate liability is granted on the following bases:
Enterprise Zones (up to a maximum of £275,000)
Rural rate relief (for small properties in a rural area with a population below 3,000)
Charitable rate relief (charities and amateur community sports clubs can apply for relief of up to 80% if a property is used for charitable purposes)
Small business rate relief (upto 100% for occupiers having a Rateable Value below £18,000 (£25,500 in Greater London)
Empty properties (for 3 months, 6 months for industrial properties and indefinitely for listed buildings, buildings with a Rateable Value under £2,600, properties owned by charities (only if the property’s next use will be mostly for charitable purposes).
Restricting relief from these recipients is guaranteed to generate equal if not greater protest and a relatively small uplift in the overall tax take. I suggest that the main areas for review would be the circumstances in which charitable relief is granted and restrictions in ratepayers ability to mitigate empty (or void) rates by sham temporary occupations designed to justify additional relief periods.
The Fairness of the Rating System
The charge is that the business rates system is uncompetitive, perverse and in dire need of reform.
Based on a system first introduced by the Poor Laws of 1572 and 1601, it is a tax on property value virtually disregarding ability to pay. Despite more recent legislation (Local Government Finance Act 1988) the basis of valuation continues to be based in case law and many question the legitimacy of what is seen to be a less than transparent valuation and assessment basis.
The process of revaluation (undertaken quinquennially since 1990) is designed to reflect differential shifts in value over time. Each revaluation is based on market rental values two years prior to the implementation of each new Rating List, so current Rateable Values in the 2010 Rating List reflect market values pertaining in 2008. In October last year the Government announced that the revaluation planned for 2015 was to be postponed until 2017, ostensibly as a cost saving measure although some more cynical commentators thought this is was a device to avoid the inevitable ‘winners and losers’ debate immediately prior to the general election.
The valuation problem with the 2008 antecedent valuation date is that the effects of the recession were not then evident; indeed the tone of values reflected boom conditions. Whilst property values some areas of the country (notably in London) have more than recovered, others remain depressed.
It is not uncommon for Rateable Values in some secondary high streets to be twice the current market rent, so the rate liability for some occupiers (and owners of empty property) is truly unfair. It all adds up to a massive subsidy from economically disadvantaged regions to successful ones, from poorer districts to well off neighbourhoods and from struggling industry to profitable businesses. The combination of the effects of recession and the postponement of the 2015 revaluation has had perverse effects which can only be addressed by ensuring that revaluation is carried out as soon as reasonably practical and that revaluations in the future are not delayed beyond a five year interval.
Unfortunately revaluation has not previously been an entirely effective in reflecting differential changes in value, as successive governments have implemented a programme called transition. The basic premise is that ratepayers who benefit from a reduction in liability following revaluation should have the saving phased in over a number of years. Conversely ratepayers having an increased liability have the benefit of the real term increase spread again over a number of years. For the 2010 Rating List the transition system was revenue neutral, so the gainers paid for the losers. This system perpetuates both the inequality that the revaluation was supposed to address and the subsidy from those who need reductions in liability to those that do not. It is essential in my view that any system of transition in the 2017 Rating List is restricted to two years.
What are the Alternatives?
It has been rather easier to complain about the current business rates system than to propose alternatives which would be fairer, more transparent and cost effective. Much of the debate has been limited to academic circles and the impact of alternative bases of taxation is not fully understood, so the temptation has been to suggest extensions of relief to the existing system or to implement the short term fix of restricting the amount of annual increases.
A fundamental question is whether or not business rates (or any alternative) should be under local control so that the tax raised bears greater relevance to the provision of local services. In 1990 the UBR was introduced by Margaret Thatcher (at the same rate for all business in England, with the money going direct to the Treasury) to stop Left-wing Labour councils using the old business rates to finance their higher spending. Local control plays well with the Government’s localism agenda, an element of which is already in the Business Rate Retention Scheme (which for a limited time allows local authorities to retain 50% of the rate income generated on new property developments).
Options for wholesale replacement of the business rate system are limited perhaps only to a local sales tax in the US model, although implementation in the UK would be complex with some unknown consequences.
The Liberal Democrat party has long been an advocate of locally based site value rating (SVR), although the idea did not feature in its 2010 manifesto. Essentially it is another form of rates, but based on land value not building value. Anyone who knows anything about property valuation will be aware of the technical difficulties of assessing site values, so practically speaking I think this is a non-starter.
There is greater scope for intra-sectoral reform, such as an online shopping tax to support bricks-and-mortar retailers, or an additional charge to out of town retailers to balance the disadvantages of town centre locations. Perhaps manufacturing occupiers would benefit from a lower rate of charge at the expense of warehousing operators?
Revision to the existing rating system will create differing groups of winners and losers, and the degree of any saving or additional cost may be considerable. The case for change has yet to be made and the evidence base established. In my view we are likely to see in the medium term some form of blended multi-based system established with an element of local control but with the majority of revenue raised centrally but based on the current business rates system.
Rateable Values are fixed by the Valuation Office, an executive agency of HMRC, and rates are charged by local authorities who receive grant support from central government allocated from the aggregate pool of rates collected nationally. The system has been established over decades and there is a well understood basis on which ratepayers can appeal against individual assessments. There would seemingly have to be a good case to justify the costs of moving away from the status quo.
In the ongoing debate, be careful what you wish for, there may be a sting in the tail.
Sources:
http://www.bbc.co.uk/news/uk-politics-15934564
http://www.nottinghampost.com/Shadow-Business-Secretary-Nottingham-champion/story-20228111-detail/story.html
http://www.scotsman.com/news/alex-salmond-in-plan-to-slash-rates-for-business-1-1498764
http://www.fsb.org.uk/london/freeze-business-rates
http://www.britishchambers.org.uk/press-office/press-releases/business-rates-need-reform,-but-reversing-corporation-tax-cut-not-the-answer,-bcc-tells-miliband.html
http://www.mdlp.co.uk/resources/general/poor_law.htm
http://www.legislation.gov.uk/ukpga/1988/41/contents
http://www.voa.gov.uk/corporate/News/2012/newsRelease_November_2012.html
http://www.libdemvoice.org/tag/land-value-tax