The business rates revaluation storm
Colette Krawczyk considers the impact of the recent revaluation on occupiers and landlords and the reliefs available
The topic of business rates has frequently been in the headlines in 2017. After causing something of a storm since Christmas, the revaluation took effect on 1 April 2017, and has continued to attract attention (almost exclusively negative) since.
Initially sparking discussion in the property sector, such was the speculation and controversy that the issue attracted attention (and criticism) across sectors and the mainstream press. This escalation in public pressure forced the chancellor to respond and tackle some concerns in the Spring Budget.
What are business rates and what is the revaluation?
Business rates are a tax that businesses must pay on industrial, office, and retail properties which is determined by the rental valuation of a property – the rateable value (RV) – combined with a multiplier which is set by the government. Crucially, the multiplier is set to ensure that the total amount collected by the government remains the same, making the revenue neutral.
On 1 April 2017 a new ratings list for non-domestic properties in England, Scotland, and Wales was introduced. Historically, new ratings lists are produced by the Valuation Office Agency (VOA) every five years. However, this latest revaluation was long overdue. It was initially scheduled for April 2015, but the government delayed it to encourage economic recovery after the recession.
An RV is based on a valuation dating back two years before the date of the ratings list. The last revaluation was 1 April 2010, which means that this was based on open market rental values as at 1 April 2008, which is widely considered to be the peak in the rental market after years of sustained economic growth. This large gap between revaluations, as well as the increase in rents between 2013 (the RV assessment date for the scheduled 2015 revaluation) and 2015 (the RV assessment date for the 2017 revaluation), has resulted in many occupiers now confronting an unwelcome, sharp spike in their rates.
What has been the impact?
The VOA’s statistics show that London and the South East have been hit the hardest with an average increase in RVs of 23.7 per cent and 9.6 per cent respectively since the revaluation. By contrast, occupiers in Yorkshire, the North East, the North West, and Wales have, on average, experienced little change in their rates.
In London, it is the retail sector that has felt the rates increases most acutely. Figures show rates on Bond Street have risen by around 100 per cent and in Westfield by around 62 per cent. With online retailers being treated more favourably by the VOA, it seems inevitable that the revaluation will contribute to the gradual decline of high streets as retail centres as they will struggle to survive (without adapting) in the face of greater competition from their online rivals.
Recent research has shown that three-quarters of international retailers are choosing countries other than the UK for business expansion, citing the business rates system as the most unattractive factor. This is hardly surprising as analysis by the Organisation for Economic Co-operation and Development shows that the UK has the highest property taxation in the developed world.
What effect has the case law had since the last revaluation?
Mazars v Woolway  UKSC 53
The Supreme Court decided in favour of the VOA and ruled that where a business occupies several floors of a property with a common stairwell or lift, each floor is to be rated separately. This decision has been keenly felt by occupiers across split-level premises since the revaluation, having lost any allowance for size that would be within the single assessment.
Newbigin v SJ & J Monk  UKSC 14
This recent Supreme Court decision overturned a much-criticised 2015 Court of Appeal judgment, and will be welcomed by developers. The Court of Appeal had ruled that if repairs being carried out would return the property to its former state, provided that the repairs were economic, the property should be valued throughout as if it were in a reasonable state of repair. This created widespread uncertainty as to what ‘economic’ meant and developers were left with two options to gain relief: either to rely on repairs being ‘uneconomic’ or to demolish the whole property.
The Supreme Court overturned this decision and reinstated the previously well-worn ‘reality’ principle that a property should be valued on the basis of its actual physical condition. If works are being undertaken that would go beyond the meaning of repair, it should be treated as a ‘building undergoing reconstruction’ and its RV should be nominal. In this case the decision reduced the property’s RV from £102,000 to £1.
While this is a victory for developers, they will need to exercise some caution as the Supreme Court did indicate that if part of the property becomes capable of beneficial occupation, this part could attract separate rates liability.
Sainsbury’s & others v Valuation Officers  UKUT 0138 (LC)
The future of ‘hole in the wall’ cash machines could be in jeopardy after a recent ruling in the Upper Tribunal that ATMs built into the front of a shop should be listed separately and have their own rates bill. The case was brought to the tribunal by a raft of retailers including Sainsbury’s, Tesco, and Co-op and non-bank ATM operator Cardtronics Europe. Retailers will now face a £206m bill for increased rates.
This decision has been heavily criticised as many ATMs could face closure or have to start charging for cash withdrawal. This would have damaging implications for small communities where the ATM is often the only local free source of cash. However, with almost one in six of the current lodged appeals relating to cash machines, it seems likely that the retailers will fight to appeal against this ruling.
What reliefs are available?
- Transitional relief: This is intended to ease the impact on businesses by limiting the percentage a rates bill can be adjusted each year following the revaluation. With gradual phasing, the relief will apply each year until the full amount is due. However, this relief is self-funded, which means even the business rates ‘winners’ are still losing from the revaluation, as they are funding the transitional relief for those with rates increases and will therefore not realise their full rates reduction for some time.
Small business relief: Historically, small business rates relief applied if the RV was less than £15,000. However, following the revaluation, this relief is now only available to those businesses with an RV of under £12,000, although there is phased relief for those properties with an RV of between £12,001 and £15,000.
Empty rates relief: This is available to a property owner for the first three months the property is empty, while industrial properties can benefit from an additional three months. To qualify, the property must have previously been occupied, and rates been paid, for at least 42 days. Other properties can also obtain this relief until they are re-occupied, including listed buildings, buildings with an RV under £2,900, community amateur sports clubs buildings (provided the next use will be mostly as a sports club), and properties owned by charities used mostly for charitable purposes.
Reliefs offered by the chancellor in the Spring Budget: In addition to the existing reliefs, the chancellor responded to public pressure and announced measures in the Spring Budget to mitigate the impact for some occupiers. To help the most vulnerable, businesses losing small business relief will not have an increased bill of more than £50 a month. A £300m fund will also be made available to local councils to offer discretionary relief. However, it has been confirmed in light of the snap general election that implementation of this fund will fall to the next government. This delay by several months will be a blow to those hoping to rely on it. The chancellor also announced a £1,000 rates discount for pubs with an RV of up to £100,000 for the first year from the revaluation. While the chancellor originally stated that this relief would help 90 per cent of pubs, he has come under criticism for overestimating this figure. Industry groups believe it will be more likely to be 75 per cent, as EU state aid rules mean that larger chain pubs are unlikely to qualify.
Can occupiers appeal their RV?
Occupiers can appeal their rating under the 2017 ratings list through a new process that has been implemented known as ‘check, challenge, appeal’. This new system is more extensive, costly, and litigious than the previous, simpler, two-stage process of ‘proposal and appeal’.
Originally, it was proposed that the Valuation Tribunal would be prevented from amending an RV being appealed unless it is ‘outside the bounds of reasonable professional judgment’. This proposal received widespread condemnation as it essentially offered the VOA one-sided discretion to refuse an appeal if the reduction in assessment determined was, in its professional opinion, not large enough.
The government subsequently revised this wording, stating that the VOA’s new approach would be ‘to decide if they consider the valuation to be a reasonable valuation’ before ordering that the RV was reduced. To the keen eye, this revision seems to be just a dressed-up version of the initial draft, namely that the decision of an appeal is based on whether the RV is reasonable, rather than whether it is correct.
Causing further embarrassment to the government, it has been revealed that the government revaluation department will see the rates on its Westminster headquarters fall by over £265,000 this year. Such revelations will be difficult for struggling businesses to stomach.
In light of all this rates turmoil, many have called for the whole system to be scrapped. However, even nuanced changes, including more frequent revaluations and fairer transitional arrangements, could make a big difference. Indeed, the chancellor has taken the first of these steps, announcing in the Spring Budget the government’s aim for a revaluation every three years. With more frequent revaluations, there would be less need for transitional relief as RVs would be able to follow the rental market fluctuations. Nevertheless, with the pending general election, any such reforms will depend on the election results and the priorities in the new parliamentary term.
Colette Krawczyk is an associate in the property litigation team at Osborne Clarke