Read other issues in this series
Background
On 1 April 2017 the business rates revaluation will take effect. This in itself is cause for significant concern. However, the ratings world is currently a maelstrom of upheaval and controversy, such that the revaluation is but one small element of a wider ratings transmogrification.
What's going on?
As well as being the first revaluation since 2010, there have been several key ratings cases impacting the ratings system. There are also changes to billing and collection, the calculation of the rate multiplier, the period between revaluations and rates retention. More importantly, a complete overhaul of the business rates appeal system has been proposed. This will decidedly and adversely impact on ratepayers' ability to successfully challenge their assessment.
Why is this important?
The purpose of this article, and the series that will follow, is to highlight the key legal, valuation, procedural and administrative changes taking place in the ratings system.
Business rates are a tax on property. Given that most businesses require property to function, the impact of revaluation is highly relevant to bottom lines. Put simply, the impact of revaluation could be the difference between profit and loss.
Asset managers should be focused on revaluation. There may be empty property considerations if the asset is unoccupied. If it is leased, revaluation could be relevant to a tenant's ability to pay rent to the landlord. This could impact on the market value of affected properties. The consequence of this could be a deflationary effect on rental value and an inability for a landlord to raise the rent at review. This could be an amelioration of the effects of revaluation from a tenant or prospective tenant's perspective. However, it is unlikely to be welcome news for an owner of commercial property if the rental income is adversely impacted upon and / or the value of the reversion suffers as a consequence of revaluation. In the event of a significant rates increase, asset managers are likely to face pressure from tenants seeking to reduce their liabilities under their leases.
Developers will be impacted by the changes. Minimising or removing rates liability pending development will be a key aim. The revaluation could also adversely impact on pre-lets and the rent realisable on first letting. This could have a knock-on consequence on development budget appraisals.
Enterprises with particular and specialist properties are sensitive to revaluation. Where there are no rental comparables, different valuation methodology applies. The valuations undertaken may result in notably skewed outcomes that may be grossly disproportionate or bear little resemblance to the 2010 valuation.
Investors will need to factor in the impact of revaluation on their investment. In particular, whether increased rates liability negatively affects the anticipated return on investment and, indeed, the length of time required for that return to be made.
Tenants who hold more than one floor or one property on an estate will need to be aware of changes in the Valuation Office Agency's (VOA) approach to valuation. The approach is unlikely to be tax neutral.
What is our route map?
In the run-up to revaluation, Dentons will be producing a series of articles covering the following topics:
- Revaluation
- Valuation methodology
- Material change in circumstances
- Challenging the list
- Reliefs
- Next steps and reform
Business rates
Business rates are a tax based on the rateable value (RV) of business property. The tax is payable by owners and occupiers of property.
The VOA calculates a property's RV. For the purposes of the 1 April 2017 valuation list, the RV is calculated at the Antecedent Valuation Date (AVD) of 1 April 2015. A multiplier (also known as the Uniform Business Rate (UBR), is then applied to the RV. The outcome of this calculation is the amount of business rates a business will be liable for, prior to the application of any relief.
The UBR is not a single figure applicable to all businesses. In England, outside Greater London, there is a distinction between "standard" businesses and "small" businesses . There is no right to appeal the UBR.
For 2017/18 the proposed multipliers are:
- Standard business – 0.479 (47.9p in the £)
- Small business – 0.466 (46.6p in the £)
In Greater London, the distinction between standard businesses and small businesses is maintained. However, Greater London has levied a business rates supplement (BRS) where a standard business has an RV of more than £55,000. For 2017/18 the BRS will remain at 0.02 (2p in the £). The purpose behind this particular business rates scheme is to fund Crossrail. This BRS will continue to be levied until the Greater London Authority's borrowing is repaid. This is expected during the 2030s. According to the Greater London Authority, less than 20 per cent of business properties within Greater London are affected by the BRS.
The City of London is entitled to set its own rate. In 2016/17, this was the equivalent of 0.05 (5p in the £) on top of the standard and small business rate multipliers.
There are various specific reliefs that are available to qualifying ratepayers. These will be explained in more detail later in this series. The business rates regimes in Wales and Scotland also differ slightly from the regime applicable in England.
How to ascertain your business rates
Business managers can obtain the data necessary to ascertain their business rates liability following revaluation. A link to this can be found on Gov.uk:
https://www.gov.uk/calculate-your-business-rates
For property portfolios or where a business holds unique or specialist property, there may well be merit in instructing a specialist ratings surveyor to assist at revaluation. Specialist surveyors can test valuations, manage the revaluation process and assist in any challenge to the list. We will look at the appeal process and the controversial proposed changes, later in the series.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
