The new rating list goes live on 1 April 2017. This last article in Dentons' rating series explores whether the rating system, post revaluation, is sufficient, or whether further reform is required.
Jerry Schurder, Head of Business Rates at Gerald Eve, comments: "The frequently heard calls for the abolition of the rating system are misplaced. A local property tax sits appropriately within the basket of business taxes available to government. The problem is that the burden of business rates in the UK with a tax rate of about 50 per cent is too high and the system doesn’t respond quickly enough to changing economic circumstances. More frequent revaluations would remove the volatility in rates bills, eliminate the need for the complex and unfair transitional arrangements and lead to a more acceptable and understandable tax."
We agree with this. Part of the rationale for reform is the disconnect between income derived from the property and the actual rateable value (RV) of the property. The current system creates unsustainable rate increases, for often unnecessarily long time periods, is geographically skewed and is overly complex. Add to this the "new" and unwelcome Check, Challenge, Appeal system and it is plain to see why business considers the property tax regime wholly unattractive.
How can the system be reformed?
Whilst a tax is required, the current business rates system is widely criticised by the industry it affects. So how could it be improved?
The Chancellor announced in his 2016 Autumn Statement that the Uniform Business Rate multiplier (UBR) will be linked to the Consumer Price Index (CPI), in line with UK inflation, instead of the current Retail Price Index (RPI). This change is due to come into force on 1 April 2020 and will seek to bring business rates in line with inflation. The CBI reports that the use of the RPI for business rates has led to an over-indexation of business rates by in excess of 8 per cent1. A change to the CPI will hopefully lead to business rates falling in line with other UK taxation.
A reduction in the UBR would decrease the taxation on businesses and would also assist in the promotion of investment in UK commercial property. On the smaller property spectrum, the sustained high business rate tax has led to an increase in the conversion of commercial property into residential property. Similarly, business rates have impacted on the viability of new commercial property developments in areas where property demand is lower e.g. in the north. This has continued to contribute to the regional imbalances in the property tax.
More frequent revaluations
Commercial property rents fluctuate constantly, reflecting the trends in supply and demand of property. Business rates are slow to respond to these changes, creating unrealistic RVs. The current valuation cycle, where revaluation took place in April 2010 (based on 2008 valuations), clearly highlights the inadequacy of maintaining RVs at levels that simply do not reflect the current rental market.
The Chancellor confirmed in his Spring Budget the government's aim for revaluation to take place every three years. This is not a novel concept, but ratepayers will nonetheless welcome the confirmation, notwithstanding that there is no reason why it could not happen sooner rather than later. Indeed there is call for revaluation to take place more often than every three years.
Furthermore, reform is required to reduce the delay in the Antecedent Valuation Date (being the date that RVs are calculated) and the date of revaluation. The current two-year delay means that, from the day the list goes live, a number of RVs are already unreflective of market values.
More frequent revaluations should also lead to a reduction in the number of genuine appeals being made as RVs should be less disconnected to the current rental market. This, in itself, should achieve the government's desire for a reduction in the number of appeals which it believes Check, Challenge, Appeal will bring.
Removing downward transition
Transitional relief currently works to neutralise certain ratepayers' increases and decreases on revaluation. Whilst this is a benefit for ratepayers suffering significant increases, those ratepayers benefiting from a reduction have their reductions phased over the rating cycle. This prevents beneficiaries of reductions unlocking capital sooner. Enabling ratepayers experiencing significant reductions to instantly benefit from decreased RVs promotes business investment and fairness as they are not penalised for long periods by inaccurate RVs.
In a similar way, through introducing more frequent revaluations, transitional relief should not be required at all, as RVs will more realistically reflect the rental market and will be less subject to spikes.
Local authority retaining business rates
The government is looking to pilot schemes in Liverpool City, Greater Manchester and Greater London to enable local authorities to retain 100 per cent of the business rates collected. The rationale behind this scheme is that it will give the local authority more control over its finances and will provide more stability and continuity to ratepayers in the future.
In practice, it is difficult to see how these outcomes will be achieved. The theory, as with many reforms, is more attractive than the reality.
Introducing an online portal to review and make payments for business rates would reduce the administrative costs incurred by the Valuation Office Agency (VOA) and make bill paying simpler and easier for the ratepayer. The availability of an online portal for bill payment may also significantly reduce the VOA's time spent policing the payment of business rates.
The government could, through frequent reviews of business rates, seek to unlock business investment through introducing exclusions to RVs or reliefs for novel industries / innovative sectors e.g. to promote investment in energy-efficient plant and machinery. How these reliefs would be funded is, however, a question for the government.
As with personal tax, introducing a self-assessment tax return for business rates, placing the onus on the ratepayer to assess and file its tax return, would seek to reduce the VOA's administrative duties, focus its limited resources on compliance and enable it to dedicate resources to pursue genuine appeals and more frequent revaluations.
The current system is, of course, some way away from self-assessment. In order for the ratepayer to take control of its taxation, the system needs to be made simpler as the calls for reform strive to achieve and a greater transparency of the information the VOA holds and uses to determine RVs would be required.
Register of professional rating advisers
The rating specialists Colliers have suggested a move to a register of professional rating advisers, similar to the register used in the financial services, to reduce the delay and cost incurred through ill-founded appeals and the burden this places on the VOA. The register may also seek to remove the "no win no fee" culture, which is increasing in the industry.
With so many areas capable of reform, is a different system required?
The UK has led the way for hundreds of years with its business property tax. As Jerry Schurder comments, there is indeed a need for a tax and few would suggest to the contrary. The current business rates system, introduced in 1990 – when few could imagine the significance on the commercial property market of online businesses – fundamentally bases RVs on rental or indeed hypothetical rental values. With increasing online businesses taking retail away from the high street, the government's aim for business rates to be tax neutral may fail. Those remaining in town and city centre hubs will become (even more) overtaxed and the property market will suffer as a consequence. The Chancellor did acknowledge in the Spring Budget that this is an area of concern, but as yet there is nothing concrete from government as to how it proposes to address the taxation unfairness arising as between a business that structures itself online and one that relies on bricks and mortar.
The existing system is clearly unsatisfactory. It is implicit in the Chancellor's emerging rates hardship fund that this is the case. Whether reforming the existing system is more appropriate than starting again with a blank piece of paper remains to be seen. Either way, expect to see vociferous calls for reform from the property and rating industry during the life of the 2017 list.