The front pages of the national press have been headlining a key message: the revaluation and proposed reforms are taking businesses on a path they are resistant to going down. In view of a plethora of hard cases, controversy continues to grow and fundamental questions are being asked as to the actual need for a local tax based on property values. In balancing the requirement for revenue with the legitimate concerns of ratepayers, the press is inundated with calls for the reform of the business rates system, a complete overhaul to the proposed regulations on the appeals process and a change in the multiplier used for calculating the rateable value. With this much controversy, should the rating system just be scrapped?

Jerry Schurder, Head of Business Rates at Gerald Eve, has commented: "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."

So how are business rates currently calculated?

Let's take this back to basics...

Which properties attract business rates?

Non-domestic property, excluding agricultural properties, churches and certain properties used for the training and welfare of disabled people, attracts business rates. The technical term for the unit of property attracting rates liability is a hereditament. Unhelpfully, there is not a statutory, or indeed succinct, common law definition.

A hereditament was commonly determined by the extent of a ratepayer's occupation. One occupier = one hereditament. However, as set out earlier in the series, following Woolway v. Mazars, the Valuation Office Agency (VOA) has changed the way it values multi-floor occupiers in the same building. The VOA's policy is to create two (or more) separate hereditaments, where there would previously have been only one. This clear change in the way in which hereditaments are being determined will be reflected in the 2017 revaluation.

The VOA has also in recent years determined that ATM machines1 are separate hereditaments from the buildings in which they are situated. Whilst the current case on ATMs has been appealed to the Upper Tribunal, with the determination awaited, if the tribunal finds in the VOA's favour, this will open the floodgates for the VOA to seek to list other third party equipment independently from its host. As with Woolway, there are serious concerns that such treatment would not be tax neutral.

So, we have our hereditament, how do we calculate the rateable value (RV)?

RVs are set at the Antecedent Valuation Date (AVD). For the 2017 list, the AVD is 1 April 2015.

Most RVs are calculated using the rental methodology. This is the annual rental value the property would have let for, year on year, on the open market. Whether or not the property is rented is irrelevant. It is a hypothetical scenario. For leased properties, where there are plenty of comparable properties, e.g. a town centre retailer, calculating the hypothetical open market rent is a fairly straightforward exercise. For owner occupied properties, which have fewer comparables, e.g. telecom networks, deciphering what rent the hypothetical tenant would pay the hypothetical landlord, over the term of a hypothetical lease, is more of a challenge.

To calculate the RV, the VOA:

  • collects rental evidence for hereditaments from ratepayers;
  • sets a common basic value per square metre for similar properties located in the same area;
  • adjusts that value to reflect any individual property nuances; and
  • applies that value to the hereditament's floor area.

In cases where the rental method is insufficient or incapable of producing an accurate or meaningful RV, there are two main alternatives – the Receipts and Expenditure Method (R&E) and the Contractor's Basis.

As is the trend with rating law, there is no statutory definition of the R&E (previously called the "profits basis"). The Rating Manual defines the R&E as "the ascertainment of the rental value … by reference to receipts and expenditure, adjusted as necessary".

In practice this means calculating:

the gross profit of the hereditament - working expenses = divisible balance.

The divisible balance is the amount to be shared between the tenant and the landlord (as rent, or RV). The tenant's share is the amount the tenant would require to commercially run the business, bearing in mind capital expenditure, profit and risk. The amount left over is the landlord's share, or RV.

A key difficulty for the ratepayer is to ensure that the accounts for the hereditament are valued and not the accounts for the occupier (as a whole). This is particularly an issue for national occupiers. Similarly, ratepayers need to ensure that the use of plant and machinery on the ground reflects the treatment of such items in the accounts presenting an accurate picture.

This method is commonly used where the rental and R&E are unsuitable. The method is derived from Dawkins (VO) v. Leamington Spa Corp and Warwickshire CC2 in that the hypothetical tenant:

  • can build a similar hereditament (the tenant's alternative) as an alternative to leasing the hereditament and paying the demanded rent; and
  • would not pay more in rent than the interest charged (or foregone) on the capital sum used in providing the tenant's alternative.

The Contractor's Basis is seen by some as a matter of last resort; however, it has been tested over the years in the tribunal and, for certain hereditaments e.g. steelworks and public buildings, it is the most appropriate method.

Is the RV the amount we pay?

No. Once the RV is ascertained, it is applied to a multiplier, the Uniform Business Rate (UBR). The UBR is set by the Department for Communities and Local Government. There is one UBR for Greater London and another for the rest of England. The UBR for 2016/17 is:

  • 49.7p and 48.4p for small businesses; and
  • (for Greater London) 50.2p and 48.9p for small businesses.

Your rates liability will therefore be: RV x the UBR - (any relevant reliefs).

Legally, the VOA is not bound by a particular method in calculating your RV. Indeed, it is required to ensure that RVs are fair and accurate. As such, there is nothing preventing you or your rating surveyor from considering the various traditional methodologies and putting alternative and novel approaches to the Valuation Officer.

Valuation is as much of an art as it is a science. Where the implications of having an inaccurate RV could result in hundreds or thousands of pounds more revenue paid to the billing authority, it is crucial to ensure that your property is correctly valued by a rating surveyor and, subject to the new regulations, challenged where appropriate.

We hope this article has provided you with a good insight into the process of valuation. If you would like to discuss the issues raised in this article, or indeed the series, please contact a member of Dentons' business rates team.

Please see link for original article's footnotes