On 1 April 2017, the controversial non-domestic rates revaluation takes place, in which, according to the British Retail Consortium's forecasts, retailers will be paying an additional £2 billion over the next three years.

So what is revaluation all about?

Revaluation occurs to enable the government to adjust the value of business rates to reflect changes in the property market. At revaluation, properties are given a new rateable value (RV). The applicable Uniform Business Rate (UBR), or multiplier, will then be applied to the RV, to arrive at the billable amount for the ratepayer.

The RV is assessed prior to the rating list going live at revaluation. This is known as the Antecedent Valuation Date (AVD). For the purposes of the 2017 rating list, the AVD is 1 April 2015.

Revaluation is designed to take place every five years. The current list came into effect on 1 April 2010. The new list was, therefore, expected to take effect from 1 April 2015. However, in October 2012, the government postponed the 2015 revaluation, to protect businesses from an increase in rates liability while the economy was still coming out of recession. The postponement was also to enable businesses to budget with certainty for the period 2012-2017.

The consequences of postponement have been problematic for certain businesses. The 2010 revaluation was based on an AVD of 1 April 2008, prior to the global financial crisis, where property values peaked. Businesses where property values have fallen since 2008, including a significant number of regional retailers, have been paying at a higher rate over the course of the extended 2010-17 list. Conversely, businesses in areas where there has been significant increase in property value, largely in London and the South East, have benefited from relatively lower rates. It will be these businesses that will be the most shocked by the extent to which their RV and ultimate liability will increase in the 2017 revaluation.

The issue is acute and has rapidly ascended up the political agenda as revaluation approaches and the consequences of it are increasingly understood. The road to revaluation is proving particularly rocky for government as the vagaries of a tax based on rateable values is thrown into sharp relief by a barrage of front-page media coverage.

How will businesses be affected?

Looking at the Valuation Office Agency's (VOA) statistics for the 2017 revaluation, it is clear that there are regional winners and losers:

Change in rateable value of the 2010 Local Rating Lists after the 2017 Revaluation of rateable properties in England and Wales

Percentage change in rateable value by Region and Sector

Area Retail Industry Office Other All
England 4.8% 4.0% 12.7% 15.9% 9.6%
North East -6.5% -0.4% -12.3% 9.5% -0.9%
North West -5.4% -3.5% -4.4% 10.7% 0.0%
Yorkshire & Humber -1.9% 0.7% -12.4% 7.1% 0.0%
East Midlands 5.6% 3.3% 8.2% 13.4% 7.4%
West Midlands -0.9% 3.4% -6.8% 12.3% 3.2%
East -3.6% 2.3% 2.4% 12.3% 3.7%
London 26.8% 15.5% 22.6% 26.1% 23.7%
South East 1.2% 6.7% 12.9% 17.8% 9.6%
South West -5.7% 5.4% -0.4% 13.9% 4.0%
Wales -8.5% -4.0% -6.6% 4.5% -2.9%

By far the biggest loser is London, which will see a 23.7 per cent increase in RV after revaluation. The South East will also see an increase in RV by 9.6 per cent. The North East, by contrast, will see RVs fall by 0.9 per cent.

As expected, there are also significant regional differences across market sectors. In London, RVs in the office sector will increase by 26.1 per cent, whereas, in Yorkshire and Humber, they will fall by 12.4 per cent. In retail, London again sees a significant increase in RV by 26.8 per cent whereas, in Wales, RVs will fall by 8.5 per cent.

What this means is that revaluation will have a disproportionately adverse impact on London and the South East. It is reported by The Telegraph that London's businesses will have to pay £885 million more annually, due to revaluation. This is on top of already challenging conditions in certain markets. Many businesses will simply be unable to increase production or facilitate a sufficient increase in sales in order to cover the additional overheads caused by the rates increase.

Rates increases will also be acutely felt by smaller businesses that fall above the small business threshold for relief and do not make significant margins. Similarly, occupiers of sizeable areas of property will be affected where the size of the property is necessary for the business (e.g. a vineyard) but where the land value itself has increased significantly.

The effect of revaluation will be mitigated to a degree by a scheme of transitional arrangements. This scheme has the effect of phasing significant rate changes. We will consider this, and other reliefs, later in the series.

Have there been any key legal changes since the last list?

The VOA has announced that, following the Supreme Court decision in Woolway (VO) v. Mazars LLP [2015] UKSC 53, it will be changing the way in which it values business properties with more than one occupier. Those affected are likely to see an increase in their business rates bill.

In summary, where an occupier uses two or more distinct spaces within a building (which are not contiguous or interconnected) that can only be accessed via the common parts (for example, floors 2 and 4 of a multi-let office block), they will be treated as separate properties for business rates purposes. Previously, such areas would have been treated as one property and assessed accordingly. The creation of multiple properties for the same occupier risks a higher business rates liability than if the space was assessed as one. This change in valuation will not necessarily be tax neutral to the ratepayer, as a tenant of a larger space would expect a discount for letting one larger property, as opposed to letting smaller, separate, spaces comprising the same total area.

These changes will impact not only rates bills but also how occupiers locate their businesses, for instance:

  • an owner-occupier of a multi-storey building may be reluctant to let any unused floorspace as their rates bill would likely increase; and
  • office tenants may want to find a larger out-of-town/city centre property to avoid the risk of having separate assessments for central multi-floor office space.

The VOA's guidance, including examples of how this new approach will work, can be found here: Changes to how we value some non-domestic properties with more than one occupier.

The decision highlights the disconnect between business rates and commercial reality. A tenant could be letting one commercial unit but, for rates purposes, be in occupation of multiple units. It is commercially unfair where two businesses in the same area, occupying the same amount of floorspace, have different business rates assessments, simply because the VOA considers one business to be one unit and the other to be multiple units.

The consequences of Woolway impact heavily on the office sector in particular. Industry, including the British Property Federation, has raised concern at government level about the consequences and commercial inconsistencies of the application of Woolway. Until any action is taken, expect to see an alchemist's approach to valuation by the VOA – creating new rateable areas from existing ones and, consequently, increasing rates recovery. A two for one approach by the VOA is no bargain for the ratepayer.

For detailed commentary on the decision in Woolway, please refer to our previous alert: Geography, function and objective necessity: a new approach to non-domestic rates in the office.