How to prepare for the business rates revaluation
09 March 2017
There has been considerable coverage of the changes to the business rates from 1 April this year, with a number of headline figures emerging as a result.
Many of these have focused on reductions for businesses in the North of England, balanced by rises for those in London and the South East.
Headline figures have shown that the Central London area will experience a 30% rise in rateable values. Widespread concern has been expressed by companies faced with double-digit increases.
While the changes are intended to be revenue neutral for England as a whole, those on the receiving end of the most significant rises are continuing to lobby the government for assistance in meeting increased costs.
Greater understanding of the impact can be seen by examining the various regions of Central London, which will see widely varying levels of increase in rateable values.
For example, single-digit increases will be seen in Docklands (4%), Knightsbridge (5%) and Battersea (9%), with Hammersmith (30%), City (32%), Farringdon (46%), King’s Cross (67%) and Chiswick Park (99%) at the other end of the spectrum.
Some markets experiencing particularly high increases in business rates are either areas which were undervalued at the last revaluation in 2010, or which have experienced significant rental growth in the seven years since the last revaluation.
Looking at the rest of the country, Leeds, Liverpool, Birmingham, Cardiff and Newcastle will see their business rates broadly reduce by between 9% and 15%, while Manchester, Bristol, Cambridge, Reading and Southampton will see rises of between 9% and 40%.
During a recent PFM Editorial Advisory Meeting, it was further suggested that the changes to the business rates system could result in FMs being charged with establishing dedicated entrances to their offices in shared buildings, in order to justify challenging business rate valuations.
Further in-depth information has been provided by CBRE senior directors William Martin and Mark Bateman, including comment on the changes to the appeals process with effect from 1 April 2017.
The appeal process has been relabelled as “check, challenge, appeal” and has become a more convoluted process. “We’ve done a variety of things to look at how best to defend the client’s position,” says Mr Bateman.
He emphasises how care needs to be taken when lodging challenges to ensure that all the required information is available and – equally important – that the implications are understood.
For example, if the process reveals that the rental charge being paid by the company is below that of the average rate for the area, this could result in increased charges for rent.
“It is also important to keep things as simple as possible to avoid misunderstandings in any area,” says Mr Martin. He further explains the rises experienced by utilities companies including BT, which will see a 500% increase in business rates.
“With transitional relief and other factors, however, they may never pay the full amount,” he says. With business rates rebased on rental rates of commercial property at a moment in time, known as the ‘valuation date’, which for the new rating assessments coming into effect next month was 1 April 2015.
Previously business rates were rebased on a five-yearly basis. Mr Bateman explains that the two year postponement of the revaluation from 2015 to 2017 took advantage of a strong period of rental growth across the South East and particularly in a significant number of areas in Central London.
Prime office rates in the West End returned to the 2008 high of £120 per sq ft in Q3 2016. While there has been considerable attention placed on the increases, it could be argued that the two-year delay in the rating revaluation gifted the majority of companies continuing to pay proportionately lower business rates.
There has also been a shift in how some companies operate, Mr Martin continues, with examples such as Amazon and others mainly operating from large warehouses which see the company paying significantly lower business rates than those with large premises in central city locations.
“During the life of a lease an occupier’s needs can change and it is always worth taking advice to see if there are grounds to appeal,” says Mr Martin.
“Equally if they haven’t got the right grounds or as occasionally happens are under assessed, they should be standing back.”
He provides the example of the creation of an internal staircase reducing the physical floor area triggering an opportunity to challenge the rating assessment which was based on the original building design.
There are opportunities to make saving which happens for a variety of reasons such as human error, adjacent buildings works creating nuisance or changes in the size of a company. Only in instances where there is a clear reason for a challenge to be launched should further action be taken, he advises.
While challenges cannot be lodged before 1 April 2017, companies have until 31 March 2022 to take action on the 2017 rating assessments.
There are also a number of grey areas within the rules, which further emphasises the need for all challenges to be as clear and simple as possible.
One of the best examples of this is for an appeal for a discretionary rate relief particularly where an occupier is undertaking alterations and the floor or floors are not capable of beneficial occupation.
Provided the works last more than three months and effect a reasonable proportion of the space a rate refund can be claimed.
Another example of a discretionary rate relief could involve disturbance from adjacent redevelopment or refurbishment works to a neighbouring building.
The grey area being the need to articulate the nature and extent of the works judged to be sufficient to justify a business rates reduction for the duration of the construction programme.
“It depends on what you fight and how you fight it,” Mr Bateman continues. “For example, if the works are further away, you may get less of a decrease depending on how this impacts on your business.”
Further explaining the approach adopted by his company to assist clients in succeeding with business rate mitigation exercises, these should be supported by being “brilliant at the basics” in gaining good quality information.
Greater understanding of future opportunist rate savings is gained through conversations with CBRE FM colleagues, particularly in relation to future approved capital expenditure and its practical impact on operations.
This creates a more efficient process in terms of time as it removes the need for clients to meet with rating surveyors to discuss the concept and simply adds a slice of rating content in the usual FM reporting regime, giving a high level view of the opportunity and potential saving.
“However, it is discretionary, so you never know if it’s going to come back or not,” Mr Martin continues.
“This is partly because it’s in the hands of the billing authority.” Many challenges to business rate rulings are covered by the “huge amount” of existing case law, including the obtaining of temporary relief for unoccupied buildings.
Companies can claim three months’ Empty Rates relief for commercial buildings and six months’ for industrial facilities.
PFM was presented with the example of the case of Macro Properties Ltd v Nuneaton & Bedworth Borough Council in 2012 over the company’s use of a former cash and carry warehouse for temporary storage.
After vacating the property a claim for six month’s relief had been lodged. This relief can be claimed again after a minimum period of 42 days, which the company then claimed following the submission of photographic evidence of its occupation, which consisted of a small number of boxes positioned at various points around the warehouse.
The court ruled that this minimal level of occupation was sufficient to show that a further six months’ period of relief was claimable.
A further example of mitigation is provided by CBRE concerning a vacant first floor in a large London office. After a lease was arranged with a charity, a rate saving of £500,000 was achieved.
A successful appeal has also been made in Aberdeen following the significant drop in oil prices resulting in reduced demand for space through company closures and consequent halving of rental values.
It has been recently announced that CBRE was successful in arguing the case at a tribunal that the collapse in rental values was a material change of circumstance and consequently office occupiers in Aberdeen will see their rateable values being reduced by 16%.
Irrespective of extensive lobbying the Budget announced a relatively minor set of changes largely focused on smaller occupiers.
Chancellor Phillip Hammond confirmed a package of £435m cuts in rates, centred around three areas:
¦ A £300m fund for discretionary rates relief to be administered by local authorities. In effect a ‘hardship’ fund which will be allocated on a formula to be released by the Department for Communities and Local Government over a three-year period.
¦ Any business coming out of small business rates relief will have increases in rate capped at £50 a month
¦ A £1,000 discount in 2017/2018 for pubs with a Rateable Value of less than £100,000 which will positively benefit about 90% of pubs in England.
A final piece of advice is provided by Messrs Martin and Bateman on registering challenges as soon as possible, while following their previous recommendation of ensuring that all the necessary information is available and options considered.
With approximately 200,000 outstanding rating appeals lodged on the 2010 Valuation List, they advise:
“Be prepared to do your review this month so as to be in a position to decide whether or not to appeal on Monday 3 April.”