The revaluation of business rates: how will retailers be affected? Q&A

The upcoming revaluation of business rates is likely to have a significant impact on retail occupiers and landlords alike.  In areas such as the South of England, which are set to see the biggest rises, the increase in rates is likely to affect the viability of many sites, and will put further pressure on the high street.

Businesses should be preparing now to ensure they understand what the potential impact will be, whether they will be entitled to transitional relief, whether they should be appealing their new (or existing) rating and what other implications this might have, for example in relation to lease renewals.

What is happening?

The revaluation of business rates is due to take effect on 1 April 2017, when the new Ratings List for non-domestic properties in England, Scotland and Wales will be introduced. Historically, new Ratings Lists are produced by the Valuation Office Agency (VOA) every five years. However, the last revaluation was on 1 April 2010, as the government postponed the 2015 revaluation to allow more time for economic recovery before introducing rates changes.

The Rateable Value is the rental valuation of a property based on a valuation dating back two years before the date of the Ratings List. Therefore the 2017 Ratings List will be based on rents as at 1 April 2015.

Despite the fact the 2010 Ratings List was based on the open market rental values as at 1 April 2008, which is widely considered the peak in the rental market after years of sustained economic growth, many occupiers will be facing an unwelcome, sharp spike in their rates.

Will the 2017 Ratings List have a greater impact in certain areas of the UK?

The VOA’s statistics show that London and the South East will be hit the hardest, in particular the retail sector of inner London which could expect an increase of up to 42%. Prime properties in areas which have experienced dramatic regeneration since 2008, for example Cambridge and Croydon, could see an increase of up to 50% in their rates.

On the other hand occupiers in Yorkshire, North-East England, North-West England and Wales can, on average, expect little change in their rates. Notably, Birmingham and Leeds will be the main benefactors of the revaluation, with falling rates for properties in those cities.

How will this affect the UK’s economy overall?

Recent research has shown that almost three quarters of international retailers are shunning investment in the UK, instead choosing other countries for business expansion. The survey questioned 130 retailers on a number of topics about investment in the UK to determine which they found attractive.

The research showed that those interviewed seemed less concerned about the impact of factors such as Brexit, and more so about direct costs such as rates. The business rates system was voted the most unattractive factor to investing in the UK. This is perhaps unsurprising as analysis by the Organisation for Economic Co-operation and Development shows that the UK has the highest property taxation in the developed world.

The revaluation will compound the challenges already being faced by the retail sector and could contribute further to the gradual decline of local high streets as retail centres. In contrast, the 2017 Ratings List shows that some online retailers will be treated more favourably. For example, some of the larger online only retailers are expecting a reduction or no change in the rates for some of their warehouses. This is going to make it difficult for high street shops, particularly independents, to survive (without adapting) in the face of even greater competition from their on-line rivals.

What deadlines do occupiers need to be aware of?

With the arrival of the new Ratings List, the deadline for lodging appeals against the current 2010 Ratings List is fast approaching on 31 March 2017. The VOA confirmed that as at 30 September 2016, it had received just over one million challenges to the 2010 Ratings List. Therefore thousands of businesses could be at risk of losing out on potential refunds in overpaid business rates if they fail to lodge their appeal before 31 March 2017.

Can occupiers appeal their new rating after 1 April 2017?

Occupiers can appeal their rating under the 2017 Ratings List through a new process to be implemented known as “Check, Challenge, Appeal”. This marks a change from the shorter 2 stage process of “Proposal and Appeal” under the 2010 Ratings List.

• Check: an occupier can request the information used by VOA to determine its ratings valuation to check this for errors. Once this check has been formally acknowledged, the VOA has 12 months to decide whether to make any amendments. 

• Challenge: if the occupier and the VOA still do not agree, the occupier can submit a more detailed appeal (including comparable evidence) within four months of the ‘check’ stage. The VOA has 18 months to issue a decision notice.

• Appeal: if still no agreement is reached, the occupier has four months from completion of the ‘challenge’ stage to lodge a formal appeal at the Valuation Tribunal. At this stage no new evidence is permitted. This is likely to involve an appeal fee of £100 to £300, which is refundable if the occupier’s appeal is successful.

The latest proposals by the government suggest that the Valuation Tribunal will be prevented from amending the rateable value of a property unless it is “outside the bounds of reasonable professional judgment“. The exact margin of discretion that will be allowed for a valuation is yet to be determined.

If occupiers instruct ratings surveyors now to verify their 2017 assessment, this will also enable them to make representations to the VOA to appeal their 2010 valuation and correct any errors before the deadline for appealing the 2010 valuation expires.

Are there any particular valuation traps to watch out for?

In Mazars v Woolway [2015], the Supreme Court confirmed that where there is occupation across several floors of a property, and access can only be made between each floor by going through a common part such as a stairwell or lift, each floor is entered individually into the Ratings List and therefore rated separately. Any allowance for size within single assessment will be lost and rates payers will be prevented from seeking discounts on this basis.

The impact of this decision is continuing to have wide ramifications and occupiers of split level premises should seek professional advice. In England, bills based on this ruling can be back-dated from 1 April 2015, but in Wales they can be from 1 April 2010. Even if the occupier has since vacated the property, it could still be landed with an unwanted retrospective bill.

The case of Newbigin v S J & J Monk [2015] brought into question the proper interpretation of the statutory assumption that a property is in a state of reasonable repair when it is valued for ratings purposes. The Court of Appeal overturned the decision of the Upper Tribunal, deciding that this repairing assumption does not apply when a reasonable landlord would consider repairs to be “uneconomic”.

Before the decision in Newbigin, the VOA’s ratings manual provided that no rates were payable at properties during demolition or strip-out, but they would become payable again when the new property was complete. However, the Court of Appeal also overturned this, deciding that rates were payable up to the time that the new works began. This could lead to a general increase in empty rates liabilities and problems with developer schedules and appraisals. However the decision was appealed in November 2016 and the Judgment of the Supreme Court is expected imminently.

How should businesses tackle these changes?

Transitional relief rules for the 2017 Ratings List are yet to be fully finalised and this will play a big part in business decisions. For occupiers that qualify, they may be able to cope with the rates change, as the impact will be spread. For those that do not, where the impact is severe, serious consideration may need to be given about the future of that property and whether the business can withstand the increase in rates. As the new appeals process is significantly more complex, businesses could face several years’ worth of rates liability before any amendments are made to their rateable value.

Recently, there has been a great deal of media speculation about whether the government will reconsider its plans for the 2017 revaluation at the eleventh hour. A number of Conservative MPs in the South of England want greater relief for businesses in their areas who will face a significant increase in rates. These MPs and several business groups are asking Chancellor Philip Hammond to use the Spring Budget to mitigate the impact and to make some “tweaks” to the revaluation. Mr Hammond has indicated that he is “listening” to these concerns and has signalled that the Treasury could be seeking to soften the blow of the revaluation.

However nothing further has yet been confirmed, so businesses should still continue to prepare for the 2017 Ratings List as it stands.

Should retailers be reviewing their property portfolios?

Retail stores, which are facing the biggest increase, may need to review their property portfolios in light of the rates changes. Those properties in prime retail areas of London may struggle to remain financially viable with the increased rates. However, properties in certain regional areas, which were previously overlooked, may now seem more attractive investment options.

Landlords might try to encourage their tenants to remain in properties in attempts to avoid increased empty rates liabilities. However tenants may decide they need to vacate a property, and should therefore seek advice on how to terminate their lease or exercise a break right.

Does the revaluation affect the renewal of leases at properties?

Landlords and tenants should also take note of the effect of the revaluation on the renewal of business tenancies under the Landlord and Tenant Act 1954. If a landlord wishes to oppose the renewal of a business tenancy under the 1954 Act by relying on a “no-fault” ground, for example because it wishes to redevelop, then it is usually liable to pay statutory compensation to the tenant when it leaves the property.

Statutory compensation is calculated by reference to the rateable value of the property and is assessed at the date of the service of the landlord’s opposed section 25 notice or counter-notice to a tenant’s section 26 request. Therefore if the date of service of one of these notices is on or after 1 April 2017 and the rateable value of the property is higher under the 2017 Ratings List, the landlord may have to pay more statutory compensation.

In terms of tactics and timings, landlords should consider serving any hostile section 25 notices before 1 April 2017 to ensure the 2010 Ratings List still applies, which could limit the liability for statutory compensation. Conversely the tenant looking to renew its tenancy should consider waiting until after 1 April 2017 to serve its section 26 request so that, if its landlord serves a counter notice opposing renewal, it will benefit from the likely increased rates and receive higher statutory compensation.

Seek professional advice

First and foremost, occupiers – if they have not already done so – should seek professional advice to understand the impact of the 2017 Ratings List on their property and to assess whether they should be submitting an appeal on the 2010 Rating List before the 31 March 2017 deadline.