Review Team

Administration of Business Rates in England

Sent by Email to: mailto: businessrates.review@hmtreasury.gsi.gov.uk

6^th June 2014

Dear Sir / Madam,

IRRV Response to Consultation: Administration of Business Rates in England: Discussion Paper

The Institute of Revenues, Rating and Valuation (IRRV) is pleased to provide the following response to this consultation paper.

The IRRV is the professional body concerned with all aspects of local taxation, valuation, appeals, financial management and local benefits administration in the United Kingdom. It has members within both the public and private sectors, including ratepayers and their agents.  Institute members are engaged in local taxation collection, property valuation, the appeals process, advising and representing ratepayers and financial management within local government. The Institute represents the professional interests of its members who work within this broad church. 

The Institute is the only professional body in the United Kingdom which specialises in the law and practice of local authority revenues and local taxation together with the appeals, reliefs and benefits which support these processes.

Body of Response

How property is valued

1. The Valuation Office Agency is currently required to set rateable values that are based on the annual rental value of each property at a certain date. What are your views on this approach whilst recognising that the government believes business rates should continue to be based on rental property values?

The current basis of valuation works well and has stood the test of time.  This approach creates a clear link between the property, its use and the rates payable and maintains consistency in rateable values between similar types and uses of property.

We consider it to be the fairest way of assessment, but only if the rental values are consistent and revaluations are timely, equitable and applied at the same consistent date.  To maintain the integrity of this approach an impartial Valuation Office needs to ensure actual rental values are adopted.  The review of rents and revaluation both need to be properly resourced and undertaken on a frequent and regular basis.

Given the current length of time between revaluations, there should be the ability to allow for material change adjustments where there is a significant change in rental values, in the same way that the vacancy rate was accepted as a material change in central London in 2003.  However, if the length of time between revaluations were to be reduced, this issue would also diminish.   

We are aware that there has been consideration of other options by other organisations, such as energy efficiency taxes, linking business rates with employment levels or Corporation Tax payments and replacing business rates altogether with a VAT exclusive turnover tax.  We can see significant difficulties with implementation and long-term operation of these alternatives.

Site value rating has a theoretical justification but it is not suitable for a country with a historic and developed built environment. 

1. What are your views on a less individualised approach to arriving at a rateable value, such as banding, a system of ’zones’, indices, or rolling revaluations, as described above?

The idea of a less individualised approach is a surprising one when the UK has systems which are somewhat the envy of other countries due to their sophistication.  A simple approach is also not appropriate when dealing with the very high level of local property taxation in this country when compared to many other countries.

Non-domestic rates are a significant overhead to many businesses given the high multiplier. To maintain competitiveness and remain fair across all businesses, rateable values should remain comparable and responsive to change. Any of the mechanisms above would distort one or both of these.

The attractions of the current system are accuracy, fairness, transparency and certainty. The adoption of broad brush approaches such as banding, zoning, blunting indices and rolling revaluations might make the system appear simpler, but it would however reduce fairness, accuracy and transparency.  To remain fair, rateable values should be based directly on the value of the specific property. We do not support the suggestion regarding banding, indices or any form of statistical manipulation.  The amount of tax raised from this source is enormous and to dumb-down the method of assessment and to reduce the ability to challenge the fairness of any tax imposition would be a very unwelcome change.

Bands and zones are unsuited to such wide ranges of value and wide geographical locations and classes of property. They bring inherent unfairness and inequality of treatment with them and particularly at the zone or band boundaries. The ability to challenge and alter allocations is also severely limited.  The number of bands that would be required to make this system workable would be enormous. This will not stop appeals because customers at the periphery of any band will be appealing to be put into the lower band.  There would not be fairness in this system because the difference from the lower end of a band to the higher end could be a difference of thousands of pounds.

The Institute believes that banding would undermine the credibility of the tax and create a greater perception of unfairness. Businesses in poorer properties compared with their competitors could potentially end up paying the same level of tax and be left at a disadvantage. 

Indexing may appear to give the government some possible relief from the criticism of the annually amended multiplier, but only if the figures produced from the rental property market could be tailored to each area of the Country/City/Street/Position in street. If ‘generally’ the rental market is up by 1% nationally, it would not be reasonable or fair to apply this to all properties where in pockets around each catchment, the rental property market had fallen.

Rolling revaluations would make an already complex system more complex. 

1. Moving from the current system to one where properties were placed in bands would result in bills rising for some ratepayers and falling for others. What would be considered an acceptable variance from current bills?

This question is basically asking to what extent ratepayers would be prepared to under-pay or over-pay relative to the correct and equitable level. The major concern is that unless many hundreds of bands exist, this system would penalise a high proportion of ratepayers. For example, if all properties within a band are subject to rates based upon the average RV within that band, this will mean that ratepayers in low value properties will actually subsidise ratepayers in higher valued properties.

 It is simply not acceptable that some ratepayers unfairly bear the burdens of others and this will bring the rating system into disrepute.

Not only is it blatantly unfair, it may result in false bandings because their will be a temptation to move those from the bottom quartile of a higher band to the upper quartile of the lower band.  Therefore, the Institute does not believe that there is an acceptable level of variance.

1. What are your views on the Valuation Office Agency’s use of the ‘receipts and expenditure’ and ‘contractors basis’ valuation methods used to value property that is not normally let?What do you think about how these methods are applied?

There is a considerable history and experience of applying these methods of valuation fairly and properly.  As these methods properly relate to methodology which is market-based, there is in principle no inherent problem in these methods continuing to be used but only where there is not direct rental value.  However, there are some issues with the use of these methods.

Whether it is a rental comparison approach or receipts and expenditure – the rent derived is always a rental bid from what that business can afford from its income. Tenants make rents not landlords. The Contractors Basis is entirely different however because it assumes capital cost equals value and it rarely does. The use of a statutory decapitalisation rate further exacerbates this.  The adoption of a statutory decapitalisation rate did reduce a significant amount of litigation to establish the correct rate for each revaluation.  However, many would maintain that the rate adopted for the last couple of revaluations was significantly too high. This caused cost and profitability problems for manufacturing industry and caused some large facilities to lose financial viability. Consideration should be given to making available a range of decapitalisation rates as clearly one size does not fit all.  At the very least, the rate should be reviewed for each Revaluation in the overall context of the trend in costs: if costs overall are increasing by 30% then the decapitalisation rate should be reduced by a similar proportion, to make the net revenues from the sector relatively neutral in terms of change.  This would have the benefit of bringing certainty and stability to a sector which at best is sensitive and precarious and will also enable continuing investment and extend asset lives. 

Going back to basics, both methods should be used with a 'stand back and look approach' as the final stage.   These methods are only a proxy for rental evidence and a simple mechanical approach is likely to produce unfair results in some cases.

1. Do you have any views on the way that public houses are valued?

The general principle is good.  The distinctions created by the ‘Scottish & Newcastle case’ create a useful and desirable situation that protects the divergence of uses in the urban environment.  This is because it ensures occupiers pay tax appropriate for their use rather than the highest value for an alternative use, which would have the effect of pushing interesting and disparate users out in favour of bland multiple occupiers.

However there is an issue where large freestanding “pubs” are situated in similar properties to freestanding restaurants delivering a very similar food orientated service, but paying a fraction of the rates.  This unfairly skews competition.

Also, ratepayers in public houses are effectively penalised for success because a greater 'fair maintainable trade' results in a higher rateable value. This may appear to be reasonable, but it often takes a rural pub out of the scope of rural rate relief resulting in a double hit.

How often property is valued

1. Some ratepayers have suggested establishing annual, 2-yearly, or 3-yearly revaluations instead of the normal 5 yearly cycle.How frequently do you think the rateable value of a property should be re-assessed at a revaluation, bearing in mind possible impacts on the predictability and volatility of bills? Why?

It is clear that the purpose of a revaluation is to fairly reflect the relative values of properties at the valuation date and this fairness will deteriorate over time.  On this basis, annual revaluations would be desirable, but this would have the disadvantage that the predictability of the tax would reduce.

The current five-yearly revaluations often cause large increases or decreases in rateable value.  This has given rise to transitional relief to help those ratepayers that are facing large increases at each revaluation. However, the cost of this relief has been placed on those ratepayers benefiting from reductions, rather than the general body of ratepayers.  By definition, it is precisely those ratepayers who should be benefiting from reductions who can least afford an additional burden.  The result is to reduce the volatility of the tax but also to distort the fairness that a revaluation should bring.

Transitional relief is likely to be necessary at future revaluations if quinquenial revaluations resume in 2017.  However, it would be fairer to spread the cost over all ratepayers.

Shorter intervals between revaluations may reduce the volatility of the tax and thereby reduce or remove the need for transitional relief. 

Ideally properties should be re-evaluated annually, if the Valuation Office has the resources to do this. The closer the revaluation the more likely this is to reflect the actual rental values that the customer is paying. For example changes in the rental values since April 2008 are not currently reflected in the rateable value of the property and for a period of 7 years the rental evidence used for the rateable value for the 2010 list is out of date by 2-9 years.

If annual re-evaluations cannot be achieved, then a three-yearly revaluation cycle would better address the accusation that the rating system is out of touch with market conditions. Property taxes become discredited if the tax base isn’t brought up to date frequently and the existing system where retailers are being taxed based on 2008 values is seen as manifestly unjust. Three-years allows sufficient time to undertake the revaluation whilst keeping values more in line with the market.

1. Would your views change if more frequent revaluations meant:

2. rates bills changed more often i.e. were less stable and less predictable than currently?

3. it were necessary to use a less individualised approach to valuing property than currently which would mean that ratepayers with different rents, who at the moment pay significantly different bills, might pay the same amount?

Both businesses and local authorities need to be able to plan their medium term finances.  If more frequent revaluations meant less stable and less predictable business rates then this would be a significant issue.

It is not believed however that a more frequent revaluation would create any more problems.  It would be easier to explain if the rateable value was assessed on a more recent rental evidence. This may also reduce the number of properties which enter into transitional phasing, which ratepayers often do not understand.

If the revaluation was more frequent but was assessed on a less individual basis, this would change our opinions because the Institute believes that the individual assessment is not something that we should remove. 

If it is not possible to move to more frequent revaluations using a properly individualised approach then the revaluation period should remain at 5 years as a preferred alternative. Fairness, accuracy and transparency must be preserved.  However, data management, data processing and valuation production methods have advanced significantly in recent years and producing accurate more frequent valuations should prove to be too difficult. 

1. Do you think ratepayers would be more, less, or just as likely to appeal the rateable value of their property if revaluations were more frequent?

We do not think there would be any increased frequency in appeals if revaluations were more frequent.  Indeed, the likelihood of appeal may well be diminished: 

a.   The survey data should now be accurate as we’ve had 5 modern revaluations. 

b.   The rateable values will be more up to date and the liability will be more in tune with the rents actually paid, reducing the perception of inaccuracy. 

c.   The liability savings to be made from appeals will be diminished because the savings will be generated over a shorter period.  At present this is 3 to 5 years (based on a 5 or 7 year rate list life), less one or two years where the liability is based on transitional relief).  It would become 1 or 2 years (based on a 3 year Rate List life) less one or two years where the liability is based on transitional relief).

Evidence from the Netherlands’ switch to annual revaluations is that appeal rates significantly reduced.

Clamping down on cowboy practices, such as rating agents being allowed to operate with inappropriate clauses in their contracts would also reduce the number of appeals made.  Such a clause would be an indemnity by the ratepayer that protects the agent against being sued for increases in liability that are created by appeals that result in increased liabilities.  This effectively means the agents will cold call remorselessly, promise the earth and appeal everything they are instructed on as they face no commercial risk.  The ratepayers trapped by this type of operation pay the price.

1. Reducing the time allowed to prepare a revaluation from the current 2 years would also reduce the time available for ratepayers to check their rateable values and prepare for changes to their rates bills. It would also mean the Valuation Office Agency would have less time to collect and analyse rental evidence to prepare valuations. How do you think this would impact ratepayers and local authorities?

There should be a maximum of 1 year to prepare for the revaluation. This would help both ratepayers and local authorities although we fully understand it will increase the burden on the Valuation Office.  Additional resources might be required to assist the process

In practice the draft Rateable Values are already published very late in the revaluation process and are consequently of limited assistance in business planning.  A move to a 12 month valuation process is therefore unlikely to make much difference to ratepayers.

Currently, billing authorities bill on the December draft list in a revaluation year.  If the draft list continues to be delivered by 31 December, it will make little difference to billing authorities.  However, it may impact on local authorities’ budget processes.

The Valuation Office have centralised their data collection teams and are constantly sending out questionnaires.  This appears to be part of a strategy to make sure that it has details of all transactions and rent reviews across the country on a continuous basis. Given the depth of information the Valuation Office has and the sophistication of their software to adjust and analyse rents there should be no reason for any drop off in quality in the valuation process. 

1. What is your understanding of how a revaluation affects final business rates bills? Would you like to receive more information from the government on how this works?

Local Authorities, the Valuation Office, large ratepayers and their agents all have a fair understanding of how the revaluation affects bills. However many small ratepayers particularly businesses occupying one property do not.  They fail to understand the link between rents and rates and the importance of ensuring their rent is as low as possible.

Local authorities are always happy to receive more information which we could put directly onto their websites.

How rates bills are set

1. Do you feel that you understand your rates bill? What would help you to understand it better?

Those engaged in the rating profession understand rates bills and large ratepayers employ rating professionals to advise them, but, small ratepayers face more difficulties in understanding bills.

However, rating agents for large ratepayers are faced with many styles of bills.  These could all be brought into a single consistent format.  The Institute would be happy to lead or contribute to a group designing a recommended format for all rate bills.  This should be introduced as recommended good practice because it would be desirable to avoid the challenges that might follow from a statutory format.   

  Local Authorities do not tend to issue demands where no rates are due making it difficult to understand if there is no charge or if the demand has merely gone missing.

1. There are a number of reliefs available for certain types of property or property use which can reduce the amount of business rates you pay. What do you think of the general level of awareness about the reliefs available?

There is a reasonable level of awareness of the main rate reliefs available.  However, the proliferation of reliefs has made the system too complex.  Despite the efforts of local authorities and the advice by rating agents to their clients, the small ratepayer may not be aware of all the reliefs available.

1. What is your experience, in general, of how the reliefs system is administered?

Historically, the administration of reliefs by billing authorities was satisfactory.  However a number of issues have changed perceptions on this recently. 

The introduction of local business rates retention has led to the belief by some that relief is more difficult to obtain because billing authorities are motivated by maintaining the rate base.  This particularly applies to section 44A part occupied relief, but also to other discretionary reliefs.

Many new reliefs have been introduced using billing authorities’ discretionary powers under section 47.  Despite these being centrally funded, authorities have faced uncertainty over how these should be applied and in particular the effects of state aid rules.

Some reliefs are blatantly unfair. Billing authorities have to refuse applications for 100% small business relief from village shops that are entitled to 50% rural rate relief.

It is clear that business rate reliefs need a fundamental review.

1. Some reliefs are applied automatically to bills and some require ratepayers to request them from their local authority. What are your views on this?

From a ratepayers point of view it would be preferable if reliefs could be automatically applied but equally a billing authority has a duty to check the eligibility for the relief.

A fundamental review of business rate reliefs should be undertaken.  This should include designing reliefs that can be applied automatically and avoiding where possible the complications of EU state aid rules.

1. Your business rates bill is calculated by your local authority (council). If you receive business rates relief of any kind, this should be listed on your bill. Do you have views on how the reliefs you receive are currently shown on your bill?

We refer back to our earlier comment that there should be standardised formats for rates bills across England.  Reliefs should be consistently displayed in a common format and describe exactly what they are.

How business rates are collected

1. Bills (demand notices) are issued to ratepayers by billing authorities. They calculate final bills by multiplying a property’s rateable value as set by the Valuation Office Agency, by the business rates multiplier as set by central government, less any mandatory or discretionary reliefs, including transitional relief. What are your views on how clearly bills show the way in which a final business rates liability is calculated? How might bills be made easier to understand?

We refer back to our earlier comment that there should be standardised formats for rates bills across England. 

Large commercial concerns can receive rates bills from well over 300 billing authorities and there is very little consistency in terms of the style or layout. This particularly relates to the deferral amounts which over-complicate the actual payment to be made.

Rates bills should be to a common format for all local authorities and contain descriptions of each stage of the calculation.   A single format that sets out the liability period, the notional liability and relief/burdens applied would make life far simpler.

More frequent revaluations might reduce the amount of transitional relief required and in turn lead to fewer complex bills.  If transitional surcharge were replaced by a general supplement to pay for any future transitional relief scheme, that would also help.

1. The government is interested to know whether the following aspects of the current system for billing and collection of business rates present issues for business ratepayers, and if so, how these might be addressed:

2. Bills are usually issued to ratepayers in paper form

3. Format of bills may vary across billing authorities, though core content should be the same

4. Each property is separately liable for rates and so ratepayers receive a separate bill for each property they occupy

5. Changes to the rateable value of a property can lead to an additional, amended bill being issued to the ratepayer

a. It would be desirable to move towards making e-billing the standard method, but paper copies should remain available.

b. We refer back to our earlier comment that there should be standardised formats for rates bills across England.  .

c.   A separate demand for each property does allow for effective management of rates payment.  The real issue is allocating payments correctly to specific accounts.  If a single demand were issued for multiple properties the issues could become unmanageable.

d.   Amended bills should be clearly marked to show what the amendments are, and what the payments made are.  If they are in credit it should be made clear how that credit should be claimed

1. It can be difficult for the Valuation Office Agency to identify promptly changes to a property that may mean its rateable value should change, particularly if these changes cannot be seen from outside the property. When the change is finally identified, this can result in backdated bills for the ratepayer. To what extent do you think this is an issue for business ratepayers? What could all parties reasonably do to limit the number of situations where this happens?

All backdating, unless it is a fraud, should be backdated at most to the start of the current financial year or the start of the current list (currently 2010). This would also include reliefs and empty properties. This will stop businesses from receiving unwelcome surprises and enable business rates to be more easily administered. This may also give more budget certainty.

There should be a duty on ratepayers to notify either the VO or the billing authority of changes to properties that might result in rateable value changes.  There should also be a duty on either the VO or the billing authority to inspect the property.

1. Changes to rateable values can be made within the life of the rating list, and up to one year after the next list has been compiled. Most backdated bills or refunds are backdated to the date when the change to the rateable value of the property came into effect. What are your views on this?

All backdating, unless it is a fraud, should be backdated at most to the start of the current financial year or the start of the current list (currently 2010).  This will also include reliefs and empty properties.

How information about ratepayers and business rates is used

1. Currently, the Valuation Office Agency collects rental information from ratepayers using forms of return sent by post. What is your experience of completing forms of return? Do you have suggestions for improving the way that you are asked to provide information to the Valuation Office Agency?

There should be a facility to send this information/data electronically to the Valuation Office Agency or doing the returns online. They should be much simpler and the initial form should just request the rent and date.  The VO can then seek more information on rents that appear relevant for the revaluation.

If the forms were to be populated by information from last return it would be easier to make changes if necessary, rather than going back to re-find copies of leases etc.

1. Do you have suggestions for improving the quality of data provided to the Valuation Office Agency, while minimising the burdens on business?

The Valuation Office Agency should provide more information including a question and answer booklet on what information should be provided to them. The data user group currently set up should continue and there should be a minimum standard of data.

A much more transparent approach is required in terms of the provision and analysis of the data collected.

There should be more transparency on all property transactions so that he details of all property transactions in the market are available to all. Transparency always promotes fairness and this should be preferred to any arguments of confidentiality.

1. The Valuation Office Agency publishes data on its website that shows rateable value and floor space.What are your views on how the Valuation Office Agency could improve the data it makes available? If you had greater access to Valuation Office Agency data, how would you use it?

An improvement in the access and transparency of VOA data would clearly assist all ratepayers to determine whether an appeal is truly necessary. The lack of transparency is a major explanation for the vast number of appeals submitted.

As much data as possible (including the rental evidence and all transactions on which the valuations are based) should all be available to ratepayers.  Transparency and fairness is key to understanding and ratepayer satisfaction.  This will also be likely to reduce the need for and number of appeals

The Valuation Office ought to make information returned on Rent Return Forms available to ratepayers with an interest in comparable property, if not more widely.  This would allow ratepayers and their agents to make judgements on the necessity to appeal their assessments in advance and would reduce the number of appeals lodged.  Disclosure of price information on residential property was thought to be equally controversial, but has proved not to be.

The Valuation Office Agency should continue to publish data on its website that shows rateable value and floorspace.

1. There are currently legal constraints that apply to the data which the Valuation Office Agency can share with ratepayers. Greater sharing of data could help the system run more smoothly. How do you think this could be achieved?What are your views on how the Valuation Office Agency could improve the data it makes available? If you had greater access to Valuation Office Agency data, how would you use it?

The VOA should adopt a much more open approach in terms of the disclosure of evidence supporting the assessment.

New legislation should be passed if necessary to allow complete transparency on all transactions in real property (in this context, most specifically in relation to leases)

The validity surrounding "legal constraints" should be fully investigated.  There should be changes made to allow data to be shared amongst the various parties including the Council to improve administration and reduce fraud. The Valuation Office Agency should be able to give the name of the liable person/company. 

At present the decision to appeal is based on risk.  If there appears to be no risk in an assessment increasing it will be appealed.  If the rental information were open to scrutiny, the appeals actually made will be limited to those that are likely to succeed.  Consequently there will be fewer appeals.

A public register of all lease transactions should be considered - or making the Land Registry more open.  The idea requires a jumping over the idea the VOA has data it cannot share to a wider disclosure to improve the market.

Other points that the Institute wishes to make in response to the discussion paper

The scope of this review of the administration of Business Rates is too narrow.  The Institute fully acknowledges your stated aim that the yield must be the same as now but the administration of Business Rates goes far wider than the issues raised in the discussion document. The discussion paper seems to concentrate on specific issues of the administration of Business Rates, such as the understanding of rate reliefs rather than a complete review.  There are a number of specific issues which are set out below.

Since 2013 the business rates retention scheme has given to local authorities a direct financial interest in the business rates system for the first time since 1990. While billing authorities have the local knowledge and inspection regimes which can help to identify properties that are either missing from the list or have been altered, they have very limited powers to ensure that this is dealt with adequately.

Until 1990 the rating authorities had the right to make proposals and be included in agreements on appeals as an Interested Person. These rights disappeared in 1990 with the introduction of the national non-domestic rates system. We strongly urge that these powers are returned to billing authorities to enable them to participate fully in ensuring the fairness and equitability of the rating system, as they were able to do before 1990. If localisation is to work then local authorities need this power in order to ensure fairness to all ratepayers.

We are concerned that the constraints of the Commissioners for Revenue and Customs Act 2005 is used to limit the information given to billing authorities, ratepayers or their agents.  It is simply unacceptable that the VO will not provide the name of a ratepayer to the billing authority and refuses to provide the authority with information on splits and mergers.  The constraints in this Act need to be reviewed urgently to enable proper joined up administration of the tax.

There needs to be a complete review of all exemptions and reliefs from rates.  The aim should be to remove anomalies, simplify application for relief and avoid the complications of state aid where possible.  The Institute is keen to discuss appropriate changes with you.  We believe that the tax needs to be simpler for ratepayers to understand.

The issue of backdating both liabilities and challenges to liabilities paid many years previously needs to be reviewed.

There is concern among some in the profession that the Valuation Office rates valuation policy is acutely focused on revenue protection rather than accuracy.  This is bringing the system into disrepute. It is denied by the VO, however agents' experience suggests the contrary.  The recent decision on Canary Wharf oversupply puts in black and white the fact that experienced VO's will stand up in Tribunal and argue that their case has merit because it will defend revenue.  See paragraph 23 in the decision on case numbers 590016555047/058N05 590016829367/058N05, 590016906718/088N05, 590016549960/539N05.

Finally, the continuance of empty rate charges at 100% is not only an issue of fairness amongst ratepayers, but is causing a considerable amount of work for billing authorities. This area also needs further review.

Please contact us should you wish to discuss any of the points raised in this submission.

Yours truly,

p.p. Gordon Heath BSc IRRV (Hons)

Chairman, IRRV Law and Research Committee