The UK has a long-established regime of real estate occupation tax, known as “business rates.” Although not unique with many similar systems globally including the US, it represents by far the largest comparable tax burden. Given the onerous amounts involved, which are generally around 50% of market rents but in many cases, much more, it has become a highly political and contentious issue of great importance to commercial real estate occupiers and owners.
All non-domestic properties, including offices, retail and industrial units, are valued on a five-year cycle by an independent Government department called the Valuation Office Agency. For most standard premises, these valuations are based on market rental evidence at a fixed valuation date, 2 years prior to the start of the effective date of those tax assessments. Where a property type has no rental market, such as hospitals, airports, hotels or oil refineries, alternative valuation methods are used based on turnover or replacement cost.
There are around two million assessments across the UK, generating over £26 billion annual tax income for the Government.
The Government sets a standard national multiplier (“uniform business rate”), which increases annually with inflation, and is applied to the valuation to calculate actual liability. The “UBR” is around 50p in the £. Supplements may be added to the UBR according to location or size and a number of rates reliefs are available, such as empty property relief.
Tax demands are collected by local authorities and passed into the central Government pot for redistribution to fund local services, but there is now a move towards local retention of the revenue to encourage councils to promote investment and development in their jurisdiction.
The tax is imposed on occupiers, but for vacant properties the owner is equally liable with only limited relief available.
The latest national Revaluation took place on April 1, 2017 (valuation date April 1 2015), which had actually been delayed by 2 years from the planned 5-year event in 2015.
Due to the substantial changes in property values over the seven-year period since the last revaluation in 2010, this latest re-assessment has hit occupiers extremely hard and made headline news in the media, especially in London where the impact is greatest. The increases are capped by statutory limits year-on-year (which also applies downwards in deprived areas where values have fallen significantly), but those caps are still relatively high, providing only limited, short-term relief.
The worst affected areas, such as West End retail and City fringe offices have seen their business rates increase by as much as 50% from April, with another 50% increase due in 2018, due to substantial rental growth in those sectors since the last revaluation.
For some of the more unusual property types, such as sporting venues, valuations have increased by over 100%, such as the O2 Arena in London which is up 141%.
There is a system of formal appeal against the assessments, but procedures are now so complex, time-consuming and confusing, with many strict deadlines, that many taxpayers will be deterred. As always, professional advice is essential to plot a way through the minefield towards a successful outcome!
It is clear from the latest appeal regulations published in March that the Government would rather avoid appeals being made. In the past, there have been too many speculative appeals which take up Government resources, create uncertainty for local authorities and clog up the system to the detriment of more genuine, worthy cases. At last count, there were still over 300,000 outstanding appeals arising from the last Revaluation in 2010 and The Government is understandably keen to prevent this repeating, but the real issue is the lack of transparency, which then compels the taxpayer to appeal simply to better understand how the assessment has been calculated and then decide whether to pursue the case. More detailed information available at the start would negate the need to appeal in a large number of cases. Business rates remain the only major tax where the assessor is not required to justify the figures applied. Given the level of tax liability involved, with some West End office occupiers paying £60 per square feet annual rates, they are understandably keen to ensure the assessment is accurate.