Within the context of a cost of living and energy crisis which is having a profound impact on the UK’s economy; inflation in excess of 10%, resulting in Government Agencies, Local Authorities, the NHS etc., having cuts in funding (once adjusted for inflation), on 1 April 2023, the next revaluation of non-domestic properties for business rates will come into effect. The Valuation Office Agency’s (or “VOA”) headline statistic indicates that the total Rateable Value (the basis for assessing business rates) in England and Wales has increased by 7.1% since the previous revaluation in 2017. So, does this mean that businesses, agencies, authorities and the NHS can expect a below inflation increase in their business rates for 2023/24? If only it was that easy; unfortunately, the percentage change in Rateable Values between 2017 and 2023 is conspicuous by its variations across geographical regions and categories of property. And then there are the myriad of reliefs, exceptions and exemptions that can be applied to specific categories of property.
A similar exercise has been undertaken in Scotland by the Scottish Assessors; however, for the purposes of brevity, this article will concentrate on the 2023 Revaluation in England and Wales and the statistic produced by the VOA.
Why undertake revaluations and some nomenclature?
So, what are Business Rates? In essence, a form of property taxation levied against the use of a “hereditament” (which is a unit of non-domestic property that business rates can be levied against) and the basis of assessing how much is to be levied, is calculated with reference to the Rateable Value (or “RV”). The RV is an estimate of the annual rent that a particular hereditament could have been let at, on the open market, as of 1st April 2021 in England and Wales, the date being referred to as the Antecedent Valuation Date (or “AVD”).
So, who pays Business Rates? It is the occupier of the property (the entity or person making beneficial use of it) that is liable for payment of business rates. If the hereditament is unoccupied, then it is the freeholder or head lessee of such property that becomes liable, although some relief may apply for a limited period depending upon the category of hereditament.
Why undertake a revaluation? Given the two statements above and that rental values of property vary both over time and between geographic regions, a revaluation makes sure that the basis of the property tax (i.e. the RVs of hereditaments) is both current and relevant, reflecting the changes in the property market over time and across the regions as at the relevant AVD. The need for periodic revaluations becomes even more apparent when considering the uneven impact of the COVID-19 pandemic on the rental values of various categories of property. For example: hospitality properties compared to industrials. The VOA states that the 2023 revaluation will reflect these changes in value that have occurred since the last revaluation six years ago.
Statistics, analysis and comment on the 2023 Revaluation
The VOA has provided a wealth of background information and statistical analysis pertaining to the 2023 Revaluation in England and Wales. The key findings of the 2023 Revaluation can be summarised as follows:
Change in RVs (excluding the Central Rating List):
The percentage change in RVs across England was +7.3% and in Wales +1.3%, producing a combined overall change of +7.1%. The total RV in England and Wales for the 2023 Revaluation was approximately £70,337,138,000; effectively the tax base upon which to levy business rates.
Analysis of the regions shows that whilst the average change in total RVs is not that great for a 6 year interval between revaluations, the variations across the regions are stark. In London, the increase in total RVs was only 3.3% compared to an increase of 23.4% in 2017; however, this modest level of increase in 2023 contrasts sharply with the increases across the South East (10.9%), the South West (9.5%) and the East (14.4% - the highest growth in RVs in England and Wales). The East Midlands (8.6%), West Midlands (9.0%), North West (7.4%) had above average changes in total RVs, whilst the North East (2.2%) and Yorkshire and the Humber (4.7%) were lower.
Given that the London region (Inner and Outer London) accounts for some 29% of the total RV in England and Wales (some £20,424,825,000), its impact on the average of +7.1 % is obvious. If the London influence is removed, then the increase in total RVs in England and Wales (excluding London) equates to +8.7%.
In the 2017 Rating List, those hereditaments that have an RV of £12,000 or less do not pay any business rates due to the Small Business Relief scheme (see below). Of the 2,142,290 hereditaments in England and Wales, 1,414,800 hereditaments (or 66.1% of the total) do not pay business rates because of this scheme. However, in the new Rating Lists, some 72,030 (or 3.4% of the total) hereditaments will lose their Small Business Relief as their RV will be more than £12,000 on 1st April 2023. However, this group of hereditaments accounts for only some 9.3% of the total RV in England and Wales.
Sector Analysis (excluding the Central Rating List):
The VOA has divided hereditaments into four broad categories when undertaking their sector analysis; namely, Industrial, Offices, Retail and Other. Across England and Wales, the sectors with the largest variation in RVs are Retail (-10.2%) and Industrial (+27.1%). Offices have seen an increase of total RV of 10.2%. Delving into the data provided by the VOA shows that specific categories of hereditament have clearly had the impact of Covid-19 reflected. For example, the change in total RVs for Hotels etc. (-28.2%), Cinemas, theatres etc. (-11.0%), Shops (-10.3%) and Hostels & homes (-11.7%) when compared to the previous revaluation in 2017. Then there are a number of other specific categories of hereditament that are noteworthy for the marked changes in their total RVs; namely, Hypermarkets (-25.6%), Supermarkets (-14.7%), Local authority schools & colleges (+16%) and Quarries, Mines etc. (+34.1%).
Of the 72,030 hereditaments that will lose their Small Business Relief due to the RV increasing to above £12,000, some 39,950 (or 55% of the total) fall within the Industrial Sector.
For the author (at least) it is the change in the total RVs of Offices that has been the most surprising, with an increase in RV of 10.2%. This in a period (note: the AVD for England and Wales is 1 April 2021 when certain Covid-19 restrictions remained in place and there was significant uncertainty about when and to what extent these restrictions would be lifted) when many offices remained empty (or were grossly underutilised), when working from home had proven to be a viable alternative to working in an office every day and when Valuers (the author included) were having to reflect Material Valuation Uncertainty in Red Book Valuations undertaken at or about AVD, due to a lack of new lettings (a primary source of evidence for Offices) and other suitable evidence during lockdown and immediately after. Although rating valuations are not Red Book Valuations, the process of evaluating evidence with Material Valuation Uncertainty would have been foremost in the VOA’s Valuers’ minds. This sense of surprise is further reinforced when an analysis of the regions shows that the variations across the regions is staggering. In London, the increase in total Office RVs was a modest 6.1% compared to 2017 revaluation RVs. Yet this, again, contrasts sharply with increases in total Office RVs across the South East (20.0%), the South West (14.0%), the East (26.3% - again, the highest growth in RVs in England and Wales), the West Midlands (15.3%) and the North West (17.2%) had above average changes in total RVs. Only the North East (8.6%), East Midlands (5.5%), Wales (5.7%) and Yorkshire and the Humber (7.9%) were lower.
The Central Rating List:
The Central Rating Lists contain the rating assessments of the network property of major transport, utility and telecommunications undertakings and cross-country pipelines. The 2023 revaluation of the Central List produced a reduction of 0.6% in the total RV of these categories of hereditament, reducing the overall change in RVs in England and Wales to 6.7%.
HM Treasury Autumn Statement 2022 on Business rates
The Treasury has announced the following measures, as part of its Autumn Statement, to assist businesses generally and to transition from the 2017 to the 2023 Rating List:
Freezing the business rates multipliers
The business rates multipliers for 2023/24 will be held at their current levels of 49.9p for the small business multiplier (where the hereditament’s RV is £51,000 or less) and 51.2p for the standard multiplier (where the hereditament’s RV is greater than £51,000). This is no act of benevolence; historically, previous transitions from one Rating List to another would see a decrease in the multipliers that reflected the increase in the total RV generated by the revaluation. In this case, a 3p to 3.5p reduction in the multipliers could have been anticipated.
Given that business rates bills are calculated by multiplying the RV of a hereditament by either the small business multiplier or the standard multiplier and subtracting any relevant reliefs, then any change in the rate liability for 2023/24 will be solely due to the change in RV from the 2017 Rating List to the new RV in the 2023 Rating List. However, it should be noted that the multipliers are usually adjusted annually by the Treasury in line with increase in the Consumer Price Index (CPI) or, historically, the Retail Price Index (RPI).
Relief for retail, hospitality and leisure businesses extended
To support businesses in the high street, the Treasury is extending and increasing the Retail, Hospitality and Leisure relief scheme from 50% to 75% for 2023/24, up to £110,000 per business. Whilst this relief will be welcomed by the occupiers of such hereditaments, it is a form of relief provided from year to year which businesses cannot depend upon when forward planning. Furthermore, it does not solve the systemic problems caused by comparatively high business rates in the high street compared to on-line businesses.
Reforming transitional relief
Transitional relief schemes have, historically, been used to support ratepayers facing large increases in their business rates bills as a result of a revaluation, as well as capping how much a bill can reduce by. The Treasury has announced that it is abolishing downwards transitional caps; therefore, those businesses that see a reduction in their RV as a result of the revaluation will receive the full benefit of the decrease from 1st April 2023.
This relief will remain unchanged so that, after the application of transitional relief (if any), if an occupier is eligible to receive charity relief it will remain at 80% relief.
Empty property relief
The Autumn Statement is silent on the reliefs for empty properties and the 2023 Rating List. However, assuming that this relief carries over into the new Rating List, then the owner of an empty hereditament is exempt from paying business rates for 3 months. After this time, most owners must pay full business rates.
Some properties can get extended empty property relief:
- industrial premises are exempt for a further three months
- listed buildings are exempt until they are reoccupied
- buildings with a rateable value under £2,900 are exempt until they are reoccupied
- properties owned by charities and then only if the property's next use will most likely be a sports club
Small business relief
Given the comments on the Change in RVs and the Sector Analysis above, the Autumn Statement does not mention any adjustment to the levels of RVs that qualify for Small Business Relief. It is therefore, assumed that the scheme will remain as for the 2017 Rating List when, after Transitional Relief has been calculated, some businesses may be entitled to Small Business Relief if the business only occupies one hereditament (with certain exceptions for multiple low value hereditaments) with an RV of less than £15,000. This relief is, currently, determined as follows:
- 100% relief for RV's up to £12,00 RV; and
- will taper from 100% to 0% for RV's between £12,001 - £15,000
So, those hereditaments with an RV just above £12,000 will receive nearly all their rates back whereas those closer to £15,000 RV will receive very little relief.
As mentioned above, some 72,030 hereditaments have increased in RV from less than or equal to £12,000 to more than £12,000. Of which as significant number will be qualifying businesses that will be expected to pay business rates for the first time (since the Small Business Relief scheme was first introduced); though this will be mitigated by the Autumn Statement’s announcement of its scheme for the protection of small businesses (see below).
Protection for small businesses
Those businesses which lose eligibility for either Small Business or Rural Rate Relief will benefit through a Supporting Small Business scheme where the increase in their bill will be capped at £600 per year for three years.
A wider issue
Then, there is the wider issue of the level of the multipliers that is beyond the VOA and Billing Authorities’ ability to address; each having their own obligations and duties, defined in Statute and Regulation, to set RVs in accordance with evidence at or about AVD and to collect business rates in accordance with the RVs listed, respectively.
The multipliers are, currently, set at about 50p in the pound. The implications of this are that businesses must pay an amount equal to some 50% of the estimated market rent, at AVD, as a property tax. This is a huge burden for many businesses and impacts disproportionately those businesses that require a physical presence to operate from (in the form of a property) compared to a virtual presence – the so called “Bricks v Clicks tax imbalance.” It is acknowledged that small businesses and various favoured categories of hereditament receive reliefs, but that simply shifts the burden of the property tax onto businesses with higher valued hereditaments, with RV’s greater than £15,000. Indeed, to emphasise this point: as mentioned above, of the 2,142,290 hereditaments in England and Wales, 1,414,800 hereditaments (or 66% of the total) do not pay business rates because their RV is £12,000 or less under the Small Business Relief scheme. However, this group of hereditaments accounts for only some 9.3% of the total RV in England and Wales.
Many businesses, Government Agencies, Local Authorities, the NHS etc. in England are, in particular, going to receive large increases in their rates bills with effect from 1st April 2023. For those organisations with a portfolio of properties, how prepared such organisations are for this increase in rates liability will depend on whether they have undertaken an Asset Management Review to reduce their exposure to business rates by disposing of, or letting to third parties, those surplus properties not required for delivery of services. However, given the Cost of Living and Energy Crisis having a profound impact on the UK’s economy, even those organisations that have undertaken a thorough Asset Management Review, may struggle with the increase in business rates over the life of the 2023 Rating List.
Given the Material Valuation Uncertainty at the AVD for England and Wales, the Asset Management Review process should identify those hereditaments that have RVs that are worth challenging. However, a cautionary note: Rating is a specialised field and, if the organisation does not have an in-house Rating Surveyor, professional advice should be sought from a reputable individual or firm, prior to embarking on challenging the RV with the VOA.
Andrew John Brooker, Property Networks Manager
Find out more
Highways Asset Management Planning Network