Friday, 7 February 2020

"Experts slam business rates appeals system"

From City AM:

Property experts today said the business rate appeals system is a "time bomb" as the backlog of claims and challenges spiked. Businesses could be waiting years for their challenges to be addressed due to the backlog of appeals, experts said.

Data from HM Revenue and Customs' Valuation Office Agency (VOA) showed that in the 33 months since the new system was introduced, 352,090 properties have started the appeal process. 

It's not the appeals system that's at fault here. if they make the appeals procedures cheaper, quicker and simpler to clear the backlog, then more people will appeal, creating a new back log.

The real cause of this is the fact that Rates are based on the market rental value of each individual building, where there will always be legitimate differences of opinion on which comparatives should be used, the condition of each particular building, how spaces within that building/plot should be classified etc.

Equally stupid is the fact this 'market value' is not the total rental value, but the total rental value minus the Rates themselves, so the effective rate (about 33%) is much lower than the headline rate (about 50%).
It would be far better to proceed as follows:

1. Assess whole streets (or whole shopping centres or whole retail parks etc) at a time, using all available data from recently agreed rents and selling prices on that street (or in that shopping centre etc). Owners of vacant premises, or those let out to charities will give their own figure of what they expect in rent from a normal business tenant. If it seems reasonable, it goes into the total. If they are low-balling, the council just takes on a lease, sublets for the higher actual value and that goes into the calculation instead.

2. Work out the total rental value of all the premises on that street (with no reduction for the Rates payable, which is a circular calculation).

3. Divide that total by the total frontage of all the premises on the street to find a value per running foot of frontage. This is based on the average value of all available rental and price data, which greatly reduces the incentive for a landlord/tenant to collude to depress the headline rent (and share the Rates saving via cash in envelopes). If you value individual premises, then depressing the rent by £1 saves 50p rates. With averaging, if a landlord/tenant collude to depress the rental value by £1, that only depresses the average by a few pence.

4. The Rates assessment for each premises is then simply the frontage (the most valuable element) multiplied by the answer from 3, minus a provisional 20% for those who accept the assessment, multiplied by an arbitrary percentage (see 8). It would be payable by the owner, not the occupant (for administrative simplicity and to improve collection rates).
There would be very few appeals against that sort of system because...

5. It is largely a data gathering and maths exercise, not questions of judgment.

6.  The actual condition or size of a particular building would be pretty irrelevant, so the owner of a dilapidated building with no lift would pay the same amount per foot of frontage as the owner of a new building next door to it which has a lift. So it would act pretty much like Land Value Tax. 

7. Of course, sometimes assessments will be based on poor data or mathematically wrong. but this applies to the whole street, so instead of some occupants appealing against individual assessments, the owners of all the premises on the whole street (which might only be one or two landlords) can pool resources and do a joint appeal.

8. The 20% discount does not mean lower Rates overall, as the percentage payable would be increased accordingly. So instead of paying 40% on £10,000 (the probable actual value), you pay 50% on £8,000 (the discounted value).

9. If you win your appeal and get the assessed value reduced from £10,000 to £9,000, you pay 50% of £9,000 (appellants waive entitlement to the discount). So before putting in an appeal, you would have to be confident you can get enough real world data to push the assessed value down from £10,000 to no more than £7,500 or so, which is going to be nigh impossible in most of the few cases where the assessments appear too high...

10. ... of course, the evidence to support the lower rental value will be taken into account at the next revaluation (appellants and non-appellants alike get a lower assessment), which will tend to depress assessed values nationally, to a low but defensible figure. Again, this is not a problem as the percentage payable in Rates can be nudged up a bit to keep revenues constant.


Andrew Carey said...

Yes in theory to this approach. Use real-world data from rental receipts / tax returns etc, and make the LL the one who is liable. Removes a lot of the gain saying of reliefs and discounts by pretending to have occupancy periods following empty periods and preferring some types of tenants entitled to reliefs over others who are not.
Big thumbs up.

Dr Evil said...

Why have rates at all? Businesses get nothing for paying this tax.

Mark Wadsworth said...

AC, thanks.

DrE, why do tenants pay rent? Because they get something in return. Part of that should rightly go the landlord, who owns and maintains the building. And that part of the rent which relates to the location belongs to those who created the value of that location, i.e. society in general and the government in particular.

So a business gets a lot back for paying Rates. At the very least, it gets a discount off the rent equal to the Rates paid, so in effect it costs them nothing.

And businesses get nothing back for all the other taxes they pay. The harder they work, the more they pay. That is a terrible idea.

Physiocrat said...

If I recall correctly, rates used to be based on Gross Annual Value ie the rent plus the rates actually paid were added together.

The trouble with the present system is that it hammers businesses with a high ratio of structure to land value such as manufacturers in the peripheral regions, heavy chemicals, petrochemicals, metal refining and those with high value installations such as robots and mechanised production lines. I believe that even Network Rail pays more if it electrifies. Then they wonder why productivity is low.