Success guide to negotiating business rates


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Success guide to negotiating business rates

  1. 1. Success Guides Successfully Negotiating Business Rates
  2. 2. Success Guides Successfully Negotiating Business Rates By Colin Hunter MRICS IRRV (Hons) Front cover picture: The Historic Dockyard Chatham on a busy day at the height of the summer season. The trust which runs the dockyard has been successful in a range of rating appeals and continues that process in relation to values assigned to its many historic structures on a case by case basis.
  3. 3. 3 AIM Success Guides Successfully Negotiating Business Rates Business rates are surrounded by myths and legends, as is only right and proper for something with 400 years of history. Business Rates may well deserve a place in a museum exhibition: in one form or another they have been with us since the 1601 Poor Law. You will be pleased to know the legislation has been updated since its inception and the current primary legislation for England and Wales is the Local Government Finance Act 1988 (LGFA) 1988. Both Acts were signed by a Queen Elizabeth. History & Background Business rates are surrounded by myths and legends, as is only right and proper for something with 400 years of history, but in essence it is simple. Under the current legislation, it is simply a property tax. Since devolution, England and Wales operate slightly different systems. Scotland and Northern Ireland have always operated under similar but separate legislation. The general principles apply to all four countries but the specifics vary. The commentary set out below relates to England; a comparison of the differences between England and the other legislative areas is set out at the end of this guide. Business rates are a significant cost to businesses, and will be an increasingly significant cost to museums over the next few years. Basics The basis of the tax is the Rateable Value which is set by the Valuation Office Agency (an executive agency of HMRC). The Rateable Value is an estimate of the rental value of the property (‘hereditament’) which is being charged business rates. Arriving at a rental value is relatively straightforward for shops, offices, factories and warehouses but is far from simple for properties which are normally never let, or which are unique. The definition of Rateable Value is set down in the legislation but has a track record of case law to ‘assist’ in working out what is being valued and what is being ignored. In its simplest form, the rates liability is arrived at from the multiplication of the Rateable Value by a nationally set multiplier, which varies from year to year, based on the RPI increase for September of the previous year. Revaluations – Resetting the Clock The Rateable Values are reset periodically by a Revaluation of all properties. The LGFA sets a statutory period of five years between Revaluations, the first being in 1990, followed by five yearly reviews up to 2010. The Growth and Infrastructure Act has however deferred the next Revaluation to 2017. The valuation date for each Revaluation is two years prior to the Revaluation coming into force, therefore the 2010 Revaluation is based on rental values in April 2008, just after the peak of the property boom. The system of grant support changed on 1 April 2013. Although the rates bills will not change, the political and economic landscape for Local Authorities in England has changed significantly and is discussed in a separate section below. This is in part driven by the Localism Act 2011, which places greater emphasis on the provision of local services by Local Government. It is however the biggest change to Local Government funding since the introduction of the ill-fated Community Charge in 1990.
  4. 4. Management Successfully Negotiating Business Rates At the start of a new Rating List, there is often a significant adjustment between different property sectors and regional locations so that some properties face significant hikes in liability and some benefit from significant reductions. This is smoothed out by capping the maximum increase or decrease based on a percentage change from the liability for the year immediately prior. Therefore for the 2010/11 rate year the liability is capped by reference to the 2009/10 rate liability. This is known as transitional allowance. The system of transitional allowance is governed by Statutory Instruments. Following the postponement of the 2015 Revaluation to 2017, there may be changes made to deal with the additional two years. As noted above, Scotland, Wales and Northern Ireland operate different regimes; please refer to the section at the end of this guide if your museum is not in England. There is nothing individual ratepayers or groups of ratepayers can do to influence the multiplier, or the transitional allowance scheme. Therefore the only part of the basic liability which can be addressed is the Rateable Value. need to understand what we are valuing. The single word museum normally conjures a mental image of a Victorian red brick purpose built municipal building. A museum is not the building or land, it is the organisation that occupies it and any type of building could be occupied as a museum. However, the normal situation is that museums occupy unique buildings, some of which are purpose built, many of which are adapted from older properties. The property itself may be the reason for the museum’s existence. There are a small number of museums, such as Beamish in the North East, which are a collection of older buildings relocated onto a single site to provide a new setting. The true value of museums is cultural, educational, and social. However the Rateable Value should only be a measure of financial value, i.e. the rent the tenant would be willing to pay, assuming the tenant has responsibility for all repairs, running costs and insurance. There are four tried and tested methods for arriving at this notional rent for rating: 1. Rental Comparable Method 2. Rateable Value Comparable Method 3. Receipts and Expenditure Method Reliefs Charities receive a mandatory 80% relief from business rates for properties they occupy for their charitable purposes. Some Local Authorities give further discretionary relief which will further reduce liability, potentially to zero. The number of authorities giving this discretionary relief has been falling for several years, and that trend is likely to accelerate due to the latest changes to the funding regime for the councils which is considered later in this note. How Museums are Valued for Rating As noted above, the Rateable Value is a notional rent for the property, but before we can arrive at that rent we 4. Contractors Method. Rental Comparable and Rateable Value Comparable For the vast majority of properties occupied by museums, there are no rental comparables, and there is no rent paid on the property so the first option is ruled out in most cases. The second option is something of a self fulfilling prophecy; it has the problem of how to compare different unique properties, and is of no help at the start of a new Rating List where there are no agreed comparables. This leaves two methods. Receipts and Expenditure The third method, Receipts and Expenditure, is commonly used when The single word museum normally conjures a mental image of a Victorian red brick purpose built municipal building. A museum is not the building or land, it is the organisation that occupies it and any type of building could be occupied as a museum. 4
  5. 5. 5 AIM Success Guides The Valuation Office’s preferred approach is to adopt a % of the Gross Receipts on the assumption that irrespective of the commercial reality, a museum will still make a bid for the building. valuing leisure attractions. Museums are in the market in competition for visitors with other leisure attractions and some are described in the Rating List as visitor attractions and not museums (for example SS Great Britain). There is a strong case for arguing that this is the appropriate method for valuing all museums but this argument runs into several difficulties. Firstly, there is a general resistance from the Valuation Office to consider the full receipts and expenditure of museums. Their argument is that museums are occupied by charitable or public bodies and so there is a belief that they are not run on a truly commercial basis and that the income generated is not as much as a well managed commercial operation would produce. Their argument also goes on to say that the costs and expenditure are influenced by the charitable nature of the business and so do not give a true economic picture. The Valuation Office’s preferred approach is to adopt a % of the Gross Receipts on the assumption that irrespective of the commercial reality, a museum will still make a bid for the building. This view is based on the values, other than financial, that museums create. This approach is normally referred to as the simplified receipts method. This argument ignores the increasing professionalism of museums over the last three decades, with marketing and promotion of the attraction on a national or global scale, the advent of internet sites and the enhanced promotion of retail sales. There is a limited degree of truth regarding costs and expenditure in that the charitable objectives of a trust are different to the commercial objectives of a for profit business. The reality is that for this sector, the charitable trusts are the market and so the considerations of a charity are the relevant considerations when deciding what a willing tenant could, or would, pay in rent to a willing landlord. Contractors Method The final method, Contractors Method, is often referred to as the method of last resort. Contractors Method assumes that if the property did not exist it would be built. The cost of constructing a replacement property, including a figure for the land and the fees for construction, is calculated and a statutory percentage is taken as being the equivalent rental value. This approach is adopted for most municipal buildings, and specialised properties such as steelworks. Where the construction cost is met in part from Central Government or EU grants, there is an argument that the costs should be reduced to reflect the availability of the grants. This argument has recently been thrown out by the Upper Tribunal (Lands Chamber) (formerly the Lands Tribunal) which is the final court in England for determining valuation matters. AIM and several of its members were contacted by the Valuation Office following the outcome of an appeal for Sport England in respect of Bisham Abbey. This decision took away any allowance for grant aid. The Valuation Office had previously made allowances (potentially as much as 50%) when valuing a range of properties funded by grants. This method normally produces far higher values for museums than the receipts and expenditure approach and raises serious problems when considering historical properties that are expensive to build and have no modern equivalent. If these properties did not exist then there would be no purpose in recreating them. As always there are exceptions to the rule, such as the recreation of the Globe Theatre on the South Bank. There are over 2,500 properties valued as museums or art galleries in England and Wales; more than 1,200 are valued by Contractors Method. Rights of Appeal The Rateable Value can be appealed against. There is however only one
  6. 6. Management Successfully Negotiating Business Rates Case Study – Waltham Abbey When the Waltham Abbey Royal Gunpowder Mill first opened as a museum, it was entered in the 2000 Rating List with a Rateable Value of £140,000. Despite 80% mandatory relief this created a level of rates liability which was unaffordable. The property had been valued by reference to the Contractors Method. After initial discussions, the Valuation Office revised its approach to include only those buildings accessible to the public or used as offices and ancillary buildings by the Foundation. This resulted in an offer to settle at £95,000. At a hearing of the Valuation Tribunal, the Valuation Officer defended this level of value and Waltham Abbey’s adviser argued for a reduction to £0 based on receipts and expenditure method. The Valuation Tribunal found for Waltham Abbey. The Valuation Officer appealed to Lands Tribunal (now Upper Tribunal (Lands Chamber)) and, to avoid costs, a compromise settlement was reached at £5,000, which is based on receipts not costs of construction. The 2005 Rateable Value was drastically reduced and agreed at £6,000, following the same argument and the 2010 Rateable Value came into the Rating List at £7,000 and has not been appealed. right of appeal for every ground (reason). It is therefore imperative that if an appeal is made it must be carried out by a qualified professional, who not only has experience of business rates but understands museums and the wider leisure market. The appeal system starts with a proposal to alter the Rating List, served on the Valuation Office. The proposal can be made on a standard form provided by the Valuation Officer, but it is often necessary to understand the detailed regulations which the form does not provide direct correlation with. If the proposal is not resolved within three months, it will be sent on to the Valuation Tribunal, by the Valuation Officer, as an appeal. Proposals made before 31 March 2017 could potentially be backdated to 1 April 2010. Although making the proposal is a simple process, and can be done using a standard form provided by the Valuation Office, the proposal must meet a number of technical requirements or it will be rejected. The detailed grounds of the proposal must be sufficiently vague that they do not rule out wide debates, but must have enough detail that the Valuation Office is required to deal with the relevant issues. It may even be necessary to make several proposals, on a number of different grounds, in order to achieve the desired outcome of minimising liability. When appeals are made, the onus of proof is on the appellant. The ratepayer has to prove that the Rateable Value is wrong. The Valuation Office does not have to prove that it is right. This is an important distinction as can be seen from the decided cases. 6
  7. 7. 7 AIM Success Guides Case Study – Bradford City Council A further complication is the free entry into national museums and galleries coupled with some Local Authorities who give free or subsidised access to their museums. In those cases there are no receipts on which to base a valuation but even in these cases, appeals are now being successful in breaking away from Contractors Method and obtaining substantial reductions. As an example of this, Bradford City Council has a policy of free entry for Moorside Mill, home to Bradford Industrial Museum. its museums. Appeals against the 2005 Rating List for the Industrial Museum (a former textile mill), Bolling Hall (a manor house with parts dating from the 12th Century) Cliffe Castle and The Manor House, resulted in a hearing at a Valuation Tribunal. The original 2005 Rateable Values were based on Contractors Method; the Valuation Officer defended different figures, and the agent on behalf of Bradford Council presented figures based on visitor numbers, and the income that could have been generated. The Tribunal took on board aspects of both. The resultant figures including the Tribunal decisions are set out below: Bolling Hall Manor House Cliffe Castle Industrial Museum TOTAL 2005 RV £19,500 £13,250 £55,000 £90,000 £177,750 VO Figure £3,350 £6,400 £35,250 £68,000 £113,000 Storeys £1,400 £2,700 £10,000 £15,000 £29,100 VT Decision £3,350 £5,900 £35,250 £50,000 £94,500 Historically, the Valuation Office had always valued these properties using the Contractors Method. The 2010 appeals are still to be settled. The argument on behalf of Bradford Council was that any potential tenant would produce a business plan based on the number of visitors known to come to the attraction. The Valuation Tribunal agreed this was a sensible approach, but due to the lack of any actual receipts, felt that they could not adopt the Rateable Values which were derived from it. The Valuation Office was forced to abandon its argument that the properties should be valued on a Contractors Method, and came up with four different approaches, one for each property. In the case of Bolling Hall, its approach included a doubling of the figure it originally thought of. The Industrial Museum was valued in line with other, still functioning, multi-storey mills but with an allowance for the fact that the location was no longer suitable for goods vehicles. The 2010 appeals are still on-going. Case Studies There have been notable successes with rating appeals for museums. In the main these successes stem from persuading the Valuation Office, or the appropriate Tribunal, to adopt a Receipts and Expenditure approach to the valuation. This can potentially result in Rateable Value £0. Three case studies involving historic buildings are given in this guide covering different aspects of the problems found in dealing with the Valuation Officer’s approach. The author was directly involved in the appeals for Waltham Abbey Royal Gunpowder Mills and Bradford City Council cases. The Court of Appeal decision for The National Trust has been widely reported.
  8. 8. Management Successfully Negotiating Business Rates The Political Background – Localism Act 2011 Occupied properties receive an 80% mandatory relief if they are occupied by charities for charitable purposes. This is set in statute, but there is some pressure (especially in Wales) for this percentage to be reduced. Local Authorities can grant discretionary relief which will further reduce liability and in some authorities the whole of the remaining 20% liability may be removed by this discretionary relief. From 1 April 2013, Central Government has reviewed the funding for Local Authorities. This affects the rates support grant, council tax relief grants, and numerous other grants. The change is described as the Rates Retention Scheme, and is a consequence of the Localism Act. Prior to 1 April 2013 all business rates collected by Local Authorities were paid over to the Treasury. The amount received in rates support grants was not related to the amount collected, except that any discretionary relief granted by the Council was part funded (25%) by the Council. Therefore Central Government carried the whole costs of mandatory relief and 75% of the costs of any discretionary relief. From 1 April 2013 only 50% of rates received is paid to Central Government, the rest is retained by the Council. Therefore the Councils now carry the cost of 50% of the mandatory and discretionary rate relief. Therefore if a museum is granted 100% relief from rates, the Local Authority must find 50% of that lost rates income. Prior to 1 April 2013, the cost to the Local Authority was only 5% of the lost income. The Council is then paid a reduced support grant (subject to various adjustments) which will be reduced by 2% in real terms year on year for the next 10 years or so to promote efficiency. However, most Councils will have lost funding at the outset: the highest loss reported is 8.8%; the average in the first year is said to be 1.8% loss. These statistics are potentially misleading as the funding of each Local Authority will be dictated by their individual circumstances. The Councils have no control over the amount of rates charged, and little control over Council Tax increases or other revenue streams. They do however have control over whether or not to grant discretionary relief. Since 1990 most Councils have operated a very laissez-faire policy toward business rates and have been reactive not proactive. The change in funding is changing this attitude. Councils will now be less likely to grant full discretionary rate relief and many may choose to refuse any discretionary relief. Councils will also be more likely to challenge mandatory relief requests with greater scrutiny regarding the purpose of occupation and degree of use for charitable purposes. This is unlikely to affect main buildings but could have an impact on properties occupied as stores or in temporary use. There is a growing body of case law on appeal from Magistrates Courts and the High Court on this topic. Empty Properties Although business rates are a property tax based on occupation, if a property is empty then after an initial 3 months void period (6 months for industrial and storage properties) the person with the right to occupy is liable for full rates. The main exception to this rule is that it only refers to buildings not land. Properties where the ratepayer is a charity may be exempt from the charge. However this only applies if, when the property is next likely to be occupied, it will be occupied for charitable purposes. Some charities have been enticed into entering agreements with landlords to take leases on empty buildings so that the landlords can avoid empty property rates. The Charity Commission has issued a warning about such practices, and the Local Authority may refuse to 8
  9. 9. 9 AIM Success Guides Case Study – National Trust Cases The National Trust successfully defended the use of the Receipts and Expenditure method with appeals that ran to the Court of Appeal on a point of legal principle. In this case, the Valuation Office was looking at a simplified receipts approach taking 3% of the gross receipts. The point of law being argued by the Valuation Officer was that a property that was Castle Drogo, at the centre of the National occupied and in use could not have a Trust’s appeal. value of £0. Both parties agreed Contractors Method was not appropriate, but on a full Receipts and Expenditure basis it could readily be shown that the National Trust property in question (Castle Drogo) made a loss. The Court of Appeal confirmed that it was reasonable when looking at an historic building to assume a landlord would accept no rent on the basis that the tenant was taking on the costs of maintaining, insuring and preserving the property. This argument has been successfully applied to other museum properties around the country and the Valuation Office is accepting that other museums should be valued on a receipts basis, but are still arguing for 3% or more of gross receipts. The discussions are ongoing, on a property by property basis, but the majority of museums have not appealed for a variety of reasons. The reason at the top of the list for not appealing is that many museums are receiving 100% rates relief and so have no interest in what level of value has been applied. If the discretionary relief is lost then an appeal should be considered. grant charitable relief so that the charity is exposed to the full charge. If your museum is approached to participate in any such schemes, you need to take expert advice of your own. There have been recent High Court decisions involving charities which have taken properties as a means to reduce the landlord’s exposure to empty property rates. The schemes have worked for the landlords but the charities have not been given the 80% mandatory relief because the properties are not wholly, or mainly, occupied for charitable purposes. Conclusion The above note gives a flavour of business rates and is by no means exhaustive. The political landscape is changing and there will be greater pressure for Local Authorities to maximise the rates revenue in their area and reduce their exposure to reliefs as far as possible. Therefore more museums will be faced with rates bills that only give the mandatory relief and where there is doubt, museums will need to ensure that their occupation of properties fully complies with the statutory requirements for any relief to be given.
  10. 10. Management Successfully Negotiating Business Rates The current 2010 Rating List will be in force until 1 April 2017 or longer and so the 2010 Rateable Value will affect rate liability for a minimum of 7 years. Museums are very difficult to value for rating purposes; many are not valued on the basis of their finances (Receipts and Expenditure) but on the cost of construction without the benefit of any allowance for grant aid or other funding. Those which are valued by reference to receipts are often valued on a percentage of gross receipts and not with regard to the full accounts. Therefore most museums are overvalued in the Rating List at the date of this guide. Appeals can be made against the Rateable Value, but need to be undertaken by a qualified rating surveyor with experience of the museum sector and leisure properties generally. Comparison between England, Wales, Scotland and Northern Ireland As with England, valuations are undertaken by the Valuation Office. In the first instance, the appeals are heard by the Valuation Tribunal responsible for the particular location in Wales. Scotland Scottish property law is radically different to the English and Welsh legal framework. The principles of valuation are effectively the same but the primary legislation is Local Government (Scotland) Act 1975. Appeals against the 2010 Rateable Values had to be made before 1 October 2010. There are very limited grounds of appeal after that date. Scotland has a uniform business rate applied to the country, and standard allowances. However the valuations are undertaken by assessors who are officers of the local councils. Appeals in the first instance are to the Valuation Appeal Committee. The next revaluation is 2017. The Scottish Assessors Association website is England Primary legislation is found in the Local Government Finance Act 1988. The detailed provisions for appeals are set out in Statutory Instruments. The current rights of appeal are open ended until the next Rating List comes into force. The valuations are undertaken by the Valuation Office, an executive agency of HMRC. Appeals, at first instance, are heard by the Valuation Tribunal England. The Valuation Office Agency website is Wales The same primary legislation applies as in England. There are separate Statutory Instruments for Wales but from a practical viewpoint, there is no regulatory difference. Rights of appeal mirror those in England. Northern Ireland As with Scotland, there is a different legal framework for rates in Northern Ireland. Unlike England, Scotland and Wales where there are separate systems of property tax for domestic and non-domestic properties, there is still a single system applied in Northern Ireland. The current revaluation is from 2003 and the initial time period for appeals is closed. However, there is a commitment to review Rateable Values if representations are made setting out detailed reasons for believing the valuation to be wrong. The valuation and charging of rates is dealt with by the Land and Property Services Northern Ireland Agency. Both valuation and collection of non-domestic rates is carried out by Land and Property Services Northern Ireland (LPSNI). Appeals can be made against the Rateable Value, but need to be undertaken by a qualified rating surveyor with experience of the museum sector and leisure properties generally. 10
  11. 11. 11 AIM Success Guides Unlike the other three nations, the current valuation list for non-domestic properties became operative on 1 April 2003 and is based on rental values as at 1 April 2001. There will be a revaluation on 1 April 2015. This will reflect hypothetical rental values effective on 1 April 2013. It is intended that the exercise will redistribute the overall rates burden although it is not expected that the overall tax take will alter significantly. LPSNI is also responsible for collecting the rates. There are two rates used to calculate liability, regional rate set by Northern Ireland Executive and district rate set by the District Council. There are no transitional phasing provisions and therefore the calculation of rates bills is simple and any reduction in Rateable Value will produce a proportionate reduction in liability. There are a number of reliefs available to business ratepayers, in particular, charitable or not-for-profit relief (if occupied for public benefit). Commonality Between the Countries The Valuation Office (for England and Wales), Scottish Assessors, and Land and Property Services Northern Ireland are all independent of each other and each work in their own way with different guidance on how to value different property types. But as stated at the beginning of this guide, the basic principles of valuation apply to all four countries. Much of the ethos and guidance for rating valuation is derived from case law and the decisions of the higher courts, especially Lands Chamber (Lands Tribunal), Court of Appeal or Supreme Court (House of Lords) will influence valuation practice equally in all four countries. Therefore decisions, such as the Court of Appeal in Hoare (VO) v The National Trust 1998 RA 391, affect every legislative area. The main differences are the calculation of the rates bills and the rights of appeal. The Land and Property Services Northern Ireland website is Storeys Edward Symons is part of the ES Group which is the collective name for Edward Symmons LLP, Storeys Edward Symmons and Aaron Fox. The group employs specialist surveyors and valuers across 10 offices, with a wide range of niche experts advising on all aspects of property and business assets, including business rates, receivership and insolvency, leasing and asset management. Colin Hunter MRICS IRRV (Hons) Director Email: DDI: 0113 2376906 Website:
  12. 12. Management Successfully Negotiating Business Rates AIM Association of Independent Museums 3 Chestnut Grove, Ludlow, Shropshire SY8 1TJ Registered in England No. 1350939 | Charity No. 1082215 Copyright © 2014 Colin Hunter MRICS IRRV (Hons) AIM Editor – Diana Zeuner 12