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Recently, the media has reported the substantial difficulties posed to commercial occupiers due to the business rates system. So what can be done to assist small and medium sized businesses (“SMEs”) in an attempt to alleviate the financial strain of paying substantial business rates? Well, there is in fact a raft of measures to look at, and the obvious one is to take advantage of available relief and, in specific circumstances, this may lead to a 100% reduction in the amount to be paid. There are also other methods such as to challenge the rating assessment.
Further, occupiers are able to reduce the expense of commercial property by employing other methods unrelated to the rating system. For example, if the tenant has a rent review on the horizon, properly engaging with the process could significantly impact the rent paid going forward. Also, is there a break clause in the lease? If so, would it be cheaper to exercise the break and move to alternative premises? Portfolio management is therefore key.
Business rates are a tax paid by the occupiers of all non-domestic/business property in England and Wales. The purpose is to generate revenue to pay for local services, such as the police, fire and rescue services.
So how are they calculated? This is in fact one of the greatest concerns with business rates……
The property will be given a ‘rateable value’, and this is supposed to represent the open market annual rental value of the property at a set period in time. A multiplier is then applied to this figure. The multiplier is set by the Communities and Local Government in England or the Welsh Government. It represents the number of pence in the pound of rateable value that will be payable in business rates.
For 2013/2014, there are 5 different multipliers:
Standard – 47.1
Small Business – 46.2
City of London
Standard – 47.5
Small Business – 46.6
Standard – 46.4
The lower multiplier is welcome for ‘Small Businesses’, although the difference is in reality marginal.
Let’s pause here – why is there a concern with how rates are assessed?
Business premises are assessed for rating purposes every 5 years. The current list is the 2010 rating list, and the practical impact of this is that the current rateable value is assessed as the value the property might reasonably be expected to achieve on the open market on 1 April 2008, taking into account a number of assumptions.
Herein lies a major problem.
Since 2008, rents have fallen (at least outside of London). Occupiers are therefore paying rates on the basis of much higher 2008 values. This is not reflecting the position on the ground for many occupiers. For SMEs in particular, this is causing a major financial burden and its impact is being felt especially hard on the High Street.
Unfortunately, the Government has announced that the 2015 review will not happen until 2017. This only exacerbates the problem.
As mentioned above, the High Street is being particularly affected by such a high rateable value assessment. And it is not just SMEs that are suffering.
For instance, a large fashion chain has recently criticised the rates system. The owner of the chain has commented that rates can be 40% of turnover and added into this that rents are increasing, often well above inflation, profits are being hit.
Also, Blockbuster complained that a significant reason for its demise was the fact business rates accounted for 10% of turnover.
Add in to this strong competition from online retailers, it is easy to see why retailers, both SME and otherwise, are suffering.
Further, it is not just the High Street that is suffering the impact of the rating system. The London Motor Museum, which runs charitable events and is popular with school visits, is in a dispute with the Council as to whether a rating relief applied. Notwithstanding this, the overall liability for rates is c.£130,000 since 2010. For SMEs in particular, rates of this level may be hard to weather.
The Government does recognise these difficulties, and the Autumn statement has provided assistance to SMEs although many critics comment it has not gone far enough.
The Autumn statement contains a package of measures designed to assist SMEs.
For instance, small businesses with premises worth up to £50,000 will be entitled to a discount of up to £1,000 on their business rates for the next two years. And also, the chancellor has promised to limit rises in business rates to 2% and the small business rate relief scheme will be extended to April 2015 (more details of this are below).
Businesses will also be allowed to pay their rates in 12 monthly instalments.
Further, the chancellor unveiled a “reoccupation relief”. The result being the halving of business rates for entrepreneurs who set up shop in vacant stores. Any help to reinvigorate the High Street in this regard is obviously welcome.
An example of the impact of the above initiatives can be shown when looking at pubs. The British Beer & Pub Association said the decision to extend small business rate relief would save thousands of pubs collectively c.£27m.
The above changes are particularly welcome when one considers that business rates alone brought in revenue of c.£26.5bn last year. The Government therefore faces a difficult choice when taking any action to reduce business rates. Nevertheless, as mentioned above, there are concerns that the Government has not done enough. Many in the property industry are calling for an urgent branch and root reform. As one commentator put it, the reason for this is that the rates system is “fundamentally unfit for
the 21st century”.
It is proposed that a discussion paper will be published in Spring 2014 setting out the advantages and disadvantages of a long-term reform of the rates system. We are watching this with interest.
Whilst we await any major changes, for SMEs, what action can be taken now to reduce the liability for business rates? There are in fact a raft of options, and whilst not possible to touch on all of these, we look at challenging the rateable value and also small business rate relief.
First, we look at small business rate relief. This is a relief that is worth up to 100% of the rates for businesses with a rateable value below £6,000 and, on a sliding scale from 100% downwards for businesses with a rateable value between £6,000 and £12,000. There are also rules which apply if the occupier has other properties. The potential savings for SMEs can be large. Also, even if the occupier does not qualify for the small business rate relief, if the property has a rateable value below £18,000
(£25,000 in Greater London), the occupier will be considered a small business. As a
result, the multiplier will be the lower small business multiplier. This is the case even if the
occupier owns multiple properties.
SMEs should therefore check whether the rates liability could be reduced using the small business rate relief and whether the lower multiplier should be used.
In addition, occupiers should think whether the rateable value should be appealed.
Owners, occupiers and their agents may be able to lodge a successful appeal against the rateable value. The appeal is sent to the local valuation officer who may then agree to lower the rateable value. There are a variety of grounds for appeal such as a material change in circumstances (such as changes in the locality that will reduce the rateable value) or there has been a decision by a Court that has affected the valuation.
In many cases, the appeal is settled by agreement. However, there are many cases that are referred to the Valuation Tribunal. If this occurs, there are a host of procedural steps that need to be complied with and there will also be a hearing.
If the applicant is unhappy with the outcome of the Valuation Tribunal’s decision, there is a route of appeal to the Upper Tribunal (Lands Chamber). Further, there is an additional route of appeal to the Court of Appeal if a technical point of law is in dispute.
If considering appealing the rateable value, we strongly recommend employing the services of professional advisors. This advice is often invaluable in assisting the applicant through the whole process and collating the necessary evidence. In addition, there is a risk that the rateable value could increase after the assessment! Care therefore needs to be employed.
Business rates are often a real drain on occupiers and there are critics who maintain that the whole system should be overhauled. Nevertheless, there are often ways to reduce rates liability for SMEs, whether this be taking advantage of the reliefs on offer or to appeal the rateable value assessment.
However, reducing the rateable value liability is often one of a number of ways to reduce the costs of operating from commercial property. Portfolio management in this regard is key. There is often real merit in considering other ways to reduce costs, such as disputing a proposed rent review increase.
We would be delighted to discuss any of the above issues in greater depth.
For more information please contact Simon Ewing, Partner
T: +44 (0)20 7203 5330