Business rate reforms: is it time for the government to think again?

Posted on February 3, 2017.

Business rates: what's changing?

Earlier this week, the Times ran a story revealing how the changes to new business rates could swiftly have punitive effects on rural businesses. In what the Times calls "the most radical reform of business rates in a generation", rural businesses and business owners could find themselves the most hard hit. Riding schools, livery yards, livestock markets and vineyards would be the most sorely affected in rural communities. Businesses in urban areas stand to be affected too. The Telegraph ran a story in December 2016, focusing on how the new  rates will impact businesses in Greater London. Indeed, the London Chamber of Commerce has called on the capital to have a business rate system separate from the rest of the country, in order to prevent London-based businesses from being priced out of central London or, even worse, forced to close altogether. Particularly at risk are small, independent shops, bars and restaurants, although big brands like Harrods and Selfridges are also at risk. Even a major transport hub like St Pancras Station faces a hike of as much as 73%. Some retailers face a 400% increase. The changes take effect in April, at the beginning of the new financial year, with new 2015 rate values replacing the old 2008 values. The hike had been delayed slightly by the government, to account for the 2015 general election. The reason for the huge hike in 2015 is painfully clear: because average rents have risen so steeply since 2008, the "rateable value" of a property (which councils use to calculate business rates) have also gone up.   In addition, the government is reviewing and implementing changes to the business rates appeal process. Currently the VTE (Valuations Tribunal for England) can order a change to a business rate value wherever it sees fit. In future, it will only be able to mandate changes where a property valuation is deemed to fall outside "the bounds of reasonable professional judgement". This means that any appeal which falls within a small margin of error could easily be thrown out, with business rates miscalculations easily going unnoticed or unregulated. An estimate quoted by the aforementioned Telegraph article puts potential business losses at £ 6 billion over the next five years, purely as a result of business rate miscalculations. Whilst business rates arguably face the greatest coordinated opposition from business owners, and the occupiers of commercial properties, it is actually the landlords who must shoulder the greatest share of the business rate burden. A report by the economic research agency Regeneris in December 2015,  cited how the cost of business rates is a burden which the landlord must ultimately bear. The report's main conclusions were:

• Changes in business rates are reflected in longer term adjustment in rental values.
• Since commercial property rents are fixed for three-five year periods, there is a time lag between changes in rates and the feed through into property rentals.
• Changes in business rates can lead to losses of up to £15o million in development capital for landlords.
• A landlord's financial liability for business rate hikes will only increase over time.

 

What do business rates mean for commercial property owners?

Whilst business rates arguably face the greatest coordinated opposition from business owners, and the occupiers of commercial properties, it is actually the landlords who must shoulder the greatest share of the business rate burden. A report by the economic research agency Regeneris in December 2015,  cited how the cost of business rates is a burden which the landlord must ultimately bear. The report's main conclusions were:

• Changes in business rates are reflected in longer term adjustment in rental values.
• Since commercial property rents are fixed for three-five year periods, there is a time lag between changes in rates and the feed through into property rentals.
• Changes in business rates can lead to losses of up to £15o million in development capital for landlords.
• A landlord's financial liability for business rate hikes will only increase over time.

  Whilst the business rates system may be something the UK government has no intention of scrapping any time soon, there are some clear pitfalls for commercial property owners.

• The long gaps in rate re-evaluations (seven years in the most recent instance) are creating massive uncertainty for commercial property owners, especially since property prices and rents have risen so sharply in the mean time.
• The business rate burden is reducing the incentive for  owners to invest in their commercial property assets.
• Because business rates are a property tax, as opposed to a land tax, they are levied on certain types of property and thus can have the unintended effect of disincentivising certain types of property investment.
• Overall a rise in business rates will reduce the amount of revenue a landlord can earn from a commercial property.

 

Case Study: The rise of property guardianship and its impact on rate payers

The fact that business rates are a kind of property tax means they can punitively affect landlords who may be sitting on a vacant or empty property.  One of the reasons why property guardianship has become part of a national conversation around the safeguarding of commercial property assets is because it offers commercial landlords the chance to maximise the value of property whilst lowering costs which would be incurred by business rates. Property guardianship changes the ancillary use of a building from commercial to residential; this allows business rates in a building to be reduced to zero (or close to zero) and ensures the long-term value of the property is retained. Because a property guardian utilises the ancillary use of the property as a domestic space, commercial landlords receive guaranteed prevention of squatters taking over the empty building, as well as saving money on security costs and ensuring a building does not fall into disrepair. So let's say the current disparities between a commercial occupant's rent and the business rates passed onto the landlord continue to grow and the business was priced out of the property: property guardianship maintains the infrastructure of a building whilst allowing the landlord to continue to gain maximum value from their asset.