To say that the new draft rateable values released last month by the Valuation Office Agency have not been welcomed by fashion businesses across the UK would be a considerable understatement. This comes as no surprise given that from 1 April 2017 many businesses will be faced with substantial increases in their business rates liability.
Whilst the increase will affect all parts of the country, London’s West End has been hit particularly hard, with some properties facing staggering increases of between 75% and 100% and the more sought after retail enclaves of Bond Street and Marylebone noting increases of circa 250% in some instances. Indeed, examples cited by Colliers International indicate that Victoria Beckham, Jimmy Choo and Alexander McQueen stores may be looking at increases of up to 415%!
Rateable value is calculated based on the average property rental value in a particular area along with the size of a property. Whilst landowners may have welcomed the surge in property prices and rental values as a result of “gentrification” and regeneration projects, the resulting impact upon rateable value could be devastating for many retailers.
This latest revaluation is based on values in April 2015. Revaluations are intended to take place on a five yearly basis, however, there has not been a revaluation since 2010, making the latest changes two years overdue. The process was postponed by the Government with the intention of avoiding “sharp changes” to business rates bills. Regrettably, due to the significant rises in property values particularly in London and the South East , these sharp changes have occurred in an even more dramatic fashion than that which the deferral was initially intended to avoid.
Retail, it seems, has been hit especially hard; and small businesses in particular. For most business rates are commonly the third largest outgoing after rent and staffing costs. Whilst prudent businesses may have taken steps to plan for what was widely expected to be a significant increase in liability, the introduction of these new rates coincides with a significant slump in sterling leading to a higher cost of imports and the introduction of a higher national living wage. As a result even the most prudent businesses may be at risk.
Transitional phasing for rates increases
In an attempt to ease the pain of immediate increases, the Government has taken steps to introduce a self-funding “transactional relief scheme”. The purpose of this scheme, is to provide the same transitional relief to small and medium businesses as was provided at the previous revaluation in 2010 by introducing exceptional measures to assist businesses with revaluations. In practice, this means that for businesses which face an increase, subject to the provisions being implemented as currently proposed, any increase may be capped at 5% in the first year for small properties, rising to 45% for large properties.
In theory, this should result in a limit on the amount by which bills will increase each year. However it seems to be more likely that the caps on relief may be much smaller than was first anticipated, such that transitional phasing may not be enough for to protect those who are unable to generate significantly increased sales to keep up with hikes.
A further matter of contention comes in the form of appeals to the Valuation Office. In the past, appeals on revaluations have always been available for aggrieved rate payers. However, much to the surprise of many businesses, in an attempt to control the backlog of pending appeals provisions, the Government has revealed that this may no longer be an option going forward. The intention is to curtail appeals by introducing a new “Check, Challenge, Appeal” system which, under the proposed “reasonable professional judgement” provisions, will only allow a rate payer to challenge a rates assessment if the margin of error is larger than 15%. Understandably, this proposal has been condemned by the British Property Federation and the British Rental Consortium on the basis that even a 15% margin is highly likely to impact on a retailer’s profitability and, as such, this limit is grossly unfair.
While the Government has tried to assure us that “the majority of businesses across the country will be unaffected or better off by the changes,” this brings no comfort to the many thousands who are. It remains to be seen what impact the perfect storm of Brexit, the sterling slump, the national living wage increase and the revaluation will have on business. There is no doubt, however, that there are challenging times ahead.
Members of Fox Williams’ property team are happy to advise on the Check, Challenge, Appeal system or on any other issues relating to property assets.