Transforming business rates – Cluttons view on Government proposals

Cluttons has responded to the Governments proposed business rates transformation, read on to find out our concerns and suggestions.

Long-term ambitions for business rates
We acknowledge the Government’s long-term ambitions for business rates advice. It is a tax that is stable and satisfies the four fundamental rules of taxation.

Ratepayers largely understand that business rates are payable on the occupation of commercial property, but are confused by the myriad of reliefs that are available, the inconsistent application of reliefs and approach to other matters by various Billing Authorities.

Ratepayers have a degree of certainty over their liability following a Revaluation. However, we do question whether more frequent Revaluations will lead to greater uncertainty and not having an understanding of the level of value that will be applied to a property following a Revaluation, or the multiplier that will be adopted. We believe that the three yearly Revaluation period strikes the right balance and allows ratepayers to budget for their immediate future liabilities with a degree of certainty. In theory, it should also smooth out large increases in assessment where Revaluation periods were on a less frequent basis. The current CCA process would not be fit for purpose if the Revaluation period were to be reduced.

We do have a major concern, that the multiplier has increased substantially since the first modern Revaluation in 1990 where the UBR was set at 34.8p. It is difficult to comprehend why the multiplier has increased substantially bearing in mind that the tax base (total Rateable Value) has increased substantially to date. This has been through the increase in property values and the increase in number of properties being valued within the Rating List in parallel with the standard multiplier has also increased substantially. This seems counterintuitive and we would suggest that reducing the tax burden through a reduction in the multiplier will free up funds for investment and, consequently, growth which the Government seeks.

Autumn Budget 2024
We note the Government has set out an intention through legislation to introduce permanently lower multipliers for retail, hospitality & leisure properties. This will replace the current Retail, Hospitality & Leisure Relief Scheme where from 1 April 2025 the relief will be reduced to 40% (from the current level of 75%).

Whilst the relief is welcome, the reduction in the multiplier will be variable from year to year, and therefore does not give certainty to the ratepayers benefiting from the scheme. Moreover, the scheme only applies to ratepayers with assessments below Rateable Value £500,000 which produces anomalies and potentially unfair competitive advantages for occupiers of properties either side of the threshold. We believe that the reduced multiplier should apply to all properties within these sectors.

We note that the Government will be redefining the definition of qualifying properties within these categories, our suggestion is that the current guidelines should continue to be followed. We also note the intention to fund the discount under the RHL scheme in a sustainable manner. The Government has provided no data to support its assertion that the proposed approach is fair or sustainable.

We believe it to be blatantly unfair and a blunt approach by increasing the tax burden on occupiers of properties with an assessment above Rateable Value £500,000. We note that what would otherwise be regarded as retail, hospitality & leisure properties will attract the higher multiplier which must work against the Government’s intention to ‘protect the high street’. For example, large retail stores that attract assessments greater than Rateable Value £500,000 are very often the linchpin of the High Street and their survival and development should be encouraged. Any further demise of these large anchor stores or venues would be counterproductive to the Government’s aims.

One of the factors that has led to the demise of the high street has been the operation of ‘online retailers’. Whilst they pay rates on the premises they occupy they do not have the footprint on the high street that a traditional retailer has and therefore pay a disproportionate lower level of rates than many retailers. The Government should therefore seriously consider targeting the higher multiplier towards online retailers and we also suggest that it should seriously consider an ‘online sales tax’.

The Government’s proposal to impose the higher multiplier on all occupiers of commercial properties will put at a serious disadvantage ratepayers who have no connection to the high street and who themselves may be subject to substantial increases in liability following the Revaluation. For example, we would point to large distribution warehouses that are not occupied by online retailers. It is likely that this sector will see substantial increases in liability following the Revaluation. The addition of a supplement of up to 10p, which potentially could amount to almost 20% of the existing multiplier, meaning a substantial increase in their tax and occupational liabilities. We would urge the Government to seriously reconsider how it funds the discount being applied to the RHL sector and it should not be to the detriment of other sectors.

A threshold of Rateable Value £500,000 provides an unwelcome ‘cliff edge’ which will lead to strategies being put in place to reduce assessments below this level. The threshold will also capture large properties such as hospitals and other critical services or infrastructure which would be an unwelcome consequence.

Small properties
We are in agreement that the small multiplier should be frozen. Moreover, we urge the Government to keep in place the Small Business Rate Relief Scheme. The Government should consider increasing the thresholds below which an exemption would apply following the Revaluation. The SBRR scheme is confusing and can be a disincentive towards expansion or investment where relief may be lost as a result.

Incentivising investment & growth
We welcome the introduction of Improvement Relief. We believe that the scheme incentivises ratepayers to invest and improve their properties. The scheme only applies to occupiers of existing buildings and does not extend to landlords improving buildings or to new buildings and hence occupation.

We believe the Government should consider the following additions to the existing Improvement Relief Scheme:-

1) That an exemption be applied to any increase in value of vacant properties as a consequence of investment made by owners of buildings even where they are not in occupation. This might allow for older redundant buildings to be brought back into use. It may ensure that buildings are not demolished or remain permanently disabled so as to avoid the payment of rates.

2) We urge the Government to consider a scheme to allow the occupier of new premises to benefit from an exemption from the payment of rates. The scheme was operated following the financial difficulties following the credit crunch to stimulate development and growth. We believe that the scheme was successful and encouraged redevelopment of old buildings and encouraged the development of new stock.

A fairer business rates system
We note the Government’s reference to avoidance in connection with the Empty Property Relief (EPR). This matter has been debated on many occasions, not least following a consultation paper and amendment to the Empty Property Rate Regulations in 2024. The Government will recall that following considerable debate and consultation it decided to strike a balance between ratepayers (including landlords), who have a substantial empty rate liability and Billing Authorities and the public purse. As such, it amended the ‘reset period’ from six weeks to 13 weeks. We believe that this amendment to the legislation struck a suitable balance. We are aware that some ratepayers decide not to avail themselves of their lawful right to manage their empty rate liability.

It is unhelpful that the Government terms the management of empty rate liability (and by extension the management of their rate liability in general) in a lawful manner as avoidance.

The consultation paper dealt with all aspects of the empty rate system and we believe it would be unwise and unproductive to revisit this area of law.

The Government could help itself by clamping down on aggressive evasion strategies and those that seek to take advantage of secondary legislation, particularly charitable legislation.

Some ratepayers take advantage of ‘charitable’ schemes so as to benefit from 80% relief. The main beneficiaries in such circumstances are not bona fide charities but rather companies behind the strategies who cream off the fees with very little going to the charities involved. Some charities can only be described as being spurious and we have no doubt the Government has been provided with evidence of such strategies by Billing Authorities who come into contact with such schemes.

It is important to recognise that landlords do not wish properties to remain vacant and would wish them to be occupied at a sensible commercial rent. Very often they are prohibited by banking covenants from reducing rents to unrealistic levels or in circumstances properties might be being kept vacant for future redevelopment purposes, perhaps during the site assembly process or until economic conditions and planning conditions allow the redevelopment.

The current system of allowing ratepayers to manage their liability strikes a fair balance and we have urged the Government to resist the temptation to increase the burden upon ratepayers who are incurring an empty rate liability. We do encourage the Government to look at the more aggressive and outlandish strategies clearly designed to enrich the providers of the schemes at the expense of the taxpayer.

A more responsive system
We believe that the current three yearly Revaluation period strikes the balance between having an up to date Rating List but without the cost of implementing more frequent Revaluations. So long as technology allows, an AVD closer to the Revaluation date might be achievable but we think the evidence would provide much more clarity (and as a consequence will reduce appeals) if the two year gap is maintained between the AVD and Revaluation date.

We note the Government’s phased implementation of the new transparency requirements which we support. However, the Government must ensure that there is clear guidance on the disclosure that may be required. Not all ratepayers understand the makeup of their valuation and hence assessment. They cannot be held liable for omissions within their valuation over which they have no knowledge nor technical expertise to understand. We believe there are a substantial number of properties that are not shown in the Rating List and the Government should focus its attention on bringing these properties into assessment and developing a mechanism to identify and bring these properties into assessment.

We suggest that an amnesty might be made available to ratepayers. This would allow them to notify the Valuation Office of properties or omissions from valuations that should be brought into assessment without the potential penalty of the assessment being backdated to the commencement of the Rating List. The Government may wish to consider a 12 month amnesty on liability from the date of notification on the payment of rates based upon an assessment that is brought into the Rating List as a consequence of a declaration.

In summary, we have urged the Government to consider the following:-

Maintain the current 3 yearly Revaluation period with the AVD set 2 years prior to the Revaluation date.
Continue to allow ratepayers to lawfully manage their empty rate liability following the consultation paper and changes to the “reset period” introduced on 1 April 2024.
To tackle empty rate evasion, particularly charitable schemes and other spurious strategies.
To reduce the standard multiplier to a more realistic level.
To reconsider the implementation of a blanket 10p surcharge to fund the RHL Scheme. Consideration should be given to an online sales tax to target companies that have contributed to and benefited from the demise of the High Street.
To extend Improvement Relief to long term voids where works are carried out by the landlord.
To remove the ‘occupancy’ clause from the qualifying criteria.
To allow relief to occupiers of new buildings.
To provide an amnesty to ratepayers who identify unassessed properties or under assessed elements of buildings in their occupation.

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