COVID-19 has dominated the news for most of the year. The impact on property has manifested itself physically in the form of vacant properties and financially in the form of a sharper focus on outgoings such as rent and rates.
Included in this edition of 'Let's Talk Business Rates':
- Surplus Space: Minimising Your Liability
- Repurposing Assets: Impact on Business Rates
- The Impact of COVID-19: Protecting Your Interests
- Business Rates: An Update from Scotland
For information on the services we provide, please visit our Business Rates page.
You can also view Cushman & Wakefield's formal response to the Government's call for evidence as part of its ‘Fundamental Review of Business Rates’.
Since the government announced the lockdown in March 2020, many occupiers have found themselves with properties sitting empty, or predominantly empty. Unfortunately, an occupier’s interpretation of “empty” is often not quite the same as the legal definition of “vacant” under rating law.
For example, the sudden lockdown of all but essential businesses left everyone with little time to fully vacate their premises. The doors were shut, staff were, where possible, told to work from home or were placed on furlough. Offices were then left with desks, chairs, IT equipment, files and so on.
Ratepayers were left with significant rates liabilities on properties which they were advised not to occupy. Can this liability be minimised?
Rating legislation states that “items that are to be used when the property is next in use” are to be disregarded when deciding whether or not a property is to be classed as vacant, so items such as desks and chairs could be ignored, files potentially could be as long as they were “working files” and not archived/stored files.
However, server rooms which were left running provide a “beneficial occupation” to an occupier. As “occupation of part equals occupation of the whole”, many local authorities refused to grant vacant business rates relief (worth three months or six months for industrial properties) based upon there being very little occupation. We have seen several authorities claim that paintings/artwork left on the wall, personal effects left on desks and even chocolate in vending machines is “beneficial occupation” and, as such, refuse to award empty business rates relief. This is a particularly bitter pill to swallow for occupiers who are facing some of, if not, the toughest times in living memory for business.
Are the Local Authorities right in this approach?
Possibly. Possibly not.
It might take a legal challenge to test this as it is not an area that has been examined in such detail previously. Authorities are likely to argue that in the Makro case, only 0.02% of the floor space was sufficient to class a property as occupied. Ratepayers seeking to mitigate long-term vacant property rates liability have quoted the Makro case during the last decade to justify minimum rateable occupation when rebasing the eligibility for new business rates relief. Perhaps the tables have been turned now. We would advise occupiers to completely empty their premises if they are looking to claim empty property relief. The fewer items that are in a property, the fewer arguments authorities have to not grant the relief. An alternative relief where occupiers find themselves using some, but not all of their property, is to request Section 44a Relief. This section of the Local Government Finance Act gives authorities the ability to grant vacant business rates relief to parts of a property that are temporarily unoccupied. This is funded locally by the authority and is discretionary. As a result, fewer authorities are granting this relief than in the past, but it is certainly an avenue worth exploring.
As the pandemic continues, we are seeing the impact across all commercial sectors for both landlords and tenants. In many cases, existing vacant space pre-COVID is now even less likely to be let, and we are seeing an increase in space becoming vacant due to closures through mothballing, downsizing or insolvency. There is also the added pressure for landlords as occupiers are simply unable to afford the rent and rates due to squeezed cashflow.
Billing authorities are unlikely to have the immediate cash to support the ratepayer, leaving them with a difficult balance to strike as we see an increase in boarded up retail/hospitality space and vacant office buildings in towns and cities.
The Government has however, now implemented significant changes to the planning use classes system in England (Use Class Order 1987) through the new Town and Country Planning (Use Classes) (Amendment) (England) Regulations 2020. The main driver of change has been a need to enable the repurposing of buildings on high streets and town centres. This has implications for business rates liabilities.
The Regulations introduce three new planning use classes (E, F1 and F2). The most significant change is the creation of a new “Commercial, Business and Service” use called “Class E”. This brackets together a wide variety of uses, all of which are now considered to be in the same planning use class including offices, retail and industrial uses which do not harm amenity.
Planning permission is not required for changes of use within the same use class.
Deleting Ratable Values
Repurposing property assets can also lead to benefits in terms of mitigating the business rates liability particularly if the property is undergoing a major redevelopment. The ratepayer can appeal seeking a deletion from the rating list for the duration of the works provided it can be demonstrated that the ratepayer is unable to occupy the property.
The likely level of rateable value following its re-entry into the rating list should also be considered early. Cushman & Wakefield can consider the proposed changes to the asset and provide estimates of the likely impact on rateable values and liability. The repurposed asset could well be worth less than the original, although values could also potentially rise depending upon the asset changes.
The impact of the coronavirus pandemic on property rental values will take some time to become fully evident. It is difficult to apply a blanket approach on how rental values have and will be impacted as there will be different effects on valuation, which will vary by property sector and by geography.
The impact on the retail, leisure and hospitality sectors has been recognised by the Government with the granting of rates relief in the form of Expanded Retail Discount for 2020/21. It remains to be seen if this will be continued into 2021/22 and a decision is due in the New Year.
No such relief has been granted for other property sectors. The pandemic has impacted on the usability and utility of office space, which has reduced significantly and similarly has impacted on the usability of space for specialist property occupiers.
As a result of this, “The G7”, (a consortia of rating advisors to which Cushman & Wakefield is a founding member of) sought Counsel’s opinion (as have the Valuation Office Agency) on the valuation issues relating to the impact of COVID-19. We have been active in our approach to protecting clients’ interests by raising COVID-19 specific checks for a material change of circumstances (MCC). Being at the leading edge of discussions and negotiations with the Valuation Office Agency, we have been instrumental in reaching agreement on the grounds that will be accepted for COVID-19 MCC Checks.
The changes in circumstances are manifest both internally and externally. Internal factors include:
- social distancing measures
- limited use of lifts in multi-storey buildings
- significantly reduced occupancy rates
External factors include the closure of retail and other premises and usability of public transport.
As yet, there is no firm evidence to support the degree of the impact for COVID-19. The next step is to gather evidence, over a 16 month agreed period, in order to progress with firm evidence to the Challenge stage.
The Valuation Office Agency is under political pressure to look at the COVID-19 MCC Checks quickly and the task now is to assess by reference to firm evidence, the impact on rental values. No-one can say how long the COVID-19 impact will last and any allowance agreed for the impact will need to apply for as long as the situation subsists.
2017 Revaluation Appeal Deadline Extended
The Scottish Government has announced that the statutory deadline for disposing of outstanding 2017 revaluation business rates appeals has been extended from 31 December 2020 to 31 December 2021.
The decision was widely anticipated given the interruption caused by Coronavirus and the ongoing difficulties for ratepayers and Assessors in progressing appeal discussions, which were interrupted because of restrictions on meeting opportunities and property inspections.
The decision of the Government to extend the deadline was undoubtedly aided by the submission of many additional Material Change of Circumstances (MCC) appeals to reflect that values had been adversely affected by the onset of COVID-19. These appeals must be disposed of before the end of March 2021.
2022 Rating Revaluation Postponed
The First Minister subsequently announced that the next business rates revaluation in Scotland will take effect on 1 April 2023 and be based on rental values as at 1 April 2022. This means that rateable values will better reflect true market conditions and delivers on a commitment to move the revaluation tone date closer to the actual revaluation date ahead of schedule. However, the delay contradicts the recommendation of the Government instigated Barclay Review of the rating system in Scotland that supported a revaluation every 3 years and prolongs existing rateable values for an additional year.
At each revaluation, the assessor gathers rental evidence from non-domestic properties. This information is used as the basis for establishing the rateable value of each property. In order to ensure fairness, all evidence is taken from a fixed date known as the ‘Tone Date’.
The Barclay Review recommended that there should be 3 yearly revaluations from 2022 with valuations based on a Tone Date one year prior. Although the impact of the 2017 revaluation did not fall within scope of the Barclay Review, many ratepayers noted the impact of the prolonged period since the last revaluation in 2010 and the large differences when rateable values caught up with movements in property rental levels that had taken place since 2008.
There was a strong consensus that three-yearly revaluations, with a Tone Date one year prior to the revaluation date, would provide more accuracy and more closely reflect economic circumstances. Halving the date between valuations being made and coming into force would have the advantage of reflecting market trends more closely and reduce volatility without being unduly onerous in terms of the additional administrative input required by ratepayers, the Scottish assessors and councils alike.
Cushman & Wakefield believes it is vital for regular revaluations to ensure that the true rental market levels, upward or downward, are reflected in the rateable values. For instance, when the 2015 revaluation was cancelled amid the recession prior to 2013, this led to many occupiers paying artificially high business rates until 2017. Coronavirus has similarly affected the 2022 revaluation, which could potentially lead to larger rateable changes by the time the next revaluation takes place in 2023.
Most ratepayers appreciate that if values are reduced across the board, then the business rates multiplier will have to increase in order to raise the required finances to fund local authorities. However, the argument that ratepayers want a cancellation is unsubstantiated. In reality, most ratepayers would accept valuations if they are more closely aligned to economic circumstances, supported by rental evidence and confirmation that all competitors are valued on the same basis.
Material Change of Circumstance Appeals (MCC)
There is growing concern that current rateable values, now to remain in place for a further year, do not reflect current economic circumstances nor rental market conditions.
Many commercial properties outside of the retail, hospitality and leisure sectors did not receive business rates relief this year. Those businesses that were fortunate enough to receive rates relief will be expected to pay the full liability from 1 April 2021. However, we anticipate that the effect that coronavirus has had on business will last far beyond 1 April 2021.
We recommend that MCC appeals are lodged with the hope that any reduction in rateable value will be backdated and extend to when the full effect of the health crisis comes to an end. The last date for lodging such appeals is the 31 March 2021.
Penalties for Non-Compliance with Return of Information Requests
The Scottish Government has circulated draft regulations proposing an increased scale of penalties for non-return of Local Authority Information Notices. Specifically, the new provisions entitle the assessor to request information relating to rental levels, turnover details and construction costs.
Requests can be sent to any person that the assessor thinks is a proprietor, tenant or occupier of lands and heritages that are to be valued or any other person who the assessor thinks has information. These provisions provide the assessor with significantly greater information gathering powers and we anticipate that there will be a large increase in requests for information.
The proposed regulations could see penalties imposed on proprietors, tenants or occupiers should they fail to return the information requests. Failure to comply with the assessor's request for information may lead to a substantial fine, calculated as follows:
|Stage 1||Stage 2||Stage 3|
|Period from date when the Information Notice is issued||28 days||70 days||80 days|
|Penalty for non-return if lands and heritages are entered within the Valuation Roll||£200 or 1% of RV (whichever greater)||£1,000 or 20% of RV (whichever greater)||£1,000 or 50% of RV (whichever greater)|
|Penalty if lands and heritages not entered within Valuation Roll||£1,000||£10,000||£50,000|