Growth and Infrastructure Bill

Memorandum submitted by Gerald Eve LLP (GIB 12)

Evidence to the Growth & Infrastructure Bill Public Committee

Clause 22 – Postponement of the 2015 Non-domestic Rating Revaluation

1.0 Summary

· We disagree with the postponement of the 2015 rating revaluation. Cause 22 should be removed from the Bill.

· The purpose of five-yearly revaluations is, in the Government’s own words, to ‘make sure each ratepayer pays their fair contribution and no more’.

· Delaying the revaluation creates unfairness by requiring struggling businesses to pay excessive rates, effectively subsidising those that have fared relatively better.

· Gerald Eve’s research into the likely impact of the 2015 revaluation differs from that revealed by the Government at Second Reading. We disagree that retail would have faced ‘big tax hikes’ and question the accuracy of the claim that 800,000 businesses would have faced increases at the 2015 revaluation.

2.0 Introduction

2.1 Gerald Eve LLP is a national firm of chartered surveyors and property consultants with a network of nine UK offices, providing a broad range of property consultancy and agency services to public and private sector organisations. The firm is widely regarded as a leading business rates advisory practice representing ratepayers occupying or owning in excess of 51,000 properties in England. The total Rateable Value of these properties is over £7 billion, representing 12.5% of the total Rating List for England. Our clients include 25 FTSE 100 companies and our team of 70 rating surveyors provide advice covering all property sectors and geographic regions. In addition to representing clients occupying standard retail, warehouse, manufacturing and office buildings, our specialisms extend to educational properties, business centres, minerals, airports, supermarkets, licenced and leisure and the energy sector.

2.2 We have ranked in the Sunday Times 100 Best Companies to work for survey for six years running and we are number 51 in the 2012 survey.

3.0 Clause 22 - Growth & Infrastructure Bill

3.1 We fundamentally disagree with the Government’s intention to delay the planned 2015 rating revaluation for two years and believe that Clause 22 should be removed from the Growth & Infrastructure Bill.

3.2 Much of the criticism of the postponement expressed in the Adjournment Debate on 30 October and at Second Reading of the Bill, as well as in widespread press comment, has focussed on the lack of any impact assessment or other evidence of the likely effects of a revaluation in 2015 and the sectors and regions which might have benefited or lost from that revaluation. Whilst we agree that national taxation policy of such importance ought not to be imposed without consultation and a full impact assessment, our criticism of the measure relates more to the principles and the purpose for revaluations, rather than being dependent upon the identity of likely winners and losers.

3.3 The purpose of rating revaluations is to achieve fairness of tax liabilities by ensuring rateable values are based upon up to date rental values and therefore to redistribute liability in line with relative movements in property values since the previous revaluation. As a consequence, revaluations do create winners and losers with those whose properties/locations/sectors have performed less well relatively since the previous revaluation benefitting from lower bills. Delaying the revaluation creates unfairness by requiring struggling businesses to subsidise those that have fared relatively better.

3.4 The Council Tax and Non-Domestic Rating (Demand Notices) (England) (Amendment) Regulations 2012 require that rate demands issued to all 1.75 million ratepayers in the country include an explanatory note regarding the rating system. This includes the following statement:

All rateable values are reassessed every five years at a general revaluation. The current rating list is based on the 2010 revaluation. Five-yearly revaluations make sure each ratepayer pays their fair contribution and no more, by ensuring that the share of the national rates bill paid by any one ratepayer reflects changes over time in the value of their property relative to others.’

3.5 This is a clear explanation provided by Government of the purpose for general revaluations and businesses are therefore entitled to rely upon an expectation of five-yearly revaluations to ensure they pay a fair contribution and no more.

4.0 Frequency of Rating Revaluations

4.1 Property taxes need to have regular and reasonably frequent revaluations to maintain fairness and acceptability – the 5 year gap has been accepted since 1990 and is generally viewed as the maximum appropriate period.

4.2 Business Rates Retention Scheme - Throughout the consultation surrounding the business rates retention scheme the Government has accepted that the 5 yearly revaluation cycle would be retained for the foreseeable future. The first reset was planned to coincide with the 2020 revaluation and the calculation of top ups and tariffs were to be recalibrated following the planned 2015 revaluation.

4.3 The Lyons Review - The last major independent review of the local government finance system was undertaken by Sir Michael Lyons who reported in March 2007. Many of his recommendations in the arena of business rates have been implemented, such as reducing the relief for empty properties and legislating for business rate supplements.

4.4 Lyons addressed the revaluation system in the context of ‘options for future governments’ and was supportive of revaluations occurring more frequently than 5 yearly.

4.5 He said:

‘8.109 From a theoretical point of view, there is much to be said for increasing the frequency of revaluations. More frequent revaluation would mean each property paid a bill more related to its actual value (relative to other properties) – whereas in the present system property values can be almost seven years out of date (revaluations are implemented every five years, but published lists use assessments of rateable value from two years before the implementation date). This would make the tax more responsive to the actual state of the property market and could have economic advantages by reducing the burden of taxation on businesses in economic downturns. Since the changes in rateable value, and hence in tax bills, would vary less if updated each year, rather than every five years, it might also be possible to scale back or remove transitional relief, which would remove some complexity from the system.

8.110 Increasing the frequency of revaluations would have some drawbacks (including possible increases in administration costs). By updating values more frequently, it would remove some of the stability of the current system, which enables a business to calculate its likely rates bill for five years at a time. The impact of this would affect different sectors in different ways, and might be particularly challenging to sectors which are not valued using the normal rental value approach. In addition, though such a system would improve the link between business taxation and the state of the property market, this might make things harder for businesses during upturns if they had difficulty of rapidly adjusting the use of property as its price changed.

8.111 There are a variety of options for increasing the speed of revaluation. With the improvements in information technology now available it seems likely that annual revaluations would be possible in the not too distant future, though with some cost implications. Another option would be to adopt a system of rolling revaluation in which only a certain proportion of properties would actually be revalued each year, while the others were uprated using statistical analyses of property price changes.’

4.6 It is clear that the thrust of his recommendations was for more frequent revaluations – there is no suggestion that a longer revaluation period would ever be considered as an acceptable option. One comment in 8.109 is worth repeating as it is especially pertinent given the economic downturn that the country has experienced over recent years since the 2010 revaluation. Lyons identified that more frequent revaluations

‘would make the tax more responsive to the actual state of the property market and could have economic advantages by reducing the burden of taxation on businesses in economic downturns’.

4.7 It would therefore clearly be perverse to postpone the 2015 revaluation. Those businesses and locations which have fared less well relatively since the last revaluation are presently paying more than their fair share of the burden and the 2015 revaluation should therefore proceed to allow their rates bills to reduce.

5.0 Impact of the 2015 Rating Revaluation

5.1 Since the Government’s announcement of an intention to postpone the 2015 revaluation for two years, there has been much discussion as to the sectors and regions which would have benefited from a 2015 revaluation and those that may have faced increases. Whilst we believe that the revaluation needs to occur regardless of the identity of the winners and losers, we have undertaken research in order to assist our clients and the trade and industry organisations we assist on rating policy to identify the potential effects of a delay until 2017.

5.2 Our research suggests that at a revaluation in 2015 the total RV in England would have fallen by around 10% reflecting movements in rental values since the April 2008 antecedent valuation date for the 2010 revaluation (and in costs for properties valued by reference to the contractors basis of valuation and trading performance for those properties valued having regards to receipts and expenditure). We had regard to our research department’s forecasts of likely future rental change until April 2013, the intended antecedent valuation date for the 2015 revaluation.

5.3 Our estimate of a 10% fall in values compares with what has been disclosed as the Valuation Office Agency’s (VOA) estimate of a 13% reduction. We consider that our respective forecasts are broadly consistent and in line with a reasonable valuation tolerance, given the relatively high level at which it is possible to undertake such forecasts in the time available and having regard to the fact that we are still nearly 5 months prior to the April 2013 valuation date.

5.4 Our and the VOA’s research is helpful in assisting identification of the potential winners and losers from a revaluation in 2015. The winners would have been those whose rental values fell by more than 13% or 10% (on the VOA’s and Gerald Eve’s estimates respectively) between the 2008 and 2013 antecedent valuation dates. They would have benefited from lower rates bills following a 2015 revaluation. Conversely, losers are those whose rental values increased, or decreased but by less than the all property aggregate (13% - VOA, 10% - Gerald Eve).

5.5 The Government has claimed, based on extrapolation from the VOA’s estimates, that there would have been 800,000 losers from a 2015 revaluation and only 300,000 winners. We seriously question this claim, not because we have been able to undertake calculations that show otherwise, but simply because we do not consider that at the high level of the VOA’s estimates it will be possible to validate and justify such analysis. To do so would require huge numbers of individual property valuations to have been undertaken and there is no indication that this detailed exercise was carried out.

5.6 The Government’s other claim we question strongly is that ‘sectors facing big hikes would have included retail …………….’ (Hansard 30 Oct 2012 : Column 18WH) . Retail is a sector area which has been hit hard by the economic downturn and very many locations would have benefited from the 2015 revaluation as open market rents in many high streets are substantially lower than those prevailing in 2008.

5.7 Our research has identified Canterbury, Plymouth and Derby amongst major cities whose rates bills would have dropped by at least 20%. Retailers would have benefitted from bills at least 10% lower in Bristol, Leeds, Nottingham, Sheffield, Blackpool, Swindon, Walsall and Wolverhampton.

5.8 Retailers and many other businesses are currently paying business rates based upon rental levels prevailing close to the peak of the market in 2007/08. There is no shortage of evidence of businesses whose rates bills now exceed the rental value of their properties. It is wholly inappropriate for these struggling businesses to be penalised by excessive rates for a further two years, in effect subsidising the relatively more prosperous businesses which should be paying a larger and fairer share of the national rates burden.

5.9 On Second Reading, the Minister stated (5 Nov 2012 : Column 606)

‘Without action, there will be massive volatility, which, in itself, could close down businesses and, at the very  least, discourage business investment. This reform will provide certainty for business to plan and invest, supporting local economic growth.’

5.10 We note the Government’s concern that the 2015 revaluation could have caused volatility in rates bills. There can be no doubt that all revaluations cause a degree of volatility as their purpose is to cause rates bills to change in line with relative changes in property values. If the Government is especially concerned that a revaluation in 2015 would produce large swings in liability, as has been claimed, this can be cushioned by transitional relief as has been applied to rates bills following every quinquennial revaluation since 1990.

5.11 Regarding the claim that the postponement of the revaluation assists businesses by providing certainty, it seems to us that the principal certainty that this delay delivers is that of excessive business rate bills for struggling businesses who would have seen reduced rates bills in 2015. They are being penalised in order to subsidise the relatively more prosperous businesses, thus perpetuating an unfairness that revaluations are designed to eradicate.

6.0 Conclusion

6.1 The 2015 Revaluation should proceed as planned with future revaluations at intervals no less frequent than five yearly.

6.2 We would be pleased to assist the Committee by providing any further evidence that it would find helpful.

6.3 Since preparing this evidence we have had sight of the ‘VOA’s high level estimates of non-domestic rental and rating assessment movements for England’ issued today. We have not had an opportunity to analyse this but our immediate comments are:

a) The VOA is now agreeing with our analysis that with the exception of central London and the food sector, high street retail would have been beneficiaries from the 2015 revaluation through reduced rates bills.

b) The only basis on which the VOA is able to claim that 800,000 businesses would have seen increased bills at the 2015 revaluation is to include in that number the 520,000 hereditaments which on its own admission it had no data readily available to analyse and therefore it had to make an unsubstantiated assumption that they would have faced increases in rates liability.

November 2012

Prepared 21st November 2012