Growth and Infrastructure Bill

Memorandum submitted by Tom Emlyn (GIB 24)

Delaying the 2015 Rating Revaluation

Summary

There are three main problems with the proposed delay of the 2015 Revaluation. The perceived threats of dramatic change and higher UBR are overstated and capable of being dealt with by Transitional Arrangements. The Valuation Office Evidence has two crucial flaws that undermine its conclusions. The risks and problems of delay have not been considered. I discuss the detail of these points under the following headings.

1. Evidence submitted by a Chartered Surveyor who acts on behalf of Non Domestic Ratepayers to advise them about their liability

2. Good Governance – the purpose of Quinquennial Revaluations

3. The Impact of Revaluations – Transitional Arrangements smooth the changes and already allow time for Ratepayers to react.

4. The Valuation Office Figures.

5. Why is a delay proposed? The concerns appear to be unfounded.

6. Conclusion – The proposed delay is poor government. The perceived threat does not exist. The dangers of delay are far greater.

Evidence submitted by a Chartered Surveyor who acts on behalf of Non Domestic Ratepayers to advise them about their liability

1. I am Tom Emlyn Jones, a Chartered Surveyor, member of the Rating Surveyors Association, and Director of Jones Norris Adams, a firm of Chartered Surveyors based in Central London advising about Commercial property, and in particular about Non Domestic Rates. I am grateful for the opportunity to provide evidence.

Good Governance – the purpose of quinquennial Revaluations

2.1 Quinquennial Rating Revaluations were brought in by law to ensure that the basis for charging Non Domestic Rates was regularly reviewed. This means that macro economic trends and micro economic factors that affect the property market and the companies operating within it will be reflected in a timely way. It is desirable that rates are charged fairly, and that the methodology works as neutrally as possible.

2.2 Regular Revaluations are a good way to ensure the tax base is reviewed, and this is something the Government recognises in their announcement. The Revaluation produces a snapshot from which to base the tax take. Every day you move away from that snapshot the list becomes more out of date. In academic discussion on this point a better way to move forward would be to have more regular revaluations, rather than longer gaps.

2.3 As there is an Antecedent Valuation Date there is already a 7 year gap from the snapshot to the last day on which rates are based on that snapshot. Over this period inevitably the Rates for some properties become relatively too low, and some become too high. If good governance includes levying taxes fairly then delaying the revaluation is a move that by definition increases unfairness.

2.4 A consequence of this is that the unfairness that delay creates in the rate burden, will then be exaggerated by the market. For example over time an area may suffer because of a macro economic trend and relatively decline. The rates in that area will be based on the historic snapshot of the last revaluation. If the area has declined, the rates will therefore reflect rosier times, and be relatively high. When businesses seek to operate in that area they will be faced with "high" rates and this will do two things. First it may discourage them operating at all and it may also discourage property investment in that area. Secondly it will diminish their rental bids, which will distort the property market. The effect of the tax may therefore feeds into rental levels. As rents are used to reset the tax base, at the next Revaluation this exaggeration of market trends will distort the subsequent Revaluation and mean the tax was not operating neutrally.

2.5 This works also in areas where over time property in an area becomes relatively better. In such areas, as time goes by, away from the Revaluation snapshot, the rates become "low" and this encourages businesses to migrate to these areas, and fuels rental growth. The areas, which are already benefitting, obtain a further benefit from the Revaluation delay and may encourage an overheating of the market by encouraging investment, and also increase the likelihood of higher rents distorting the next Revaluation.

2.6 Delaying the Revaluation increases the chances of unfairness, and the size of the unfairness, and starts to feed into the subsequent revaluation by its impact on the property market. Previous legislators have decided on quinquennial Revaluations. Any step to extend the gap between Revaluations is a step in the wrong direction. If anything moves should be made for more regular Revaluations.

The impact of Revaluations – Transitional Arrangements smooth the changes and already allow time for Ratepayers to react.

3.1 Non Domestic Rates is a very easy tax to understand in principle. If you occupy a Non Domestic Property, you pay tax.

3.2 The details however, are obscure and widely misunderstood. Educated and successful businessmen fail to appreciate that the Council do not have any control of the size of their bill, that the size of the bill has no direct bearing on local services, that the Rateable Value is not the amount that they pay, what Transitional Relief is, what thresholds and criteria apply for Small Business relief. The bills themselves are often extremely difficult to understand, and often if you speak to the Council they cannot explain the bill either. What businesses do know is what they pay, and those that forecast into the future generally put in what they paid this year and add a bit.

3.3 When there is a Revaluation many ratepayers show interest in what their new Rateable Value is, but their real interest is not their Rateable Value, or the poundage, but what their liability is. Ratepayers are also often interested with what their neighbour is paying as much as the absolute amount.

3.4 Following Revaluations Businesses liabilities do not initially change very significantly because of the system of Transitional relief and Surcharge. This system phases in the impact of the Revaluation. It in effect delays the redistributive consequences of the Revaluation. It means that there is no dramatic change in liability which would cause difficulties for business.

The Valuation Office Figures.

4.1 I have studies the information provided by the Valuation Office as the basis for the proposed Revaluation delay. There are various matters to which I would draw your attention.

4.2 The analysis has had no regard to any scheme of Transition. Following recent Revaluations there has been a scheme of Transition which phases in the impact of Revaluation. It would be surprising if transitional arrangements were not made again, and to ignore them is a significant oversight.

4.3 The analysis has been made by projecting inflation into the Rate Poundage in 2015. This would be done anyway, and is generally accepted and recognised by business. Its inclusion increases the perceived increase in the poundage. It is unclear whether inflation increases between now and the Revaluation have been taken into account, and it appears that if not the figure of a 20% increase in poundage maybe excessive.

4.4 The analysis has been made projecting an assumption about successful 2015 appeals. It has also been made with explicitly no assumption for further 2010 appeal success. This means the analysis does not adopt a comparison of apples with apples, but apples and pears and the consequence is to inflate the assumed increase in the poundage of 20%. On the one hand the assumed 2015 UBR is increased to reflect Rateable Value reductions following 2015 appeals, but contrariwise the 2010 Rateable Values used explicitly makes no assumption for reductions on appeal. With so many appeals outstanding this will distort the results, and the consequence is to inflate the likely 2015 UBR inaccurately.

4.5 The analysis has been undertaken explicitly assuming no new buildings or Rateable Value comes into the list in the next two and half years. One of the impacts of charging full rates on empty properties has been that efforts have been made to destroy unwanted empty buildings. This process has been mostly undertaken. The likelihood going forward is that more Rateable Value is going to be added to the Rating list in the next two and half years. A simple example is that the Rateable Value for the Shard is not yet in the list or included in the analysis. To ignore that and other new buildings means the 20% increase in the UBR is likely to be excessive.

4.6 The Valuation Office figures suggest that the most extreme changes of liability for the bulk classes of non-domestic property will be a reduction in office liabilities in Central London, and an increase in office values in the East Midlands.

4.7 I do not think I will be alone at being surprised at the suggestion for offices in London. I think this is for two reasons. First very few of the appeals against Central London Offices have been concluded and so the base from which the Valuation Office has made their estimates is excessive. This means the Valuation Office have probably overstated the reduction in Central London liabilities. Secondly I am anxious that the Valuation Office has used historic evidence to forecast Revaluation values. Their estimates are from January 2012 a full 15 months before the Antecedent Valuation date for 2015. As a practitioner in Central London I do not recognise as sharp a change as they anticipate. It seems to me they have overlooked the increase in office Values in London in 2012. As the Central London Office market is such a large part of the National Rateable Value cake to not include this change, when much of the rest of the country has been stagnating or declining will mean the wrong conclusions will be drawn.

4.8 The impact on the East Midlands reveals a different point. It is widely recognised that the Valuation Office undervalued properties in this area for the 2010 Revaluation. While at first glance this has practical advantages for the authorities, in terms of pleasing ratepayers, in fact it reflects poor governance, and is likely to cause unfairness. Under valuing can only be fair if everyone is undervalued by the same amount, and to do that you need to know what the correct value is. Chartered Surveyors within and outside the Valuation Office are very experienced and skilled at valuing correctly and it has to be better to try and get it right. In this instance the undervaluation in the East Midlands in 2010 creates a problem for 2015. It is a different logic but of the same theme that delaying the Revaluation will have unforeseen consequences and unfairness.

4.9 I note that the decision has been based on assumptions that 800000 liabilities will go up, and 300000 will go down. The inevitable conclusion from this, assuming a bell shaped distribution is that more of the increases will be modest. The more dramatic changes will be reductions rather than increases.

Why is a delay proposed? The concerns appear to be unfounded.

5.1 I have considered the various comments as to why the Revaluation is to be delayed. In the original Statement to Parliament it was announced

"A revaluation at this point would be likely to result in sharp changes to business rate bills in many parts of the country and in many sectors. Tax stability is vital to businesses looking to grow and help improve the economy."

There are two problems with this.

5.2 The whole point of the Revaluation is to redistribute the Rate Burden and so this proposal is on the one hand a denial of the very reason for Revaluations. Rather contradictorily in the next paragraph the Government pledges its support for quinquennial revaluations. It is ironic that the Government is having to enact primary legislation to alter the tax system. These proposals alter a system that people involved with, are used to, plan for and operate. Having criticised the previous Government for regularly tinkering with the tax system it is extremely disappointing that this Government has decided to make this change and suggest this is for reasons of tax stability.

5.3 Secondly the problem it identifies ignores any affect transitional arrangements might make to soften the impact for rate payers. Governments who have had similar concerns in the past have found this an effective mechanism to deal with this.

5.4 Following a number of complaints by vested interests about how the delay was going to be unfair the Government responded that the reason for the delay was not to save money, nor to increase the tax take. This is understandable and re-assuring.

5.5 I have lobbied various MPs and the President of the Rating Surveyors Association has received a letter from the Prime Minister. As well as repeating the motivation above being to avoid "unexpected increases" he goes onto say that the "tax take would have to rise by 20% to 56.9p in the pound following the 2015 Revaluation". I perceive this is a political fear that Ratepayers will be disappointed by such a high UBR figure. For this fear to be the driver for the Revaluation delay is wrong for broadly two sorts of reasons, one technical, and the other governmental.

5.6 From a technical point of view most ratepayers simply won’t find the detail of the Rate Poundage important. They will look at their liability. As it happens it seems also that the Valuation Office figures in their assumptions have inflated the likely UBR. The Government’s fears about "sharp increases" in liabilities are unfounded, and not demonstrated in the figures. Transitional Arrangements will soften the more severe changes and because adopting the Valuation Office estimates more liabilities will go up than down, the increases for the risers will average to be lower.

5.7 The Governmental reason to delay the Revaluation should not be because the UBR is going to go up. Five year Revaluations were set out in Statute for the very reason to avoid Governments fiddling with the system. Exaggerated fears should not take precedence over an established system, particularly when there is no consideration of the disadvantages.

Conclusion

6.1 The Government rightly states that business does not like Politicians interfering with the tax system, and yet that is exactly what they are proposing to do. There are good and accepted reasons for five yearly Revaluations. The basis for charging rates is set at each Revaluation, and as time goes by that basis becomes out of date. As it becomes out of date, the charges become increasingly unfair, depending on the macro-economic and micro-economic factors that are present in the country. To delay the Revaluation is essentially unfair.

6.2 If the Revaluation is delayed the variances in liability (being either relatively high or low) will start to impact on the market in a way that accentuates the variance. So not only does delay create unfairness, it accentuates it.

6.3 The perceived threat of "sharp changes" in liability is not demonstrated by the Valuation Office figures and there appears no reason that what changes there are cannot be managed by transitional arrangements, as they have in the past.

6.4 The perceived threat of a high UBR appears to have been inflated in the assumptions the Valuation Office have made. Their suggested 14% fall in values has converted to a 20% increase in UBR, ignoring new buildings coming into the list, and Rateable Value Reductions on the many 2010 appeals outstanding. It also reflects a concern which is of very limited interest to ratepayers. They are interested in their liability rather than its calculation.

6.5 The fears about the 2015 Revaluation seem to be overstated. The risks of delay and unforeseen problems that may be caused thereby, does not seem to have been considered. Delaying the Revaluation to 2017 will mean it has to deal with greater variations in value, and the likelihood of larger changes in liabilities is increased. By seeking to avoid perceived shocks for business now the Government is more likely to generate larger shocks later.

6.6 I would urge further consideration in respect of the proposed measure and that the 2015 should go ahead as laid down by existing statute.

November 2012

Prepared 21st November 2012