Business, Innovation and Skills CommitteeFurther supplementary evidence submitted by Paul Turner-Mitchell

I write to you as author of Section 2 of The Grimsey Review which deals with business rates.

I feel that I must write to you regarding the evidence given to during the oral session by the Minister, Brandon Lewis.

It is worth noting that no business or business organisation was consulted on, or has voiced support for, these proposals.

The Government has attempted to justify postponement by claiming that “800,000 premises would see a real-terms rise in their rates bill, where only 300,000 premises would see their bill fall”, and further alleges, without any evidence, that “smaller and medium firms are likely to be harder hit”.

Independent evidence and the work of rating specialists outside the VOA cause us to be extremely sceptical about the Government’s statements. Indeed, even on its own terms, the VOA data contains no justification or support for the claim that 800,000 premises would have seen increases. Based on what can be reasonably inferred from the VOA’s estimates and the evidence it says it has collected, about 350,000 premises would see their bills fall, and about 377,400 premises would see their bills rise.

Table 2 of the VOA high level estimates identifies that a revaluation in 2015 would have reduced tax liability for London offices by £440 million. Although not explained in the accompanying report, a reduction in liability of £440 million would require total Rateable Values for London offices to have fallen by some 28% at a 2015 revaluation, ie there would have to have been a fall in rental values between April 2008 and April 2013 of 28%.

This degree of fall is simply not supportable based upon independent research data which we summarise below.

Investment Property Databank (IPD) is a leading provider of worldwide critical business intelligence, including analytical services, indices and market information, to the real estate industry. Each year, IPD produces more than 120 indices, as well as almost 600 portfolio benchmarks, across 32 countries enabling real estate market transparency and performance comparisons.

Its UK Quarterly Digest provides data closest to the relevant antecedent valuation dates for the 2010 and 2015 rating revaluations of 1 April 2008 and 2013. We have analysed IPD’s data for offices as at March 2008 and September 2012. It identifies that standard offices in inner and central London fell by 17% over that period and in the rest of London by 10%.

Cushman & Wakefield, a leading global property consultant, produce a quarterly central London index covering prime offices. Taking central London as a whole their index shows a fall of just 11.4% between March 2008 and September 2012. They also segment central London into districts and show the following rental value change.

Centre Rental change

EC2 Banking and Finance -8.3%

EC3 Finance & Insurance -8.3%

WC1 Holborn -20.8%

E14 Docklands -10.0%

W1 Mayfair -21.2%

SW1 Victoria -3.7%

SW1 St James’ -21.2%

It is apparent that the VOA has overestimated the effect on London offices of a 2015 revaluation and that most office occupiers in the City of London would have paid more as a consequence of the 2015 revaluation.

Rental data of shops shows that some of the sharpest rental falls have been seen in high street retail, particularly in towns and regions that have struggled since 2008. Forcing these areas to pay artificially high business rates for an additional two years will undermine the Government’s attempt to address the high street decline.

Average Zone A Shop Rents—The Story Since 2008

Research by Colliers shows the change in shop rentals in the UK since 2008. In England, taking London out of the equation, rents have been reduced by an average of 20.6% and as much as 22.3% in Scotland and 30.8% in Waes.

	Average of 2008	Average of 2009	Average of 2010	Average of 2011	Average of 2012	Average of 2013	% Change 2008 vs 2013
England (ex London)	112.2	97.6	96.9	94.8	91.8	89.1	−20.6%
London	206.4	194.0	200.3	205.3	220.2	229.8	11.3%
Scotland	102.4	87.8	85.6	83.9	81.7	79.5	−22.3%
Wales	86.7	74.5	70.0	68.1	62.4	60.0	−30.8%
Grand Total	131.7	117.7	118.4	118.8	120.2	120.5	−8.5%

Not only will postponement force many retailers to pay artificially high bills until 2017, but will also in our view exacerbate the significant hurdles that already exist to investing in struggling high streets.

Look at 193/197 Regent Street, London. This property currently trades as Ferrari but has been let to Hackett. The menswear designer will open a flagship store providing 11,000 sq ft to trade over three floors. Hackett will pay £1.575 million pa for a new 15-year lease—a record zone A rent for the street.

If you consider the key ground floor of the shop premises, presently valued for rates purposes at £548,600 Hackett will be paying rates for this space in 2015–16 of some £285,000.

However, had the revaluation planned for April 2015 not been postponed and had the Valuation Office adopted the rent basis agreed by Hackett, the rates bill for the ground floor would have been £767,000 in 2015–16, more than two and a half times greater.

In a report prepared by the Valuation Office Agency to justify the postponement of the 2015 revaluations, it states:

“Across the country the food retail sector (convenience stores, food stores, supermarkets and hypermarkets) is likely to see significant tax increases, against the general retail sector trend of unchanged payments. Overall the retail sector is judged -13% RV change; implied +1% tax change.”

The VOA was asked, under an FOI, to justify that statement with the evidence and confirm the significant tax increase in monetary term.

The response was that the VOA did not hold estimates relating to their statement.

The Grimsey Review says that this questions the credibility of the statement and the entire projections made by the VOA which they say blatantly plays down the effect upon town centres and high streets up and down the country and do not stand independent scrutiny.

There are 1945 assessments (premises) in England for properties categorised by the VOA as hypermarkets/superstores.

Their total current RV is £2,749,957,750 or say £2.75 billion (4.65% of total RV of £59.085 billion) and current liability therefore £1.295 billion (this how much hypermarkets/superstores will pay this year in business rates)

If their RVs had increased by 20% at a 2015 revaluation which is what the evidence outside of the VOA in the public domain, from property specialists and rating experts suggests then their total RV would have been £3.3 billion.

The Government said 2015–16 UBR would have been 56.9p but that is the small UBR to which I have added 0.9p to get to the large UBR, hence 2015–16 liability of £1.91 billion—an increase of 47%.

Supermarkets/hypermarkets will save alone £620 million in 2015–16 and £639 million in 2015–16 allowing for the projected RPI figure by the OBR. A total saving of £1.26 billion for the two years of the postponement.

The Combined UK turnover of Big 4 (Tesco, Sainsbury, Asda, Morrison) is £104bn and combined post-tax profits of £3.3 billion according to corporate health monitoring specialists, Company Watch.

The Reality

Colliers Research ahead of the Growth & Infrastructure Bill showed prime rents in 344 (83%) of the 416 retail centres we survey have fallen between 2008–12.

Secondary locations are likely to show even larger reductions.

The winners such as Central London Retail are presumably populated by businesses that can afford any proposed increase.

By the Government’s own estimate, 300,000 businesses which will benefit from a Rating Revaluation in 2015 would be subsidising those businesses located in stronger locations.

So what could this mean?

Businesses will have to renegotiate rents in a downward direction as a result of inflated outgoings until 2017.

The rental values of the losing retail locations will reduce further with capital values also falling, resulting in possible defaults on loans and repossessions/administrations etc.

Retailers will no longer be in a position to take new units and empty units on the High Street will remain empty for the next four years, until a proper revaluation is undertaken.

This could result in the final nail in the coffin of town centres which are in terminal decline.

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 lead to a degree of volatility as their purpose is to cause rates bills to change in line with relative movements 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.

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.

Paul Turner-Mitchell

6 December 2013

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