31.Although reform of the appeals system is already underway, we received substantial evidence on the impact on authorities’ business rate revenue of ratepayers appealing against their business rates bills; it was often the very first issue raised in the written submissions and oral evidence. Once an appeal is launched, a council must set aside a sum of money in case it is successful, which means that, in aggregate, often substantial amounts are unavailable for long periods of time. Appeals were a “massive problem”, had a “significant adverse financial impact”, were “huge but repeatedly ignored by DCLG” and “unfair and completely outside the control of councils” and were the “most unsatisfactory aspect of the present system” and the “most significant area where reform is required”.
32.Under the current system, authorities are responsible for 50 per cent of the value of appeals and thus bear 50 per cent of the risk, including of those started before April 2013 which date back to revaluations carried out in 2005 and 2010. There was concern among those giving evidence that councils would bear 100 per cent of the risk under the reformed system. Boston Borough Council observed that, before April 2013, “such losses would have been borne by the Government’s National Non-Domestic Rates Pool and the impact spread out nationally”. It is notable that, apart from the safety net, there is no way of protecting authorities from reductions in rate revenue caused by appeals or compensating them for their losses.
33.In summing up his authority’s situation, Dennis Napier, Assistant Head of Financial Resources at Sunderland City Council, defined the issue for us:
We in Sunderland have roughly 1,429 appeals still outstanding. We have settled 295 and 183 came in this year. The value of these appeals, if successful, is over £11.3 million. That just gives you an idea of the context and the scale of things that are beyond the local authority’s control. Out of that £11 million, we have about £3 million ongoing. If you take the backdated figures out, that would be another cost of £3 million moving forward.
34.For many councils, a significant proportion of their rateable value is under appeal; for example, 33 per cent in Sheffield and 40 per cent and 34 per cent respectively in the City of London and in Westminster. Paul Dransfield, Strategic Director of Major Programmes at Birmingham City Council, said that “Going forward, we have to provide forty-something million pounds’ worth of dampening down per annum to provide for successful appeals”. If the appeal is successful, councils are liable to repay substantial amounts to businesses.
35.We heard that, for a range of reasons, appeals inject volatility and uncertainty into the business rate retention system. Sheffield City Region said that the “volatility” of the appeals process “makes it difficult to accurately predict the level of income that will be generated” and the City of London Corporation said, due partly to the “length and complexity” of the appeals process, appeal losses were “inherently difficult to predict”. R3 Intelligence, a research consultancy based at Northumbria University which monitors and simulates business rates retention, highlighted the “uncertainty, volatility, and turbulence” in the rating system itself, which they said made it difficult for councils to plan new functions and responsibilities. Decisions by the Valuation Office Agency (VOA) and courts to reduce rateable values, which then apply to similar types of property across the country, demonstrate this. Examples include Hartlepool power station: its rateable value was halved following a VOA review, leading to a drop in revenue for Hartlepool Borough Council of £3.9 million per year; and Virgin Media’s case which, if successful, could require around 60 local authorities to make substantial refunds of business rate revenue. Stockton-on-Tees Borough Council said that, as a result of Virgin Media’s appeal, they have had to identify £2.8 million to be set aside and almost £500,000 a year going forward which they say will have a “significant effect on the ability of the authority to deliver services at current levels”.
36.Authorities told us that growth in their business rate revenue was being outweighed or, in some cases “eradicated” by the impact of appeals. Cllr Tim Mitchell, Cabinet Member for Finance and Corporate Services at Westminster City Council, described the “conundrum that […], to date, under the present system since 2013–14 we have lost £220 million on appeals, but we have only gained £100 million in terms of growth”. Greater Manchester Combined Authority summed up the consequences of this for 100 per cent retention:
It is already clear that the fluctuations in revenue caused by the appeals process are so large that they are likely to swamp growth incentives. Unless […] addressed, there is a significant risk that the Government’s reforms will fail to meet their productivity and growth objectives.
37.The Enterprise Act 2016 introduced a new appeals system, aimed at reducing the number of long-term appeals in the system and discouraging speculative appeals, which goes live on 1 April 2017. The City of London Corporation said that, although this had addressed some of the “wider concerns” about the appeals process, local authorities needed to play a more active part in the process, given their “direct stake in the outcome of appeals”. The Greater London Authority welcomed the reforms but called for urgent action to reduce the existing backlog of appeals both in London and the rest of the country.
38.We were interested to hear that appeals will be dealt with separately under the additional business rate retention pilots in Greater Manchester and Cambridgeshire and anticipate that this approach is considered for the reformed system. We received a range of suggestions for tackling the impact of appeals on councils’ rates revenue and growth incentives. These included:
Issues for consideration:
48 See, for example, City of London Corporation () para 2 and Boston Borough Council () para 5
49 LGSS () para 4
50 Boston Borough Council () para 5
51 Gateshead Council () para 4.2
52 City of London Corporation () para 2
53 Greater London Authority ()
54 LGSS () para 4; Stockton-on-Tees Borough Council (); Sunderland City Council ()
55 Boston Borough Council () para 5
57 Sheffield City Region () para 28
58 Greater London Authority ()
60 Sheffield City Region () para 27
61 City of London Corporation () para 3
62 R3 Intelligence () para 1.2
63 Leeds City Council () para 2.1.7
64 Stockton-on-Tees Borough Council ()
65 Andy Hall at Q51
67 Greater Manchester Combined Authority ()
68 The new system is based on a three stage approach: ‘check, challenge, appeal’. At the ‘check’ stage, ratepayers wishing to challenge their rateable value will be required to propose an alternative value to the Valuation Office Agency (VOA), and provide evidence for it. If agreement cannot be reached, within four months, the ratepayer may initiate the ‘challenge’ stage and set out the points on which the parties have been unable to agree, explaining their position with reference to evidence and/or legal argument. The third stage is ‘appeal’: this will be a hearing before the Valuation Tribunal for England. This can occur if the ratepayer disagrees with a decision notice at the ‘challenge’ stage, or if the appeal has spent over 18 months at the ‘challenge’ stage.
69 City of London Corporation () para 7. See also Birmingham City Council () para 3.9.2
70 Greater London Authority ()
71 Qq192, 200
72 City of London Corporation () para 5
73 LGSS () para 4, Q63 [Andy Hall], Q87 [Dennis Napier]
74 Newcastle City Council ()
75 Local Government Association () para 5.1.5
77 Qq64, 140
9 June 2016