Update on Property Tax Issues: IPTI May 2017
The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep members up to date with the latest developments in property taxes both in the USA and Europe.
IPTI has put together a selection of brief reports from articles contained in IPTI Xtracts which can be found on its website (www.ipti.org). As far as Europe is concerned, this month’s report includes articles concerning Croatia, Ireland, Latvia, Norway and a focus on the United Kingdom; in addition, there are articles concerning the United States, with a focus on New York.
Croatia: Ministers Defend Introduction of Property Tax
Government says that nothing much will change for citizens.
Minister of State Property Goran Marić and Finance Minister Zdravko Marić commented on the introduction of the property tax in Croatia, which is supposed to enter into force on 1 January. They said that the tax would not be a new burden for citizens and local self-government units, and that there is enough time for preparations prior to its introduction.
Asked by journalists how the property tax would impact citizens and local government units, Minister Goran Marić said that the recent session of the Association of Towns discussed the issues of financing of local government bodies and management of state assets. He added that any tax which would increase the existing tax burden would not be acceptable and that property tax can only be a replacement for the existing fees.
“If this is a replacement for the current utility fee, as this type of tax is now called, or a substitute for the tax on holiday homes, in other words if there is no additional tax burden, then it is an acceptable tax for local government units as well, since it will not affect their revenues and will also not be additional burden for citizens”, said Goran Marić. “It is absolutely impossible for the property tax to be introduced if utility fee is not discontinued.
That would be unacceptable and that will certainly not happen”, he said.
Asked by reporters about the main benefits of the property tax, Finance Minister Zdravko Marić pointed out that the legislative proposal introducing the tax passed two readings in Parliament. “We have said that the utility fee, tax on holiday homes, and monument annuity would be consolidated into the single property tax, which will be introduced on 1 January 2018. This year will be used for adjustment to the new law, and that is precisely what we are doing”, said Zdravko Marić.
He added out that towns and municipalities are preparing for the introduction of the property tax, and that they have at their disposal the Tax Administration, the State Geodetic Administration, and the Ministry of Construction. “We believe that we have enough time, because, since the introduction of the value-added tax in 1997, there has never been a full year left for adjustment”, said Zdravko Marić.
He denied that local elections, which will be held in May, could slow down the preparation process, explaining that all deadlines have so far been met. “By 31 March, all local government units will receive all registries from the government institutions, Tax Administration, Geodetic Administration and the Ministry of Construction. Then towns and municipalities will have eight months to prepare, adapt and check the registries. Before we start sending tax notices to citizens next year, we will make a final check to once again be certain that everything is ready”, said the Finance Minister.
Coatia: Authorities Prepare for Introduction of Property Tax
Našice and Daruvar are the first towns whose citizens have been issued forms to report their property.
Residents of Našice and Daruvar are the first in Croatia who have received a request to provide to local authorities information about properties they own. Similar forms will be sent by the end of the year to home addresses of other property owners, because towns and municipalities have started with preparation for the introduction of property tax. The tax will be introduced starting on 1 January 2018, reports Večernji List on March 23, 2017.
So far, the first 400 local government employees who will work on the implementation of the law and calculation of tax liabilities have passed training sessions, and town and municipal offices are receiving additional data on the basis of which local governments must update their existing registers of real estate on their territory.
State Geodetic Administration has already delivered them orthophoto imagery, which will be used to determine properties to be taxed.
At the time of the adoption of the law, the government stressed that the property tax would be a transformation of the current utility fee, which annually amounts to about 2.1 billion kuna. In addition to utility fee, the property tax will also integrate tax on holiday homes and monument annuity. Finance Ministry estimates that the consolidated tax will bring local governments about 2.4 billion kuna, or 300 million more than they collect now. It claims that the majority of citizens will not feel any difference, but the exact numbers will not be known until March 2018, when first tax rulings will be sent to property owners.
The current utility fee will be the basis for calculation, but it will be amended with new elements that will take into account age and quality of the property. In the forms which have been delivered to residents of Našice and Daruvar, the citizens are asked whether their houses or apartments are habitable, whether they have a pool, when they were built, whether they have been expanded. Property owners must fill out the form. In cases where data supplied by the owners is different from data from public sources, additional controls will be performed.
The annual amount of tax per square metre will be determined by multiplying the value of the basic value with zone coefficient, purpose coefficient, condition coefficient and age coefficient. Although details will be determined by each town and municipality, it is known that primary apartments will have the coefficient of 1, for holiday homes the coefficient will be up to 6, and for properties which currently pay monument annuity up to 12. Buildings constructed prior to 1940 will have coefficient of 0.8, while those built after 2006 will pay the coefficient of 1.2.
It is estimated that taxes on buildings built before 1940 should be cheaper than the current utility fee, for properties built from 1971 to 1987 should be the same, while for all buildings constructed after 1988 the new tax will be higher. The exact amounts will be known next year. Association of Towns points out that it is up to local government units to decide whether the tax will be paid annually, semi-annually, quarterly, or monthly.
Ireland: South Dublin Revaluation 2017 Reaches Proposed Valuation Issue Stage
The revaluation of all commercial and industrial properties in the South Dublin County Council rating authority areas has now reached the Proposed Valuation Certificate issue stage.
On the 13th April 2017, Proposed Valuation Certificates were issued to approximately 6,475 ratepayers in this Local Authority area.
Ratepayers who are satisfied with their proposed valuation do not have to respond to the Valuation Office.
Ratepayers who are dissatisfied with any material aspect of the Proposed Valuation Certificate may make representations to the valuation manager up to and including 22nd May 2017.
Final Valuation Certificates will be issued in September 2017 and will take effect from January 2018.
If Ratepayers have any queries in relation to the revaluation process, they should contact the Valuation Office of Ireland directly.
Ireland: Commercial property rates revaluations are proving controversial
The ongoing revaluation of the rates liability of every commercial property in Ireland is proving controversial in some areas – and presents a fee-earning opportunity for valuers. The purpose of the revaluation is not to increase income for local authorities, but to redistribute the rates burden on a more equitable basis, taking into account changes to properties and infrastructure, for example, road bypasses.
Previously, rates liabilities were based on the Net Annual Value (NAV) of the property as of 1988. That figure was then multiplied by each local authority’s annual rateable value (ARV), or what used to be known as ‘the rate in the pound’. The ARV is calculated each year, depending on the budget required by the local authority to provide services. Now, under the Valuation Act 2015, rates are being assessed off a rental value as of October 30, 2015.
Before getting into some of the technical issues, I suggest that some of the problems arise from confusion among occupiers over the higher rental values. Values in 2015 are of course higher than in 1988, but they are now multiplied by a lower ARV, to give the appropriate rates liability. The purpose of updating the rental value is to ensure that the overall burden is spread fairly, in the light of changes which affect the property’s value. Another factor creating resistance, I think, is an inherent belief that rates aren’t good value and that services have been reduced: for example, bin collection.
All the Dublin local authority areas have been revalued, as have Waterford and Limerick city and county. Properties in ten other counties are now being revalued. South Dublin County Council was the first area to be revalued in 2007 and will be the first area revalued for a second time as proposed valuation certificates (PVCs) will be issued to owners before the end of April. This revaluation is also taking place over much larger geographical areas, since the consolidation into ten local authorities.
It’s very important that owners and tenants (to whom the rates liability is passed) pay careful attention to the process, as substantial sums of money are involved. If your property is incorrectly assessed and you miss the timescales for appealing, you will be paying excess rates for seven to 10 years. As a rule of thumb, your rates bill should be between 15pc and 20pc of your annual rent.
The procedure is that the Valuation Office (VO) issues a PVC and the owner has 40 days within which to appeal that. A valuation certificate is issued by the VO, followed by a final valuation certificate, and the owner has a further 28 days to appeal. Any further appeal goes to the Valuation Tribunal, who aim to issue a decision within six months. Further appeals can only be made on a point of law, to the High Court or Supreme Court.
According to rating expert Kevin Daly of Colliers, the main controversies have arisen over retail properties, and particularly provincial shopping centres. He told me that while the Valuation Office (VO) have access to more information than agents, notably, letting and turnover details from occupiers, they are under-resourced and are valuing by “sampling” and inspecting approximately 25pc of properties.
He cited the example of the TK Maxx unit at Athlone Town Centre, where the VO assessed the NAV at €668,000 p.a. Colliers assessed same at €160,000 p.a. and have appealed.
Daly told me problems are arising where the VO assess a rental value per square metre, for example in a shopping centre, and can then apply that rate across all units in the scheme, without allowing for location in the centre, the size of the unit, or its shape. He also said that he has seen cases where the VO has “an alternative method of valuing hotels, away from the traditional profits method for trading assets, in that they are applying subjective percentage multipliers to gross receipts from drink sales, food sales and golf courses etc., no matter where the hotel is located in the country”.
Industrial revaluations are also producing discrepancies and a Colliers appeal for a global software firm in Dublin 22 produced a saving of €82,000 p.a.
Generally, agents handle rating appeals for a fee of up to 50pc of the first year’s savings. Property owners should seek expert advice, bearing in mind that under the 2015 Act, your appeal can also see your rates assessment increase.
Latvia: Coalition forms workgroup to find solution to excessively high property taxes in Latvia
The coalition today agreed to form a workgroup tasked with finding a solution to the excessively high sums many households are required to pay in property tax, reports LETA.
The workgroup is expected to come up with a solution to the excessively high property tax payments in 2018 and 2019, assessing also some local authorities’ role in charging disproportional taxes on residents’ properties, Justice Minister Dzintars Rasnacs (National Alliance) told journalists after the coalition meeting today.
The workgroup will be chaired by Saeima member Vilnis Kirsis of Unity party, with each coalition delegating its representatives to the panel.
This Tuesday, April 11, the government is due to review a report of the Finance Ministry’s workgroup on medium-term tasks, including the Justice Ministry’s progress on drafting legislation that would put a freeze on properties’ cadastral value until 2020, the justice minister said.
Saeima is expected to pass the draft legislation by the Midsummer Festival, the politician said.
As reported, the Cabinet of Ministers’ committee has not supported a proposal to lift property tax on residential property if the given apartment or private home is the person’s only home, and instead proposed reducing the proportion of the property’s cadastral value on the total amount of property tax applicable.
Latvia: FinMin supports Justice Ministry’s proposal on property tax hike that does not exceed 10%
The Latvian Finance Ministry supports the proposal of the Justice Ministry, providing that the property tax hike may not exceed 10%, Finance Minister Dana Reizniece-Ozola told LETA.
Since the end of last year, the Finance Ministry has been working on possible solutions for the property tax changes, but the work group could not reach an agreement on principles. As a result, a political work group was established that agreed to move forward the proposal of the Justice Ministry to “freeze” cadastral values of properties until 2020, and provide that the property tax hike may not exceed 10% starting from 2018. Also, methodology of cadastral values should be improved.
The finance minister was sceptical about completely lifting property tax on the only home. She said that local governments already now have the rights to apply different tax exemptions to make this tax payable for residents.
She also said that local governments should explain their residents in more detail why property tax should be paid and what their benefits from this tax are.
Latvia: Investors seriously worried about rise of property tax in Latvia
Instability always causes great concerns to investors, and Latvia’s tax policies are currently only adding to these worries, Viktors Savins, the Latvian partner at EfTEN Capital real estate fund manager, said at the conference on the Latvian real estate market’s development.
The EfTEN Capital representative said that investment has been flowing into the economy. EfTEN Capital, for instance, has invested EUR 200 mln in various properties in Latvia over the past three years, and the company’s investments in the Baltic have exceeded EUR 500 mln.
“We used to be very optimistic about the market. But the current property tax in the commercial sector is quite frightening,” Savins said.
He said that properties’ cadastral values are being brought closer to their market values, but said he was baffled how civil servants who are not involved in business can estimate the market values and how they can understand the property business to set the tax rates on particular buildings.
“Just a few countries in Europe charge taxes on land, but a concrete tax rate has only been set in France and Latvia. How can a land property that does not make any profit be taxed? You could just as well charge tax on the money in each resident’s bank account,” Savins said.
He mentioned two shopping centers owned by EfTEN Capital in the Estonian town of Viljandi and Jelgava in Latvia as an example. “Both shopping centers are similar by their size, the towns are similar, and the cash flow generated by the two shopping centers is also similar. Yet in Jelgava, the property tax on this center is 10 times higher than in Viljandi,” Savins said.
Norway: Majority says no to property tax
Property tax is debated and disputed. In a new poll 56 percent said they oppose the tax. Six out of seven municipalities are taxing their inhabitants this way.
Both of the Government parties are against the municipal tax, but the Conservatives have no resolution to remove it, and the Progress Party has prioritized other issues, according to VG.
Under the so-called blue-blue Government an additional 41 municipalities have introduced property tax, so that it now required in 365 of the country’s 426 municipalities.
In connection with VG’s party polls, Infact asked people whether they are for or against the property tax. 56 percent say they are against, half as many against leaving 16 percent undecided.
Eight out of ten percent of Conservative voters have little sympathy to the tax, slightly outnumbered by the Progress Party voters, where 83.7 percent said no.
Labour voters are almost split down the middle: 42.8 percent are against, while 40.3 percent is for – leaving 17 percent of Labour voters with no stated opinion.
United Kingdom: Retailers lose court fight over business rates bill on free ATMs outside shops
Shop owners fear for the future of free cash machines attached to shops
Fears are mounting over the future of free ‘hole in the wall’ cash machines attached to shops after retailers lost a key court battle over business rates bills on ATMs.
A legal ruling published on Thursday upheld a controversial decision in 2013 t hat cash machines built into the front of a shop or petrol station should have a separate business rates bill.
Now retailers’ hopes of clawing back £200 million in rebates for past rates paid have been dashed, while they are also facing a mammoth £206 million bill for the next five years under the recent revaluation.
There are concerns that small shops and independent petrol forecourts may be forced to close ATMs or start charging for cash withdrawals.
It comes as the sector is already facing crippling rate rises under this month’s revaluation.
Figures compiled for the Press Association by rents and rates specialists CVS showed that hefty rates bill hikes from April 1 are costing retailers £39.3 million a year – or nearly £2,800 on average for each ATM.
The figures from rents and rates specialists CVS show the number of cash machines being liable for business rates has surged from 3,140 in 2010 to 14,068 this year.
The judgment, which was made in the Upper Tribunal last week and published today, follows a long-running case brought by a raft of retailers, including major supermarkets Sainsbury’s, Tesco and the Co-operative Group, as well as non-bank ATM operator Cardtronics Europe.
Retailers were sent reeling after the 2013 decision by the Government to charge rates on ‘hole in the wall’ cashpoints, which saw b ills sent to thousands of retailers in 2014, backdated to the start of the last tax regime in April 2010.
Almost one in six – or more than 196,000 – current business rates appeals lodged with the Valuation Tribunal Service relate to cash machines, according to a recent freedom of information request by CVS.
CVS has slammed the Government’s move to charge rates on cash machines as a “stealth tax” and said it could deprive many communities of vital access to cash, given swathes of bank branch closures across the UK.
The Association of Convenience Stores (ACS) wants to see local authorities use funds announced in the Budget for business rates relief to reduce cost burden for hard-hit retailers.
While ATMs attached to retailers are having to pay rates, the regime does not apply to free-standing cash machines within stores.
But it still affects many thousands of hole-in-the-wall ATMs.
A spokesman for CVS said retailers are expected to lodge an appeal against the ruling.
He said: “Given the importance of the decision, both sides indicated that they would wish to appeal an adverse decision to the Court of Appeal. As such the battle looks set to rumble on.
“However, in the short term, there won’t be any respite in tax liabilities which is going to hit small retailers and forecourts the hardest.”
ACS chief executive James Lowman said: “Sadly this ruling will make it harder for retailers to offer free-to-use cash machines that are accessible from the outside of their store.
“This will have wide ranging and damaging implications not just for convenience stores, but also for small businesses, markets and other services on high streets and in neighbourhoods where this is often the only local free source of cash.”
He added the ruling shows “what a mess the business rates system is in” following the recent revaluation.
United Kingdom: Business Rates Blunder
Sajid Javid faces backlash after saying redrawing business rates to tackle online giants isn’t ‘priority’
The Communities Secretary told MPs it could be another FIVE YEARS before any proposals are drawn up by the Government.
SAJID Javid faces a huge backlash after saying that redrawing business rates to tackle online giants such as Amazon isn’t a “high priority”.
And the Communities Secretary told MPs it could be another FIVE YEARS before any proposals to even the playing field between the likes of Amazon and high street stores are drawn up by the Government.
Javid said small firms were more worried about the Government carrying out more revaluations of business rates
The incredible confession came just weeks after Ministers were humiliated by figures revealing Amazon’s business rate bill for its distribution centres will fall this year – while pubs and small shops suffer eye-watering hikes.
Speaking to a cross-party Commons Committee, Mr Javid said: “These issues of online-offline, in town-out of town it is not something that is the highest priority issue at the moment.”
He insisted small firms were more worried about the Government fulfilling promises to carry out more frequent revaluations of business rates.
Store bosses have long urged Ministers to update the business rates regime because it’s based on property rather than sales.
Marks & Spencer has axed 6 stores and Debenhams announced a huge closure programme across its shops and distribution centres.
United Kingdom: Treasury accused of £3bn business rates ‘tax grab’ over appeal estimates hike
The Treasury has been accused of a £3bn stealth “tax grab” in the new business rates revaluation by substantially increasing estimates for successful appeals.
During each revaluation the Government predicts how many firms will appeal their new business rates, to ensure the Treasury is not left out of pocket.
In recent years officials predicted around 4 per cent of the total amount collected which would eventually be paid back after successful appeals.
However, this year the estimate has increased to 6 per cent – far higher than recent years – with little explanation for the change.
The number is significant because the Government bills businesses pre-emptively for the amount they expect to pay back overall.
If they over-estimate the amount of businesses who will win appeals to reduce their bills then the money is kept by the Government.
Experts last night said the increase was unjustified and suggested it is actually becoming harder for firms to appeal their rates.
They claim the change will net the Treasury an estimated £600m more every year, totalling £3bn over the next five years.
Jerry Schurder, head of business rates at Gerald Eve, said: “Business rates are an extremely complex and opaque tax and there is inadequate transparency for ratepayers.
“The substantial tax burden is particularly damaging to business’ trust in the Government, and firms will want assurances that the calculations are fair and there is no tax grab.
“Business rates are onerous enough without the Government hoovering up an extra £600 million a year through hidden calculations and small print that firms would never even notice.
“Regretfully, the Government appears willing to exploit the nation’s ratepayers in this way.”
Business rates – a tax that companies pay based on the rentable value of their properties – changed for the first time in seven years this month.
Some 510,000 businesses saw an increase in their rates, 420,000 are paying the same and 920,000 had a decrease according to Government estimates.
Government sets a formula for how rates are calculated, which is then applied to businesses based on the value their property could be rented for. Businesses have the ability to challenge the rate they are given.
Estimates for what proportion of business rates revenue will be handed back through appeals has jumped from 4.1 per cent to 6 per cent, analysis by Gerald Eve found.
When approached for a comment, a Government spokesman did not challenge the figures on estimated appeals but criticised the way it was framed.
A Government spokesman said: “This is yet another misleading claim from Gerald Eve. The business rates revaluation is revenue neutral and helps make sure bills are fair and accurate.
“We’re required by law to set aside funding for businesses who successfully challenge their bills, which ensures that councils do not face a funding shortfall.”
It comes amid frustration that a £300 million relief package to help those worst affected by business rates rises of up to 50 per cent has yet to be implemented.
The announcement was made in the Budget after a backlash from Tory backbenchers and small businesses about how they would cope with the changes.
A consultation on the scheme was only completed this week and critics claim it could be months before the fund is up and running.
It is also unclear who will benefit because councils have the power to decide for themselves how to distribute the funds.
Government sources defended the plans by saying they were only announced weeks ago and that the fund will be up and running “as soon as possible”.
United Kingdom – Scotland: Business rates appeals to take extra month
People who are challenging their business rates bills in Scotland will have to wait an extra month before they can begin the appeal. The disclosure that the start of the process has been extended from 70 to 105 days piles further pressure on ministers.
Ryan James, head of the Glasgow Restaurant Association, warned of a “total crisis coming” because of the Scottish government’s difficulties in dealing with the problems.
Ministers faced intense criticism after businesses were told they would be hit with rises of 300 per cent or more in their rates for the coming year.
After demands from businesses and opposition politicians, the Scottish government announced a cap of 12.5 per cent on rises for pubs, restaurants and other hospitality companies. However, Derek Mackay, the finance secretary, had failed to mention that the cap would be subject to inflation, which would put up bills by 14.75 per cent. It then became apparent that the cap would not be automatic and businesses would have to apply for the relief.
The Conservatives published details of the new appeals process yesterday. According to the rules, any business owner can ask for an appeal against the revaluation of a business but this appeal cannot be heard for at least 105 days from the day the request is made.
Murdo Fraser, a Tory MSP, said: “This is yet more evidence of the SNP’s business rates fiasco unravelling.”
A government spokesman said that it had made clear that the cap would include inflation when it was announced.
United Kingdom – Scotland: Rates system that is not fit for purpose
THE handling of the business rates revaluation has not shown the Scottish Government in a good light. First, it announced a commission to review the entire system. Then, before the commission could report, a revaluation was announced which left many businesses facing huge increases – some said they would be forced out of business altogether.
Faced with a furore over the rises, the finance minister Derek Mackay then announced a cap of 12.5 per cent on the rises for some firms for one year. But even now some businesses remain confused and concerned about what the changes could mean for them. The whole situation is an absolute mess.
But it did not have to be this way. The Government announced the Barclay Commission in the first place because it recognised that the current business rates system is not fit for purpose, but for some reason it was not prepared to wait for the commission’s report in the summer. Instead, it forced through a revaluation which caused consternation in many parts of the business community, particularly the hospitality sector and oil and gas. The Government should have waited for the commission’s report so that it could take a more considered and thorough approach.
The Government does have a point though when it says that many smaller businesses will pay less under the revaluation. Businesses also do have to pay their fair share of tax at a time when public services badly need the money. And it should be acknowledged that, even with some businesses facing huge rises, the total income to be raised from non-domestic rates will actually fall by 2017-18.
However, even with the 12.5 per cent cap agreed, many businesses are still uncertain about where they stand. Ryan James, the chairman of the Glasgow Restaurant Association, says the city council has told him the cap will not be applied automatically and businesses will have to apply to confirm their eligibility. Will they be able to do so before their first payment is due? The possible effect on cash flow is obvious.
The Glasgow Chamber of Commerce’s response has been that businesses should appeal against their new bills. It has also pointed out that the cap is, at best, a short-term solution to the long-term problems with the system. Pubs, for example, have their rates calculated based partly on turnover while the rates of other types of commercial property are calculated largely on square footage, with turnover excluded. Oil and gas firms in Aberdeen also face having to pay rates that were calculated in 2015 before much of the decline in the sector took hold.
If there is a positive to come out of this fiasco, it is that the Government has been forcefully reminded of the problem with business rates and will hopefully realise the system needs to be thoroughly overhauled so it commands the respect of businesses. In the meantime, it also needs to ensure that businesses know where they stand on the 12.5 per cent cap before taking a hard look at how non-domestic rates work. Right now, businesses are confused and angry. What we need is a replacement that is transparent, simple and above all fair.
United Kingdom: Rating – the road to revaluation: Reform
The new rating list goes live on 1 April 2017. This last article in Dentons’ rating series explores whether the rating system, post revaluation, is sufficient, or whether further reform is required.
Jerry Schurder, Head of Business Rates at Gerald Eve, comments: “The frequently heard calls for the abolition of the rating system are misplaced. A local property tax sits appropriately within the basket of business taxes available to government. The problem is that the burden of business rates in the UK with a tax rate of about 50 per cent is too high and the system doesn’t respond quickly enough to changing economic circumstances. More frequent revaluations would remove the volatility in rates bills, eliminate the need for the complex and unfair transitional arrangements and lead to a more acceptable and understandable tax.”
We agree with this. Part of the rationale for reform is the disconnect between income derived from the property and the actual rateable value (RV) of the property. The current system creates unsustainable rate increases, for often unnecessarily long time periods, is geographically skewed and is overly complex. Add to these the “new” and unwelcome Check, Challenge, Appeal system and it is plain to see why business considers the property tax regime wholly unattractive.
How can the system be reformed?
Whilst a tax is required, the current business rates system is widely criticised by the industry it affects. So how could it be improved?
Change to the Uniform Business Rate multiplier
The Chancellor announced in his 2016 Autumn Statement that the Uniform Business Rate multiplier (UBR) will be linked to the Consumer Price Index (CPI), in line with UK inflation, instead of the current Retail Price Index (RPI). This change is due to come into force on 1 April 2020 and will seek to bring business rates in line with inflation. The CBI reports that the use of the RPI for business rates has led to an over-indexation of business rates by in excess of 8 per cent (1). A change to the CPI will hopefully lead to business rates falling in line with other UK taxation.
A reduction in the UBR would decrease the taxation on businesses and would also assist in the promotion of investment in UK commercial property. On the smaller property spectrum, the sustained high business rate tax has led to an increase in the conversion of commercial property into residential property. Similarly, business rates have impacted on the viability of new commercial property developments in areas where property demand is lower e.g. in the north. This has continued to contribute to the regional imbalances in the property tax.
More frequent revaluations
Commercial property rents fluctuate constantly, reflecting the trends in supply and demand of property. Business rates are slow to respond to these changes, creating unrealistic RVs. The current valuation cycle, where revaluation took place in April 2010 (based on 2008 valuations), clearly highlights the inadequacy of maintaining RVs at levels that simply do not reflect the current rental market.
The Chancellor confirmed in his Spring Budget the government’s aim for revaluation to take place every three years. This is not a novel concept, but ratepayers will nonetheless welcome the confirmation, notwithstanding that there is no reason why it could not happen sooner rather than later. Indeed there is call for revaluation to take place more often than every three years.
Furthermore, reform is required to reduce the delay in the Antecedent Valuation Date (being the date that RVs are calculated) and the date of revaluation. The current two-year delay means that, from the day the list goes live, a number of RVs are already unreflective of market values.
More frequent revaluations should also lead to a reduction in the number of genuine appeals being made as RVs should be less disconnected to the current rental market. This, in itself, should achieve the government’s desire for a reduction in the number of appeals which it believes Check, Challenge, Appeal will bring.
Removing downward transition
Transitional relief currently works to neutralise certain ratepayers’ increases and decreases on revaluation. Whilst this is a benefit for ratepayers suffering significant increases, those ratepayers benefiting from a reduction have their reductions phased over the rating cycle. This prevents beneficiaries of reductions unlocking capital sooner. Enabling ratepayers experiencing significant reductions to instantly benefit from decreased RVs promotes business investment and fairness as they are not penalised for long periods by inaccurate RVs.
In a similar way, through introducing more frequent revaluations, transitional relief should not be required at all, as RVs will more realistically reflect the rental market and will be less subject to spikes.
Local authority retaining business rates
The government is looking to pilot schemes in Liverpool City, Greater Manchester and Greater London to enable local authorities to retain 100 per cent of the business rates collected. The rationale behind this scheme is that it will give the local authority more control over its finances and will provide more stability and continuity to ratepayers in the future.
In practice, it is difficult to see how these outcomes will be achieved. The theory, as with many reforms, is more attractive than the reality.
Online one-stop shop
Introducing an online portal to review and make payments for business rates would reduce the administrative costs incurred by the Valuation Office Agency (VOA) and make bill paying simpler and easier for the ratepayer. The availability of an online portal for bill payment may also significantly reduce the VOA’s time spent policing the payment of business rates.
Excluding certain assets from RVs
The government could, through frequent reviews of business rates, seek to unlock business investment through introducing exclusions to RVs or reliefs for novel industries / innovative sectors e.g. to promote investment in energy-efficient plant and machinery. How these reliefs would be funded is, however, a question for the government.
As with personal tax, introducing a self-assessment tax return for business rates, placing the onus on the ratepayer to assess and file its tax return, would seek to reduce the VOA’s administrative duties, focus its limited resources on compliance and enable it to dedicate resources to pursue genuine appeals and more frequent revaluations.
The current system is, of course, some way away from self-assessment. In order for the ratepayer to take control of its taxation, the system needs to be made simpler as the calls for reform strive to achieve and a greater transparency of the information the VOA holds and uses to determine RVs would be required.
Register of professional rating advisers
The rating specialists Colliers have suggested a move to a register of professional rating advisers, similar to the register used in the financial services, to reduce the delay and cost incurred through ill-founded appeals and the burden this places on the VOA. The register may also seek to remove the “no win no fee” culture, which is increasing in the industry.
With so many areas capable of reform, is a different system required?
The UK has led the way for hundreds of years with its business property tax. As Jerry Schurder comments, there is indeed a need for a tax and few would suggest to the contrary. The current business rates system, introduced in 1990 – when few could imagine the significance on the commercial property market of online businesses – fundamentally bases RVs on rental or indeed hypothetical rental values. With increasing online businesses taking retail away from the high street, the government’s aim for business rates to be tax neutral may fail. Those remaining in town and city centre hubs will become (even more) overtaxed and the property market will suffer as a consequence. The Chancellor did acknowledge in the Spring Budget that this is an area of concern, but as yet there is nothing concrete from government as to how it proposes to address the taxation unfairness arising as between a business that structures itself online and one that relies on bricks and mortar.
The existing system is clearly unsatisfactory. It is implicit in the Chancellor’s emerging rates hardship fund that this is the case. Whether reforming the existing system is more appropriate than starting again with a blank piece of paper remains to be seen. Either way, expect to see vociferous calls for reform from the property and rating industry during the life of the 2017 list.
(1) CBI analysis – OBR economic and fiscal outlook November 2015
United Kingdom: Government ‘must tackle flaws in business rate appeal system or chaos may ensue’
A new system for appealing against a business rates rise risks descending into chaos unless the Government takes urgent action to iron out its faults, an industry body has warned.
Business rent and rates specialists CVS said a tax portal introduced ahead of the business rates revaluation may have “vital elements missing” which could prevent firms from lodging an appeal.
The concerns echo a broadside from cross-bench peer John Lytton who told the House of Lords earlier this month that the Check, Challenge, Appeal platform involved “the most torturous” registration and had been designed to “prevent appeals”.
The business rates revaluation, which comes into force on Saturday, updates rateable values to take into account property prices over the last seven years.
CVS has been working with the Valuation Office Agency to help test the new portal.
Mark Rigby, CVS chief executive, said: “The new system is creating a bottleneck at the early stages of the appeals process which could deter businesses from bringing genuine appeals.”
Chief Secretary to the Treasury David Gauke is looking to crack down on speculative business rates appeals which he claims are “clogging up the system”.
There was an average of 4,500 appeals per week in the first three months after the current tax regime was introduced in 2010, according to CVS, which expects an even bigger influx following the revalutation.
Mr Rigby added: “I am deeply concerned that with the system to be launched this weekend it may have vital elements missing, which could undermine the Secretary of State’s ambition to have appeals resolved quickly, efficiently and effectively.
“It is vital these issues are resolved before the weekend or chaos could ensue.”
The Government has added 4.6% to rates to cover the cost of appeals, while the Chancellor has handed pubs a £1,000 discount on their business rates to help firms hit hardest hit by the revaluation.
However, the Earl of Lytton warned the Government that the new system was not ready to handle appeals.
Speaking in the House of Lords on March 14, he said: “HMRC is devising a system known as ‘check, challenge, appeal’ -CCA, if you like – which requires the most tortuous and demanding ratepayer registration that could possibly have been devised and, separately but in parallel, an equally tedious system for rating agents to register.
“The ‘check’ aspect is still at the beta testing stage with, I understand, lots of anomalies and glitches to be sorted out, while ‘challenge’ and ‘appeal’ have yet to run at all.
“In my opinion it is clearly designed to prevent appeals generally by obstructing access to them.”
The Press Association revealed earlier this month that political heavyweights George Osborne and Philip Hammond will both benefit from the business rates revaluation.
The current Chancellor’s property firm – Castlemead – will receive a business rates cut of more than £12,000 over the next five years.
Meanwhile, Mr Osborne’s family wallpaper firm is to enjoy a cut of more than £3,400 a year for its showroom in London’s swanky King’s Road.
Firms in London are set to be among those hit hardest due to soaring property values, with the Institute for Fiscal Studies (IFS) estimating businesses in the capital will see rates rise by around 11% above inflation over the next five years.
United Kingdom: The British Retail Consortium described the £435 million support package announced to offset business rate rises as “a drop in the ocean”
The new business rate revaluation may be taking effect on April Fool’s Day but for those businesses facing the biggest increases it is no laughing matter.
Over the next five years, revenues from business rates in England and Wales are projected by the Office for Budget Responsibility to net local authorities and the Treasury an extra £4.9 billion, up 17 per cent on the 2016-17 tax year.
Analysis by CVS, the rent and rates consultancy, suggests that office properties in the Yorkshire and Humberside area, the West Midlands and northwest are among the biggest winners in terms of decreases in the rateable value. The biggest losers include offices, shops, factories, pubs and hotels in London.
Paul Drechsler, the CBI president, met Sajid Javid, the communities and local government secretary, this week and made the point that, while the CBI welcomed the package of measures taken in the budget to reduce the burden, disproportionate rises remained “a barrier to entrepreneurship”.
The British Retail Consortium described the £435 million support package announced in the budget as “a drop in the ocean” on “an unsustainable property tax higher here than anywhere in the developed world”.
The Federation of Small Businesses urged councils to distribute the main £300 million hardship fund in the package “as speedily and fairly as possible, to end the uncertainty and anguish being felt by thousands of smaller businesses”.
Mike Cherry, the FSB’s national chairman, said: “Small firms in pockets throughout the country are still vulnerable to staggering increases. This delayed revaluation comes at a time when business costs are spiralling amid unprecedented economic uncertainty.”
The British Chambers of Commerce agreed that the business rates regime was a “broken system . . . in need of fundamental reform”. It said the huge increases come as businesses face costs from the exchange rate to the rising living wage, the new apprenticeship levy and the higher insurance premium tax.
CVS highlighted the threat faced by the capital’s hotels from the new rates when several councils are holding talks with Mr Javid over the introduction of a tourist bed tax to generate extra funds. It said the London hotel sector would have to pay an extra £117 million a year in rates over the next five years.
Ufi Ibrahim, chief executive of the British Hospitality Association, urged Mr Khan and Mr Javid to “stop the preposterous idea of introducing a tourism levy” and a spokesman for the Institute of Directors said: “The government is refusing to grasp the nettle and reform business rates to create a level-playing field between high-street shops and the out-of-town distribution centres of online retailers.”
United Kingdom: Business rates expert slates govt’s ‘appalling inaction’
As new business rates bills come into effect on April 1, an expert and campaigner for change has condemned the “appalling inaction and spectacular lack of ambition” behind what he terms the government’s failure to enact genuine reform.
Gerald Eve head of business rates Jerry Schurder said the “inequities and unfairness inherent in the business rates system have been known for some time, and of particular prominence following recent campaigning by industry bodies, ratepayers and sympathetic MPs. But despite a number of reviews and innumerable opportunities to embrace real change, ratepayers face at least five more years of unjust bills”.
He writes: “The Government claimed it wanted to create a business rates system that “works better in the 21st century”, and would seek to find ways to make the system “simpler, more transparent and more responsive to economic circumstances”. By any analysis, it has failed to deliver any of these aims:
- Fit for the 21st Century – Government has failed to address the inequalities caused by the rise of internet retail, and the unfair burden placed on high street retailers.
- Simpler – Government has failed to simplify the system and a huge level of complexity remains: few businesses actually understand the system and a new appeals process is creating yet more confusion. Rates bills, containing a plethora of reliefs and supplements, as well as new discounts announced at last minute in the Budget, have become almost unintelligible.
- More transparent – Government has failed to make rates more transparent – VOA still refuses to share evidence with ratepayers and won’t justify its valuations. This is leading to more appeals, which the Government is making more burdensome and onerous to undertake.
- More responsive – Government has failed abysmally, promising in March 2016 that it would revalue more frequently but then immediately issuing a negative discussion paper with no intention to do anything until 2022 at the earliest.
Schurder added: “It is only now, with new rates bills hitting doormats, that firms can truly appreciate the cost of the Government’s failure to grasp the nettle and genuinely reform the system.
“UK Plc has spent the past seven years calling for reform, and the Government has had myriad chances to do so, but its consummate failure to do anything other than apply sticking plaster solutions for small businesses has hit most ratepayers hard, and will continue to do so for at least the next five years.
“Review after review has been undertaken, with firms responding consistently about the need for genuine change, but each time the Government’s response has been at best muted and at worst dismissive. It has become impossible to view the Government’s inaction throughout this time as anything other than cynical ploys designed to give the impression of action while actually kicking the issue into the long grass.
“Its flagship policy to devolve business rates to local authorities by 2020, itself criticised this week by the National Audit Office, provides Government’s only response to businesses’ complaints, which is to make this a local government problem and deflect all future criticisms away from Whitehall. This Government should be ashamed of its abject failure to deliver the reforms it promised.”
Compliments of IPTI: