IPTI | Update on U.S. & EU Property Tax Issues: February 2023

The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep its members up to date with the latest developments in property taxes in the USA and Europe. IPTI has put together below a selection of articles from IPTI Xtracts; more articles can be found on its website (www.ipti.org).

United States

Work-from-Home Trend Leads to Property Tax Turmoil in Office Sector

Of all the property types, office buildings may wrestle with the pandemic’s damaging consequences the longest. The fallout from COVID-19 will clearly have a lasting economic impact. During the government-mandated shutdowns, businesses – including brick-and-mortar retail stores, restaurants, movie theaters and gyms – suffered tremendous losses.

With everyone except first responders and essential workers stuck at home, office occupancy rates plummeted as business districts, commercial developments, roads and public gathering places emptied. Many companies could not survive the shutdowns and were forced to lay off employees or permanently close their doors.

During the throes of the pandemic, companies that remained in business were compelled to adapt and learn how to effectively put their employees to work from home. Virtual meetings eventually became commonplace and routine. Then as the pandemic waned, companies began to demand that employees return to the office. While some workers ventured back to the workplace, many expressed a desire to continue to work from home.

This widespread sentiment has persisted. In fact, nearly 40 percent of workers would rather quit their jobs than return to the office full-time, and more than half would take a pay cut of 5 percent or more to retain their workplace flexibility, according to a recent survey by Owl Labs.

Given the tightening job market and the need to retain workers, many companies complied with employees’ demands and either permitted them to work remotely or allowed hybrid arrangements. Little did these employers know that allowing employees to work from home would have a profound effect on the appraisal of office buildings for property tax appeal purposes.

Property taxes are the largest single expense for most office landlords, and most property taxes in the United States are ad valorum, or market-value based. In other words, higher-valued properties have greater property tax levies. Therefore, property owners frequently file tax appeals to reduce this expense.

In the context of a real property tax appeal, the valuation of office buildings can be complex. Typically, an arms-length or comparable sale is the best evidence of value in a tax appeal proceeding. Since there aren’t many arms-length purchases of single office buildings today, they are commonly valued by capitalizing the property’s rental income stream minus property-based expenses. As a result, the actual rents collected are critical to the building valuation.

And rents have suffered. The mass exodus from office buildings to remote locations significantly lessened the demand for dedicated office space. With employees working remotely, many companies have realized they can function as well as before while occupying much less space.

Thus, as leases expire, the tenants that choose to renew their leases are requesting a much smaller footprint with lower overall rents.

Compounding the decreased demand for office space, building expenses have skyrocketed. Rapid inflation has helped to propel insurance and general property maintenance costs, which have surged upward by more than 15 percent since 2020. Furthermore, lingering COVID-19 health concerns have led to enhanced cleaning protocols and upgraded air filtration systems, which have likewise raised building expenses.

Simultaneously, the Federal Reserve has raised interest rates to combat inflation. These higher interest rates, meanwhile, have further reduced property values by increasing the cost of financing. Mortgage interest rates and the risks on the equity side have also increased. This has a negative effect on the market valuation of office buildings as higher capitalization rates generate much lower appraised market values.

Altogether, reduced office space demand, weakened cash flows, higher building expenses and rising interest rates do not bode well for the U.S. office sector. Landlords are being forced to offer concessions such as free rent or are paying for extensive interior buildouts to attract tenants.

This large shift in lease renewal rates, occupancies, expenses and capitalization rates have produced the equivalent of the four horsemen of the apocalypse for office building valuations, driving property tax appeals and raising a distinct possibility that many office buildings will become stranded assets. Experience indicates these changes can result in a 10 percent to 30 percent drop in market value from pre-pandemic levels.

A good rule of thumb would be that if a building’s net operating income has dropped, the real estate tax levy should go down correspondingly. Most municipalities, however, have not reduced assessments to reflect the economic downturn.

Consequently, now more than ever, property owners must be vigilant to avoid paying excessive property tax bills. Conferring with experienced counsel, questioning assessors’ property valuations and challenging tax assessments will help to ensure an office building’s current real property taxes are based on this new valuation reality.

New York: NYC’s most valuable building, and other nuggets from the tax roll

Buried in the bewildering data dump that is the city’s tentative property assessment are nuggets of interest to real estate. For one, the 1.8 million-square-foot GM Building just became the most valuable in the city with a market value of $1.9 billion – up 17 percent from a year ago. Its billable value increased by 6.4 percent to $796 million.

For the lay reader wondering why the two values are so different and went up by vastly different amounts, understand that the city makes property taxes inscrutable. Perhaps the idea is to create jobs for accountants and tax certiorari lawyers, whom building owners routinely hire to challenge their assessments.

The city estimated gross income for the tower, 767 Fifth Avenue, at $304 million and its expenses at $65 million. It figured a base capitalization rate of 7.46 percent, “which is the Department of Finance’s estimate of the rate of return that an ordinary investor would expect on their investment in this type of property.”

Note to DOF: Ordinary investors don’t own skyscrapers. In this case, Boston Properties, Chinese property tycoon Zhang Xin and the Safra banking family do. But never mind. Back to the data:

The market value of the Empire State Building, once the city’s most valuable property, increased by nearly 10 percent to $993 million. Its billable value rose by 7.8 percent to $440 million.

The iconic skyscraper has in recent years received an energy-saving overhaul, suffered a retail slump and enjoyed a revival, but also endured the pandemic’s wipeout of its observation deck revenue.

Also of note in the tax roll, the luxury rental building at Blackstone’s 8 Spruce Street saw its assessment leap from $4.4 million to nearly $31.6 million. Based on the current Class 2 apartment tax rate of 12.67 percent, the tax bill of the Frank Gehry–designed tower will go from $379,000 to $4 million. This one is easy to explain: The Manhattan building’s 421a tax break is starting to phase out.

For the same reason, the Rockrose-developed 709-unit rental tower known as the Linc LIC at 43-10 Crescent Street in Hunters Point had its billable value boosted from $740,000 to $12.9 million, despite its market value dropping from $163.7 million to $137.3 million. This means its $90,700 tax bill this fiscal year will rise to $1.58 million starting in July.

Opponents of the abatement program, which for new projects expired June 15, 2022, love to point out that it wipes out almost $1.8 billion in annual taxes, including at luxury buildings (available apartments at 8 Spruce run from $4,672 to $32,000 a month). They never mention how much is collected from buildings after their abatements end.

Of course, no one knows if these buildings would have even been built had 421a not existed. Commercial properties can also get temporary tax breaks.

At Two Court Square in Long Island City, the office property’s ICIP exemption is ending, bloating its billable value from $1 million to $24.7 million and its tax bill from $109,000 to $2.7 million starting in July, based on the current tax rate of 10.755 percent – despite its market value dropping by $4.5 million, to $54.9 million.

ICIP stands for Industrial and Commercial Incentive Program. The program offered exemptions of up to 25 years for constructing or rehabilitating industrial and commercial buildings but was killed in 2008 and succeeded by ICAP, with “abatement” replacing “incentive.”

An oddity in the new tax roll is that some hotels’ market value was increased by identical or nearly identical percentages.

The figure for the city’s most valuable hotel, the Hilton in Midtown, rose by 7.47 percent, while the Plaza’s went up 7.69 percent and the Ritz Carlton’s by 7.66 percent. Three more of the highest-value hotels were given market-value increases of exactly 15.5 percent and a fourth got a 15.4 percent bump. Another three got matching 8.15 percent increases.

It was as if a computer rather than trained assessors came up with the numbers, which are supposed to stem from income and expense statements submitted by the hotels.

Vijay Dandapani, president and chief executive CEO of the Hotel Association of New York City, surmised that the Department of Finance improvised because the pandemic so disrupted hotels’ 2021 revenues, on which next year’s tax assessments would normally be based.

The agency also lacks data from last year, when revenue per available room remained below 2019 levels despite about 15,000 rooms being closed at any given time, the hotel owners’ trade group leader said by email. “Incidentally,” Dandapani added, “some hotels, particularly luxury hotels, were within 10 percent of their 2019 performance on the revenue side with a few even better, while most others were worse.”

Overall, hotels’ market value increased by 9.7 percent and their billable values by 7.8 percent.

On the residential side, Class 1 homeowners’ market values were raised by 6 percent to $25.1 billion. If the numbers hold, homeowners’ tax bills will increase by 6.3 percent in Brooklyn and by 6.1 percent in Queens and Staten Island – although Staten Island homes’ market value increased by 12.1 percent, the most of any borough.

The Department of Finance has made efforts to explain these figures on the notices of property value it mails to residential owners. It remains a work in progress.

This year’s four-page notice estimates next year’s property tax on the first page, but omits the current year’s tax. Taxpayers who want to know the increase they are facing must find their current taxable value on page 3, multiply it by the 0.12267 tax rate on page 1, and subtract the result from next year’s projected tax.

Owners unhappy with the result can challenge their assessed value with the New York City Tax Commission. The deadline is March 1, except for Class 1 (single-family) owners, who have until March 15. The assessed value for Class 2 and 4 is fixed at 45 percent of the market value and 6 percent for Class 1, so it is not clear from the mailing what good it would do to challenge it.

The logical choice is to challenge the market value, which should not be confused with what a home would sell for, but that’s another story (it’s explained online but not on the mailed notices). Class 1 owners can request a review of their market value or other potentially incorrect facts until March 15 while Class 2 and Class 4 owners have until April 3, but don’t bother the Tax Commission. Another agency, the Department of Finance, handles that.

The new proposed value of all city property is $1.479 trillion, a 6.1 percent increase from the current fiscal year, which ends June 30. Taxpayers will be billed 4.4 percent more starting in July, but changes for specific properties depend on individual assessments and the city budget hashed out later this spring by the mayor and City Council.

The tax roll reflects “mixed signs of growth and economic recovery,” said Finance Commissioner Preston Niblack, noting “improvements in subsectors of the residential market while key commercial sectors still lag behind pre-pandemic levels.” His summary: Office, retail and hotels are struggling, while single-family homes, which make up a majority of residential properties, “have exhibited a robust recovery.”

Class 2 residential apartment buildings rose in value by $3 billion to $351 billion. Condominiums’ market value increased 5.1 percent but co-ops went up a mere 0.5 percent and rentals just 1.6 percent. The increases were small in part because not enough buildings were constructed.

Rentals’ tax per unit will drop slightly from $5,396 to $5,385, perhaps because of Covid-era rent decreases. Co-ops’ per-unit tax will rise from $8,859 to $8,936 and condominiums’ from $13,520 to $14,095.

Among the five boroughs, billable values rose the most in the Bronx, up 11.6 percent. It appears that new construction of higher-quality buildings led to the increase. The average tax per unit in the borough rose by $182, to $2,495.

Property values can run up faster than tax bills, thanks to another convoluted tax law that especially benefits property owners in gentrifying neighborhoods. Increases in assessed value for both Class 2 and Class 4 are “transitioned” in over five years.

In the realm of commercial buildings, Class 4’s market value rose overall by 7.4 percent, to $317.2 billion, and billables by 5.2 percent, to $129.7 billion. Office buildings rose 7.1 percent in market value and 4.4 percent in billable value. Taxes per foot for Class A towers are rising from $16.25 to $16.97 but trophy towers will see a drop from $20.81 to $20.67 per foot.

Despite Class B rents starting to drop like stones, their taxes per foot will rise from $13.76 to $14.24. The phrase “lagging indicator” comes to mind. Retail buildings’ market value went up 5.4 percent and billable values rose 4 percent.

New York: NYC Property Values Are Seen Rising 6.1%, Boosted by Single-Family Homes

• Value of NYC real estate climbs to $1.48 trillion, city says
• Office market continues to struggle with record vacancy

The value of New York City’s 1.1 million properties is projected to rise 6.1% for the next fiscal year, boosted by single-family home prices.

The city set a market value of about $1.48 trillion for residential and commercial properties and utilities for the fiscal year beginning in July, according to a tentative assessment roll released by the Department of Finance on Tuesday. Citywide assessed values, which determine the value of property for tax purposes, are projected to rise 4.4% to $286.8 billion. Property values for fiscal year 2024 reflect real estate activity from Jan. 6, 2022 to Jan. 5, 2023.

“The decline in office occupancy continues to impact retail stores and hotels in the city contributing to the sector’s slow recovery,” Department of Finance Commissioner Preston Niblack said in a news release. “At the same time, single family homes, which constitute a majority of residential properties, have exhibited a robust recovery and continued growth,” he said.

Real estate taxes are the biggest contributor to New York City’s coffers, providing about one-third of the revenue for its $106.4 billion budget. Property taxes are also the primary source of funds backing the city’s approximately $40 billion of general obligation bonds.

The market value of single-family properties rose 8.3% citywide to $765 billion, with homes in Staten Island having the biggest increase at 12.1%, according to the finance department. Meanwhile values for co-ops, condos and rental apartment buildings rose about 1% to $351 billion.

To be sure, the residential market in the second-half of 2022 slowed as a result of the Federal Reserve’s aggressive campaign to raise interest rates and amid declining Wall Street profits.

Home sales in the city have slowed for five straight quarters on an annual basis and slumped to 17% below year-ago levels in the third quarter and are projected to fall about 5% in 2022 and 2023, according to the finance department. Still, transactions are projected to remain above the pre-pandemic average of about 51,000 sales per year.

Meanwhile, New York City’s office market continues to struggle as workers have been slow to return and uncertainty remains about the long-term impact of remote work.

The total market value of commercial properties rose to by 7.4% to $317.2 billion and assessed values rose by 5.2% to $129.7 billion. Market values of offices rose 7.1%, while retail buildings and hotels registered a market value of increase of 5.4% and 9.7%, respectively. The market value for commercial property is still below pre-pandemic levels. The combination of weak leasing activity and a surplus of new inventory, particularly in Midtown, pushed the vacancy rate to 22% in November.

City officials expect vacancy rates to rise further in 2023 while asking rents are projected to decline to their lowest level in nearly a decade, according to a financial plan released last week as part of Mayor Eric Adams’s preliminary budget.

New York: $9B plunge in NYC commercial real estate sets up brutal political fight over shrinking tax pie

A new NYC Department of Finance report reveals the city’s once growing real estate market may be shrinking. New York City’s golden goose isn’t just losing its feathers, it’s coughing up blood, and the whole structure of government will need to adjust.

Per the city Finance Department, the total value of Gotham’s commercial real estate – offices, stores and hotels – is nearly $9 billion short of its most recent high. And it’s likely headed down more, as companies downsize their office footprints and stores across the city close. One of the city’s real-estate giants, Vornado, just got demoted from the S&P 500.

As Finance Commissioner Preston Niblack notes, “The decline in office occupancy continues to impact retail stores and hotels in the city contributing to the sector’s slow recovery.”

It’s not just a drop in the property-tax take: The Finance Department projects revenue from taxes on commercial transactions to fall nearly 43% this fiscal year — about $465 million. The take from residential transfer taxes will drop 27.3% — down hundreds of millions more.

Real-estate taxes are the biggest contributor to New York City’s coffers, covering a third its $106.4 billion budget. Expected future property taxes are also the main backing for Gotham’s $40 billion or so in general-obligation bonds.

The loss of office workers that’s driving this also bodes grim for the city’s retail, hospitality and construction sectors, all of which got slammed during the pandemic. That hurts the city (and state) income and sales-tax take, as well.

City and state politicians have come to expect ever-more cash to spend. (Heck, real estate also gives them a ton of campaign donations.) If the real-estate collapse proves more than temporary (and the rise of remote work alone is a game-changer), all their long-term expectations have to change.

That means far more than dropping leftover Bill de Blasio dreams like universal 3K, or fat-trimming like Mayor Eric Adams’ recent cuts to the city-employee headcount. Every special interest that feeds off New York City’s obscenely large government is going to find its cheese is moving, perhaps even taken away.

This means brutal political warfare over a suddenly-shrunken pie, possible public-worker strikes and a potential new fiscal crisis.

All the usual suspects will blame Adams, but the math gives the mayor no choice but to keep on cutting.

Wisconsin: Without dissent, Wisconsin Supreme Court strikes blow to ‘dark store’ tax theory

The Wisconsin Supreme Court sided with the City of Delavan on Thursday, deciding that its property tax assessments of a Lowe’s Home Improvement store were correct after the store had sued in an attempt to get a lower assessment, and therefore pay less property tax.

The decision strikes a blow to the use of so-called “dark store” tax theory that has become common in Wisconsin and across the country. The method involves comparing the value of an operating big box retail store to long vacant, or “dark,” stores nearby. Pushed by big box retailers such as Lowe’s, Menards and Walmart – with the support of Wisconsin Manufacturers and Commerce, the state’s largest business lobby – dark store theory has been criticized by local officials and the public because it can take revenue away from municipalities and cause the property taxes on residents’ homes to increase.

“Property taxes for homeowners and main street businesses are increasing in Wisconsin as national retailers pay less,” the League of Wisconsin Municipalities wrote in a 2017 document. “A carefully-orchestrated wave of 100s of lawsuits in Wisconsin is forcing assessors to slash the market value of thriving national retail stores, shifting their tax burden to local mom and pop shops and to their home-owning customers.”

The dark store theory has drawn significant coverage in the national news media as local officials warn of what could happen to municipality’s ability to provide services such as police and fire, public schools and road maintenance if big box stores, that were lured to these towns because of the promise of jobs and effect on the local economy, are able to decrease their tax bills using this method.

In Lowe’s v. Delavan, the hardware store was challenging city assessments of its property in 2016 and 2017. The store, located in a “thriving retail area,” according to the city, was assessed at $8,922,300 in both years by Delavan’s assessor. The outside assessor Lowe’s hired valued the property at $4,600,000, nearly 50% less than the city’s value. An outside assessor hired by the city valued the property even higher than the city’s original assessment at $9,200,000.

The store appealed the assessment at the local board of review and then filed a lawsuit in Waukesha County Circuit Court. The circuit court sided with the city, so Lowe’s appealed the decision. The appeals court also sided with the city, so Lowe’s appealed to the Wisconsin Supreme Court.

At issue in the lawsuit were the stores used by each assessor to come up with the market value. When a store hasn’t been sold recently, which in this case hadn’t happened because the property had operated as a Lowe’s since it was constructed in 2005, assessors find comparable stores in the area to come up with a value.

The assessor hired by Lowe’s had almost entirely used stores that were “dark,” vacant or considered distressed.

Three of the stores had once been locations of the now-defunct American TV and Appliance and had been sold after the business closed through a receivership, meaning they were forced sales to cover the business’ debts and therefore the circuit court considered them not comparable to the Lowe’s.

Another of the properties was a closed former K-Mart that had been vacant for four years prior to its sale, classifying it officially as a dark store. The K-Mart was also not in a busy retail area like the Delavan location. The assessor also used a Walmart in Brown Deer that had initially been a Lowe’s but closed after just five years in that location and sat vacant for two years before the purchase by Walmart. The final store used was a shuttered Target in Kenosha that had gone dark after sitting vacant for four years.

The city’s outside expert, on the other hand, used comparison properties that had all been sold while still occupied.

In a majority decision written by Justice Ann Walsh Bradley and joined by Justices Rebecca Dallet, Brian Hagedorn, Jill Karofsky, Patience Roggensack and Annette Ziegler, the court decided that both the circuit court and appeals court were correct when they decided that the Lowe’s assessor’s comparison properties weren’t adequate for assessing the property’s value. Justice Rebecca Bradley wrote a concurring opinion that Roggensack joined.

“Generally, a site that can sustain a business is more valuable than one that cannot,” Walsh Bradley wrote in the majority opinion. “The highest and best use of a store in an area that is conducive to business (and is in fact operating as a business) is different from the highest and best use of a property that contains a failed big-box store. Lowe’s’ argument treats these different things alike, which is not [an] “apples to apples” comparison …”

The League of Wisconsin Municipalities, which filed a friend of the court brief in the case on the side of Delavan, celebrated the decision as a win for Wisconsin’s taxpayers.

“We think it’s tremendous news for taxpayers,” Jerry Deschane, the League’s executive director, says. “The court has very definitively and hopefully finally put to rest the use of dark stores in our communities. I think it stuck a fork in the strategy is what it did, it’s done. There are places where it is reasonable to use a vacant property as a comparable sale, but not to the extent the people that proposed the philosophy wanted it to go. The court rejected that six ways to sunday.”

Deschane says the League believes it’s especially important that the decision was essentially unanimous.

“That’s part of what convinces us that the dark store proponents have been wrong all along,” he says. “When you get reasonable jurists together, they come to the same conclusion. The fact that the Wisconsin Supreme Court came out with what is essentially a unanimous decision, this argument does not have credibility when it comes to assessing property.”

EUROPE

Germany: A Third Of The Property Tax Returns Are Still Missing

A few days before the deadline, only a good 65 percent of owners submitted their property tax returns. Time is pressing – even if defaulting owners usually do not have to expect sanctions immediately.

Four days before the deadline, just under two-thirds of the owners have submitted the required property tax return. A spokeswoman for the Federal Ministry of Finance said on Friday that 56.9 percent of the owners concerned had now submitted the declaration electronically. In addition, there would be an additional 8.6 percent of those subject to property tax who submitted the declaration on paper. The deadline expires on January 31, i.e. next Tuesday.

No penalties for defaulting owners

The German tax union speaks out against another postponement. “I don’t believe in extending the deadline again in general,” said union boss Florian Koebler to the newspapers of the Funke media group. The financial administration urgently needs the necessary information from the property owners.

According to a query by the advice portal Finanztip, defaulting owners do not have to expect a late payment surcharge or penalty payment for the time being. 14 of the 16 federal states initially want to send them a reminder.

However, experts advise submitting the property tax return as soon as possible. Otherwise the tax office will estimate the property tax value that determines the tax – and that should usually not be an advantage for the taxpayers concerned. Tax offices and municipalities need the data in order to implement the property tax reform decided by the legislature and to calculate the respective taxes up to 2024. From 2025, the recalculated property tax will then be levied.

Revaluation of 36 million properties

The original deadline for submitting the necessary declarations was October 31st. However, the federal and state governments extended the deadline by three months to January 31.

The Federal Constitutional Court declared the current rating system unconstitutional in 2018 because similar properties are treated differently. The previous calculation is based on property values that are decades old – in the west they date from 1964, in the east from 1935. The reform of the property tax should retain the principle that the valuation is based on the value of a property. For this, 36 million properties have to be revalued.

Germany: Why Germany’s property tax reform is mired in chaos

Millions of property owners in Germany still have to file the confusing property tax declaration ahead of the Tuesday deadline. Taxpayer and tax consultant groups say the reform is chaotic and should be postponed.

With the deadline looming, around two-thirds of property owners in Germany had submitted their updated property tax declarations just before the weekend. That still leaves millions who still have to fill out the confusing and cumbersome declaration by midnight on Tuesday.

The declarations are part of a government initiative to reassess German property tax around the country. That’s because German properties are based on old valuations that haven’t been updated for over 50 years. The government intends to use the declarations to arrive at updated valuations, meaning that property tax amounts could end up increasing.

Anyone who owns property in Germany – from individual owners to commercial landlords – has to fill out a separate declaration for each property they own. Some tax consultants fill them out for a fee. But anyone doing it themselves contends with a long, confusing application full of property law terms even the average German will have a hard time understanding – let alone a foreigner.

The process has also been mired in chaos from the beginning, with the ELSTER tax system crashing as soon as it rolled out the electronic filing for property tax in July.

That’s part of why several associations are now criticising the reform process.

“New property tax value decisions should definitely be issued provisionally,” read a joint letter to the federal Finance Ministry from the German Taxpayer Association, the German Tax Union, Association of Tax Advisors, and the Property Owners Association. The associations note there’s already objections and lawsuits pending, particularly concerning the new property value calculation method.

Will the deadline be extended?

The associations recently called for the January 31st deadline to be extended. The Finance Ministry, however, declined, having already extended the deadline once at the end of October 2022.

It’s not clear what penalties may apply to people who don’t file on time, particularly if so many people miss the deadline. Depending on the federal state, non-filers may first get a reminder notice before eventually being hit with late payment surcharges.

Property owners can send in their declarations electronically to the tax office. Owners can also apply to their local tax office for an extension. But there is no guarantee this will be granted.

Do tenants have to worry about this?

Not directly, no.

Only property owners in Germany have to file this declaration. However, if it results in higher property taxes, there’s a chance landlords may pass this cost on to tenants. However, the new property tax values are still about two years away, coming into force on January 1st, 2025.

Vocabulary

• Property tax – (die) Grundsteuer
• Deadline extension – (die) Fristverlängerung
• Piece or parcel of real estate property – (das) Grundstück
• Calculation – (die) Berechnung

United Kingdom: Business rates still ‘broken’ despite savings for retail, says BRC

Business rates are still a ‘drag on town and city centres’, according to the BRC’s Dickinson

The business rates system is still broken and in need of wholesale reform despite a package of support announced in the autumn budget, the BRC has said.

BRC CEO Helen Dickinson was responding to an announcement from the Treasury this morning that retail’s business rates bill is set to drop by a fifth from April.

The reduction is the result of a £13.6bn support package including an extension and increase in relief for retail, hospitality and leisure from 50% to 75% in 2023-24. It also includes freezing the business rates multiplier for another year, and ending so-called ‘downwards transitioning’, meaning new rates will apply immediately from April instead of being phased in over three years.

Dickinson said ending downwards transitioning had been an “essential step” but that the measures still fell well short of the fundamental reform promised by the Conservative Party ahead of the last election in 2019. She also slammed the tax for taking no account of a business’s profits.

“The need for business rates reform is far from over,” Dickinson said.

“The broken business rates system is a drag on investment, jobs, and the vibrancy of town and city centres. For example, while other business taxes like corporation tax and VAT rise and fall with the changes in the economy, business rates must be paid in full whether firms are making a profit or a loss.

“This makes business rates a final nail in the coffin of many struggling stores; shutting shops, costing jobs and preventing new openings. Any meaningful plan for the future of our town and city centres must have wholesale reform of our business rates system at its heart.”

According to the Treasury, the total business rates bill paid by retail is predicted to fall by 20% from April, while large distribution warehouses will see a 27% increase.

Victoria Atkins, financial secretary to the Treasury, said: “The firms that make up our high streets are facing challenging times and I want them to know the government is on their side. One of the ways we can help them is by making it easier – and cheaper – to do business.

“This package does just that. It protects all from rising inflation, partly caused by Putin’s brutal war in Ukraine, it means a tax cut for many as shops will pay one fifth less in rates and it reflects the modern market by finally addressing the balance between online and in-store sales.”

Property consultancy Colliers has forecast retail’s business rates bill will drop by 10% overall from April. In some locations, the bill is predicted to fall by 30% or 40%, with large department stores and hypermarkets among the biggest winners. Colliers has said the imminent savings are already spurring store openings for some retailers, pointing to plans recently announced by M&S and Poundland.

However, not all bricks & mortar retailers are set to benefit. Food stores of the size favoured by Lidl and Aldi are forecast to pay more, thanks to a surge in demand for such properties driven by the growth of the discounters themselves.

Authors:

• Paul Sanderson, President | psanderson[at]ipti.org
• Jerry Grad, Chief Executive Officer | jgrad[at]ipti.org
• Carlos Resendes, Director | cresendes[at]ipti.org

Compliments of the International Property Tax Institute (IPTI) – a member of the EACCNY.