Business rates

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Throughout this article, the unqualified term "pound" and the £ symbol refer to the United Kingdom pound.

Business rates is the commonly used name of non-domestic rates, a United Kingdom rate or tax charged to occupiers of non-domestic property. Business rates were introduced in England and Wales in 1990, and are a modernised version of a system of rating that dates back to the Elizabethan Poor Law of 1601. As such, business rates retain many previous features from, and follow some case law of, older forms of rating.

Business rates form part of the funding for local authorities, and are collected by them, but rather than receipts being retained directly they are pooled centrally and then redistributed. In 2005/06, £19.9 billion was collected in business rates, representing 4.35% of the total UK tax income.^[1]

Business rates are a property tax, where each non-domestic property is assessed with a rateable value, expressed in pounds. The rateable value broadly represents the annual rent the property could have been let for on a particular valuation date according to a set of assumptions. The actual bill payable is then calculated using a multiplier set by central government, and applying any reliefs.^[2]

Rateable values are currently set in revaluations every five years. The latest revaluation was 1 April 2005, with a valuation date of 1 April 2003. The rateable value is set by the Valuation Office Agency, a UK Government Executive Agency.^[3]

[edit] History

Former workhouse at Nantwich, dating from 1780. Workhouses developed as part of the poor law, which was funded by rates

Business rates are the latest incarnation of a series of taxes for funding local services known as rates, based on property values. The first rate was part of the Poor Law Act 1601, which established relief for the poor on the local parish level, to be paid for by a local rate paid by inhabitants of the parish.

An evolving systems of rates to fund local government and services existed over the next three centuries, including a different system operating in London to the rest of the country from 1869 to 1963.^[4] Changes included a stricter definition of how to value for a rate,^[5] the introduction of a valuation list containing the assessed values,^[6] the ability to object to the assessed value,^[7] and the introduction of the valuation officer, appointed by the Commissioners of Inland Revenue (now Her Majesty's Revenue and Customs), as the assessor.^[8]

The immediate predecessor to business rates was the general rate established by the General Rate Act 1967. This was a local tax in England and Wales on both domestic and non-domestic property, and was based on rental values. Many of its features can still be seen in the modern system. The Local Government Finance Act 1988^[9] repealed the General Rate Act and replaced it with two new taxes: the domestic part was replaced with the Community Charge, better known as the Poll Tax, while a new non-domestic rating system covered the remainder. The Community Charge was itself replaced by Council Tax, which returned to a property-based tax for domestic property. Non-domestic rates now covered all property not defined in the Act as domestic, and was intended as a similar but modernised version of the general rate.

[edit] Non-domestic rates

The new non-domestic rating system quickly became known as business rates. It retained (with revisions) from the general rate the basic concept of a series of local rating lists with each property being assessed for a rateable value that would be used to determine liability. Previously, local authorities had decided what proportion of rateable values to charge. The new system featured a centrally set multiplier, referred to as the Uniform Business Rate, by which the basic bill was calculated. The bill may be further modified by various reliefs. Notably, the new system introduced Transitional Relief, a scheme designed to smooth large jumps in liability due to revaluations.

[edit] Calculation of liability

For each property in the rating list for their area, the local authority calculates and issues a bill, which it is responsible for collecting, and has the usual powers to pursue payment. The rateable value is multiplied by the Uniform Business Rate,^[10] referred to in legislation as the non-domestic rating multiplier,^[11] to arrive at an annual bill. For example, a rateable value of £10,000 and a multiplier of 40p would produce an annual bill of £4000. The bill usually requires payment in instalments over the financial year.^[12]

The multiplier is set by central government, and is uniform. Power to set the multiplier in Wales has been devolved to the National Assembly for Wales. A special case exists where a defined special authority^[13] can set its own multiplier within centrally defined limits.^[11] The only current qualifying authority is the City of London.^[14]

The Uniform Business Rate is increased each year by the same proportion as the increase in the Retail price index, which is a measure of inflation. When revaluations take place, the multiplier is adjusted so that the overall change across the country is the same as the Retail price index change.^[11] The introduction of Small Business Rate Relief in 2005 added a supplement to the UBR to fund the relief.^[15]

The income from business rates does not go directly to the local authority (unlike Council tax). Rather, it is pooled centrally and redistributed to the authorities.^[16]

[edit] Reliefs

The bill may also be reduced by having one or more reliefs applied to it.^[17] Reliefs are administered by the local authority and they do not affect the rateable value of a property. Where reliefs are discretionary, they are decided upon by the local authority. The costs of giving some reliefs have to be borne, in whole or in part, by the local authority.^[18]

Reliefs in England^[19] and Wales^[20] can differ. This includes there being no 2005 list transitional relief in Wales; and from 1 April 2007 rural property relief in Wales has been subsumed into a newly introduced small business rate relief.^[21]

A relief on non-agricultural business on agricultural land or former agricultural buildings has been removed with effect from 14 August 2006.^[19]

In addition to the reliefs listed below, a hardship relief is available at the discretion of the local authority.

[edit] Charitable and non-profit making organisation relief

Charities are entitled to a mandatory 80% relief on properties they occupy. They must actively apply for it, however. They can also apply for a discretionary extra relief of up to a further 20%. Being a registered charity is conclusive proof of charitable status, but is not the only method to establish it.^[22][19] Certain non-profit making bodies may also apply for a similar, but discretionary, relief. The criteria are given as follows:

To be eligible for consideration, the ratepayer must be a non-profit making body and the hereditament used for charitable, philanthropic or religious purposes, or concerned with education, social welfare, science, literature or the fine arts, or used wholly or mainly for recreation by a not-for-profit club or society.^[22]

[edit] Empty and partly occupied relief

Where a property is empty, there is an initial period of 100% relief for the first three months. This is reduced to 50% after that period, except for a "qualifying industrial hereditament", where the relief remains at 100%.^[23][19] Properties meeting other criteria can also retain 100% empty relief, including those below a certain rateable value (currently £2200^[19]) and listed buildings.^[23] In the 2007 Budget,^[24] plans were announced to amend the relief from April 2008, with no relief after the 3-month period, or 6 months for industrial property. These changes will require legislation before they come into force.

Where part of a property is to be empty for a short time, a discretionary form of empty relief exists for that empty part, and an apportionment of the rateable value between empty and occupied parts will be made by the Valuation Office Agency at the request of the local authority.^[25]

[edit] Rural property relief

To give relief to properties considered vital to rural communities, a combination of compulsory and discretionary reliefs exist in England.^[26] In Wales, a previous scheme has been incorporated into small business rates relief from 1 April 2007.^[21] Properties of a given rateable value (currently £7000 in England) can receive the relief if they are in a rural settlement (defined as a population of 3000 or less, within designated rural areas), and are the only general store or post office, or a food store. The only public house or petrol station (currently with rateable values of up £10500) may also receive the relief, which is a mandatory 50%. Discretionary relief of up to 100% is available for the previous properties, and for any others up to a current limit of £12000 rateable value, provided they are judged to be of benefit to the local community.^[19]

[edit] Small business rate relief

In England, the rating list that came into force on 1 April 2005 featured a new relief designed to benefit small businesses. The Local Government Act 2003 introduced a small business relief,^[15] currently set at 50% for properties with a rateable value of below £5000, which is reduced by 1% for each £100 over £5000 (effectively a sliding scale from 50% at £5000 to 0% at £10,000), where the ratepayer has:

• one property, or
• one property plus additional properties, none of which may have a rateable value of more than £2200, and the total rateable value of all properties is £15,000 (£21,500 in London).^[19]

Where there are additional properties, only the main property will have the relief applied. The relief must be actively applied for.

In order to fund the relief in England, a supplement is added to the Uniform Business Rate multiplier.^[15] However, this supplement is only applied to properties with rateable values of £15,000 or higher (£21,500 in London), and so the multiplier is lower for those properties.^[19]

In Wales, small business rates relief was not introduced until 2007.^[21] It replaced rural property relief, but included similar provisions. It gives relief of 50% for most properties with a rateable value of below £2000, and 25% relief for rateable values between £2000 and £5000. Post offices with rateable values of up to £9000 are eligible for 100% relief; while those over £9000 and up to £12000 receive 50%.^[20] It also authorises local authorities to set up local schemes of relief for properties up to a limit of £12000 rateable value.

[edit] Transitional relief

On revaluation, the UBR is adjusted so that the overall increase in liability across the country is in line with the Retail price index, a measure of inflation. A property whose rateable value changes exactly in line with the national average would see an inflation-only rise in liability. Conversely, properties with an unusually large change in rateable value would have a significant change in liability. In order to smooth large liability changes, schemes of transitional relief have been applied to each rating list. These have operated by restricting the proportion by which liability may change per year, with full liability arriving by the fifth year. Transitional relief is designed to be revenue-neutral over the lifetime of a rating list, and so both increases and decreases are affected. Transitional relief applies only to changes in liability between rating lists, not changes within lists.^[27][28]

Individual transitional relief schemes have been applied to the 1990,^[29] 1995,^[30] and 2000^[31][32][33] rating lists in England and Wales, and to the 2005 rating list in England.^[34]

[edit] Rating list

City Hall, London. Entered in the 2005 rating list on 1 April 2005 as 110, The Queens Walk, London, SE1 2AA, Offices and premises, rateable value £3,740,000.

Starting on 1 April 1990, a rating list for each local authority was compiled. Although there is technically a separate list for each authority, it is common to refer to the aggregate of the lists as, for example, the 1990 Rating List. Rating lists are maintained during their lifetime to reflect changes in properties, and new lists are compiled every five years. The current list came into force on 1 April 2005. As well as local lists, there are a small number of central rating lists, used to assess properties that would otherwise span multiple lists, such as railway or telephone networks. A rating list is required to identify each relevant non-domestic property in the area, and assign a rateable value, based on a rental valuation of the property. The task of compiling and maintaining the list is given to the valuation officer for each authority, who in practice is a civil servant of the Valuation Office Agency, an Executive Agency of Her Majesty's Revenue and Customs.

[edit] Rateable value

Rateable value is an estimate of the annual rent that might be paid for the property at a fixed date two years prior to the beginning of the list (known as the antecedent valuation date), incorporating certain assumptions laid down in the legislation. In order to value a property, a valuer would look at the physical properties of the property (such as size and state), and consider the economic conditions (the market price for similar local properties), along with the nature of the transaction (such as a freehold sale, or agreement of a lease). Assessing a rateable value requires a valuation that follows the above process, but the matters to be considered are constrained by legislation. So the physical properties are considered not at the present day, but at the Material Day, and are constrained by the valuation assumptions. The economic conditions are considered at the Antecedent Valuation Date. The valuation is based on a hypothetical lease laid down in the valuation assumptions.^[35]

[edit] Valuation assumptions

The valuation assumes that a year to year (that is, ongoing) lease is being agreed, where the tenant pays all repairs and insurance, and that the property "is in a state of reasonable repair".^[36]

It had been the intention by the drafters of the Local Government Finance Act 1988^[9] that the assumption of reasonable repair would continue in the rating system. However, a successful legal challenge at the Lands Tribunal (Benjamin (VO) v Anston Properties Ltd [1998]^[37]) showed that they had in fact failed to include it in the legislation. This was rectified by the Rating (Valuation) Act 1999,^[38] which amended the 1988 Act to explicitly include the assumption. The repair assumption includes the proviso of "excluding from this assumption any repairs which a reasonable landlord would consider uneconomic."

[edit] Material day and Antecedent valuation date

The material day is the day on which matters affecting the physical state of the property are taken into account. The matters are those affecting:

• the physical state or physical enjoyment
• the mode or category of occupation
• the physical state of the locality, or which have a physical manifestation there^[35]

When the list is compiled, the material day is the day the list is compiled (1 April 2005 for the current valuation list).^[35] If the list is further altered, the material day may be different for that alteration. For example, in the current 2005 rating list the material day for an alteration to reflect an extension to a property will be the day the extension is completed.^[39] Previously the material day for an extension had been the day on which the list was altered.^[40] There are a number of different categories of events which cause the list to be altered, each of which has a specified material day.^[40]

[edit] Hereditament

Hereditament is a legal term for a unit of property, which often appears to be synonymous with simply "property", in the bricks and mortar sense of the word. The concept of hereditament in rating law has developed along with that of rateable occupation through case law, as no single statute has defined it adequately. The Local Government Finance Act 1988 specifically retained^[41] the definition of hereditament (and therefore the associated case law) from the General Rate Act 1967:

"hereditament" means property which is or may become liable to a rate, being a unit of such property which is, or would fall to be, shown as a separate item in the valuation list.^[42]

This links the concept of hereditament in rating to that of rateable occupation, as established in case law.

[edit] Concept of hereditament

Three Brindleyplace, an office block in Birmingham. Although a single building, it has multiple occupiers. It therefore contains multiple hereditaments, each with a separate entry in the 2005 rating list.

In the leading case of Gilbert (Valuation Officer) v Hickinbottom & Sons Ltd [1956],^[43] Lord Denning said:

The case therefore raises the important question: What is a separate hereditament for rating purposes? The statutes contain no definition, but the practice, which has prevailed for many years past, warrants the following general rules Where two or more properties are within the same curtilage or contiguous to one another, and are in the same occupation, they are as a general rule to be treated for rating purposes as if they formed parts of a single hereditament. There are exceptional cases, however, where for some special reason they may be treated as two or more hereditaments. Where the two properties are in the same occupation but are not within the same curtilage nor contiguous to one another, each of them must as a general rule be treated as a separate hereditament for rating purposes: and this is the case even though they are used by the occupier for the purposes of his one whole business.^[43]

The principle Denning stated shows that if a business occupies a single property, that is the hereditament. If it occupies only the ground floor, that is the hereditament (and the first floor is a separate hereditament). If it occupies the neighbouring property as well, the two together are the hereditament. Gilbert v Hickinbottom in fact featured an exception to the general rule, where there were two properties in the same occupation, separated by a public highway. It was held that the functional connection between the two properties was so great that they were to be treated as a single hereditament. In Edwards (VO) v. BP Refinery [1974],^[44] the analogy of a spark plug was used to illustrate the principle. So functional connection must be judged by the strength of the connection and the degree and nature of the separation.

A hereditament can include the right to exhibit advertisements on another's property (such as a commercial advertising hoarding), mines, and certain sporting rights.^[41] Some items of plant and machinery within a hereditament^[45][46] are assumed to be included in the hereditament.^[35]

[edit] Rateable occupation

Rateable occupation is occupying a hereditament so as to be liable to pay a rate. The case of LCC v Wilkins (VO) [1957]^[47] brought together various previous cases to establish four essentials for rateable occupation:

• Actual - a matter of fact, not of legal title.

• Exclusive - again, a matter of fact, although legal title will often play a part. The courts have laid down down that where there are competing occupations, the facts must be considered to establish where paramount control lies. (Westminster City Council v Southern Railway Co & Others [1936],^[48] for example, considered the case of various stalls and shops on a railway station).

• Beneficial - occupation that is of benefit to the occupier. It is not necessary to consider financial profit, as the test here is whether someone will pay rent for the property. In R v School Board for London (1886),^[49] the fact that the school board could take no profit was held not to affect the case.

• Not too transient - the occupation must not be for too short and fleeting a time. The courts have held back from giving a precise length of time, preferring to judge cases on their facts, including the intentions of the parties involved.

The relationship between rateable occupation and the hereditament can be a complex one - taking rateable occupation of part of a hereditament creates a new hereditament out of the larger one, for example. In practice, determination of rateable occupation and hereditament is often interlinked.

[edit] Exemption

Certain properties which would otherwise be rateable are in fact exempt from rating (that is, are not entered in any rating list). These properties are specified by the Local Government Finance Act 1988,^[50] and include the following:

• Agricultural land and buildings

Portland Bill Lighthouse, owned by Trinity House and therefore exempt from non-domestic rates

• Fish farms
• Places of public religious worship
• Lighthouses, buoys and beacons occupied by or belonging to Trinity House
• Sewers and accessories belonging to a sewer
• Certain property of drainage authorities
• Parks
• Property used for the disabled
• Air raid protection works, provided the hereditament is not used or occupied for any other purpose
• Swinging moorings
• Roads crossing over or under watercourses
• Hereditaments in Enterprise Zones
• Visiting forces premises

It is possible for only part of a property to be exempt, and the rest of it rated accordingly.

[edit] Domestic and non-domestic

Domestic property is defined in section 66 of the Local Government Finance Act 1988.^[51] Any hereditament that does not meet the criteria for domestic will be non-domestic^[52] (although it may then be exempt^[50]). It is possible for a hereditament to be both non-domestic and domestic in different parts, for example a shop with living accommodation. This is known as a composite hereditament, and the whole property is entered in the rating list, but the valuation based on the non-domestic part only.^[53]

[edit] Alterations to the rating list

Each rating list runs for five years, and may change within that time. The value from the very start of the list can be altered, or events within the life of the list, such as an extension, can be reflected by a change within the list, leading to different values at different times.

For example, a property could enter the list at 1 April 2005 at £10,000. An extension could then see it increased to £12,000 from 1 April 2006. An appeal against the orginal value of £10,000 could then reduce it to £9000 from 1 April 2005, but the second entry would remain unchanged at £12,000 (and could be appealed separately, or further changed by another extension).

The Local Government Finance Act 1988 gives broad authorisation for regulations to be made about alterations^[54], which can include alterations by the Valuation Office Agency to maintain the list accurately, or proposals by interested parties to change the list.

The regulations made have differed widely over the lifetime of business rates, generally in terms of when alterations can have effect from. For example, proposals to alter the rating list by an occupier in the 2000 rating list were restricted to taking effect in the financial year in which were made.^[55] The 2005 rating list removed this restriction, so that a successful proposal can have effect as far back as 1 April 2005.^[55]

[edit] Proposals to alter the rating list

What is commonly known as an appeal is more correctly known as a proposal to alter the rating list. Proposals can be made on a number of grounds, including challenging the basic rateable value, an alteration to the property, or proposing a reduction from a specific date due to a particular event (such as changes to a street affecting traffic).^[56]

Where an appeal is made, it will first be discussed with the Valuation Office Agency, who will attempt to come to an agreement. If no agreement is reached, and the proposal is not withdrawn, it will be heard by an independent valuation tribunal.

[edit] Effects of Welsh devolution

In 1997, the creation of the National Assembly for Wales took some of the powers previously exercised by the UK government and devolved them to the Welsh Assembly government. As a result, the systems in England and Wales have begun to diverge slightly, including Wales setting a different Uniform Business rate multiplier,^[57] and different reliefs. Small Business Rates Relief was not implemented in Wales until 2007,^[21] when it replaced rural relief.^[58] A separate transitional relief scheme was implemented for the 2000 rating list.^[33], and no transitional relief scheme was implemented in Wales for the 2005 rating list.^[59]

[edit] See also

• Taxation in the United Kingdom
• Rates
• Local government in the United Kingdom:Funding

[edit] Notes

[edit] References