success guide to negotiating business rates

Success Guides

SuccessfullyNegotiatingBusiness Rates

Success Guides

SuccessfullyNegotiating BusinessRates

By Colin Hunter MRICS IRRV(Hons)

Front cover picture: The Historic Dockyard Chatham on abusy day at the height of the summer season. The trustwhich runs the dockyard has been successful in a range ofrating appeals and continues that process in relation tovalues assigned to its many historic structures on a case bycase basis.

History & Background

Business rates are surrounded bymyths and legends, as is only right andproper for something with 400 years of history, but in essence it is simple.Under the current legislation, it issimply a property tax.

Since devolution, England and Walesoperate slightly different systems.Scotland and Northern Ireland havealways operated under similar butseparate legislation. The generalprinciples apply to all four countriesbut the specifics vary. The commentaryset out below relates to England; acomparison of the differences betweenEngland and the other legislative areasis set out at the end of this guide.

Business rates are a significant cost tobusinesses, and will be an increasinglysignificant cost to museums over thenext few years.

Basics

The basis of the tax is the RateableValue which is set by the ValuationOffice Agency (an executive agency ofHMRC). The Rateable Value is anestimate of the rental value of theproperty (‘hereditament’) which isbeing charged business rates. Arrivingat a rental value is relativelystraightforward for shops, offices,factories and warehouses but is farfrom simple for properties which arenormally never let, or which areunique. The definition of RateableValue is set down in the legislation buthas a track record of case law to ‘assist’

in working out what is being valuedand what is being ignored.

In its simplest form, the rates liability isarrived at from the multiplication ofthe Rateable Value by a nationally setmultiplier, which varies from year toyear, based on the RPI increase forSeptember of the previous year.

Revaluations – Resetting theClock

The Rateable Values are resetperiodically by a Revaluation of allproperties. The LGFA sets a statutoryperiod of five years betweenRevaluations, the first being in 1990,followed by five yearly reviews up to2010. The Growth and InfrastructureAct has however deferred the nextRevaluation to 2017. The valuationdate for each Revaluation is two yearsprior to the Revaluation coming intoforce, therefore the 2010 Revaluation isbased on rental values in April 2008,just after the peak of the propertyboom.

The system of grant support changedon 1 April 2013. Although the rates bills will not change, the political and economic landscape for LocalAuthorities in England has changedsignificantly and is discussed in aseparate section below. This is in partdriven by the Localism Act 2011, whichplaces greater emphasis on theprovision of local services by LocalGovernment. It is however the biggestchange to Local Government fundingsince the introduction of the ill-fatedCommunity Charge in 1990.

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Successfully NegotiatingBusiness Rates

Business Rates may well deserve a place in a museumexhibition: in one form or another they have been withus since the 1601 Poor Law. You will be pleased to knowthe legislation has been updated since its inception andthe current primary legislation for England and Wales isthe Local Government Finance Act 1988 (LGFA) 1988.Both Acts were signed by a Queen Elizabeth.

Business rates aresurrounded by mythsand legends, as is onlyright and proper forsomething with 400years of history.

At the start of a new Rating List, thereis often a significant adjustmentbetween different property sectors and regional locations so that someproperties face significant hikes inliability and some benefit fromsignificant reductions. This is smoothedout by capping the maximum increaseor decrease based on a percentagechange from the liability for the yearimmediately prior. Therefore for the2010/11 rate year the liability is cappedby reference to the 2009/10 rateliability. This is known as transitionalallowance.

The system of transitional allowance isgoverned by Statutory Instruments.Following the postponement of the2015 Revaluation to 2017, there maybe changes made to deal with theadditional two years. As noted above,Scotland, Wales and Northern Irelandoperate different regimes; please referto the section at the end of this guide ifyour museum is not in England.

There is nothing individual ratepayersor groups of ratepayers can do toinfluence the multiplier, or thetransitional allowance scheme.Therefore the only part of the basicliability which can be addressed is theRateable Value.

Reliefs

Charities receive a mandatory 80%relief from business rates for propertiesthey occupy for their charitablepurposes. Some Local Authorities givefurther discretionary relief which willfurther reduce liability, potentially tozero. The number of authorities givingthis discretionary relief has been fallingfor several years, and that trend islikely to accelerate due to the latestchanges to the funding regime for thecouncils which is considered later inthis note.

How Museums are Valued forRating

As noted above, the Rateable Value is a notional rent for the property, butbefore we can arrive at that rent we

need to understand what we arevaluing. The single word museumnormally conjures a mental image of a Victorian red brick purpose builtmunicipal building. A museum is not the building or land, it is theorganisation that occupies it and anytype of building could be occupied as a museum. However, the normalsituation is that museums occupyunique buildings, some of which arepurpose built, many of which areadapted from older properties. Theproperty itself may be the reason forthe museum’s existence. There are asmall number of museums, such asBeamish in the North East, which are acollection of older buildings relocatedonto a single site to provide a newsetting. The true value of museums iscultural, educational, and social.However the Rateable Value shouldonly be a measure of financial value,i.e. the rent the tenant would be willingto pay, assuming the tenant hasresponsibility for all repairs, runningcosts and insurance.

There are four tried and testedmethods for arriving at this notionalrent for rating:

1. Rental Comparable Method

2. Rateable Value Comparable Method

3. Receipts and Expenditure Method

4. Contractors Method.

Rental Comparable and RateableValue ComparableFor the vast majority of propertiesoccupied by museums, there are norental comparables, and there is norent paid on the property so the firstoption is ruled out in most cases. Thesecond option is something of a selffulfilling prophecy; it has the problemof how to compare different uniqueproperties, and is of no help at thestart of a new Rating List where thereare no agreed comparables.

This leaves two methods.

Receipts and ExpenditureThe third method, Receipts andExpenditure, is commonly used when

Management Successfully Negotiating Business Rates 4

The single wordmuseum normallyconjures a mentalimage of a Victorianred brick purpose builtmunicipal building. Amuseum is not thebuilding or land, it isthe organisation thatoccupies it and anytype of building couldbe occupied as amuseum.

valuing leisure attractions. Museumsare in the market in competition forvisitors with other leisure attractionsand some are described in the Rating List as visitor attractions and not museums (for example SS GreatBritain). There is a strong case forarguing that this is the appropriatemethod for valuing all museums but this argument runs into severaldifficulties. Firstly, there is a general resistance from the Valuation Office to consider the fullreceipts and expenditure of museums.Their argument is that museums areoccupied by charitable or public bodies and so there is a belief that they are not run on a truly commercialbasis and that the income generated is not as much as a well managedcommercial operation would produce. Their argument also goes on to say that the costs andexpenditure are influenced by thecharitable nature of the business and so do not give a true economic picture.

The Valuation Office’s preferredapproach is to adopt a % of the GrossReceipts on the assumption thatirrespective of the commercial reality, a museum will still make a bid for thebuilding. This view is based on thevalues, other than financial, thatmuseums create. This approach isnormally referred to as the simplifiedreceipts method.

This argument ignores the increasingprofessionalism of museums over thelast three decades, with marketing and promotion of the attraction on anational or global scale, the advent of internet sites and the enhancedpromotion of retail sales. There is alimited degree of truth regarding costsand expenditure in that the charitableobjectives of a trust are different to thecommercial objectives of a for profitbusiness. The reality is that for thissector, the charitable trusts are themarket and so the considerations of acharity are the relevant considerationswhen deciding what a willing tenantcould, or would, pay in rent to a willinglandlord.

Contractors MethodThe final method, Contractors Method,is often referred to as the method oflast resort. Contractors Methodassumes that if the property did notexist it would be built. The cost ofconstructing a replacement property,including a figure for the land and thefees for construction, is calculated anda statutory percentage is taken asbeing the equivalent rental value. This approach is adopted for mostmunicipal buildings, and specialisedproperties such as steelworks. Wherethe construction cost is met in partfrom Central Government or EU grants,there is an argument that the costsshould be reduced to reflect theavailability of the grants. This argumenthas recently been thrown out by theUpper Tribunal (Lands Chamber)(formerly the Lands Tribunal) which is the final court in England fordetermining valuation matters. AIMand several of its members werecontacted by the Valuation Officefollowing the outcome of an appeal forSport England in respect of BishamAbbey. This decision took away anyallowance for grant aid. The ValuationOffice had previously made allowances(potentially as much as 50%) whenvaluing a range of properties funded by grants.

This method normally produces farhigher values for museums than thereceipts and expenditure approach and raises serious problems whenconsidering historical properties thatare expensive to build and have nomodern equivalent. If these propertiesdid not exist then there would be nopurpose in recreating them. As alwaysthere are exceptions to the rule, suchas the recreation of the Globe Theatreon the South Bank. There are over2,500 properties valued as museums or art galleries in England and Wales;more than 1,200 are valued byContractors Method.

Rights of Appeal

The Rateable Value can be appealedagainst. There is however only one


The Valuation Office’spreferred approach isto adopt a % of theGross Receipts on theassumption thatirrespective of thecommercial reality, amuseum will stillmake a bid for thebuilding.

right of appeal for every ground(reason). It is therefore imperative thatif an appeal is made it must be carriedout by a qualified professional, whonot only has experience of businessrates but understands museums andthe wider leisure market.

The appeal system starts with aproposal to alter the Rating List, servedon the Valuation Office. The proposalcan be made on a standard formprovided by the Valuation Officer, but itis often necessary to understand thedetailed regulations which the formdoes not provide direct correlationwith. If the proposal is not resolvedwithin three months, it will be sent onto the Valuation Tribunal, by theValuation Officer, as an appeal.Proposals made before 31 March 2017could potentially be backdated to 1 April 2010.

Although making the proposal is asimple process, and can be done using

a standard form provided by theValuation Office, the proposal mustmeet a number of technicalrequirements or it will be rejected. The detailed grounds of the proposalmust be sufficiently vague that they donot rule out wide debates, but musthave enough detail that the ValuationOffice is required to deal with therelevant issues. It may even benecessary to make several proposals,on a number of different grounds, inorder to achieve the desired outcomeof minimising liability.

When appeals are made, the onus of proof is on the appellant. Theratepayer has to prove that theRateable Value is wrong. The Valuation Office does not have to prove that it is right. This is animportant distinction as can be seen from the decided cases.


Case Study – Waltham Abbey

When the Waltham Abbey Royal Gunpowder Mill first opened as amuseum, it was entered in the 2000 Rating List with a Rateable Value of£140,000. Despite 80% mandatory relief this created a level of ratesliability which was unaffordable.

The property had been valued by reference to the Contractors Method.After initial discussions, the Valuation Office revised its approach to includeonly those buildings accessible to the public or used as offices and ancillarybuildings by the Foundation. This resulted in an offer to settle at £95,000.At a hearing of the Valuation Tribunal, the Valuation Officer defended thislevel of value and Waltham Abbey’s adviser argued for a reduction to £0based on receipts and expenditure method. The Valuation Tribunal foundfor Waltham Abbey.

The Valuation Officer appealed to Lands Tribunal (now Upper Tribunal(Lands Chamber)) and, to avoid costs, a compromise settlement wasreached at £5,000, which is based on receipts not costs of construction.

The 2005 Rateable Value was drastically reduced and agreed at £6,000,following the same argument and the 2010 Rateable Value came into theRating List at £7,000 and has not been appealed.

Case Studies

There have been notable successeswith rating appeals for museums. Inthe main these successes stem frompersuading the Valuation Office, or theappropriate Tribunal, to adopt aReceipts and Expenditure approach tothe valuation. This can potentiallyresult in Rateable Value £0.

Three case studies involving historicbuildings are given in this guide coveringdifferent aspects of the problems foundin dealing with the Valuation Officer’sapproach. The author was directlyinvolved in the appeals for WalthamAbbey Royal Gunpowder Mills andBradford City Council cases. The Courtof Appeal decision for The NationalTrust has been widely reported.


Case Study – Bradford City Council

A further complication is the free entry into national museums andgalleries coupled with some Local Authorities who give free orsubsidised access to their museums. In those cases there are noreceipts on which to base a valuation but even in these cases,appeals are now being successful in breaking away fromContractors Method and obtaining substantial reductions. As anexample of this, Bradford City Council has a policy of free entry forits museums. Appeals against the 2005 Rating List for the IndustrialMuseum (a former textile mill), Bolling Hall (a manor house with parts dating from the 12th Century) Cliffe Castle and The Manor House, resulted in a hearing at a Valuation Tribunal. The original 2005 Rateable Values were based onContractors Method; the Valuation Officer defended different figures, and the agent on behalf of Bradford Councilpresented figures based on visitor numbers, and the income that could have been generated. The Tribunal took onboard aspects of both. The resultant figures including the Tribunal decisions are set out below:

2005 RV VO Figure Storeys VT Decision

Bolling Hall £19,500 £3,350 £1,400 £3,350

Manor House £13,250 £6,400 £2,700 £5,900

Cliffe Castle £55,000 £35,250 £10,000 £35,250

Industrial Museum £90,000 £68,000 £15,000 £50,000

TOTAL £177,750 £113,000 £29,100 £94,500

Historically, the Valuation Office had always valued these properties using the Contractors Method. The 2010 appealsare still to be settled.

The argument on behalf of Bradford Council was that any potential tenant would produce a business plan based onthe number of visitors known to come to the attraction. The Valuation Tribunal agreed this was a sensible approach,but due to the lack of any actual receipts, felt that they could not adopt the Rateable Values which were derived fromit. The Valuation Office was forced to abandon its argument that the properties should be valued on a ContractorsMethod, and came up with four different approaches, one for each property. In the case of Bolling Hall, its approachincluded a doubling of the figure it originally thought of. The Industrial Museum was valued in line with other, stillfunctioning, multi-storey mills but with an allowance for the fact that the location was no longer suitable for goodsvehicles.

The 2010 appeals are still on-going.

Moorside Mill, home to Bradford Industrial Museum.

The Political Background –Localism Act 2011

Occupied properties receive an 80%mandatory relief if they are occupiedby charities for charitable purposes.This is set in statute, but there is somepressure (especially in Wales) for thispercentage to be reduced.

Local Authorities can grantdiscretionary relief which will furtherreduce liability and in some authoritiesthe whole of the remaining 20%liability may be removed by thisdiscretionary relief.

From 1 April 2013, Central Governmenthas reviewed the funding for LocalAuthorities. This affects the ratessupport grant, council tax relief grants,and numerous other grants. Thechange is described as the RatesRetention Scheme, and is aconsequence of the Localism Act.

Prior to 1 April 2013 all business ratescollected by Local Authorities werepaid over to the Treasury. The amountreceived in rates support grants wasnot related to the amount collected,except that any discretionary reliefgranted by the Council was part funded(25%) by the Council. Therefore CentralGovernment carried the whole costs ofmandatory relief and 75% of the costsof any discretionary relief.

From 1 April 2013 only 50% of rates received is paid to CentralGovernment, the rest is retained by the Council. Therefore the Councilsnow carry the cost of 50% of themandatory and discretionary raterelief. Therefore if a museum is granted100% relief from rates, the LocalAuthority must find 50% of that lostrates income. Prior to 1 April 2013, thecost to the Local Authority was only 5% of the lost income.

The Council is then paid a reducedsupport grant (subject to variousadjustments) which will be reduced by2% in real terms year on year for thenext 10 years or so to promoteefficiency. However, most Councils willhave lost funding at the outset: thehighest loss reported is 8.8%; the

average in the first year is said to be1.8% loss. These statistics arepotentially misleading as the funding ofeach Local Authority will be dictated bytheir individual circumstances.

The Councils have no control over theamount of rates charged, and littlecontrol over Council Tax increases orother revenue streams. They dohowever have control over whether ornot to grant discretionary relief.

Since 1990 most Councils haveoperated a very laissez-faire policytoward business rates and have beenreactive not proactive. The change infunding is changing this attitude.Councils will now be less likely to grantfull discretionary rate relief and manymay choose to refuse any discretionaryrelief. Councils will also be more likelyto challenge mandatory relief requestswith greater scrutiny regarding thepurpose of occupation and degree ofuse for charitable purposes. This isunlikely to affect main buildings butcould have an impact on propertiesoccupied as stores or in temporary use.There is a growing body of case law onappeal from Magistrates Courts andthe High Court on this topic.

Empty Properties

Although business rates are a propertytax based on occupation, if a propertyis empty then after an initial 3 monthsvoid period (6 months for industrialand storage properties) the personwith the right to occupy is liable for fullrates. The main exception to this rule isthat it only refers to buildings not land.Properties where the ratepayer is acharity may be exempt from thecharge. However this only applies if,when the property is next likely to beoccupied, it will be occupied forcharitable purposes.

Some charities have been enticed intoentering agreements with landlords totake leases on empty buildings so thatthe landlords can avoid empty propertyrates. The Charity Commission hasissued a warning about such practices,and the Local Authority may refuse to


grant charitable relief so that thecharity is exposed to the full charge. Ifyour museum is approached toparticipate in any such schemes, youneed to take expert advice of yourown.

There have been recent High Courtdecisions involving charities which havetaken properties as a means to reducethe landlord’s exposure to emptyproperty rates. The schemes haveworked for the landlords but thecharities have not been given the 80% mandatory relief because theproperties are not wholly, or mainly,occupied for charitable purposes.

Conclusion

The above note gives a flavour ofbusiness rates and is by no meansexhaustive.

The political landscape is changing andthere will be greater pressure for LocalAuthorities to maximise the ratesrevenue in their area and reduce theirexposure to reliefs as far as possible.Therefore more museums will be facedwith rates bills that only give themandatory relief and where there isdoubt, museums will need to ensurethat their occupation of properties fully complies with the statutoryrequirements for any relief to be given.


Case Study –National Trust Cases

The National Trust successfullydefended the use of the Receipts andExpenditure method with appealsthat ran to the Court of Appeal on apoint of legal principle. In this case,the Valuation Office was looking at asimplified receipts approach taking3% of the gross receipts. The point oflaw being argued by the ValuationOfficer was that a property that wasoccupied and in use could not have avalue of £0. Both parties agreedContractors Method was not appropriate, but on a full Receipts andExpenditure basis it could readily be shown that the National Trustproperty in question (Castle Drogo) made a loss. The Court of Appealconfirmed that it was reasonable when looking at an historic building toassume a landlord would accept no rent on the basis that the tenant wastaking on the costs of maintaining, insuring and preserving the property.

This argument has been successfully applied to other museum propertiesaround the country and the Valuation Office is accepting that othermuseums should be valued on a receipts basis, but are still arguing for 3%or more of gross receipts. The discussions are ongoing, on a property byproperty basis, but the majority of museums have not appealed for avariety of reasons. The reason at the top of the list for not appealing is thatmany museums are receiving 100% rates relief and so have no interest inwhat level of value has been applied. If the discretionary relief is lost thenan appeal should be considered.

Castle Drogo, at the centre of the NationalTrust’s appeal.

The current 2010 Rating List will be inforce until 1 April 2017 or longer andso the 2010 Rateable Value will affectrate liability for a minimum of 7 years.

Museums are very difficult to value forrating purposes; many are not valuedon the basis of their finances (Receiptsand Expenditure) but on the cost ofconstruction without the benefit of anyallowance for grant aid or otherfunding. Those which are valued byreference to receipts are often valuedon a percentage of gross receipts andnot with regard to the full accounts.Therefore most museums areovervalued in the Rating List at thedate of this guide.

Appeals can be made against theRateable Value, but need to beundertaken by a qualified ratingsurveyor with experience of themuseum sector and leisure propertiesgenerally.

Comparison between England,Wales, Scotland and NorthernIreland

England

Primary legislation is found in the LocalGovernment Finance Act 1988. Thedetailed provisions for appeals are setout in Statutory Instruments. Thecurrent rights of appeal are openended until the next Rating List comesinto force.

The valuations are undertaken by theValuation Office, an executive agencyof HMRC. Appeals, at first instance, are heard by the Valuation TribunalEngland.

The Valuation Office Agency website iswww.voa.gov.uk

Wales

The same primary legislation applies as in England. There are separateStatutory Instruments for Wales butfrom a practical viewpoint, there is noregulatory difference. Rights of appealmirror those in England.

As with England, valuations areundertaken by the Valuation Office. In the first instance, the appeals areheard by the Valuation Tribunalresponsible for the particular locationin Wales.

Scotland

Scottish property law is radicallydifferent to the English and Welsh legalframework. The principles of valuationare effectively the same but theprimary legislation is Local Government(Scotland) Act 1975.

Appeals against the 2010 RateableValues had to be made before 1October 2010. There are very limitedgrounds of appeal after that date.

Scotland has a uniform business rateapplied to the country, and standardallowances. However the valuationsare undertaken by assessors who areofficers of the local councils.

Appeals in the first instance are to theValuation Appeal Committee. The nextrevaluation is 2017.

The Scottish Assessors Associationwebsite is www.saa.gov.uk

Northern Ireland

As with Scotland, there is a differentlegal framework for rates in NorthernIreland. Unlike England, Scotland andWales where there are separatesystems of property tax for domesticand non-domestic properties, there isstill a single system applied in NorthernIreland.

The current revaluation is from 2003and the initial time period for appealsis closed. However, there is acommitment to review Rateable Valuesif representations are made setting outdetailed reasons for believing thevaluation to be wrong.

The valuation and charging of rates isdealt with by the Land and PropertyServices Northern Ireland Agency.

Both valuation and collection of non-domestic rates is carried out byLand and Property Services NorthernIreland (LPSNI).


Appeals can be madeagainst the RateableValue, but need to beundertaken by aqualified ratingsurveyor withexperience of themuseum sector andleisure propertiesgenerally.

Unlike the other three nations, thecurrent valuation list for non-domesticproperties became operative on 1 April2003 and is based on rental values asat 1 April 2001.

There will be a revaluation on 1 April2015. This will reflect hypotheticalrental values effective on 1 April 2013. It is intended that the exercise willredistribute the overall rates burdenalthough it is not expected that theoverall tax take will alter significantly.

LPSNI is also responsible for collectingthe rates. There are two rates used tocalculate liability, regional rate set byNorthern Ireland Executive and districtrate set by the District Council.

There are no transitional phasingprovisions and therefore thecalculation of rates bills is simple andany reduction in Rateable Value willproduce a proportionate reduction inliability. There are a number of reliefsavailable to business ratepayers, inparticular, charitable or not-for-profitrelief (if occupied for public benefit).

The Land and Property ServicesNorthern Ireland website iswww.dfpni.gov.uk/lps

Commonality Between theCountries

The Valuation Office (for England andWales), Scottish Assessors, and Landand Property Services Northern Irelandare all independent of each other andeach work in their own way withdifferent guidance on how to valuedifferent property types. But as statedat the beginning of this guide, the basicprinciples of valuation apply to all fourcountries.

Much of the ethos and guidance forrating valuation is derived from caselaw and the decisions of the highercourts, especially Lands Chamber(Lands Tribunal), Court of Appeal orSupreme Court (House of Lords) willinfluence valuation practice equally inall four countries. Therefore decisions,such as the Court of Appeal in Hoare(VO) v The National Trust 1998 RA 391,affect every legislative area.

The main differences are thecalculation of the rates bills and therights of appeal.


Storeys Edward Symons is part of the ES Group which is the collectivename for Edward Symmons LLP, Storeys Edward Symmons and Aaron Fox.The group employs specialist surveyors and valuers across 10 offices, with a wide range of niche experts advising on all aspects of property andbusiness assets, including business rates, receivership and insolvency,leasing and asset management.

Colin Hunter MRICS IRRV (Hons) DirectorEmail: [email protected]: 0113 2376906Website: www.es-group.com


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