2017 business rates revaluation

LGIU Policy Briefing logo

10 November 2016

2017 business rates revaluation

Author: Tom Lawrence, LGiU Associate

Summary

September and early October saw the release of a number of documents relating to the 2017 revaluation of business rates (BR). These were issued by the Valuation Office Agency (VOA) and the Department for Communities and Local Government (DCLG) and there was also an observation published by the Institute for Fiscal Studies (IFS) on the 28 September releases. This report summarises these publications and comments on them.

Briefing in full

Context – the BR system

Business rates are levied in relation to all non-domestic properties. Usually, the occupier pays, but when the property is empty, the owner may be liable.  The amount they are levied is based on the “Rateable Value” (RV) of the property.  This is determined by the VOA, an executive agency of HM Revenue and Customs.

The next stage of calculating the BR bill for a property is multiplying the RV by the “multiplier”.  This is the number of pence the ratepayer is liable for per pound of RV.  There are two multipliers: there is a small business multiplier, which is applied for properties with an RV of less than £25,500 in London or £18,000 elsewhere (provided that the ratepayer is not eligible for mandatory reliefs other than small business rate relief – see below). In 2016-17, this is set at 48.4p in the pound. For all other businesses, the main multiplier is used. In 2016-17, this is set at 49.7p.

At present, all rateable values are reassessed at a set time.  This is known as revaluation.  This usually takes place every five years. There was thus a revaluation in 2005 and 2010. The next revaluation would have taken place in 2015, but the Government decided to postpone it until 2017.

All properties are included on a valuation list. There are “local lists” relating to the properties in each billing authority’s area. There is also a central list for properties spanning many local authority areas. (For example, the central for England includes regional transport networks such as London Underground and utilities infrastructure networks such as gas pipelines, power cables and internet cables. Wales has its own list and both can be seen here.) New lists are issued by the VOA for each revaluation. Each billing authority thus had a 2005 list and a 2010 list.

A given list does not just contain a single value for each property. Rather, it has a record for each property which can be added to as necessary. So if a property was eligible for BR at any point between 1 April 2005 and 31 March 2010, it will have an entry on the 2005 list. Between these dates, the property’s RV would only change if there were alterations or changes to the property.  These changes would be appended to the list, with the resulting new RV.

In most cases, a property’s RV is based on its floor space in square metres, multiplied by the average rental value per square metre for comparable properties. (In some cases, such as where there are no comparable properties – or very few – a different approach may be used. There are also numerous subtleties in how this is done – for example, different values for different floors, and the use of zoning for smaller shops.)

Naturally, this average fluctuates over time, so a specific date is chosen as a reference point. This is known as the “antecedent date” and is two years before the new list becomes active. For example, on 1 April 2010, BR bills moved from being based on the 2005 list to the 2010 list and ratepayers faced changes in their bills at that point. RVs on the 2010 list were based on average rental values per square metre on 1 April 2008.

The multipliers are uprated annually. Between revaluations, it usually rises in line with the Retail Prices Index (RPI). Specifically, the billing year starts in April and the multiplier increase is usually the annual increase in RPI calculated the previous September. However, in April 2014 and April 2015, the rise was capped at 2% (see our January 2014 and February 2015 briefings). Also, the Government has announced that from April 2020 increases in the multipliers will be limited by the Consumer Prices Index (CPI) instead (see our March 2016 briefing).

In revaluation years, the multiplier is adjusted to ensure that at the national level, there is no change in yield due to the revaluation. Thus a business whose property has increased in RV by more than the national average will see an above-inflation increase in their bill. Conversely, a business whose property has increased in RV by less than the national average will see a below-inflation increase in their bill.

Revaluations can cause a major increase or decrease in a property’s RV.  To ensure that businesses do not see a sudden hike in their bills, they are given “transitional relief”, which allows the increase to be phased in over a number of years.  Similarly, limits are placed on the reductions in bills, to help pay for the limits in rises.

There are other reliefs which must be applied by law, everywhere in England.  These “mandatory reliefs” include measures to help charities and owners of empty properties.  In addition, local authorities have powers to introduce their own “discretionary reliefs”. These powers were greatly widened under the Localism Act 2011 and there is a prospect for them being extended still further (possibly by giving powers to precepting authorities) in the near future. (Further details can be found in our November 2015 and September 2016 briefings.)

Rises and falls in RV will not be spread evenly across England. The regional impact of the 2017 revaluation is described below. This will affect the BR yield accruing to each local authority. When Business Rate Retention (BRR) was introduced in 2013-14, the Government stated that they did not wish the effects of revaluation to impact councils’ total income from BRR (“retained income”). The Government therefore proposed to adjust tariffs and top-ups to ensure that retained income is unaffected by changes in RV. DCLG is currently consulting[/has recently consulted] on the methodology for this adjustment in 2017 – see below for details. The recent consultation on 100% BRR asked whether these adjustments should continue for revaluations after 2017 – details on this can be found in our August briefing.

Chronology of the recent publications

The 2017 revaluation is due to come into effect on 1 April 2017. The antecedent date for the revaluation was therefore 1 April 2015. Since then, the VOA has been preparing the central and local lists for 2017.

In advance of any publications by the VOA, DCLG published a consultation on the 2017-18 Local Government Finance Settlement (LGFS) on 15 September. The consultation ran until 28 October and among other issues, it proposed a methodology for adjusting tariffs and top-ups to take account of revaluation.

On 28 September, the VOA published a Statistical Release which provided statistics for the changes in RV by English region (and for Wales), broken down by sector. It is noted that

“This release shows the situation as at 1 August 2016. At this date, there were still a small number of properties which had not gone through the full revaluation process, meaning the percentage change in rateable value may change when the 2017 revaluation is complete. For this reason, these statistics are estimates of the change in rateable value.”

The tables are also provided in spreadsheet form in the same release.

On the same day, DCLG published a consultation on the transitional relief scheme for the revaluation, with an associated news release. This consultation ran until 26 October.

Later the same day, the IFS published an “Observation” containing analysis of the data contained in the Statistical Release and the consultation.

Detailed data has been released since. On 30 September, the VOA published an online tool to allow businesses to view their draft RV (and if necessary appeal it). This was accompanied by a news release. It also released the 2017 Central Lists for England and Wales.

Further statistical analysis was published by the VOA on 6 October, including statistics at billing authority level.

Content of the recent publications

2017-18 LGFS consultation

This consultation covered a number of issues. One of these is how to adjust tariffs and top-ups to take account of revaluation.

To understand the proposal here, it is worth understanding the difference between changes in RV and changes in income. A 3% increase in RV, for example, will not necessarily lead to a 3% increase in income. This is partly because of the adjustment to the multipliers. There will also be consequent changes to the total amount of relief granted and which of the two multipliers is applied to which properties. For example, there will be changes to the amount of transitional relief paid out and individual properties may become eligible or stop being eligible for small business relief. Even allowing for these, the amounts actually collected would differ from projections. Firstly, there will always be some bills which are not paid and will need to be written off as bad debt. This amount may be affected by revaluation. Secondly – and crucially – there will be appeals against the new RV. Billing authorities need to include a margin or “provision” in their projections of total yield to allow for this.

The consultation document explains that the Government wishes to “adjust each authority’s tariff or top up … to ensure, as far as is practicable, that their retained income is the same after revaluation as immediately before”. However, in practice, DCLG does not believe it will be possible to predict the changes in retained income accurately in advance of the new municipal year. This is because of the uncertainty around the above effects. Therefore, DCLG proposes a “proxy” measure. This, in essence, is to calculate the proportional change in gross rates income – RV multiplied by the multiplier, without applying reliefs or provisions for appeals/bad debt – and applying it to BR income in 2015-16. This would determine the adjustments to tariffs and top-ups in 2017-18.

The income for 2015-16 would be used rather than that for 2016-17, as the latter would not be known in advance of the start of the municipal year. However, it will be known by April 2018, so this amount will be used for calculating the adjustment for 2018-19. It will also allow the Government to reimburse authorities in 2018-19 for using the “wrong” figure in the 2017-18 calculation (or recoup money from them).

The RV figures used in this method are those known on the day the new list comes into force. The effects of any appeals lodged after this would be dealt with through the use of provisions by the billing authority and if necessary, safety net payments (see our September briefing).

Full details of the methodology can be found in Annex A to the consultation document.

There is one question in the consultation in relation to this proposal:

Question 8: Do you agree with the methodology for calculating the revaluation adjustment to business rates tariff and top-up payments as outlined in paragraphs 3.4.1 to 3.4.8?

Statistical Release

The Statistical Release of 28 September contains data on absolute RV and relative RV, broken down by sector and region. One table shows the percentage change in RV by sector and region. The English regions are those defined by the Office for National Statistics (ONS), based on the former Government Offices for the Regions (see here for further information). The table also contains data for Wales (by sector). The sectors are “Retail”, “Industry”, “Office” and “Other”. A list of the types of property in each sector can be found in the sheet “Sectors” of the Transitional Relief Supplementary Tables here. A second table shows the percentage change in RV in the central lists for England and Wales.

Figure 1 below reproduces this data in the form of charts, superimposed on a map of the regions. The map is provided by ONS under crown copyright. Crown copyright information is reproduced with the permission of the Controller of HMSO and the Queen’s Printer for Scotland.

screen-shot-2016-11-12-at-08-04-56
Figure 1 – change in rateable value from 2010 list to 2017 list, by sector and region

The Statistical Release also contains a bar chart for the change for each sector for each of the English regions, relative to the change in total RV for England. (For Wales, it just has the change for each sector relative to the change in total RV or Wales.)

The tables and the data the bar charts are based on are also provided in a separate spreadsheet, as part of the same publication.

Transitional relief consultation

The consultation states that:

“The Government will ensure, (as far as is practicable), that the transitional arrangements are self-funding and that neither the government nor ratepayers overall are financially disadvantaged as a result of the scheme.  The cost of the relief for those ratepayers facing increases must be funded from other ratepayers.”

The transitional relief system will be similar to previous years, consisting of caps on the percentage increase in a property’s bill between years, and caps on the percentage decrease. (The Government considered an alternative, where the cost of the relief is spread across all other taxpayers through a supplement on the multiplier, but rejected it.)

These caps vary over the five-year period and vary between values of the property in question. However, in previous years, there have been just two bands for the value of properties in this scheme. For example, under the 2010 transitional relief scheme, one set of caps applied to properties under £18,000 (£25,500 In London), and another applied to properties over this threshold. In the proposed scheme, by contrast, there will be three bands:

  • properties with an RV of up to £20,000 (or £28,000 in London) will be classed as “small”;
  • those above this and up to £100,000 are classed as “medium”,
  • those above £100,000 are classed as “large”.

The consultation presents two options for the caps. These two options are presented in tables – see Tables 1 & 2 below. The figures that differ between the two options are highlighted here for ease of use.

Table 1 – Option 1 in consultation on transitional relief

Property size 2017/18 2018/19 2019/20 2020/21 2021/22
Upwards cap Small 5.0% 7.5% 10.0% 15.0% 15.0%
Medium 12.5% 17.5% 20.0% 25.0% 25.0%
Large 33.0% 29.0% 30.0% 27.0% 13.0%
Downwards cap Small 20.0% 30.0% 35.0% 55.0% 55.0%
Medium 4.1% 5.6% 5.9% 5.8% 4.8%
Large 4.1% 5.6% 5.9% 5.8% 4.8%

 

Table 2 – Option 2 in consultation on transitional relief

Property size 2017/18 2018/19 2019/20 2020/21 2021/22
Upwards cap Small 5.0% 7.5% 10.0% 15.0% 15.0%
Medium 12.5% 17.5% 20.0% 25.0% 25.0%
Large 45.0% 50.0% 50.0% 16.0% 5.0%
Downwards cap Small 20.0% 30.0% 35.0% 55.0% 55.0%
Medium 10.0% 15.0% 20.0% 25.0% 25.0%
Large 4.1% 4.6% 5.9% 5.8% 4.8%

The Government’s preferred option is Option 2.

Tables are also included in the consultation document showing the number of properties affected by each of these caps (for each year and each band). Respondents are asked for views on these two options and asked which they support.

These tables are not provided in spreadsheet form. However, there are “supplementary tables” provided in spreadsheet form. These could be useful to local authorities.

As mentioned above, one table lists the property types included in each sector.

Two more relate to the changes in bills. As described above, in revaluation years, the multipliers are increased in line with inflation (unless the Government decides to cap this rise), but they are also adjusted to reverse out the effects of the revaluation. The first table shows the percentage changes in bills for each region and sector, taking into account the changes in RV and consequent adjustment to the multipliers, but before the inflation increase in the multipliers, all reliefs and any effects of appeals. This is quite revealing: for retail, office and industrial properties, London is the only region with an increase in bills – in double digits for the first two of these sectors. For other properties, the three northern regions see a reduction in bills or no change, while all other regions see an increase – again with double-digit growth in London. The highest percentage growth in the table is that for the central list, where the total bill is up a massive 28%. The second table shows the absolute changes in bills, in £million, under the same conditions.

There are also two more tables for each option. The first shows the “yield” and “cost” of the scheme for each year for each sector (that is, the amount raised by limiting falls in bills and the cost of providing caps on growth in bills). The second shows the yield and cost for each year for each region.

IFS Observation

  • The IFS Observation draws attention to what could be termed the “London and central” effect. RV has increased very rapidly for properties in London and on the central list. This has driven a large increase in RV at the national level – up a huge 11%.
  • One effect of this is a corresponding cut in the multiplier. This means that in regions outside London, even where RV is increasing, bills will usually be falling. This is illustrated in a bar chart showing the effect in each region. The chart shows that in the five regions of the south (excluding London) and midlands, total RV is increasing. However, the overall effect of revaluation is a reduction in total revenues (the total of all bills before reliefs). For the three regions of the north of England, total RV is falling slightly, but the overall fall in gross yield is much larger.
  • The Observation notes that London has been growing faster than the rest of the country on other measures too. Consequently, the public sector is becoming increasingly reliant on London for a large proportion of its funding from taxes.
  • It also considers the range of variation to bills for small properties: an estimated 242,000 would see a rise in bills before reliefs of at least 24%, while 141,000 would be due cuts of more than 20%. Consequently, under the Government’s preferred option for transitional relief, it would be granted to almost half of properties in 2017-18. The effect of the scheme is labelled “a long transition”. The scale of these changes to bills leads the IFS to support more frequent revaluation.
  • It points out that the difference in the caps between small, medium and large properties in effect redistributes from large properties to smaller ones. More large properties will be contributing to the scheme costs in the final year than received help in the first year.
  • There is also a reminder that a large volume of appeals is likely. The Government will be adjusting the multiplier upwards to take account of this, as well as the usual RPI uprating. The Observation concludes that:
    • “After accounting for these factors as well, the government estimates the standard multiplier will be 0.48 next year, around 3% lower than the current 0.497.  This means that properties that have seen their rateable value increase by around 3% or less can expect a cut in their rates bill next year, while those whose value has increased by more than 3% can expect an increase in their bill next year.”
  • The penultimate paragraph turns to the impacts on councils. These are well known. Firstly, more valuable property means that growth in business rates base will have a greater impact on revenues. Here it is worth remembering that new properties will receive a valuation reflecting local circumstances – in most cases, an RV per square metre will be used which reflects rent levels in similar nearby properties. Secondly, councils will have to cope with appeals against the new valuations and initial estimates of appeal volumes are “unlikely to be completely accurate”.
  • The final paragraph refers to the reforms to the business rate retention system, and states that “The IFS is launching a major research programme to look at these and other issues related to local government and devolution. Our first report, setting out the context and key issues, will be published on 26th

Online tool and central ratings lists

The online tool published by the VOA on 30 September is publicly accessible. Details of properties can be looked up by postcode or street address. For example, I looked up the details of a council office I used to work in. The tool states its RV per square metre, its area and its consequent RV. It gives these for 2017 and for its current valuation. For some properties, the figures for previous valuations will also be provided. Finally, it provides the details for other properties in the same valuation scheme (group of properties with similar values and/or sizes). In the case I looked up, these are all in the same postal district and most are part of the same complex of council buildings.

  • There are 108 properties on the central ratings list for England and 29 on the list for Wales. Their details (company, registered address, description and RV) are provided in a pdf file and an Excel spreadsheet for each nation.

VOA publication on 6 October

The VOA released a much more detailed set of documents on 6 October. The headline document is a second Statistical Release. The new material in this starts with a stacked bar chart showing the regional distribution of RV and number of rateable properties (“hereditaments”) in England. There is also a chart for each sector showing the median RV for each English region and for Wales, along with upper and lower quartiles, for both the 2017 and 2010 lists. (This includes a chart for “all sectors”.)

There are then two charts for the whole of England showing distribution of total RV by RV interval and number of properties by RV interval, and two for Wales.

The release also includes a highly informative set of tables in a spreadsheet (also available as a zipped set of CSV files). The most useful of the new data in this for local authorities consists of two sets of tables. The first of these (tables 1.0 to 1.4) includes one table for each sector and one for all sectors. Each table shows a number of statistics relating to RV for each local authority in England and Wales – both for 2017 and for 2010. It also shows the number of rateable properties in each authority area.

The second set shows the absolute number of rateable properties and the percentage in each of six RV intervals, along with the total RV in each interval and the percentage of total RV in each interval. These are tables 3.0 to 4.1. Table 3.0 shows this information at England and Wales levels, while table 3.1 breaks it down by region, table 4.0 breaks it down by sector in England and table 4.1 breaks it down by sector in Wales.

The collection also includes various heat maps. One document shows the English regional and sectoral totals illustrated in figure 1 as heat maps of England. There are also heat maps for each region, showing the change in RV for each authority in the region for each sector.

Comment

Local authorities will be interested in the 2017 revaluation for a variety of reasons:

  • It will have an impact on their BRR income, certainly in terms of the distribution between bills and tariffs/top-ups, and possibly in terms of overall total (see below);
  • It will affect the running costs for businesses in their area;
  • The RV figures give a measure of the strength of the business property market in 2015.

The data shows the growing dominance of London in the business rates base. Increasing proportions of local government funding are thus being supplied by London. Total RV for London is about £20.3bn in the new figures. Central list RV is rising at an even faster rate and will now stand at £3.8bn.

With the way the BR system operates, the steep rise in RV in London and for central list properties has a strange effect. These rises result in a larger downwards adjustment of the multipliers, reducing bills for the rest of the country. Many businesses may therefore expect an increased bill but receive a reduced one. This skews the proportion of funding coming from London even further.

This anomaly can be traced to the fact that there is a single multiplier for England, despite the fact that market conditions vary so widely. The new figures therefore provide powerful ammunition to the argument for local variation in the multipliers. This case is strongly supported in local government, including in London.

No single measure is likely to bring growth in the North and Midlands more into line with that in London. Transport improvements are likely to help, as are initiatives to showcase the opportunities for business in these regions. However, it would also help for local authorities and combined authorities to have greater control over the parameters of taxation, such as the business rate multipliers and thresholds for mandatory reliefs.

In this context, it is worth noting that the changes in RV vary widely not just between regions but within regions. For example, in London, Hillingdon has seen its total RV increase by just 0.8%, while Hackney has seen an increase of 46.2%. In the South West, Torbay has had a 5.9% fall in its RV, while the RV in West Somerset has increased by a whopping 84.1%. In Yorkshire and Humberside, the overall change in RV is zero, but this conceals a range for local authorities from -6.4% to +14.9%, while in the North East, Redcar and Cleveland has seen a fall of 20.5%, while RV in Northumberland has grown by 7.7%.

To see the impact on bills, though, billpayers and local authorities will have to factor in the effect of the change in the multiplier, as well as changing entitlement to reliefs. Naturally, this includes transitional relief, and the effect of this – for medium and large business properties – depends on which of the two options is chosen.

It should be noted that the figures in Tables 1 and 2 show the caps on the rises and falls between one year and the next. The cumulative change over the full period can be much larger than the percentages shown. Under both options, for small properties, bills can rise over the period by up to 64.2%, or fall by up to 92.6%. For medium properties, the maximum rise is higher: 147.9%. The maximum fall is smaller though: 36.3% under Option 1 and 65.6% under Option 2. The largest properties have a relatively low cap in their maximum reduction in bills: 36.3% under Option 1 and 22.8% under Option 2. The maximum rises for large properties, however, are huge: 220.1% under Option 1 and 297.4% under Option 2. That is, the choice for the largest properties is whether bills are allowed to rise to up to three times their current levels, or up to nearly four times their current levels. However, it should be borne in mind that this will affect very few properties. Only 500 large properties would otherwise have bills beyond the limit in Option 1 and only 300 beyond that in Option 2. This is out of a total of 1.8 million properties of all sizes.

Many respondents may therefore view it as acceptable to have such high caps on bills for large properties, where the bill payers are more likely to have the margins to allow such rises. This raises the interesting question of the Government’s motivation for presenting the two options. The Government will need to analyse responses and determine which option is more favoured by respondents. But the answer to this is pretty predictable: respondents will generally support whichever provides the lower bills for them. As many more bill payers are likely to benefit relatively from Option 2, this is almost certainly the option that will receive greatest support. This suggests that the Government is essentially trying to seek democratic permission to provide a high level of cushioning for many small businesses at the expense of a very small number of large ones.

The impact on local authority incomes is still harder to gauge. The revaluation will clearly generate many new appeals. The VOA is prioritising its “Check, Challenge, Appeal” programme to tease out these three as separate procedures. It is unknown how successful this will be in dampening down the volume of appeals – either for the new appeals or for the backlog of appeals on the 2010 list. Council officers will be trying to estimate a reasonable provision for their authority for appeals that will be submitted after 1 April 2017. Appeals after this date could leave many authorities significantly out of pocket. (There is provision within legislation for the Secretary of State to adjust the multiplier upwards to offset loss of business rates from future appeals. The proposed approach in 2017 is discussed in paragraphs B.10 and B.11 of Annex A of the LGFS consultation. Unfortunately, the wording is somewhat opaque.)

Besides appeals, in theory there should not be any financial impact of revaluation on council incomes, due to the adjustment to tariffs and top-ups. However, the methodology that is being used to estimate the necessary adjustment does not take account of changing levels of reliefs. It assumes that the total relief granted is the same fraction of RV before and after the revaluation. There are arguments presented in paragraphs B.6 and B.7 of Annex A of the LGFS consultation as to why this should be reasonable accurate for various reliefs. Finance and revenue officers are likely to be able to take a view as to whether these arguments are valid for their authority.

Curiously, transitional relief is absent from this list. While total transitional relief across England is zero, the impact of the new transitional relief scheme varies from region to region. This is demonstrated in the supplementary tables to the transitional relief consultation. For example, under Option 2, in 2017-18 the net cost of transitional relief in London is £335m, while in the North West there is a net yield of £175m. In 2021-22, these have fallen to £19m and £23m.

Given these variations between years and between regions (and probable larger variations between authorities), transitional relief seems likely to change between 2016-17 and 2017-18 out of proportion to RV for most authorities. Authorities which are concerned about whether this could impact their income may wish to check the position with DCLG.

This highlights a further issue with this body of documents relating to revaluation. In a sense, the consultation on the adjustment methodology was published too early. When the LGFS consultation was published, asking about the adjustment methodology, no figures relating to the revaluation – let alone transitional relief – had been published. Until these figures were published, it would have been difficult for local authorities to take any view on the proposed methodology. Now that they have been, it would be extremely helpful for DCLG to publish exemplifications of how the proposed methodology is likely to play out for individual authorities. This, more than anything, would be likely to draw attention to any weaknesses in the proposal.

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