A short-sighted victory with long-term consequences for UK businesses

This article originally appeared in Estates Gazette, June 2022.

Stripping ratepayers of a right to appeal not only fuels further criticism of the business rates system, it will undermine growth and investment

One of the few things that ratepayers appreciated about the business rates system was their fundamental right to challenge property assessments that are excessive.

But the Government’s decision to strip them of that right will not only fuel further criticism of the actual system but will also undermine growth and investment writes Robert Hayton, UK President at the real estate adviser Altus Group.

The impact of the pandemic gave rise to an appeal right, and Government allowed ratepayers to incur costs in pursuing that right only to retrospectively legislate at the eleventh hour to prevent those appeals from proceeding, a draconian act contrary to the spirit of fair taxation, now upheld on appeal by the Valuation Tribunal.

The Chancellor to his credit gave retail, leisure and hospitality businesses in England a 15-month long business rates holiday during the height of the pandemic before tapering off reliefs. But that didn’t include those properties vacant and to let. Empty rates are essentially a penalty to try and bring properties back into use quickly. How do Landlords do that during a pandemic and when such premises were mandated to close? The exclusion was never explained.

In all around 865,000 non-domestic properties in England didn’t receive any support or reliefs whatsoever, having to pay their business rates bills in full, despite restrictions. Councils the length and breadth of England still collected £32.1 billion through the business rates tax during the pandemic in the 2020/21 and 2021/22 financial years. All based upon estimates of open market rents as long ago as 1st April 2015.

Between revaluations the determination of rateable values, which forms the basis of how bills are calculated, can be both challenged and changed to reflect “material changes of circumstances”. Around 170,000 business premises in England, across all sectors of the economy, exercised their right to argue that the impacts of the coronavirus on commercial property had been devastating arising from the restrictive measures introduced to counter the pandemic and that their rateable value should have been reduced.

The Government even allowed more than 55,000 of those businesses to proceed to make a formal Challenge with the Valuation Office Agency, an executive agency of HM Customs & Revenue, with their representatives negotiating in good faith for the best part of a year over a framework for the level of rebates on a sector-by-sector basis.

By December 2020, whilst offices were still under a work from home instruction, a provisional interim settlement of 25% off the rateable value of all offices under Challenge was agreed. The Valuation Office Agency were, quite rightly, applauded at the time for facilitating discussions to get us to that point where the focus then shifted to full and final reductions as well as other asset classes. But the conversations abruptly stopped. Expectations were high that a full framework would be announced at the Spring Budget in 2021 given the fiscal implications were put at around £5 billion.

Despite those expectations and the negotiations, without warning and notice, the Government announced in March 2021 that they would be legislating against Covid material change in circumstances appeals. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, which received Royal Assent last December, was introduced to disregard the pandemic and the Government’s response to it when determining a property’s rateable value. The Act received Royal Assent last December.

In May, Altus Group brought forward a series of 26 test cases before the Valuation Tribunal, an independent judicial body, to test the Act. It involved a novel and important point of law which had national implications. Around 40,000 potential new appeals could have been lodged depending upon the Tribunal’s interpretation of the Act, and for these reasons, we had to put our head above the parapet and lead the way.

The hearing was treated as complex and attracted widespread interest as evidenced by the number of persons that had requested links to join the virtual hearing and to observe the proceedings. The crux of the argument was that the Tribunal should circumvent the intent of the Government as the Act was very specific in the terms of its scope and that many of the issues firms are still grappling with as a direct result of the pandemic weren’t specifically excluded as affecting property values.

Whilst these novel and complex arguments didn’t succeed, the panel held that the likelihood was that, before the passing of the Act, ratepayers would have achieved the reductions that they had set out to achieve and the Government’s purpose of the Act was to “effectively nip in the bud any potential loss of non-domestic rating income.”

Whilst we reflect upon the decision handed down with our clients and the wider business community at large this is, undoubtedly, a pyrrhic victory for the Government and very short-sighted. An Act simply to avoid losses on taxation income for the Chancellor. But at what cost? The UK economy faces an ever-increasing risk of falling into a recession as firms grapple with the fastest inflation rate in four decades.

The actions of Government have hindered the recovery from the pandemic and will now add to the woe’s firms up and down the country face from the ‘cost of doing business crisis’ that they are now experiencing post pandemic. If the economy does slip into recession, the Government will be blamed for making policy errors and this will be a glaring one.

Jacob Rees-Mogg, the minister of state for Brexit Opportunities and Government Efficiency talking about the new tax introduced on excess profits on oil and gas said “retrospective taxation, to my mind, is entirely improper. People must be taxed on what they know is going to come.”

Rees-Mogg is entirely right. Ratepayers knew the law at the time and knew they would be able to reduce their assessment and claim a rebate. The Tribunal conceded they would have succeeded had it not been for the actions of the Government. Actions sadly have consequences.

Robert Hayton is UK President, Altus Group, Britain’s largest ratings advisory, whose firm represented the ratepayers in Vistra International Expansion Ltd and 25 others -v- Ms Dawn Bunyan (Valuation Officer).