A ‘bigger picture’ review
The 2023 List Revaluation
The Valuation Office Agency (VOA) is responsible for assessing Rateable Values (RVs) for non-domestic properties for the purpose of calculating Business Rates. The VOA’s Revaluation takes place periodically to ensure RVs are up-to-date and reflect changes in the property market. The most recent rating Revaluation went live on 1st April 2023 and the following is meant to provide some bigger picture comments - some you might agree with, some you might not…
Positive effects
Fairness and equity
Validating Business Rates as a fair tax relies heavily on the accuracy, and independence, of the VOA's valuations. One of the primary objectives of a rating Revaluation is to ensure Business Rates (the actual revenue/tax raised), once assessed, are distributed proportionately among differing property types and locations. Over time, rents may increase or fall due to market changes and a revaluation helps rebalance these changes. This should lead to a fairer distribution of the rates burden, where a higher burden is paid for properties that have increased in value and a lower burden where rents have decreased. However, the total amount of rates levied in England, Northern Ireland, Wales, and Scotland (about £26bn) changes each year due to inflation. This discord between RV (a notional property rent) and the performance of the wider economy can weaken the perception of fairness despite every rate payer being similarly affected by inflation – though, of course, some more than others. For instance, if inflation increases the rate multiplier by five per cent, but a property's RV falls by five per cent, the rate payer ends up paying the same rate liability despite their property's decreased value.
The VOA is commissioned by HMRC to undertake regular revaluations to capture changes in RV. As a result, some local authorities may “win” and some may “lose”, as business rates are redistributed following a revaluation. From a macroeconomic standpoint, consider the impact of decentralisation, indeed, take the part-relocation of the BBC from London to the regions, not least, Manchester's Northern Powerhouse and Media City. If the net floor space in a local authority grows due to increased demand and supply, these additional business rates can be used to fund more public services. Conversely, in areas where property rental values fall (reduced occupier demand and/or oversupply), a revaluation can result in lower RVs, therefore, affording lower rate liabilities to residual businesses.
Encouraging investment and regeneration
A rating revaluation can encourage property owners/developers, and occupiers, to invest in their properties. Correcting RVs to market levels encourages developers/landlords to invest by de-risking short-term holding costs, such as empty rate charges, but also by reducing ongoing occupational costs (rates) for their tenants. Take central Newport (Wales) as an example, retail and office rates were excessive and vacancy levels were unprecedented. Once the RVs were corrected landlords/developers were then able to afford, due in part to de-risking their costs, and releasing substantial capital sums to be spent.
Supporting small businesses
A rating revaluation can provide much-needed reductions in rate liability to small businesses. If a property's RV is decreased because of a revaluation it can lead to a lower rate burden which, in turn, can improve the financial viability of small businesses and help them remain competitive. This can be especially beneficial in areas where qualifying small musinesses’ RVs are reduced to below £12,000 (the Small Business Rate Relief threshold) where typically there’s nothing to pay.
Negative effects
Disruption and uncertainty
A rating revaluation can create uncertainty and disruption for businesses, especially those that experience significant large changes in RV (high or low). Businesses may need to re-evaluate their budgets and financial projections to account for changes rate payments, which, in turn, can impact their cash flow and profitability.
Impact on affordability
While rating revaluations aim to promote fairness and equity, it can also result in an increased rate burden when in fact their own business might not be performing as well as others in their locality/sector. This can be especially challenging for businesses operating on tight profit margins or within certain industries and sectors already grappling with financial difficulties. For instance, businesses in the retail sector, which have been struggling with declining sales and increasing costs, may face higher business rates payments due to a revaluation, further straining their financial viability. In a high inflation market, where increased costs cannot be quickly passed onto customers, and high debt ratios, this issue can quickly result in negative cash flow and ultimate business failure.
Regional disparities
A rating revaluation can exacerbate regional disparities. In areas where property rental values have increased significantly, a revaluation can result in higher RVs and, consequently, higher rate payments. This can disproportionately impact businesses in these areas, as they may face higher costs compared to businesses in less costly areas. Consequently, this can contribute to regional inequality and disparity in economic opportunities. The current three-yearly revaluation cycle is an effort to better follow market fluctuations in rental values, thus helping avoid legacy issues when valuing during a market peak or trough, but regional disparities remain whilst the Uniform Business Rate (the RV multiplier) remains different in say Wales and England or for those located in an Enterprise Zone or not.
Impact on property owners
Excessive rate liabilities, as determined by the market, increase the cost of occupation (if due to a revaluation) therefore reduce the affordability of rent because an occupying business is less profitable. This could lead to financial strain or even closure (nil rent) which in turn would result in more frequent leasing activity (higher landlord costs) and/or shorter average periods of occupation or longer void periods.
Administrative burden
A rating revaluation can also impose an administrative burden on businesses, local authorities, and of course the Valuation Office Agency/Scottish Assessors. The process of assessing and updating RVs can be complex and time-consuming and will require additional resources, expertise, and coordination among different stakeholders. Businesses may need to provide updated information on their properties, undergo valuation appeals processes, and comply with new rate payment/relief requirements. Local authorities may need to update their systems, processes, and communications to implement the changes effectively.
As government intervention continues to increase, it inevitably brings about greater complexity and administration and the 2023 Rating Revaluation is no exception.
On the positive side, a three-yearly revaluation promotes fairness and equity, this is despite the challenges faced when valuing properties during a pandemic.
It can encourage investment by reducing risk. The large number of rate reliefs can target businesses in need, not least small businesses, but also bricks and mortar retailers who face structural changes in competition. Where there’s room for improvement, stakeholders should look to reduce disruption and uncertainty, measure affordability, reduce regional disparities, assess how investment decisions are made, and look to substantially reduce the administrative burdens felt by rate payers.
It is essential for policymakers and stakeholders (including the VOA, local authorities, and ratepayers alike) to proactively manage the impacts of a Rating Revaluation to ensure the benefits outweigh the challenges it presents. For me, simplification is key.
Ben has more than 20 years of experience, specialising in business rates and is currently managing Colliers' business rate appeal work in South West England and South Wales. He has a wide range of knowledge in different locations and property types. Ben's expertise allows him to provide personalised advice, dedicated to each property.