Gordon Martin: Scotland’s commercial property rates at a crossroads

THE system of business rates in Scotland has been in place as a tax on non-domestic property for a long time, but never has it been placed under the stress and scrutiny it is under now.

The basis for the tax is the rateable value of non-domestic property. The rateable value represents an estimate of rental value and it is assessed by one of fourteen local assessors in Scotland. General revaluations usually take place every five years to keep pace with the property market.

The rateable values published in the local valuation rolls are then used by local authority finance services to levy business rates charges. The valuation rolls are lists of all non-domestic property addresses together with a note of the owner, any tenant and occupier and also the rateable value.

The levy is calculated by multiplying the rateable value by the national uniform business rate (UBR or rates poundage) set by the Scottish Government. Any other appropriate reliefs, such as small business relief and empty property relief, are applied in arriving at the final annual bill.

In Scotland, there are about 217,000 non-domestic properties with a combined rateable value of just under £6.7 billion.

It is clear to see that the annual tax from this level of value is substantial.

The system has worked well over the years, but something of a perfect storm has arrived in the shape of an increasing uniform business rate (pegged with inflation), decreasing rent levels being out of kilter with rateable values and the Scottish Government seeking to raise revenue to support other policy agendas.

Other factors putting

pressure on the system include an expensive and complex appeal procedure for rate payers and it has to be said, under-resourced assessors who are subject to the same public spending cut-backs facing the rest of local and central government.

The Scottish Government had given an undertaking to match the uniform business rate applied in England and Wales and at the beginning of the last revaluation in 2010 this led to a fall in the rates. Since then, however, in maintaining the philosophy of pegging the uniform business rate to the rate of inflation, rates bills have increased significantly.

Given that the charge is ostensibly a property tax on occupation, it doesn’t seem reasonable to maintain that position in the face of falling or static property values.

Perhaps some other property-related index would provide a better answer and at least be linked to the market for property rather than a basket of groceries, which is how inflation is measured.

The Scottish Government has also dabbled with rates over the years to provide relief to small businesses. This relief is a fiscally neutral option, funded by an additional levy on occupiers of properties with large rateable values.

More recently, the government has sought to use the rates system to support other non-property related policies. The so-called “Tesco tax”, which will see large retailers of cigarettes and alcohol paying an enhanced level of rates, is in support of the public health agenda. The recent Scottish budget confirmed that those retailers licensed and registered to sell alcohol and tobacco in properties with a rateable value of £300,000 or higher will see an additional levy imposed on the normal rates liability.

The point is, the government seems to recognise that the business rates tax take can be adjusted to suit all kinds of manifesto commitments by tinkering with the uniform business rate.

This approach shouldn’t be all bad news. For example, the uniform business rate could be adjusted to promote sustainable buildings, for example by imposing lower rates on properties meeting the most stringent energy performance certificate levels.

Fiscal neutrality could be maintained by offsetting this with a small adjustment imposed on less efficient property. The benefits are clear – providing a stimulus for better and more sustainable buildings.

The Scottish Government has also announced a review of the current system of empty property business rate reliefs that can apply.

It is expected that owners of empty property will see significant increases in business rates from April 2013 as the system is brought in line with England and Wales, where empty property relief is extremely limited in its scope.

So much for the uniform business rate itself, but what of rateable values?

The current rateable values are based on rent levels from April 2008.

Not long after that, the worldwide economic bubble burst and the impact on property values in some sectors and locations has since been stark. Rent levels across retail centres in Scotland have collapsed as landlords seek to attract or retain tenants.

The rates system in Scotland has in-built mechanisms to deal with falls in rental value, but significantly, due to the timing of the current economic decline, the law appears confused on how far and when exactly the rateable value of a property can be adjusted to reflect the prevailing conditions.

The inbuilt systems, it seems, never envisaged a wholesale collapse in rental levels just before a new valuation roll comes into force.

The current position sees property occupiers paying rates based on a rateable value fixed at a level set in the height of the last property boom, and calculated with reference to a uniform business rate that has increased out of line with any property market indicator.

Several appeals on the issue of the correct level of current rateable value as compared to 2008 and later rental levels are currently working their way to the Lands Valuation Appeal Court. It is hoped some clarity will be handed down on the interpretation and application of the current regulations.

This brings matters to the appeals system itself. Those appeals described above will have cost ratepayers several tens of thousands of pounds with no guarantee of success.

There are, perhaps, opportunities to streamline what can be an onerous legal process full of pitfalls for the uninitiated. A review and potential overhaul of the process might be considered.

The next revaluation is due to take place in 2015 and against what political landscape that will take place is very much open to question.

Perhaps the independence referendum of 2014 will allow a fresh look at how the system operates to ensure a fair, transparent and efficient business rates system to the benefit of all interested parties.

• Gordon Martin is a director within the business rates team at GVA. For further information, contact Gordon on 0131-469 6046.