The Business Rates Time Bomb

Transcription

1 Thought Leadership The Business Rates Time Bomb Autumn 2013

2 Background Many business occupiers are facing challenging conditions in the current economic climate, with the level of outgoings a major concern. A major financial burden that increases every year and no longer mirrors rental values is business rates. The 2010 revaluation resulted in a large increase in rateable values as the antecedent valuation date (AVD) was April 2008 (just a few months from the peak of the market). Since then rental values have decreased in most areas, so the difference between open market rental values and rateable values has increased year on year. This gap is now large in many locations, particularly in the retail sector, causing increased hardship to occupiers. These problems have been magnified by above target inflation causing the uniform business rate (UBR) multiplier to increase at a fast rate, as it rises each year in line with RPI inflation. The government s decision to defer the next revaluation by two years, with a valuation date of April 2015 rather than April 2013, will hit many occupiers hard and further erode occupiers profitability. This bulletin examines and quantifies these problems and their ramifications. It also considers what could be done to make the rating system fairer and more equitable at the local level. 2 I GVA 10 Stratton Street London W1J 8JR

3 The Business Rates Time Bomb Executive summary Business rates are attractive to the government, providing a major source of income ( 21.6 billion in 2012/13 for England), equivalent to about half that raised through corporation tax and about three times that raised from Stamp Duty Land Tax. Irrespective of revaluations the amount of business rate income received is guaranteed, with annual increases linked to RPI inflation. Business rates continue to grow disproportionately to most other government revenue sources. With the increasing burden of business rates on occupiers the government s decision to postpone the 2015 revaluation is hard to justify. It represents a missed opportunity to ensure a fairer distribution of the tax. The tax is increasingly inequitable because rateable values are currently based on rental values at the 1st April 2008 valuation date when the market was at its peak. Over the following five years the weak state of the economy and the subsequent fall in rental values means that current rental values bear little resemblance to current rateable values. GVA s view is that the overall total market fall in rental values is close to 15% 20%. This is in line with the government s own prediction that if a revaluation were to go ahead in 2015 the Uniform Business Rate would rise to 60p in the. This would represent an unprecedented level of rates as a % of rental value and equates to a 72.5% increase in the uniform business rate since its introduction at 34.8p back in The effect of major declines in rental values has not benefitted many occupiers. The effect of upward only rent reviews and rate bills increasing each year in line with inflation has meant an increase in total occupancy costs for many occupiers at a time when income/turnover has fallen significantly. Given the reasons for a 2015 revaluation were so compelling why did the government decide to postpone it for two years? DCLG said the decision will avoid local firms and local shops facing unexpected hikes in their business rate bills over the next five years. This simple statement ignores the reasons behind why a revaluation is undertaken. Those businesses in the worst affected markets would have experienced falls, not increases, in their rates. GVA questions whether the decision was in fact Treasury, not DCLG, led because it delays the government having to introduce a transitional relief scheme, which would phase in larger revaluation increases in liability, part funded by phasing in revaluation decreases in liability. But in practice the scheme is actually front end loaded and costs the government 1 billion in the first two years of its operation (as evidenced from the 2005 and 2010 revaluations). GVA recognises that the government is very unlikely to change its decision to delay the 2015 revaluation. GVA therefore urges it to use the 1 billion to help businesses that need this assistance the most. There are a number of potential ways in which these savings can be returned to occupiers: An inflationary freeze in business rates for the 2015/16 and 2016/17 rate years Targeted help to businesses in the locations and sectors in England that have suffered so much through the revaluation deferment. I ncrease empty rates relief to pre April 2008 levels for a two year period. In the longer term other solutions should be considered: Make the appeal procedure easier and quicker Ensure a more level playing field between online retailers and bricks and mortar retailers. GVA proposes having more town centre retail enterprise zones to attract occupiers and stimulate growth in town centres. Ensure that rating revaluations occur more frequently, ie. every three years.

4 Income from rates Increase in tax receipts 2007/8 to 2012/13 30% 20% 10% 0% -10% -20% Rental value changes nationally Business rates are currently based on rental values that existed at April 2008 (very close to the market peak). The next valuation date should have been April 2013 but the government has postponed this for two years. This means that at the local level, regardless of how much rental values have changed since 2008, the amount of rates paid each year will be unaffected, and will in fact increase as the UBR is indexed to RPI inflation. This will be 3.2% based on RPI for September There have been two main problems with the rating system over the last five years and these problems will be exacerbated by the decision to postpone the revaluation. -30% -40% Source: HRMC Income Tax Corporation Tax SDLT Business Rates Council Tax Firstly, the severity of the 2008/09 recession and the very weak upturn that followed has meant a large change in rental values which has varied greatly in different parts of the country as the economic effects of the recession and its aftermath have affected areas differently. So, relatively, some areas have suffered hugely but other areas have benefitted from rateable values remaining fixed at April 2008 levels. Business rates are attractive to the government as they provide a major source of income ( 21.6 billion in 2012/13), equivalent to about half that raised through corporation tax and about three times that raised from Stamp Duty Land Tax. Over the ten years from 2001/02 to 2011/12 business rates income increased by 44% where as corporation tax income increased by 36.5%. Since 2007/08, the detachment between rates and other forms of taxation has become even clearer, marked by a rise of 25% to 2012/13 compared to falls of 12% in Corporation Tax and 31% for Stamp Duty Land Tax. Business rates are also attractive to the government as they are very difficult to avoid paying and are almost guaranteed to increase each year by the increase in the size of the building stock and by the rate of RPI inflation. The reasons that business rates are attractive to the government are the very reasons they are unattractive to occupiers as explained in the next section. Secondly, as most areas have seen rental values fall, and in some areas the fall has been very large, most areas have suffered because rateable values have remained fixed at April 2008 levels. Business output/turnover has suffered (leading to reductions in occupier demand and hence reductions in rental values) but rate payments haven t reduced in line, they have actually increased as the UBR has increased in line with RPI inflation (by about 12% since April 2010). The change in rental values is, therefore, very important. The last five years have seen unprecedented changes in rental values in many areas due to the severity of the recession and its aftermath. These changes are discussed below. At the UK level All Property rental values have fallen by 9.3% between end March 2008 and end March 2013 (IPD Quarterly Index). Office rental values have fallen by 11.2%, retail rental values by 8.8% and industrial rental values by 7.7%. But this data only covers the larger centres where institutional investors and major property companies invest (and contribute to the IPD database). Smaller/poor secondary/tertiary centres are generally not included. In these centres rental decline is likely to have been greater. 4 I GVA 10 Stratton Street London W1J 8JR

5 The Business Rates Time Bomb The IPD rental value data is an average of all property owned by institutional/major property company investors. Arguably the lowest quality properties are excluded and for the properties that are included there are very large differences between the rental growth for properties in the lowest yield quartile ( prime properties) and in the highest yield quartile ( secondary properties). For example, in the retail sector prime standard retail saw UK rental value growth over the last five years of +4.2% (IPD Quarterly Index) in contrast to secondary standard retail which saw rental values decline by 25.3%. So poor quality town centres, many of which are not in the IPD database, have seen a large fall in rental values and even this figure masks huge differences at the local level as explained below. Rental value changes sub nationally All sectors At the UK level, All Property rental values have fallen by over 9% over the last five years, but at the county/regional level there are some marked differences. London (6.4% decline), the South East and Eastern regions have seen below average declines, whereas the South West, West Midlands, North West, Yorkshire & Humber, Scotland and Wales have all seen above average declines, as the map illustrates. The greatest decline was in Wales, at 15%. Prime and secondary retail rental value range March 2008 March 2013 County and regional five year all property rental growth 10% 5% 0% -5% -10% -15% -20% All property rental growth Q Q % to -6% -10% to -8% -10% to -12% -14% to -12% -15% to -14% -25% -30% Standard Retails: Low Yield (Top Quartile) Standard Retails: High Yield (High Quartile) Shopping Centres: Low Yield (Top Quartile) Shopping Centres: High Yield (High Quartile) Retail Warehouses: Low Yield (Top Quartile) Retail Warehouses: High Yield (High Quartile) Source: IPD, GVA Source: IPD, GVA 10 Stratton Street London W1J 8JR GVA I 5

6 Retail sector Standard Retail property at the county/regional level saw rental growth vary from +8.6% in London to -23.2% in Wales (IPD Annual Local Markets data from end 2007 to end 2012), but there were large differences between central/inner London (+10.5%) and outer London (-10.5%). At the County level Cleveland was worst, with rental values falling 23.2%. At the Local level, Knightsbridge saw the strongest rental growth (+24.4%) and Middlesbrough the worst (-40.3%). But there was no clear north/south split - Stevenage, Thamesdown (Swindon) and Plymouth saw rental value declines of 30 37%. These falls in rental value are huge but they reflect a mixture of prime and secondary properties. It is clear that smaller poor secondary or tertiary shops/ town centres will have suffered even more. Retail rental value changes Dec 2007 Dec 2012: Local authorities by growth band 34.0% 9.3% 4.1% 5.2% 21.6% 10%+ 0% to 10% 0% to -10% -10% to -20% -20% to -30% -30% to -40% Analysis of IPD s data shows that nine local authority areas saw positive rental value growth over the last five years. 16 local authorities saw a decline less than the sector average and 72 saw a decline above the sector average. 42 local authorities saw rental value declines of more than 20% and nine saw declines of more than 30%. The retail sector s problems have been reinforced by: the severe recession and its aftermath, where wage increases have been very weak and more than offset by inflation, meaning negative income growth in real terms, online retailing which has syphoned off retail sales from physical shops (but doesn t pay rates except on low value warehouses) and increased rateable values in the last revaluation, resulting from strong rental growth over the previous five year upturn. This has meant stepped rate increases each year from 2010 due to the transitional adjustment. As a result much of the retail sector has seen annual increases in rates payable due to the effects of transitional adjustment and annual increases in UBR, at a time when rental values have declined strongly, reflecting weak occupier demand and declining turnover. Business rates in some cases are more than the rent for the property. The rental value in one Arcadia Group store is reported (Financial Times, 3 July 2013) as having fallen from 500,000 pa in 2008 to 125,000 pa in 2013, whilst rates payable were 227,000 (but subject to inflation linked increases). The Arcadia Group pays about 150m pa in rates which would fall by 30 40m pa if rates were calculated off up-to-date rental values (FT, 3 July 2013). Source: IPD, GVA 25.8% 6 I GVA 10 Stratton Street London W1J 8JR

7 The Business Rates Time Bomb Office and Industrial sectors Office rental value growth at the regional level shows a less varied picture than for retail. Most areas, including central London (despite the recent buoyant market), have seen an overall fall in rental values. A few areas have seen a small increase, but most have seen a decrease. The four worst areas were all in the south Bracknell, Camberley, Swindon and Bromley with falls of up to 30%. Analysis of IPD s data shows that four local authority areas saw positive rental value growth over the last five years. 27 local authorities saw a decline less than the sector average and 23 saw a decline above the sector average. Five local authorities saw rental value decline of 20% or more. Industrial rental value growth at the regional, county or local authority area has varied less than for the other sectors, but most areas have seen a fall in rental values over the last five years. At the regional level there is a rough north/south split but it is not very marked, with London rental values falling 4.6% and Wales, North West, Yorkshire & Humberside and the North East rental values falling by %. Scotland, due to strong growth in Aberdeen (+23.8%), saw only a marginal overall decline of 0.5%. At the local level a number of areas saw single figure rental value growth and at the other end of the scale, Leicester, Bracknell and Bolton saw rental value falls of %. Effects on occupiers The above analysis is summarised in the chart below, which contrasts the rise in the UBR during the current cycle with the fall in rental values in different sectors. Five year change in UBR and rental values UBR = five years from 1st April 2010 Rental value growth = five years from AVD 1st April % 20% 10% 0% -10% -20% -30% Analysis of IPD s data shows that 17 local authority areas saw positive rental value growth (marginal in most cases) over the last five years. 48 local authorities saw a decline less than the sector average, but 85 saw a decline above the sector average. 39 local authorities saw rental value declines of 10 15% and 14 saw declines of 15 25%. Office rental value changes Dec 2007 Dec 2012: Local authorities by growth band -40% -50% Uniform Business Rate Industrial rental values Retail rental values All property rental values Plus deferment Office rental values 5yr growth Secondary Lowest Shopping local Centres market rental standard values retail rental values 7.4% 1.9% 1.9% 5.6% 40.7% 42.6% Source: IPD, GVA 10%+ 0% to 10% 0% to -10% -10% to -20% -20% to -30% -30% to -40% Source: IPD, GVA The effect of such major declines in rental values is causing severe problems to occupiers. The effect of upward only rent reviews, rate bills increasing each year in line with inflation and in some cases the effect of transitional adjustment resulting from the increase in rental values between the last two rating revaluations, has meant an increase in total occupancy costs. This in turn has reduced occupier demand and caused a further decline in rental values for secondary property in particular, compounding the problem for occupiers, but also for investors. Investors have the additional problem of vacant property very high in many secondary locations, where they have no income but have to pay rates, which increase annually, based on rateable values which bear no relation to current rental values. 10 Stratton Street London W1J 8JR GVA I 7

8 Deferring the rating revaluation for two years effects on occupiers Clearly many occupiers, and some investors, are currently suffering from paying rates which increase every year as the UBR increases in line with RPI inflation. At the same time the rateable value on which their annual rates bill is calculated has remained fixed despite the rental value having fallen significantly, and in many cases quite dramatically. For these occupiers the rating revaluation could not come soon enough. Had the valuation date been 2013, when it was due to occur, this would have meant that from 2015 annual rates bills would have fallen noticeably. However, transitional adjustment would have phased these lower rates bills over five years and so the huge problems many occupiers currently face would still continue for many more years. Delaying the rating revaluation by two years means, in effect, that there will be no correction to the problems currently faced for another four years and even then transitional adjustment will mean further delay. This delay could be a serious, possibly fatal, blow to many occupiers, particularly retailers in depressed town centres. These retailers are already suffering from reduced turnover as a result of the recession and the loss of sales to online retailers. Nationally online retail spending doubled its share of total retail sales over the four year period, In weak towns badly affected by the recession, the situation has been much worse, hence the severe decline in rental values. But unless new leases have been granted, or break clauses exercised, rent payments will not have fallen and the rates bill will have increased each year. Declining income and rising costs have led to bankruptcies and very high levels of vacancies in many towns (in many cases % above the national average vacancy rate which itself is historically high). The deferment of the rating valuation is, therefore, a major blow. 8 I GVA 10 Stratton Street London W1J 8JR

9 The Business Rates Time Bomb Deferring the rating revaluation for two years benefits to the government Given the reasons for a 2015 revaluation were so compelling why did the government decide to postpone it for two years? DCLG said the decision will avoid local firms and local shops facing unexpected hikes in their business rate bills over the next five years. This simple statement ignores the reasons behind why a revaluation is undertaken. Those businesses in worst affected markets would have experienced falls not increases in their rates. Also where there have been increases in rate bills from revaluations the transitional adjustment scheme means that increased rates have been subject to phasing since GVA has reviewed the costs to government of a revaluation to identify any other reasons for the postponement. We believe that the real reason for deferring the revaluation was Exchequer led, rather than the reason given by DCLG above. Ratepayers who experience the most extreme increases in rates from the revaluation have their increases phased in through a transitional adjustment scheme, with the increase phased in at a fixed percentage each year. To help fund the scheme those rate payers who face a decrease in rates liability have their decrease phased in. The higher or lower the rates liability resulting from the revaluation, the greater the impact and the longer the transitional adjustment scheme runs. However, this comes at a cost to government. Although they try to ensure the scheme is revenue neutral over the whole revaluation cycle, it is not. In particular, the first two years of any new revaluation are a real burden to government. After the 2005 revaluation the net cost of the scheme in England for 2005/06 and 2006/07 was 1.1 billion. Following the more recent 2010 revaluation the net cost of the scheme in England for 2010/11 and 2011/12 was 980 million, according to the Treasury website. By delaying the revaluation for two years, the government will defer this transitional adjustment net expenditure of about 1 billion until after the 2015 election. This substantial saving (albeit only temporary) appears to be the real reason for the revaluation delay. Despite protest and lobbying across many fronts the government is now very unlikely to reverse its decision to delay the 2015 revaluation. The estimated 1 billion in savings through not having to operate a transitional adjustment scheme from 2015 should, therefore, be used to help businesses that need this assistance the most. 10 Stratton Street London W1J 8JR GVA I 9

10 Business rates retention The major concerns by occupiers need to be addressed and the system made more equitable. The government in fact has made things worse by postponing the rating revaluation by two years and introducing the business rates retention scheme. The main aim of the business rates retention scheme, in the government s view, is to make the system more equitable between local authorities, rather than trying to make it more equitable between occupiers. The changes mean that local authorities will now be able to keep half of any future increase in business rates, resulting from new development, to invest locally. In fact the increase is not just from new development but from any change that increases the amount of business rates. There is, therefore, an incentive to target existing commercial occupiers where: There is a perception of undervaluation, and the Valuation Office is encouraged to review values. Create an industry to fine comb commercial property assessments for missed building alterations etc (inaccuracies may be longstanding and not reflected in business budgets). The Business Rates Retention scheme favours wealthier councils where there is plentiful new development, to the detriment of poorer councils where little new development occurs. This scheme does nothing to address the problems faced by occupiers in weaker towns where rates bills have kept on increasing, whilst business turnover falls, occupier demand reduces and rental values fall. In fact it will quite likely make problems worse. A further problem for many local authorities will be caused by the office (B1a use) to residential change of use now permitted if the building is vacant and the change is undertaken over the next three years. This will potentially reduce the business rates payable in an area and will complicate the redistribution formula between local authorities, penalising those where business rates have fallen. The retail to residential change of use proposals, if confirmed after the consultation period ends, will also reinforce the loss of business rates at the local level in some areas. This suggests a lack of joined up thinking by the government.

11 The Business Rates Time Bomb Possible solutions A number of changes could be made to the current system to improve the situation for business occupiers, either temporarily or permanently. Change the annual indexation of UBR to CPI inflation rather than RPI inflation. The RPI measurement of inflation has been widely supplanted by the CPI measurement of inflation by the government for payments (as it is usually a lower figure). The use of CPI inflation indexation would in most years mean lower annual increases in the UBR, but the increases would only be slightly lower and it would still mean annual increases would always occur (unless inflation went negative). This would only be a marginal change and more fundamental changes are needed. Use the deferred transitional adjustment to cap the annual increases to the UBR to limit the amount of annual increases or ensure an inflationary freeze in business rates for the 2015/16 and 2016/17 rate years. Ease the rates burden to businesses in the locations and sectors in England that have suffered so much from the revaluation being deferred for two years. This means some form of targeted relief at the local level or by say exempting very small businesses from paying rates until a revaluation occurs or perhaps introducing lower rates for businesses that take vacant premises. Increase empty rates relief to pre April 2008 levels for a two year period. Make the appeal procedure easier and quicker where there have been large falls in rental values and large increases in vacancies, i.e. where a major change in underlying market conditions can be shown to have occurred. The Valuation Office Agency (VOA) are currently being obstructive to handling this difficult issue, taking a defensive rather than a helpful stance. Ensure a more level playing field between online retailers (which have no physical shops and so only pay business rates on their warehouse premises, reflecting industrial rather than retail values) with bricks and mortar retailers. GVA suggest a positive solution creating more town centre retail enterprise zones, which offer state aid relief up to a maximum of 55,000 to help attract new occupiers and stimulate growth in town centres. Ensure that revaluations occur more frequently (i.e every three years). This would also reduce the scale of transitional relief, with any savings to the government concentrated on reducing the Uniform Business Rate in England. 10 Stratton Street London W1J 8JR GVA I 11

12 London West End London City Belfast Birmingham Bristol Cardiff Dublin Edinburgh Glasgow Leeds Liverpool Manchester Newcastle Published by GVA 10 Stratton Street, London W1J 8JR 2013 Copyright GVA GVA is the trading name of GVA Grimley Limited and is a principal shareholder of GVA Worldwide, an independent partnership of property advisers operating globally gvaworldwide.com For further information please contact: David Jones London david.jones@gva.co.uk Leigh Richardson South West and Wales leigh.richardson@gva.co.uk Graham Knight Midlands graham.knight@gva.co.uk Duncan Harkness North West duncan.harkness@gva.co.uk Paul Manning North East paul.manning@gva.vo.uk Gordon Martin Scotland gordon.martin@gva.co.uk Dan Francis Research daniel.francis@gva.co.uk James Kingdom Research james.kingdom@gva.co.uk gva.co.uk This report has been prepared by GVA for general information purposes only. Whilst GVA endeavour to ensure that the information in this report is correct it does not warrant completeness or accuracy. You should not rely on it without seeking professional advice. GVA assumes no responsibility for errors or omissions in this publication or other documents which are referenced by or linked to this report. To the maximum extent permitted by law and without limitation GVA exclude all representations, warranties and conditions relating to this report and the use of this report. All intellectual property rights are reserved and prior written permission is required from GVA to reproduce material contained in this report. GVA is the trading name of GVA Grimley Limited GVA