It will not be a surprise to many but when I am reviewing a company’s profit and loss account, I am often surprised about the percentage of turnover that is spent on rent and business rates.
I am currently advising a probable liquidation of a retail outlet within a centre of town shopping precinct. Although not significant in size, in fact it is mostly just a shopfront, the rates are a major cash flow headache for the director to deal with every month. Unlike wages this is a fixed cost and it is not flexible depending on trading results or seasonal fluctuations.
I was therefore startled to read recently that business rates, particularly in the South, are likely to increase over the next 5 years as a result of the government recently publishing the new rateable values for properties.
How are business rates calculated?
Business rates valuation are based on the value of the real estate but they also take into account things like the value of machinery and equipment as well as the sector in which the business is operating.
Every five years the underlying value of properties is assessed to determine their "rateable value".
That figure broadly represents the yearly rent (the rentable value) for which the property could be let. The rateable value is then combined with the business rates "multiplier" which is a figure set by the government each year and this determines the final bill.
However, the underlying property values that are used are always from two years previously. As it currently stands business rates are assessed on 2008 property values. As they were last set in 2010.
The impending revaluation comes into effect on 1 April 2017, with rental values being assessed as at April 2015.
So what does the revaluation mean for UK business rates and why are the changes so controversial?
The period between 2008 to 2015 has been especially volatile for the property market.
Many cities now appear to be over the worst of the downturn and some have started to gather speed, so they are potentially gearing up for increases in their rateable values.
Property values have changed very differently in different parts of the country, with very large increases in some areas, particularly London, and big decreases in others, such as some struggling town centres around the rest of the country. These relative changes will have a direct effect on the calculated business rates bills.
What areas will be affected?
It is thought that around 324 retail centres across Britain will see a decrease in business rates; 21 will pay the same amount; and 76, mostly in London and the South East, are likely to see increases.
The problem for London retailers is unique as some will face huge rate rises due to the surge in property values in the capital in recent years. High-end fashion shops like Jimmy Choo and Alexander McQueen are likely to see their rateable values increase by 415%. Figures predict that Polo Ralph Lauren in London’s Bond Street will face a business rate rise from £2.2million to £3.9million, an 80 per cent increase, before supplements are applied. Brixton may see a 128% increase, Westfield in Shepherds Bush could see a 102% increase.
But in other parts of the country, such as Newport in South Wales, will experience business rates reduction. There is likely to be a 71% cut in rateable values. In Suffolk, Lowestoft may get reductions of 41% and in Yorkshire, Redcar may see 38% cuts.
This sounds dramatic, how am I going to afford a significant increase?
The changes will be not be enforced immediately. There will be a cap on how much bills can rise or fall over the next few years which should help cushion the transition for those expecting an increase.
However businesses that are set to benefit from lower property valuations will also see the changes introduced in stages. Their rates bills will fall gradually over the next five years with some arguing that this amounts to struggling businesses in the North continuing to subsidise businesses that are thriving in the South, even though they have already waited for an extra two years for the revaluation.
Do I have any recourse if I am hit with a large increase?
When the list goes live on 1 April 2017, ratepayers will be able to appeal their assessments formally, but a new system is coming into effect which will influence which battles ratepayers wish to pick.
The Valuation Office is hoping that the introduction of the Check Challenge Appeal process will reduce the number of frivolous claims and lead to more challenges being settled in the early stages, with fewer appeals being heard before the Valuation Tribunal. Under the present regime it is felt that too many appeals are being put in speculatively with little chance of success.
The lesson is clear, these changes are coming. Businesses must make a point of checking their new business rates valuation. If they feel that they have a genuine case to make they should engage an appropriate RICS qualified rating surveyor and put together their case for an appeal. They only have one bite of the cherry and so this will need to be well researched.
Business owners should take the opportunity now to assess their cash flow and review their current tenancy position. Is it sensible and cost effective to downside in advance of the new rates coming into effect?
If you are tied into a long lease and you know that a rates increase will affect your ability to trade profitably is it time to consider a formal restructuring process like a CVA to assist with the costs of any move whilst spreading the repayment of your current creditors over a longer term?