As businesses continue to struggle in the face of a continued high burden of rate liability, there seems to be little or no relief in sight, despite the decline in rental markets.
Rateable Values (RVs), the key variable used to calculate your business rates bill, are tied to a historic valuation, which is dated from before the last market crash. As a consequence, business rate liabilities continue to depress the level of affordable rents across the UK.
The government is intent on ‘inflation-proofing’ business rates
The next revaluation is due to take place on 1 April 2015, but with reference to market conditions at or before 1 April 2013. On the basis that rents will have fallen between this date and the previous valuation, which dates to on or before 1 April 2008, the rating assessments should follow. However, the government is intent on retaining an inflation proof tax yield from rates. This will preclude falls in liability for most ratepayers and increases for some.
The Uniform Business Rate is going to rise over the next two years
At present the government yields £26bn per annum from rates (in England, Wales and Scotland). For this level of revenue to continue in real terms, the Uniform Business Rate (UBR), the multiplier applied to Rateable Values to calculate rates payable, is going to rise over the next two years: reaching almost 50p in the pound by 2014/15. With the anticipation that there will be a much smaller RV pool at the revaluation, the UBR could increase very steeply from April 2015 onwards.
Rents and rates are at 2007 levels
Take the example of grade A offices in a typical northern city like Manchester or Leeds. Prime rents were between £25 and £30 per sq ft in 2007, but just a couple of years after the market crash tenants could have actually been paying as little as £10 per sq ft for the same grade A accommodation. As a result rents and rates are now at a similar level, and rates may even be exceeding net rental levels in some areas.
As an extreme example, at the 2015 revaluation, a halving in rentals between 2008 and 2013 on a national basis could lead to a 100% plus increase in the UBR for everyone in business premises. If this increase were to materialise, the UBR multiplier will rise from 45.8p to over £1 for every pound of rent payable. Businesses would therefore be paying over 100% of their rental bill in annual rates.
However, a uniform drop in rents of this scale is unlikely; therefore we would not expect the UBR to increase by such a steep margin at the next valuation date. Data from the IPD all property index would suggest that, on average, rents in 2013 will be approximately 9% below their 2007 level. The fall in rental levels combined with inflationary pressures will lead to increases in the average rate liability.
Hardship relief is the only prospect for business rates reduction
With the government’s decision to maintain the level of income the treasury receives from business rates, it is very unlikely that a decline in Rateable Values at the next revaluation date will result in a commensurate decrease in business rates. Only an increase in the amount of hardship relief available to businesses and developers will provide this.