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Viewpoint - 19/11/2012

Changes to business rates

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The government’s Department for Communities & Local Government has made two important announcements with respect to business rates.

The changes, outlined below, are likely to increase the business rates levy and maintain artificially high rating assessments in the long-term. In light of these changes, you should contact us to seek advice on mitigation, and take steps to reduce your tax bill.

Business revaluation postponed to 2017

In an unexpected and controversial move, the government has announced that it has postponed the 2015 commercial property revaluation. The implication of the decision is that many businesses occupying property in a collapsing rental market will continue to pay grossly inflated levels of business rates which no longer represent the value of the property which they occupy.

Since 1990, all commercial and industrial property in England & Wales has undergone a revaluation every fifth year. The assessment for a property is based upon an amount equal to the annual rent which the property might reasonably be expected to let for from year to year. This assessment, multiplied by the Uniform Business Rate (set at 47 pence in the pound for large properties in 2013/14), determines the level of non-domestic rates levied upon occupiers of commercial property. Assessments may be subject to transitional relief.

A revaluation can result in a substantial increase or decrease in the cost of occupying a particular property. The current revaluation, completed in 2010, was based upon rental market evidence gathered as of 1 April 2008. Since then, the UK has entered a double-dip recession and the market for commercial/industrial property has changed significantly, with rents collapsing in a number of market sectors and geographic locations. In many cases, rates are now a greater cost to the occupier than rent.

In spite of this, the government has decided to postpone the 2015 revaluation in order to avoid businesses “…facing unexpected hikes in their business rate bills over the next five years”. However, the true impact of the decision will be to ensure that current valuations, set prior to the onset of the recession and thereby reflecting peak rental levels, will be maintained for a further two years. This is disastrous news for businesses already suffering unreasonably high rates bills.

The postponement currently applies only to England, although we expect Wales and Northern Ireland to quickly adopt the same policy. The Scottish parliament is also considering its options.

Business rates to rise by 2.6% from 1 April 2013

The government has announced that the September 2012 Retail Price Index increased by 2.6% over the previous year. Barring a decision by the Chancellor to limit the increase, business rates in England & Wales will increase similarly from 1st April 2013.The combined effect of RPI-driven rises in the past three years has increased the average rate demand by 13.4%.

Business rates are a tax on the occupation of commercial property. With the exception of those businesses attracting one of a number of reliefs and exemptions (including small businesses and charities), the majority of occupiers, and also owners of un-let property, are liable to pay this tax. The annual increase in the business rate is limited by statute, with the September Retail Price Index (RPI) being used to determine the rate of increase which becomes effective from 1st April of the following year.

On 16th October, the government announced that the September 2012 RPI was +2.6%. This compares favourably with increases announced in previous years (+5.6% in 2011, +4.6% in 2010). Yet, in extremely difficult trading conditions, this increase will have a substantial impact upon trading viability for many businesses.

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