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Viewpoint - 12/10/2010

The business rate system has improved – but problems remain

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The Valuation Office Agency (VOA) has recently completed the fifth modern rating revaluation and has confidently given an undertaking that it will contain reductions in the compiled list assessments to a maximum of 3.6%.

Only the outcome of appeals against the new lists will show whether this is achievable. Since the normal margin of error in valuation is plus or minus 10%, if the VOA has achieved an accuracy of 96.4%, it is to be congratulated.

The rating system has progressively improved – but considerable problems remain

It is in the interests of all parties that rating lists are as accurate as possible. The VOA objective of “right first time” is admirable, but never achievable. The Agency has since the first modern revaluation in 1990 progressively improved the accuracy of each list. This improvement has come about as a result of:

• Better trained and more experienced valuers

• Improved property records

• Increasingly sophisticated IT support

• Better data capture.

Despite this achievement the rating system is creaking at the seams. Indeed many would say it is no longer fit for purpose. Those that use it be it as ratepayer/business, local councils, rating surveyors, and even those working in the Agency see its short comings and complain that it does not meet the needs and expectations of their customers, the ratepayers, billing authorities or the Department for Communities and Local Government (CLG) and the Welsh Assembly Government (WAG).

These criticisms might initially appear to be unjustified since it is the cheapest of all national taxes to administer costing less than one percent of the £25 billion it raises and consistently collecting over 98% of the anticipated yield. It is a simple tax based upon the rental value of property.

Relative rental values change over time and for this reason the VOA in England and Wales revalues all non-domestic property every five years using an Antecedent Valuation Date (AVD) set two years earlier. This two year gap between the valuation date and the compilation date enables as much evidence as possible to be collected to provide a credible foundation for the values adopted as at the AVD.

Adapting to changing economic, technological and market conditions

There is no doubt however that the rating system is, and increasingly will be, criticised for its inability to respond quickly to changes in economic circumstances. The reality is that whilst rental value fall because of declining demand for property, the rules mean that in some cases changes which occurred between 2008 and 2010 can only be reflected in reductions in assessment and consequential liability from 2015 onwards. Indeed if the CLG continues with its current policy on transition, this fall in rental value may not fully reflected in reduced liabilities until some years thereafter, possibly up to 2020.

When modern revaluations were introduced in England and Wales in 1990, this five year cycle with a two year AVD was the best which the profession, could cope with given its lack of experience in handling rating revaluations and relatively modest IT support.

Inability to respond quickly to changes in the property market

The rating system is under pressure not only because of its inability to respond promptly to changes in the property market but also as a result of more specific criticism. It is criticised because it fails to respond to the speed at which the property market is evolving. This acceleration driven by globalisation, advances in technology, the power of the internet, blogs, etc. inevitably casts doubt on a property tax which, by the end of a revaluation cycle, is based upon rents which are seven years out of date.

The recent recession, which in general stalled any increase rental values in the autumn of 2007, had by April this year driven some significant rental reductions. Current legislation enables a VO to take into account changes of a physical nature which affect a property or its environment, but not those which are legal or economic.

Uniform Business Rates (UBR) unpopular with councils, but liked by businesses

Local council’s dislike the system because under UBR their share of the yield is fixed. They complain that they have neither interest in nor incentive to encourage property development since they do not benefit from increases in non-domestic property values. UBR is necessary because there is no correlation between the distribution of property assets by value and the population. This mismatch of income from rates and the demand for local authority services driven by population numbers necessitates a rate re-distribution scheme. UBR is undoubtedly the most effect way by which this can be achieved.

Businesses have long memories. They have not forgotten how exposed they were prior to 1990 to the wiles of some left wing authorities who ignored the views of business when fixing local rate poundages. Locally fixed rates in 1989/90 ranged in London from £2.6581 in Greenwich to £1.222 in Kensington and Chelsea.

Outside the capital the capital the range was as stark with Calderdale at £3.9118 whilst Hereford only charged £2.039. Whilst the average customer would not cross the road for a bar of chocolate, he would be willing to travel from Greenwich to Kensington to purchase of a new car if the dealer was able to offer a more attractive price due to his lower rate liability. The adoption of UBR in 1990 provided a level playing field and predictability.

Pressure to improve the system

The Royal Institution of Chartered Surveyors (RICS) and other professional bodies are pressing for more frequent revaluations not only to address volatile rental markets, but also in the believe that this will result in smaller changes in rental values eliminating the need for transition. A transitional scheme undermines the fundamental purpose of a revaluation and is unfair as it imposes upon those businesses that are doing less well the requirement to fund a reduction in taxation for those that are prospering.

This can best be seen in the retail world where business and rents have migrated from the traditional high streets to the shopping malls and out of town shopping centres. It is perverse that the current transitional scheme makes poorer performing high street shops pay a premium on their rate liability to fund a reduction in the liabilities of the major supermarkets to whom they are losing business.

Unacceptable cost to the public

It is clear that, without other reforms, any change in the current revaluation cycle to three, two or one year, would impose considerable and unacceptable cost on the public purse.

The current economic predicament of the UK economy makes it imperative that we look at ways in which we can work more efficiently whilst cutting the cost of administration. The “buzz” word is “work more smartly”. The RICS in its contribution to the VOA’s evaluation review of the preparation and publication of the 2010 Rating Lists strongly recommended the Agency work more closely with its professional colleagues in private practice in preparing of future Rating Lists.

If the profession is to improve the quality of future rating lists there must be a fundamental change in culture. The current ethos of confrontation can only be overcome by determined leadership from the top within both the VOA and private practice.

An early task for the profession is to reduce the number or unnecessary appeals. These incur needless costs to all parties and delay the progress of valid appeals bringing the system into disrepute. Unfortunately even if the Agency has achieved an accuracy rate of 96.4%, the only way this can be verified is through the appeal system. If there is to be a reduction in the number of appeals the VOA must achieve a higher level of confidence in the accuracy of its lists.

The system can be improved by increasing communicating with agents

If the VOA wishes to improve the efficiency of the rating system and to build confidence it must concentrate its efforts on improving communications with agents because they make 95% of appeals by value and 90% by number. It is in this area that the opportunities for improvement exist. The Agency must resist political pressure to concentrate on unrepresented ratepayers. They are a very small minority of appellants and are often uninterested in using IT.

The robustness of a rating list depends upon the accuracy of the evidence upon which it is based. The VOA valuers do not operate in the property market and are not best placed to appreciate how it is evolving. The Agency’s Specialist Rating Units have for some time worked with their colleagues in private practice to develop schemes of valuation for unusual or difficult classes of property. This has been a success. These arrangements need to be extended to the retail, office, warehouse and industrial markets.

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