Business rates have never been more in the spotlight as they have over recent months with the updated rating list going live on 1st April and a new 'Check, Challenge, Appeal' system being introduced – both of which have generated heated debates across the real estate industry.

Whilst many are focused on the impacts of the revaluation in certain locations, which are hugely significant given the change in the commercial property landscape since the last rating revaluation seven years ago, there also appears to be a fundamental inconsistency in the way that the rates are actually calculated from sector to sector.

In essence, business rates are a tax on property, rather than turnover (this is already taxed through other means), which is why business rates have been and should continue to be a successful (albeit unpopular) tax, assuming it is managed and calculated correctly.

However, for those firms operating in the leisure sector, businesses rates are often linked to turnover and calculated on their accounts rather than their property or properties. Known as the 'receipts and expenditure' method, the profitability of a company is taken into consideration by the Valuation Office Agency (VOA) who then apply a formulaic approach to work out the respective business rates. The outcome of this is that many pubs, bars, restaurants and leisure facilities are set to see their business rates soar when the revaluation comes into effect in April. In effect they are being penalised for performing well, which is not the case with other businesses.

In addition, the education sector is also subject to an 'alternative' method of valuation for business rates with universities and colleges of higher education seeing their tax based on costs of constructing a modern equivalent of their buildings. As changes in construction costs don’t mirror changes in rental values, the consequence is that these institutions are seeing rates bills rise significantly above average changes in other sectors of the market.

Inevitably, these different methods of valuation are causing inconsistencies across the property industry, which is only exacerbating further the issues with the rating revaluation, which itself is being hailed as one of the biggest changes to the market in a generation.

The appeal system is generally the route for being able to challenge these methods of valuation and the approach adopted, but this is becoming far more difficult and virtually impossible for an unrepresented ratepayer to navigate through, augmented by a substantial backlog of appeals at the VOA.

The Budget on the 8th March promises some assistance to businesses affected by the rating revaluation, but possibly only to small businesses with the assumption that larger businesses can quite simply afford substantial increases in tax. It remains to be seen whether the Chancellor will listen to the far wider cries for help being echoed across the industry.

Further information

Contact Savills Rating Services