COVID-19 Delayed Business Rate Revaluation in England and Wales Set to Take Effect April 2023 but Will Be Mitigated by New Legislation

Commercial property owners in North America are used to having their real property taxes set based on a market-supported assessed value times a tax rate and sometimes a local assessment ratio. Accordingly, if these same owners have properties located in England or Wales, the local taxation can be very confusing, particularly because the reassessment cycle is much longer than in most U.S. and Canadian jurisdictions.

In the UK, property taxes are established through ratable values that are based upon the fair market value of existing leases. English and Welsh commercial ratable values are supposed to be issued every five years, but they were delayed because of COVID-19. Ratable values are the open market annual rental value that a property could have been leased for at a certain date. The new values will reflect market rentals as of April 1, 2021, not 2023.

The UK Valuation Office Agency (VOA) is charged with regularly updating the ratable values of all businesses and other nonresidential properties in England and Wales. The VOA gives the British government the valuations and property advice needed to support real property taxation and benefits. VOA makes its periodic updates to reflect changes in the property market. In turn, this helps ensure business rate bills are based on up-to-date information. VOA is an executive agency, sponsored by HM Revenue & Customs. Local councils use the ratable value to calculate a property’s business rates bill.

VOA has just published future valuations for England and Wales, which shall become effective on April 1, 2023. These are usually refreshed every five years, but because of COVID-19, they are now being issued in 2023 as of January 1, 2021. Accordingly, for appeal purposes, the key date is January 1, 2021.

What Are Ratable Values?

Ratable values are the open market annual rental value a property could have been let for at a certain date. In this case, that date is April 1, 2021. A property’s ratable value is not the same as its business rate bill. Business rate bills are worked out by multiplying the ratable value by a multiplier then applying any rate relief. This multiplier is set by the central government. Bills will also reflect any relief that a property is eligible for. In 2021-22, small business rate relief meant 740,000 businesses did not pay any business rates at all. If the ratable value goes up, it does not necessarily mean that the business rates bill will go up by the same amount.

The Overall Picture

There are 2.14 million non-residential properties in England and Wales. Together, these properties have a total ratable value of £70.3 billion, compared with £65.7 billion in 2017. It has been six years since the last revaluation. The new ratable values will reflect changes in rental values between 2015 and 2021.

For most valuations, market rental values are used as the primary basis. If rents have gone up since the last reassessment, ratable values will likely go up as well. Likewise, if rents have decreased, so will ratable values. VOA does not set the market with its valuations; rather they reflect what occupiers/tenants are paying in rent to use and possess their respective premises.

The economic factors influencing rents vary by property market sectors and location. At a revaluation, it is normal to see different changes in ratable value for different types of properties and locations. Some sectors, properties, and locations do better than others in the years between revaluation dates. These differences are reflected when a revaluation occurs.

VOA is moving to valuing properties more frequently. This will ensure that changes in economic conditions are fed through more rapidly into business rates liabilities. It will also be fairer as revaluations redistribute the overall level of business rates collected, reflecting changes in relative property values.

COVID-19 Impact

Many commercial property owners and ratepayers will want to know how the negative impacts of COVID-19 have been reflected in their new 2023 valuation. To reflect the impact that COVID-19 and the lockdown efforts/quarantines had on many market rents, the British government chose to have the new values based on the conditions existing on April 1, 2021, not 2023. It is intended that the new valuations will reflect the full negative impact COVID-19 had on rental values at that time. However, in every market and sector, there are likely to be individual properties that buck the trend. This may be down to the characteristics of that property, including rental demand and supply, as well as its location relative attractiveness to other properties.

Changes in Value Across Sectors

These are the headline figures for 2023, by sector, looking at the percentage change in ratable value by subsector for both England and Wales. The following table shows the percentage change in ratable value by sub-sector for England:

https://valuationoffice.blog.gov.uk/2022/11/23/revaluation-2023-and-business-rates/

Of course, headline figures only ever tell part of the story. Retail, pubs, and hotels are some of the sectors where ratable values have generally decreased. The evidence we collected about rents in this market shows COVID-19 had a big impact. In most cases, this was greater than the growth in these sectors since the last valuation.

Not All Properties Pay Business Rates

Around 1.5 million properties in England and Wales have a ratable value, which means they may qualify for small business rate relief.

VOA’s Valuation Methods

VOA uses recognized valuation methods approved by the Royal Institution of Chartered Surveyors. These methods are used for many purposes, not just taxation.

They have been clarified and confirmed by decisions from the courts over many years. The specific methodology used depends on the type of property and the evidence available.

Britain Softens Business Rates Blow with £13.6 Billion Support Package

The new British Prime Minister has recently announced that Britain will provide £13.6 billion ($16.1 billion) of support to retail, hospitality, and leisure companies facing higher business rate bills next year to help them through the recession and a fall in consumer spending. British companies have for years complained that business rates—a property tax charged on most commercial properties to fund local services—is archaic and hands an unfair cost advantage to online retailers such as Amazon (AMZN.O).

The Prime Minister also confirmed to Parliament that he would proceed with a planned revaluation of business properties from April 2023 that could lead to higher business rates for some. He said he would provide temporary support to limit the impact of surging inflation. The planned 2023 increase in business rates had been feared by most commercial property owners as likely driving up their operating costs by cumulative increases in the double digits since the prior revaluation. The relief package means that the total increase in business rate bills will be less than 1%, compared with more than 20% without intervention, the finance ministry said.

Britons are also facing a bleak economic outlook. With inflation at a 41-year high of 11.1% and consumer confidence close to the gloomiest on record, they are cutting back. Britain’s budget watchdog said rising prices would further erode people’s wages and reduce living standards by 7% by April 2024. The government also said it had decided not to introduce an online sales tax, which some businesses have called for in combination with business rates reform.

What Should North American Property Owners Do?

Firstly, it is going to be important to track and review all new proposed ratable values for properties owned or leased in England and Wales. Secondly, it is important to understand that these are proposed ratable value increases, and they can be challenged through the appeal process.

The UK tax specialists at Ryan are available to assist in determining whether such an appeal should be filed and how to do so timely. Please contact Michael Allen (michael.allen@ryan.com) and Scott Fowler (scott.fowler@ryan.com) for more information or to assist in a review.