by Ian Gatenby
What, more rating jargon? Yes, but, unfortunately, property people will need to be aware of these new problem areas in rating after April 1. In this article I explore a problem area which, I suspect, could give rise to difficulty.
Composite hereditaments
As most readers will know, a hereditament is a unit of occupation for rating purposes, but a “composite hereditament” is a new animal, created under the Local Government Finance Act 1988. It is a hereditament which comprises both domestic and non-domestic property. Currently, one does not have to worry about such distinctions for most practical purposes, since both domestic and business property is rateable. This will change after April 1 when domestic property ceases to be rateable and becomes potentially liable for community charge. After April 1, for rating valuation purposes, one must exclude any part of a property which is used for domestic purposes, as defined in the 1988 Act.
A typical composite hereditament would be the shop with a flat above. For these purposes I assume that it is properly one hereditament, for example, because the flat shares an entrance with the shop and, therefore, cannot be let separately. The theory is that the whole hereditament appears on the rating list, with an indication that it is a composite hereditament, but only the shop part is valued for rating purposes and only that value is shown in the rating list. The practical effect is that rates are payable on the shop part only.
In case matters became too simple, the Government has defined “domestic” in several ways, though it is outside the scope of this article to go into the complexities. For present purposes, I draw attention to the point that accommodation which is domestic for rating purposes will not necessarily be domestic for community charge purposes. If the facts are right or can be adjusted to be right, you might escape with the best of all worlds and pay neither rates nor community charge in respect of the flat above the shop. However, for the present, I assume that the flat is domestic for both rating and community charge purposes, and the following comments are based on this assumption.
If someone actually uses the flat as a sole or main residence that person will (subject to the community charge exemptions) pay personal community charge. On the other hand, if the flat is unused or used residentially but not as a sole or main residence, standard community charge could well be payable in respect of the property. It will be payable by the owner or, if the property has been let on a tenancy of six months or more, by the tenant. It is expected that the standard community charge in most areas will be twice that of the personal community charge.
In the vast majority of cases this kind of situation will give rise to few practical problems: the extent of the property to be valued for rating purposes will be relatively clear. The shopkeeper will pay rates in respect of his shop, and either he or perhaps his tenant will be liable for community charge of one kind or another in respect of the flat.
What is important is that anyone with a property which is composite should take special advice on the position because of (a) the different definitions of “domestic” for rating and community charge purposes and (b) the possibility of altering the physical circumstances before April 1 to achieve the best fiscal position.
Other typical examples of composite hereditaments would be the office incorporating a director’s flat, commercial premises incorporating a caretaker’s flat, various forms of institutional use, and hotels and boarding houses which have partly short-stay residents (deemed to be non-domestic use) and partly long-stay residents (domestic use). A home which is also used for business purposes could be a composite hereditament as well, but here there is the benefit of the “minor use rule”. This has no statutory force, but rests on an assurance given by the Government in Parliament. The effect is that minor business use of domestic property will be ignored if it does not materially affect the character of the domestic property as a whole. The assurance was given in the context of bed and breakfast lettings, but there is no explanation of how it will be interpreted. I assume that the occasional bed and breakfast letting during the summer season would be ignored under the minor use rule, but that the long-term letting of rooms to students might not fall within the rule, with the result that the property would be a composite hereditament and there could be a liability for rates. For the person who works from home, in so far as there is a room or rooms set aside for work, these rooms might be rateable unless they are exempt under the minor use rule.
Quasi-composite hereditaments
But what of the property whose use fluctuates from time to time? The flat above the shop might be used by the shopkeeper sometimes for storage purposes in connection with his business, when it would be non-domestic property and rateable. Sometimes it might be used (or empty and available for use) as accommodation, when it would become domestic property and thus not rateable, but perhaps liable for standard community charge. Strictly speaking, this is not a composite hereditament, because a quirk of the legislation is that the test is applied on each day. In other words, on each day the question is asked whether the property is domestic, non-domestic or composite. On any one day it has to be one or the other, and there are provisions to ensure this. Thus, a property whose use fluctuates from day to day or week to week is not technically a composite hereditament, but it does give rise to major problems and, for convenience, I called this type of fluctuating use property a “quasi-composite hereditament”.
As I have indicated, the theory of matters is that one assesses the situation on each day, but plainly this is impractical. So far as I am aware, it is the intention of the Valuation Office to form an assessment of the likely balance of uses, between domestic and non-domestic, of these quasi-composite hereditaments, with the intention that rates would be levied on that assumed balance of uses. For example, it might be assumed that a shopkeeper would use his flat for business storage for 70% of the time and use it for domestic purposes for the remainder. Matters will then be arranged so that he pays rates on 70% of the commercial value of the flat and, presumably, is potentially liable for community charge for 30% of the year. The mechanics for dealing with this have not yet been revealed.
In broad principle this is a sensible arrangement, but it has a number of problems. First, at present there is no legal authority for it. Second, there is no guarantee that the Inland Revenue Valuation Officer, in charge of rating assessment, is going to agree with the District Council Community Charge Officer; and there is no obvious mechanism for them jointly to agree on the division between rating and community charge. Third, there is no obvious mechanism for how rates and community charge will be paid. Do you, each month, pay 70% of the full rates bill and 30% of the community charge bill, or do you pay rates for 70% of the year and community charge for the balance? Finally, there is no definite means of dealing with the situation where the actual use of the property is different from the assumed use. For example, if the Valuation Officer assumes business use for 70% of the time, what happens if, in fact, in one year the business use is for only 50% of the time? Are you entitled to reduce your rateable value and, if so, by what mechanism? There is more than a suspicion that the Government has been taking the view that, once the notional balance of uses is assessed, rates must be paid on that basis irrespective of the actual use, although I have grave doubts whether this is correct as a matter of law; for example, so far as I am aware, the valuation officer has no power to bind the community charge officer, and vice versa.
Second homes
In the case of second homes the Government realised the possible danger and has taken action. This was potentially a nightmare. A second home could be a classic quasi-composite hereditament which might be used in one week by the owner and his family, which would be domestic use in respect of which standard community charge but not rates would be paid. During that week, in theory, the property would be off the rating list. In the next week, the property might be let out commercially as residential accommodation. This would be non-domestic use. In theory, the property would go back on to the rating list. It would give rise to a liability for rates but not for community charge. The problem was (a) how to assess such a fluctuating situation and (b) how then to deal with the mechanics of paying rates and community charge.
So the Government has decided that second homes which are available for commercial letting for 20 or more weeks in the year are deemed to be in non-domestic use throughout the year, irrespective of the facts of the case. Property available for commercial letting for less than this period will be deemed to be in domestic use throughout the year. There is no legal basis for this rule, as yet. We await the relevant legislation.
Conclusions
Anyone with a property comprising both domestic and non-domestic uses for rating purposes should take care. It may be possible to alter the physical circumstances before April 1 in order to achieve tax advantage. For example, if the flat above the shop is partly used for storage purposes, the shopkeeper might think about removing the storage use to ensure that the flat was wholly domestic for these purposes; conceivably, it might be worthwhile to carry out works to ensure that the flat was domestic for rating purposes but not for community charges. The board of directors might want to remove any filing cabinets and computer terminals from the director’s flat to ensure that it was not physically equipped for business purposes. The person who works from home might want to think about confining his business activities to fewer rooms.
Occupiers of quasi-composite hereditaments, ie those with a use which fluctuates daily, need to take special care. There are, as yet, no answers to how their rating and community charge liabilities are to be assessed or how they are to be paid. Again, the question arises whether before April 1 the pattern of use of the property should be changed to give the best fixed advantage.
