by Jerry Schurder
It is common knowledge that there were major changes to the system of business rates from April 1 1990, with a revaluation throwing up large increases in rateable value (RV) in many cases and the change to the uniform business rate (UBR) in place of locally fixed rate poundages.
A less well-known aspect of the legislation is the introduction of the right to payment of interest on rate refunds following a successful appeal against an assessment (see Local Government Finance Act 1988, section 55(7)(b), and Non-Domestic Rating (Payment of Interest) Regulations 1990 (SI 1990/1904)). Now that appeals lodged by ratepayers against rating assessments are being settled in increasing numbers, and refunds of overpaid rates are becoming payable, ratepayers are having to attempt to understand the rules governing the calculation of interest upon refunds of such overpayments. This article is intended as a basic guide to a simple concept, but one which is likely to become a complex and confusing issue.
Under General Rate Act 1967, when an assessment was under appeal following a revaluation there was the right to withhold payment of part of the rates. This entitlement has ceased and the ratepayer must pay rates on the basis of the entry appearing in the rating list, but will be compensated by interest on any refund found to be due.
If an appeal results in a backdated reduction in the RV entered in the list, or if the valuation officer unilaterally reduces the assessment, the payment position between the ratepayer and the charging authority is adjusted subsequently. Thus a successful appeal will often lead to a refund of rates.
This will not always be so, because the rather complicated transitional arrangements, which were introduced to moderate the larger increases and decreases of rate bills following the 1990 revaluation, may have caused the amount of rates which has actually been paid to be either less or more than the amount based on the RV at April 1 1990.
Many ratepayers have made proposals for reductions in the assessments appearing in the list on revaluation or subsequently, and determination of all the appeals will take a considerable time. With the high interest rates prevailing during the first two years of the new scheme, the entitlement to interest on refunds will therefore be a matter of significance. Inevitably, however, the rules for calculation of the interest are complex. The Government has recently introduced Non-Domestic Rating Payment of Interest (Amendment) Regulations 1991 (SI 1991/2111) and the DOE has issued a guidance note — Non-Domestic Rates Practice Note No 6, Payment of Interest on Overpayments — on the matter which runs to 28 pages of explanatory text and calculations.
The rate of interest payable is fixed for each chargeable year at 1% below the average of major bank base rates at the previous March 15, and so for the year commencing April 1 1990 is 14%, and for that commencing April 1 1991 is 12%.
Calculation of the interest payable on a refund can be complicated. The first step in the calculation is to ascertain whether there has been an overpayment for the purpose of the payment of interest regulations and, if so, how much. Rate liability arises daily, but the annual liability is usually paid in 10 equal monthly instalments so that, at any stage in the chargeable year, more than the proportionate amount accrued will have been paid. This effect is sometimes known as “front-loading” of instalments.
The definition of overpayment contained in the recently issued amending regulations is complex, but is intended to be the amount by which the total sum paid towards the discharge of rate liability as established at the time of payment exceeds the revised total liability as determined following an alteration of the list. It is thus important to calculate not only the sums actually paid but also the sums which should have been paid disregarding the instalment scheme.
Example 1
The entry in the list on 1.4.90 (the date R first occupied the property) was RV £100,000 and, on 28.9.90, the list was altered, wef 1.4.90, to reduce the RV to £80,000. The charging authority calculated the adjustment on 30.10.90.
R was liable for rates in respect of the property throughout the chargeable year and when the list was adjusted R had paid six out of 10 instalments of £3,480 (being 1/10 of the annual liability of £34,800, ie RV £100,000 x UBR of 34.8p).
In this case, because the amount paid was not in excess of the revised annual liability, there is no overpayment and no interest payable.
Example 2
The facts are as in Example 1, but R occupied the property from 1.4.90 to 31.8.90 only (153 days) and had paid only five instalments.
The balance of the amount which has actually been overpaid (ie, £17,400.00 – £11,669.92 – £2,917.48 = £2,812.60) occurred because of the front-loading effect of the instalments and will be repaid without interest.
Having established that an overpayment has occurred, and its amount, the next step is to ascertain for how long interest is payable. The period begins with the effective date of the alteration and ends the day before the refund is paid (or credited) to the ratepayer.
The effective date of an alteration appears in the rating list. When the appeal was against the RV entered in the list on April 1 1990, the alteration of the list will be effective from that date. Where the alteration arose from a change of circumstances occurring after April 1 1990, the effective date of alteration will generally be the date of the change of circumstances. An alteration in the list will not be effective earlier than April 1 in the chargeable year in which the proposal for alteration was made unless the propoal was in response to an alteration made by the valuation officer prior to that year.
As to the date the refund is paid, the regulations do not provide whether this should be taken as the date stated on the cheque, the date of posting, the date of receipt or perhaps some days after receipt to allow for the cheque to be cleared. In my view, payment cannot reasonably be taken to have been made until sufficient time has elapsed for the refund to be transferred to the ratepayer’s account.
The rates of interest may vary during the period for which it is payable, if that period spans more than one chargeable year for which different interest rates are fixed, as mentioned above. Furthermore, the regulations differentiate between what are called “relevant periods” and “subsequent periods”. Those who have to grapple with them will find that the definitions of relevant and subsequent periods and the formulae for calculating interest are not particularly straightforward. They are too complex to be covered fully in a short article, but their effect may be described as follows.
For the chargeable year in which an overpayment arises interest is paid only at half the appropriate rate; this is, no doubt, intended to take account of the fact that payment of rates will normally have been made by instalments. Where the overpayment is not refunded in the same chargeable year as it arose, interest is payable at the full appropriate rate during each subsequent year until the day before repayment.
Thus, if the rating list is altered in November 1991 with effect from April 1 1990, and a refund is made on December 1 1991, the relevant periods during which interest at half the appropriate rate may be payable are the complete rate year 1990-91, and the part year April 1 to November 30 1991. However, the overpayment for 1990-91 was not refunded on April 1 1991 but was held over until December 1991, and interest at the full rate is payable for that subsequent period.
Some additional points may be noted briefly:
- A rate refund will carry interest only if it results from an alteration of the list; an overpayment of rates which has occurred from some other cause will be repayable without interest.
- Similarly, if the ratepayer has delayed payment to the extent that the charging authority has obtained a judgment or liability order for the rates ultimately overpaid, no interest is payable on the refund of the overpayment.
- When paying the interest, the charging authority will be obliged to deduct income tax at basic rate and to supply a certificate of deduction on request.
- There is no requirement for the charging authority to provide an explanation of their derivation of the amount of interest payable.
When first announced, the intention to pay interest on refunds of overpaid rates was welcomed as equitable and long overdue. It is perhaps a little premature to pass judgment upon the system which has been devised, owing to the relatively few appeals that have been determined and thus the limited occasions for charging authorities to make interest payments, but considerable confusion may well arise from the regulations.
Ratepayers will have to become familiar with the complex rules for the calculations of interest in order to ensure that they receive what is owing to them.
Finally, those who have become victims of the recession and are no longer in business will be wishing that the right to withhold payment of part of the rates had been retained. That concession might well have prevented some ratepayers from going out of business, but the payment of interest to the receiver will be of no comfort.
