How will the phasing provisions affect the bills of non-domestic ratepayers?
The phasing provisions affecting the rate liabilities of non-domestic properties will need to be taken into account in the vast majority of cases. The arrangements were drawn up in an attempt to mitigate the combined effects of the changeover to the national non-domestic rate multiplier (NNDR) and the new rating list, both introduced (rather ominously) on April 1 1990. From the outset, the Government made it clear that the cost of phasing-in increases in liability would be met by an equivalent phasing-in of decreases, the gainers subsidising the losers as it were. As a consequence, only a small proportion of ratepayers will actually be required to pay rates based on the simple multiple of their new rateable value and the national rate multiplier.
Broadly speaking, where phasing applies, both increases and decreases in liability will be limited to the previous year’s rates plus an allowance for inflation and a fixed percentage adjustment.
Section 57 of the Local Government Finance Act 1988 makes provision for special transitional arrangements for the calculation of business rates for the period 1990-95. It should be noted that section 58 provides for an extension of phasing beyond 1995 if so desired. The transitional provisions themselves were introduced in the Local Government and Housing Act 1989 under Schedule 5, which added section 7A to the 1988 Act as the vehicle for transition. The detailed provisions are set out in The Non-Domestic Rating (Transitional Period) Regulations 1989.
Where properties are faced with either a decrease or increase in rates payable as a result of the revaluation and the introduction of the NNDR they will qualify for transitional provisions only if they appeared in both the 1973 valuation list and the 1990 rating list and provided the RV was at least £500 (with the exception of advertising hoardings). Thus new property introduced to the list after April 1 1990 will not qualify for transition.
These are the only qualifying requirements for properties which will benefit from a decrease in liability, but properties facing an increase must also satisfy certain ownership and occupation qualifications. Thus for increases, transitional protection will apply only where the property is occupied on March 31 1990 and either continues to be occupied by the same person after that date or, if it becomes unoccupied, remains in the ownership of the former occupier.
If the property is unoccupied at March 31 1990 transitional protection will apply, provided that the property has been occupied at some time between April 1 1988 and March 31 1990 by the person who owns the property on March 31 1990, that the property has not been occupied by anyone else since last occupied by that person and that it has remained in the ownership of that person since he last occupied it.
Phasing sets an annual limit on increases and reductions in rate bills by comparing rate bills payable in the transitional period with those of the previous year. This operates by determining a notional chargeable amount which can be compared with a base liability for the previous financial year.
The notional chargeable amount is calculated by multiplying the April 1 1990 rateable value of the property by the new non-domestic rate poundage for the year. The base liability for 1990-91 is calculated by multiplying the rateable value of the property in the old valuation list by the general rate poundage for 1989-90 for the area in which the property is situated. The old list value for the purpose of this calculation is the value appearing as at February 15 1989, or the date at which the property first appeared in the valuation list if later. Alterations to the old list as a result of proposals received by the valuation officer after this date will not be taken into account in arriving at the transitional liability. This ruling was introduced to prevent ratepayers from inundating the VO with appeals prior to the introduction of the new list, solely as an attempt to influence the effect of phasing.
If the notional chargeable amount (1990 RV x NNDR) exceeds the base liability (1973 RV x 1989-90 rate poundage), the increase in the rate bill will be limited to 20% plus an allowance for inflation in the case of larger properties and 15% plus inflation for smaller properties. The differential rates were introduced to provide a greater measure of assistance for smaller businesses. Larger properties are defined as those having a rateable value on April 1 1990 of at least £10,000 outside Greater London (£15,000 in Greater London).
The allowance for inflation is calculated by reference to the increase in the Retail Price Index for the year ending in the September of the year preceding the year for which the calculation is being made. This is actually 7.56% for the year 1990-91, being the annual increase in the RPI to September 1989.
Where the notional chargeable amount is less than the base liability, the reduction will also be limited. The actual limit is prescribed by order and is set once the effect on national rate income of the phasing-in of increase is known. This is because the transitional scheme has to be self-financing. For 1990-91 the limits are 10.5% for properties above the rateable value thresholds of £10,000 and £15,000 and 15.5% for properties below these thresholds, again affording a greater measure of benefit to smaller businesses. The limits for 1991-92 have been announced at 13% and 18% respectively. Percentage limits for subsequent years will be announced when sufficient information on the amounts required to maintain phasing on a self-financing basis is available. As with increases in liability, the phasing for decreases also contains an allowance for inflation based on the Retail Price Index.
The phasing provisions can be illustrated using simple theoretical examples which show the calculation of the actual liability for 1990-91 in the four possible cases which might arise; reductions and increases in liability for both small and large properties (see example 1). Each example assumes a local rate poundage for 1989-90 of £3.50 in the £. Notional liabilities are calculated by reference to the actual NNDR for England, 34.8p in the £.
Phasing continues in this way until such time as the notional liability exceeds the base liability. At this point the property is out of phasing and from that time onwards the rates payable will be based on the usual formula, RV x NNDR.
If some estimate of the future rate of inflation is made, it is possible to construct a calculation showing the longer-term effects of phasing. Example 2 shows the effect of phasing in subsequent years in respect of properties one and three in example 1.
For the purpose of assessing liabilities, calculations are actually made daily so that phasing will cease to operate in a particular case at the precise point during the appropriate year. For the sake of simplicity the examples all show annual calculations.
It can be seen that property one comes out of phasing during 1992-93 and property two in 1993-94. There will be many cases where phasing will have to continue beyond 1995 for the full increases and decreases to be phased in at these rates and it remains to be seen whether or not advantage is taken of the section 58 provision to extend phasing beyond 1995.
The rules set out above and illustrated in the examples apply only to those circumstances which are straightforward in that the property appears in the same form in both 1973 and 1990 lists. There is, however, a whole range of circumstances where this will not be the case. These include assessments which are changed as the result of alterations taking effect after the list comes into force. The transitional provisions require that the transitional path for a property must always be calculated by reference to the value it has in the new list when the list comes into force. This is known as the “effective value”. Thus, in the case of increases in value, where the new rateable value exceeds the effective value, the amount of the additional rate bill attributable to the increase will not attract transition. This is illustrated by example three, which shows the effect on phasing in the case of a property extended after March 31 1990. Phasing will not apply to any additional proportion of the RV attributable to the extension.
Where a property is split, the effective value of the property must be apportioned among the new hereditaments, and phasing for each of them will be calculated using the apportioned figure Where two or more properties in transition are merged, transition will still apply, provided all the properties were subject to the limit on reductions or, where they are subject to the limit on increases, that the merged property continues to be occupied by at least one person who occupied the properties, subject to that limit, prior to the merger.
The limits on reductions and increases will normally be determined by the rateable value category in which the property was when the list came into force. In the case of mergers, if one of the properties which is merged has a rateable value below the threshold but another has a value above the threshold, the merged property will be treated as being wholly above the threshold.
There are special provisions applying to properties in the City of London, properties appearing in central rating lists, formula-rated hereditaments, mineral workings, dock or harbour undertakings and Crown hereditaments, and these are contained in the 1989 Order.
Transition will not apply to properties which are exempt on April 1 1990 but which subsequently cease to be exempt, properties in enterprise zones for example. Composite or partly exempt properties will have a baseline liability calculated by reference to an old list value equivalent to the value appearing in the new list on the non-exempt part. This will be determined by the valuation officer, and ratepayers will be able to request a certificate from the VO to confirm the value. Disputes on the values contained in the certificate can be referred to the Valuation and Community Charge Tribunal for determination.
As the vast majority of properties will be subject to phasing in one direction or another, rating surveyors will need to take additional care in checking clients’ rate liabilities during the phasing period. In addition, those advising ratepayers will have to exercise vigilance in cases of mergers, splits, and other complex situations. In some instances there will be room for negotiation where the VO is required to issue a certificate, as the values to be included will not always be clear cut. Phasing may also have implications for relocation decisions, as moving to a new property will almost certainly mean a reversion to the full liability with no phasing-in of increases. Phasing on decreases is not subject to the occupation qualification, so moving to a new property with a reduced liability will be of no benefit.
It is clear that there will be cases where even sizeable reductions negotiated on 1990 rateable values will have no immediate effect on the size of actual rate bills. However, ratepayers would be well advised not to accept a valuation which may be too high, not only because the rules on phasing could be altered at any time but also because there is no firm guarantee that the next revaluation will take place in 1995. Chastened by the experience of the 1973 list, which was also subject to quinquennial review, many rating surveyors believe that the 1990 list could be with us for a lot longer than five years.
