by Michael Capon
There has been much publicity and speculation about the effects of the simultaneous introduction on April 1 1990 of the new Revaluation Rating Assessments and the Uniform Business Rate. A new dimension was added to the debate earlier this year when Environment Secretary Nicholas Ridley gave broad hints about the levels of the phasing provisions likely to be introduced under section 57 of the Local Government Finance Act 1988.
There have been forecasts of rates burdens doubling or even trebling as a result of the 1990 changes and most surveyors are now aware that valuations, rent review negotiations, rental growth projections and new scheme appraisals must be carried out in the knowledge of the likely shifts in rates burden.
Estimates of these shifts can now be carried out with a little more precision as Nicholas Ridley has announced that phasing will take the form of a straightforward ceiling on the annual percentage increase in rates payable, and that the ceiling will probably be pegged at no more than 20% pa compound for most business ratepayers with a lower ceiling of around 15% pa compound for small businesses.
It has been known since the publication of the green paper in 1986 that the increases were to be phased, but this was the first guide given as to the possible levels of the proposed ceilings. These are undoubtedly a great deal lower than many people had predicted, and an analysis of a few examples shows some fascinating results, as well as slaying some long-created dragons.
Some examples
Example 1 relates to a shop in Oxford Street. The current rateable value is £25,000 and the current estimated rental value is £200,000 pa which should therefore also be the 1990 revaluation rateable value (as the 1990 assessments will be based on rental values as at April 1 1988). Assumptions have to be made as regards the 1989-90 rate poundage and more particularly as regards the uniform business rate in 1990-91. The UBR is now widely predicted to be around 40 p in the pound and should then be pegged to the annual increase in the retail prices index.
Column 2 of the table shows the envisaged rates burden shifts ignoring the phasing provisions. The most notable feature is a near doubling of the rates burden in 1990. But column 3 shows the effects of phasing with the 1990 increase reduced to only 20%.
Column 6 shows the impact of the rate increases as a percentage of rent and rates taken together and helps to put the overall effects firmly in perspective — the increase due to the revaluation/UBR in 1990-91 to 1992-93 being dwarfed by the 1993-94 rent review increase.
Example 2 follows a similar formula, but this time for a shop in South Molton Street, often cited as the perfect example of a shopping location that will suffer horrendously from the 1990 changes but, as the table shows, rates are currently so low compared with rent that the phased revaluation/UBR increases for the years 1990-91 to 1994-95 are even less significant than the Oxford Street example when considered as a fraction of rent plus rates.
This is an illustration of an ironic phenomenon caused by the operation of the phasing provisions as currently proposed — a greater adverse effect on rental growth for properties where the rates burden would have doubled without the phasing provisions than on properties where the rates burden would have tripled or quadrupled without phasing.
The big question mark in the South Molton Street example is what will happen in 1995 when a further revaluation is due to take place. In particular, will the outstanding increases from the last revaluation be brought in during that year or will the phasing continue? Section 58 of the Local Government Finance Act 1988 makes provision for further phasing after 1995 but the mechanics of these provisions are as yet unknown.
Example 3 illustrates the effects on good modern offices in Harrow and the sort of increase illustrated will be fairly typical of similar London locations and provincial towns in the South. Although the revaluation/UBR increases are not so extreme as in the two previous examples and would be almost entirely phased in by 1992-93, they none the less have a greater impact in the earlier years when considered as a proportion of rent plus rates.
The impact is likely to be less in the City of London (Example 4) where the 1990 rate burden shift could be so slight that the phasing provisions would not even take effect. The example relates to fairly mediocre office accommodation, but the percentage changes would be not dissimilar for better office space, albeit starting from a higher base.
Example 5 relates to warehousing space in Swindon where industrial/warehousing values have risen sharply since 1973. The revaluation increases are softened by the relative reduction in poundage as the current rate in the pound is well above the national average. The phasing provisions would bite for only one year, the 20% increase in rates equating to 4.9% of rent and rates together.
New schemes
The percentage increases in rent and rates indicated in these five examples suggest that, provided Nicholas Ridley sticks to the 20% phasing, the revaluation/UBR shifts may not be as catastrophic as some had predicted. The notable exceptions, however, are new properties and schemes first coming into rateable occupation as distinct from physical completion on or after April 1 1990.
The Secretary of State has already indicated that the full new rates burden will apply to such properties immediately — there will be no phasing. This means that for example, two similar shopping centres in a particular town could have widely different rates burdens, just because one was occupied before April 1 1990 and the other subsequently. There will inevitably be hard-fought disputes as to whether particular properties are actually in rateable occupation before April 1 1990.
Analysis of a fairly typical example in a major provincial town centre shows that a shop unit with a rental value of £100,000 pa in a post-April 1 1990 scheme would have a rates liability of around £40,000 in 1990-91 as against around £28,500 for a similar shop unit in an existing scheme in the same town centre, ie an £11,500 or 40% rates disadvantage. This would reduce to £7,800/23% in 1992-93 and £3,000/7.5% in 1993-94 with party in 1994-95.
This may not be a one-way street, however, as the Secretary of State has also indicated that he may phase in revaluation/UBR gainers as well as losers. If he does so, some post-1990 developments would benefit from a temporary rates advantage against existing property.
Remaining questions
These examples are only illustrative but are intended to give a broad indication of the sort of effects that might occur if the phasing provisions hinted at by Mr Ridley were brought into effect. We will not hear the DOE’s definitive proposals until nearer the end of 1988.
By this time, the DOE will have a more detailed estimate of the effects of the 1990 changes and should be in a position to frame the section 57 regulations. Anyone considering bringing in a new development in early 1990 will need to do their rating sums as soon as possible after the formal announcement of the provisions so that they can consider whether they should aim at pre- or post-April 1 1990 occupation. In some instances, if they miss the deadline they will need to be ready to deal with requests for staged rents from potential tenants.
If the phasing provisions are dependent on the existence of a pre-April 1 1990 rating assessment, the Inland Revenue Valuation Office will also need to prepare itself to deal with last-minute assessments as the 1989-90 rate year draws to a close. The pressure on the Valuation Office will be exacerbated by the lack of any provison for an occupier, for example, to protect his position by making a proposal to bring a new property into assessment before March 31 1990.
Until the formal announcement is made there are still many question marks. Will a scheme first occupied in March 1990 be fully phased? How will the provisions affect properties that are extended during 1989-90 or that have a nil assessment or some other temporary reduction during that year, or an appeal outstanding against the old valuation list assessment? What about properties temporarily vacant on March 31 1990? At what level of assessment will the “small businesses” provision bite?
There will be many instances where the phasing provisions will have a very significant impact, particularly on new schemes, and the sooner that the precise levels and mechanisms are announced, the better.
Until the announcement developers and business occupiers are doing their financial planning in the dark.