by Charles Partridge
All hotel operators will be aware that the Government must call a General Election not later than June 1992. While the Labour Party would appear to be ahead in the opinion polls, the Tories are closing the gap, and it would be a brave person who would put money on the eventual outcome. Whichever party wins the election the arrangements under which hotels currently contribute to local authority finance through the uniform business rate (UBR) or community charge (poll tax) will be revised.
It is important that the hotelier understands the changes which the two main parties propose to introduce if they are successful in the election.
Before considering these changes, a common misunderstanding about the way in which the current arrangements work must be rectified. Since April 1990 the money paid by hotel operators, in common with all other commercial occupiers, by way of UBR is no longer retained by the local council, but is paid into a central fund maintained by the DOE. This fund is then redistributed by the DOE to local councils on a per-capita basis. Thus there is no direct link between the amounts paid to the local council and that authority’s income. At the same time domestic property was exempted from the payment of rates and instead individuals living in an authority’s area are currently liable for the payment of poll tax.
This means that hotels, which often include owner and staff accommodation, are in a group of properties which are partly valued as commercial, thus paying UBR, and partly exempt from rates, with the residential staff being liable for poll tax.
The level of poll tax is often far higher than the old liability for rates in respect of the accommodation occupied by staff, although in some cases where the hotel includes owner accommodation the reverse is true.
Rating revaluation
A related change which is having an even greater effect on the rate liability of the hotelier is the 1990 rating revaluation. The base upon which the rates had been levied in England and Wales prior to April 1990 was the 1973 rental value of the property (1985 in Scotland). This base was updated with effect from April 1 1990 to the estimated level of rent which the property would have commanded as at April 1 1988 — a gap of 15 years. The average increase in rental values throughout England over that period was approximately 8 times (8.4 in Wales).
Hotels, however, had seen an unprecedented growth in value during the same period and increases in rateable value in excess of 15 times for first-class London hotels are not uncommon; some provincial hotels increased by even more. Any value attributable to the private domestic or staff accommodation of the property should have been deducted from the assessment by the valuation officer.
Many of these new assessments are being challenged by surveyors acting for the hotel industry, who are hopeful that they will be able to substantially reduce them. Herring Son & Daw, for example, has under appeal on behalf of clients over 250 hotels with a total rateable value in excess of £100m.
The effect of these increases in rateable value may have been exaggerated or mitigated by the change to UBR, depending on the local rate poundage in 1989-90. In that year the rate in the pound varied from £1.22 in Kensington & Chelsea to £3.9995 in the city of Sheffield. UBR was set to collect the same amount in 1990-91 throughout England, with a similar but separate calculation for Wales, as was collected in total from all commercial property in 1989-90 by individual local councils, subject only to an increase for the rise in the retail price index. For 1990-91 the level of UBR was set at 34.8p for England (36.8p for Wales), which was the equivalent to a rate being set on the old 1989 rateable values at £2.40 in the pound.
The overall change in the level of rates payable following the revaluation therefore partly depends on whether the council in whose area a hotel is situated levied a rate in 1989-90 above or below this average.
Transitional arrangements
Hotels, in common with some other properties, particularly in the retail and leisure trades, faced truly horrific increases in their rate liabilities which in some cases in 1990-91 would have been as much as four times the 1989-90 liability. For example, one hotel situated in the Royal Borough of Kensington & Chelsea was faced with an increase in its rate liability from £392,000 to £1.244m.
Ministers accepted that increases of this magnitude were unacceptable, and introduced transitional arrangements to phase in these increases over as many years as necessary. The basis of the calculation is the rate liability in 1989-90 and the increase in the amount payable each year is restricted to 20%, after adjustment for inflation. Phasing applies until the full level of charge has been reached.
There are a number of important criteria which must be met in order to qualify for transitional relief, the most important of which are that the property must have been occupied on March 31 1990 and that there has not been a change of occupier since. Phasing also does not apply to alterations or extensions completed since April 1 1990.
The result can be a substantial reduction in the amount of rates payable. This is illustrated by the examples showing the full and transitional liabilities of four hotels, two in London and two in the provinces, where my firm has appealed on behalf of clients.
After the election
The existing arrangements will change, whichever party wins the election.
Conservative win
The Conservatives have indicated that, should they win, they will retain UBR basically unchanged, but will replace the poll tax with the Council Tax. It will be recalled that the poll tax, which replaced rates in respect of the domestic part of the hotel, is a tax on individuals and subject to means-testing, and is set at a standard rate for all residents in a particular loca authority.
The Council Tax, on the other hand, is a property tax based on the value of the accommodation occupied. Where there is only one occupier there will be a 25% discount.
The upper level of each band will be as follows:
It is likely that most staff accommodation within hotels will fall into bands A to C, although owner accommodation in some private hotels could fall into a higher band. It has been suggested that the commercial hotel assessment should be increased to include these parts of the property, but as this will remove any link between the benefits that the staff receive from the local authority and a local tax it is unlikely to be followed. It must be remembered that UBR is a national tax which, although collected by local authorities, is paid to the central Government and then redistributed to each local authority depending on the number of adults in that area. It has been the policy of this Government that the best method of controlling local government expenditure is to make the local voter feel the direct pain or benefit in his or her pocket. This, they believe, will be reflected in the ballot box.
Under the Council Tax the local authority will fix the level of tax for band D, and the level of tax in the other bands will be a direct proportion of this tax:
- Band A 67%
- Band B 78%
- Band C 89%
- Band D 100%
- Band E 122%
- Band F 144%
- Band G 167%
- Band H 200%
The Government believes that if a local authority spends at a level which is in line with the Government’s estimates then band D would be set at £400. This would mean that a single-person household in band D would have a liability of £300 and that at band A the tax would be £267 (single person £200). The tax at band H would be £800 (single person £600). It is likely that many authorities would set band D at different levels. The Government estimates that on current expenditure band D would this year have varied from £135 in Wandsworth to £620 in Haringey or £609 in Wigan. It is the Government’s intention that this tax should be introduced on April 1 1993.
Labour win
The opinion polls indicate that the Conservatives’ chances of winning the next election are at best less than even. It is important, therefore, to consider the consequences of a Labour victory.
The Labour Party has made it clear that it will change the basis of local authority finance from the start of the financial year (April 1) following election, provided that the date of the election is more than six months before the start of that year.
Labour will abolish UBR and restore to local councils the ability to fix their own rate in the pound. The current transitional arrangements are inconsistent with the restoration to local councils of a direct interest in commercial rate income and would have to be abolished. It follows, therefore, that hotels, particularly in London, face the prospect of substantial increases in their liability from the financial year following a Labour win at the polls.
The abolition of UBR, which is linked to the rate of inflation, would also mean the loss of a major benefit of the present system. Provided that an estimate of future inflation is made, it is currently possible to forecast reasonably accurately for budgeting purposes the rate liability of any property in the country for the period up to March 31 1995.
The Labour Party has stated that increases in direct taxation will be modest, and this has been criticised by the Conservatives on the grounds that it is inconsistent with its published expenditure plans. One way in which this aim could be achieved and at the same time keep direct taxation within proposed limits would be to use local councils as agents to fund many of Labour’s policies. This would result in substantial increases in the rates burden.
Labour has said that if elected it will re-introduce domestic rating, but substitute capital values for rental values. They will put in hand a capital revaluation of all domestic property, but while this is being undertaken the party will revert to the old 1973 Valuation List for domestic property. It has not yet published details of how this will work, but hoteliers will face the prospect of the domestic part of their hotel being subject to rates based on the apportioned 1989 rateable value, but at a level of rate which will have been substantially increased since 1989-90 to take into account not only inflation since April 1989 but also the changes outlined above.
1995 revaluation
The one point on which there would seem to be agreement between the two main political parties is that they will not make the mistake which occurred in England between 1973 and 1990 of not revaluing property regularly. They are both committed to a general revaluation of all non-domestic property with effect from April 1 1995. This is to ensure that the level of assessment for rates stays in line with rental values and that any changes which occur as a result of revaluation are kept within reasonable bounds.
It is clear that the future of local government finance is set to remain a key political issue. Whatever changes are introduced, it seems inevitable that rates in one form or another will continue to be an ever-increasing overhead for business in general and the hotel industry in particular.
