Business Rates Update Paul H Easton – Director & National Head of Business Rates Melanie M Oates – Director, Business Rates

Introduction Paul H Easton – Director & National Head of Business Rates Lambert Smith Hampton 2015 to date Storeys Edward Symmons 2011-15 storeys:ssp/Storey Sons & Parker 1977-2011 Melanie Oates – Director, Business Rates As above but much younger than Paul ssp 1990 - 2011 Both Involved in: Business rate appeals Empty property rate mitigation Business rates recovery audit Business rates payment management

Introduction The expected 2017 Revaluation will be the first review of the system for seven years. How will this affect individual locations and sectors? Never before has it been so important to understand how to mitigate the liability to business rates.

Introduction Cover three areas: Business rates update – 2010 appeals update and what we know about the 2017 revaluation including changes to the appeal system. Local market update – How the 2017 revaluation will affect local business. Update on relevant case law and key principles.

Business Rates Update 2010 Rating List VOA Statistics – As at 30th September 2016 Challenges against 2010 rating list – 1.04m Total hereditaments in list 1.94m Challenges against 2005 rating list – 937,000 (almost all now resolved)

Business Rates Update 2010 Rating List Between January-March 2015 around 200,000 appeals made. Why? Change in appeal regulations: Ratepayer appeal before 1 April 2015 could go back to 1 April 2010 (or appropriate effective date). Ratepayer appeal after 1 April 2015 the effective date limited to 1 April 2015 (or appropriate effective date). VOA alter the rating list before 1 April 2016. Could, subject to regulations, be effective from 1 April 2010 (or appropriate effective date). VOA alter the rating list after 1 April 2016 the effective date is limited to 1 April 2015 (or appropriate effective date).

Business Rates Update 2010 Rating List April to June 2015 – back to around 18,000 appeals April to September 2016 : 41,000 appeals Over 760,000 challenges resolved (73%) with 280,000 outstanding! (England and Wales only). Of 760,000 resolved cases about 29% (220,000) have resulted in a change. So 71% or 554,000 appeals have been withdrawn/dismissed. Figures for the North East – 43,920 challenges against 29,640 resolved. Statistics can be found at www.gov.uk/government/statistics

Business Rates Update 2010 Rating List Valuation Tribunal England – Publish Statistics Period 1 October – 31 December 2015 Appeals carried forward as at 1 October 2015 – 254,700 Appeals received – 27,900 Appeals cleared – 17,900 Appeals carried forward as at 31 December 2015 – 264,700 Appeals arise when a proposal to alter the rating list is not resolved within three months and it is automatically transferred to VTS Statistics can be found at www.valuationtribunal.gov.uk/vtsstatistics

Business Rates Update 2010 Rating List Not the end of the 2010 list just yet. Looking at the statistics for North East alone still 14,280 appeals outstanding Average number resolved over the last 6 years has been c.5000 per year Almost 3 years work left before any further appeals taken into account Ratepayer can still appeal up to 31st March 2017 If VON served have either until 31st March 2017 or 6 months from date of notice whichever is later VO has the ability to alter the rating list for e.g. alterations; new properties - up to 31st March 2018 with a 6 month right of appeal thereafter. Appeal on grounds of VT/ Upper Tribunal decision on another hereditament, can appeal up to 6 months after 1st April 2017 Dual system for 2010 and 2017

Business Rates Update What do we know about the 2017 Revaluation? It was due on 1 April 2015. Postponed to 1 April 2017 in: England Wales Scotland Except Northern Ireland – retained 2015 as last one 2003 The antecedent valuation date was 1 April 2015 (AVD) Rental values and economic circumstances at AVD Physical circumstance 1 April 2017 Draft rating list now published on VOA website.

Business Rates Update 2017 Revaluation Can see draft rateable value and for most, a summary valuation of how it is made up. No rental evidence visible to support the rateable value. Properties valued by reference to trade do not have details of that trade. Properties valued by other methods i.e. contractors do not have a summary valuation. Ratepayer opportunity to check draft and if thought to be incorrect make representations to the VOA. As previously, an appeal can be made on/after 1 April 2017, but Check, challenge, appeal will be in for 2017 Details of this still to be finalised

Business Rates Update 2017 Revaluation – Local Market Update Last revaluation 2010 based on rental values and economic circumstances at 1 April 2008. (Before the world fell off the end of a cliff!) Next revaluation 2017 based on rental values and economic circumstance at 1 April 2015. So what has happened? Newcastle Retail – Prime Northumberland Street. Agreed Zone A £2,750/m² for 2010. Draft 2017 - £2,200 ZA Eldon Square – Chevy Chase : 2010 £2500/m2 ZA, draft 2017 £2200 /m2 ZA St Andrews Way : 2010 £2500 /m2 ZA, draft 2017 £2600/m2 ZA Newcastle Offices Grade A agreed £190/m² for 2010. 2017 valued at £170/m2 Grey Street offices - £190/m² on refurbished also valued at £170/m2 for 2017

Business Rates Update 2017 Revaluation – Local Market Update Blackett Street – Southside e.g. North Face; Warehouse; Agreed ZA £1,650 for 2010. £1,600 ZA for 2017 Blackett Street – Monument Mall e.g. Fat Face; Molton Brown; Jack Wills Agreed ZA £2,000 for 2010. 2017 draft list £2,200/m² Grainger Street – Tone varies but Zone A rates are between -15% to + 14% change. Grey Street Restaurants – Agreed £300/m² for 2010. £400/m2 for 2017. New Greys Quarter has opened. Industrials – Team Valley –Generally 10-15% increase in RV. On the face of it great news for ratepayers in retail and offices in Newcastle. Big reductions in RV in some instances. Big reductions in rates bills.

Business Rates Update 2017 Revaluation – Local Market Update Not necessarily because of…. TRANSITION Operates to phase in increases and decreases that arise because of revaluation Multiplier will be £0.479; Small Business Multiplier will be £0.466 Notional rates liability for 2017/18 - 2017 RV x multiplier But in simple terms final rate liability in 2016/17 can only increase or decrease by a certain percentage Government consultation in September 2016 Two options consulted on with the Government stating their preference as option 2 Government’s response to the consultation published after the Autumn Statement Option 2 - slightly modified.

Business Rates Update Final: Transitional Arrangements 2017 revaluation (before inflation) funded by 3 caps on reductions Property Size 2017/18 2018/19 2019/20 2020/21 2021/22   Upwards Cap Small 5.0% 7.5% 10.0% 15.0% Medium 12.5% 17.5% 20.0% 25.0% Large 42.0% 32.0% 49.0% 16.0% 6.0% Downwards Cap 30.0% 35.0% 55.0% 4.1% 4.6% 5.9% 5.8% 4.8% Small Property – RV £20,000 and below (London RV £28,000 and below). Medium Property – RV above £20,000 (London RV about £28,000). Large Property – RV above £100,000.

Business Rates Update 2017 Revaluation – Local Market Update Example of downward phasing Unit 1, 42 Northumberland Street 2010 RV£940,000; 2017 Draft List RV £650,000 Without transition 2017 rates liability £311,350.00 Final liability 2016/17 - £454,960.00 But can only decrease from the 2016/17 rates payable by 4.1% (before inflation and SBRR supplement) so actual liability for 2017/18 is £452,610.00 If reduction to RV secured to say £600,000 liability would only reduce by £650 per annum across the life of the list.

Business Rates Update 2017 Revaluation – Local Market Update Example of upward phasing Licensed sector will see larger increases. Trade based valuation. Property some of you may be familiar with Brandling Villa, Gosforth 2010 RV £30,000 2017 Draft RV £90,000 If transition was not in force then rates payable on RV£90,000 would be £43,110.00 Final rates payable in 2016/17 - £14,520.00 Increase is phased in however so can only increase by 12.5% above 2016/17 liability Actual rates payable in 2017/18 £17,799.03

Other matters of interest 2017 Revaluation Small business rates relief scheme extended permanently from 1 April 2017 Relief double. Small business with a rateable value below £12,000 paying no business rates at all. 600,000 will benefit. Between rateable value £12,000 and £15,000 tapered relief. 100% to 0%. The small (standard) multiplier will now apply on rateable values up to £51,000. Over half of business ratepayers will benefit from 1 April 2017. CPI replaces RPI from 2020. Business rate review announced March 2015. Administration of business rates is to be modernised to revalue properties more often and make it easier for business to pay their rates. Introduce at least three yearly revaluations/formula based/self assessment.

Business Rates Update Business Rates Retention Plans announced to extend Business Rates Retention (introduced 1 April 2013) so councils instead of retaining 50% of business rates growth, they will retain 100% from 2020. The multiplier (UBR in old money!) will be abolished (Although councils will only have power to reduce the “rate in the £”. Cities which move to be combined authorities will be able to increase rates for special infrastructure projects. Grants will be phased out by 2020 although “top ups and tariffs” will apply to protect poorer authorities. Likely to see more councils employing inspectors

Business Rates Update Councils can keep business rates income but Also have to pay out any refunds Copeland Borough Council – 67% of business rates income from Sellafield. RV £53.77m was £65.9m. At risk from any significant changes to that single RV. Hartlepool Council – May 2015 Hartlepool Power Station RV reduced from £33.6m to £17.5m from 2010 at VT. This was 25% of business rates collected by Hartlepool (41.7% of total RV). Caught in transition 2010-15 so refunds for 2010-15 of circa £676,200 paid by Hartlepool. But rates collected down by £7,937,300.00 for 2016-17. Council has pleaded to Government to intervene and recognise that the business rates retention system is failing the people of Hartlepool.

Business Rates Update In England there will be a new appeal process from 1st April 2017. In October 2015 Government consulted on proposals for a new three-stage approach to business rates appeals. Check, Challenge, Appeal. The reforms aim to provide a system which is easier to navigate, particularly for small businesses or unrepresented ratepayers. Consultation closed on 4th January 2016 (214 responses) and a policy statement was published on 6th July 2016. Overwhelming majority of respondents recognised the need for change. To put in place a swift structured and transparent system. Promotes early engagement. Most businesses and agents were sceptical about whether this would be achieved. Mainly because ratepayers want more information about basis of their assessment. Concern of length of time the three stage process could take. Additional administrative burdens on businesses.

Business Rates Update The New Process The 3 stages will be moved through in order but there will be trigger points which will allow the ratepayer to move through the system in the event that a stage is not completed. There will still only be one Check, Challenge and Appeal opportunity for each ratepayer per list on each of the grounds. Civil penalties will be introduced if false information is provided by ratepayers or representatives in the check and challenge stage. Maximum level of £500.

Business Rates Update Check Enables the ratepayer to confirm the accuracy of facts on which the rating list entry is made. Check stage formally begins when the ratepayer confirms existing facts or provides new facts. Ratepayers are only expected to submit a check if they believe the rating list is not accurate. Check is the stage at which factual matters should be established and cases will stay in check stage until the facts are agreed or until disputed facts are clearly identified. Check – more property data will be available online.

Business Rates Update In addition to summary valuations a “verified” ratepayer will be able to log into an online account to view additional facts. Age Age of refurbishment Provision of heating, lifts, air conditioning etc If case has been in check stage for 12 months ratepayer has the right to move to the challenge stage [Trigger Point]. The check stage can be extended by agreement between the parties. Check stage is completed when the VOA notifies the ratepayer that the facts have been agreed and changes have been made; or when the VOA notifies the ratepayer of the agreed facts and those still in dispute; or when trigger point is reached.

Business Rates Update MCC Appeals The proposal The ratepayer should submit a Check as soon as possible after the MCC event. This will set the “material date” for any change. The ratepayer will then have up to 16 months to submit a Challenge, based on evidence, accumulated during this period. The check process will run in parallel. These are some concerns about the operation of the Check for MCC’s. This was covered by many in responses to this consultation paper.

Business Rates Update Challenge At the end of the check stage if the ratepayer believes the entry is still inaccurate they can challenge it. Challenge is actually a “Proposal” in the draft regulations. Early engagement and exchange of relevant evidence and information. A challenge must be submitted within 4 months of completion of the check stage. The challenge will be made via an online account that enables the ratepayer to log on and confirm facts held are correct. Alternatives will have been offered at Check stage. Ratepayers have the right to move from the challenge stage to the appeal stage after 18 months [Trigger Point]. To make a challenge the ratepayer must set out grounds for the challenge; substantive reasons for the challenge backed by supporting evidence; and an alternative valuation supported by evidence. If the criteria are not met the VOA will not accept it. The ratepayer will have the opportunity to correct and resubmit the challenge within the original 4 month time limit.

Business Rates Update Wherever possible the VOA will seek to amend the rating list if this evidence shows the rating assessment is incorrect. If VOA does not agree to rate payers alternative entry they will provide, as soon as practicable, tailored information and evidence that responds fully to the evidence and alternative valuation. Ratepayer will have opportunities to respond to any information and evidence the VOA put forward. Ratepayers may agree to extend their Challenge beyond 18 months if they choose The decision notice will set out a summary of their decisions on outstanding matters, with reasons for their decisions. The challenge stage is completed when either an agreement is reached; a decision notice is issued or the trigger point is reached.

Business Rates Update Appeal Ratepayer can proceed to appeal stage if they disagree with the decision notice or in cases where no decision notice issued proceed to appeal stage. An appeal must be submitted within 4 months of the completion of challenge stage. To incentivise full disclosure by both parties at Challenge stage the scope for the parties to introduce new evidence at Appeal will be constrained. Proposed that fees are introduced for appeals. No charge at check or challenge stages. For appeals a maximum of £300. Is this progress? I’m not convinced it is. Government is missing the point, rate payers need to understand how their tax has been calculated. Rents Rents Rents!

Business Rates Update The Government then consulted on the Statutory implementation on CCA. 16th August 2016 to 11th October 2016. LSH response – 12 pages! Introduction of “Reasonable Professional Judgement” in appeals to Valuation Tribunal. No one saw that coming! How will it operate if it is introduced?

Business Rates Update Check Challenge Appeal – The Practicalities “We know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.” We use River Lake who, with others, attended a meeting with VOA on 7th November 2016 to discuss: Business and user authentication Property linking Agent permissions

Business Rates Update Check Challenge Appeal – The Practicalities Business and User Authentication: Interested party (the ratepayer?) registers their company and individual users on Government Gateway (GG). Individual users verified with NI number, passport etc. Agents/organisation needs to be registered on GG. VOA expect a single account for an agent. Can set up multiple accounts. VOA will use agent/organisation contact as main route to contact, if fails use personal contact details.

Business Rates Update Check Challenge Appeal – The Practicalities Property Linking Process where interested person registers their properties and indicates which agents act for each. User searches rating list, specifies capacity (owner/occupier) and makes a legal declaration of their interest. If VOA deems information held as sensitive they will require further evidence to allow access such as a rates bill, lease etc.

Business Rates Update Check Challenge Appeal – The Practicalities Agent Permissions Once interest registered on a property, they can assign an agent by entering an agent code (after agent registered!). Process for changing agents. Once appointed on system, asked to confirm correct.

Business Rates Update Check Challenge Appeal – The Practicalities Comments Administrative – registering properties and linking agents. VOA expect IP to do it. IP expect agent to. Multiple property portfolios. No registration until after 1st April 2017. All communication via portal. Get notifications that there is a new information but have to log in to see it. VOA admits portal will not display alerts covering sizeable portfolios/properties. Occupiers of multiple properties have not been considered in this process. Looking at but not by 1st April 2017. All clear on that?

Update on relevant case law and key principles Woolway (VO) v Mazars LLP (2015) Mazars occupied the second and sixth floors of Tower Bridge House, London. They were assessed separately – as expected. Mazars applied for a single entry on grounds that two floors were occupied by the same business and were functionally interdependent – Not entirely sure how they could be but. The VT merged the entries! No actual benefit to Mazars as single RV was same as sum of two. Point elsewhere is quantum/other end allowances.

Update on relevant case law and key principles Woolway (VO) v Mazars LLP (2015) VOA appealed to the Upper Chamber. They agreed but for different reasons. Test was whether it was possible to move between the two floors without leaving the building or going out to the highway. VOA appealed again. Court of Appeal agreed with the Upper Chamber. VOA appealed again and the Supreme Court has unanimously allowed their appeal. There should be two entries. Back to where we started from!

Update on relevant case law and key principles The Supreme Court suggested the principal test is a geographical one. Are properties contiguous? If contiguous units do not intercommunicate and can be accessed via other property of which the common occupier is not in exclusive possession, this will be a strong indication that they are separate assessments i.e. if access is only via common areas, the assessments should not be merged (So contiguity is no longer sufficient). Functional Test Where two spaces are geographically distinct, a functional test may enable them to be treated as a single hereditament but for them to do so the use of one part must be necessary for the effectual enjoyment of the other part.

Update on relevant case law and key principles And that question depends not on the business needs of the ratepayer but on the “objectively ascertainable character of the premises”. In other words if two properties are occupied together but do not directly intercommunicate they should not be assessed together unless one part could not be effectively let without the other.

Update on relevant case law and key principles How will this decision affect existing entries of merged properties? Offices in Newcastle of two or more floors can have allowances in their rateable values of 5% or more (depending upon size). This could be removed. Adjoining industrial units that don’t intercommunicate (hole in wall) may be separately assessed but check, do they have a yard that effectively connects them that they control? Why did the VOA keep going? Concerned about a tsunami of appeals for none contiguous occupations Concerned about non-vertical same occupations. I don’t think anyone expected the Supreme Court to go as far as they did. They have effectively consigned Gilbert v Hickinbottom to the waste bin. The VOA will look to split merged entries where they are not geographically one unit. When might they do it from? Have until 31st March 2018 to get back to 1st April 2015. Written to many potentially affected ratepayers. Provision? The VOA rating manual Volume 4 – Section 2. Occupation and the hereditament has been updated post Mazars.

Update on relevant case law and key principles Monk v Newbigin (2015) Floor in an office building in Sunderland RV£102,000. Refurbishment being undertaken and ratepayer appealed to VT for reduction to RV£1. VT dismissed ratepayers appeal and confirmed assessment of RV £102,000. Ratepayer appealed to the Upper Tribunal of the Lands Chamber. The building had been stripped out including the removal of the heating and air conditioning systems and the electrical circuit. The Upper Tribunal found that to replace major building elements such as these would go beyond the meaning of repair, regardless of whether such works were economic. Decision of the Upper Tribunal found that the building which was undergoing refurbishment was incapable of beneficial occupation. The decision was that the entry in the list should be amended to show RV £1, with the description of “building undergoing reconstruction”, with effect from 1st April 2010. VOA appealed and the Court of Appeal overturned the Upper Tribunal decision.

Update on relevant case law and key principles The issue related to the physical state of the building and what must be assumed when valuing for rating purposes and what constitutes repair. For rating purposes the assumption is that property being valued is in a state of reasonable repair but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic. The Court of Appeal considered whether the works required to the building could be described as repairs. It applied the tests in the earlier case of McDougall v Easington BC [1989] Whether the alterations affected the whole or substantially the whole of the structure or merely a subsidiary part; Whether the effect of the alterations was to produce a building of a wholly different character; and What the effect of the work was on the value and lifespan of the building. The Court of Appeal held it was not uneconomic simply to reinstate the building to its previous condition and the property had to be valued in its assumed state rather than its actual state. Supreme Court has granted the ratepayer leave to appeal this decision. Heard on 7th November 2016 – Decision awaited with interest!

Update on relevant case law and key principles The VOA rating manual has been updated post Monk. Volume 4 – Section 4 : Practice Note: Rating (Valuation Act) 1999. Barber (VO) v CEREP III TW SARL (2015) - Upper Tribunal (Lands Chamber) First appeal on ‘state of repair’ to be considered by UT since Monk Court of Appeal decision Shop in Tunbridge Wells which formed part of a redevelopment site Other properties in the redevelopment site were hoarded off but this one outside the hoarding At AVD was trading but in May 2008 became vacant Then subject to vandalism and brown asbestos exposed By 1st April 2010 all units in the redevelopment site were vacant VTE determined property was incapable of beneficial occupation due to presence of exposed asbestos and reduced assessment to RV£0. VOA appealed contending that works required to the property were works of repair and that the works required were economic

Update on relevant case law and key principles Upper Tribunal determined that following the Court of Appeal decision in Newbigin the correct approach was not to ask if the property was incapable of beneficial occupation but to ask the three questions on repair Are the premises in such repair as, having regard to the age, character and locality of the property, would make it reasonably fit for the occupation of a reasonably-minded tenant? If not, are the works required to put the premises into such condition works of “repair”? Could those works of repair be carried out economically? Evidence presented showed that the property was in disrepair and that the works required did fall within the definition of repair Would repairs be considered economic? Costs of repairs were just under 2 times RV But, the rating hypothesis requires the physical nature of the property and its surroundings to be reflected At the material day, the appeal property and every other property within the development site were vacant.

Update on relevant case law and key principles The planning permission for the development could be taken into account and even though in place for some time the existence of the redevelopment proposals was a positive indication that development was going to take place. The hypothetical landlord would be faced with the risk that the development could come forward sooner rather than later. Tribunal considered it highly unlikely that the hypothetical landlord would be willing to spend £112k in these circumstances. The UT considered that ‘the hypothetical landlord could have had no confidence that his investment in the repairs would yield much, if any profit and accordingly, for the purposes of paragraph 2(1)(b), a reasonable landlord would consider them uneconomic.’ Consequently RV£0

Residual Mall Assessments New VOA initiative. Assessed 73 shopping centre malls before 31st March 2016 deadline. Range of assessments RV £4,000 to RV £154,000, many backdated. VOA have until 31st March 2018 to assess others in 2010 from 1st April 2015 (or later date). Provision? VOA have assessed the commercialisation of the mall areas using receipts based approach. What is the hereditament? What is it’s value? When should it be effective from? Is there any double counting?

Questions? Or email them to peaston@lsh.co.uk or moates@lsh.co.uk

End slide www.lsh.co.uk