Rating Manual section 4: valuation methods

Part 1: practice note 2 - 2010 effect of rates relief on the rental market

The Valuation Office Agency's (VOA) technical manual for the rating of business (non-domestic) property.

1. Introduction

This Practice Note is intended to draw attention to the need to consider the effect of rates reliefs on the rental market. Primarily it is concerned with Small Business Rates Relief (SBRR) but reference is also made to other rates reliefs.

Following on from research carried out in 2006 on the effect of rates relief in enterprise zones, research was undertaken, close to AVD, into the effect of SBRR on the rental market.

2. Reliefs

Reliefs are applied to the rates bill by the billing authority and therefore affect liability rather than rateability.

2.1. Small Business Rates Relief

2.1.1. England

Small Business Rates Relief (SBRR) was introduced in England by the Non-Domestic Rating (Small Business Rate Relief)(England) Order 2004. The relief came into effect on 1 April 2005.

Where a ratepayer occupies a single property with a RV of less than £10,000:

  • Eligible ratepayers with rateable values of below £5,000 attract 50% rate relief on their liability.
  • Eligible ratepayers with rateable values between £5,000 and £10,000 the relief decreases on a sliding scale of 1% for every £100 of rateable value over £5,000, arriving at nil at £10,000.

Where the ratepayer occupies more than one property, (a main property and other additional properties), providing the additional properties do not have individual rateable values of more than £2,200 and the combined rateable value of all the properties is under £15,000 (or £21,500 in London), the occupier is eligible to claim SBRR for the main property only. The ratepayer nominates the main property and the threshold for the combined rateable value is dependent on the location of the main property. The additional properties will have their charges calculated using the standard multiplier.

The Small Business Rate Relief scheme is funded by a supplement on the non-domestic rates bill of those ratepayers not eligible for the relief. This supplement is built into the standard multiplier.

Eligible ratepayerss with rateable values of between £10,000 and £14,999 (or between £10,000 and £21,499 in London) are not subject to the supplement which is built into the standard multiple, and their liability is calculated at the lower rate.

Until 31 March 2007, for a ratepayer to benefit from this relief, there was a requirement to make an application to the billing authority on a yearly basis. However, the Non-Domestic Rating (Small Business Rate Relief) (Amendment) (England) Order 2006 provided an amendment to the original 2004 Order. This removed the requirement to apply annually for SBRR. From 1 April 2007, eligible ratepayers needed only apply once during the revaluation period for relief, including those with rateable values between £10,000 and £14,999 (or between £10,000 and £21,499 in London). If a ratepayer ceases to be eligible on a day during the financial year, the relief will cease on that day.

Assuming a ratepayer meets the eligibility criteria, the relief can only be granted if the property the ratepayer occupies is entered in the rating list from the beginning of the financial year in which they are claiming relief. The date of occupation of the property is irrelevant, the key date is the effective date entered in the relevant rating list. If the property has an effective date after 1 April, then the relief can only be applied for from 1 April of the following financial year.

It is important to remember that the emphasis is on the occupier to claim the relief.

2.1.2. Wales

The Small Business Rates Relief Scheme in Wales replaced Rural Rates Relief and was introduced by The Non-Domestic Rating (Small Business Relief) (Wales) Order 2006 as amended. SBRR is fully funded by the Assembly Government and the relief is applied automatically to rates demand bills when they are issued by local authorities. It replaces the Rural Rate Relief Scheme, and provides the following relief for business across Wales:-

  • 50% for businesses with a rateable value of £2,000 or less;
  • 25% for businesses with a rateable value between £2,001 and £5,000;
  • 100% for post offices (and hereditaments, which include post offices) with a rateable value of £9,000 or less; and
  • 50% for post offices (and hereditaments, which include post offices) with a rateable value between £9,001 and £12,000.

The following are not eligible:

  • advertising rights;
  • beach huts;
  • electronic communications stations;
  • sewage works;
  • car parks and spaces;
  • certain self-catering property let commercially (excluding caravans);
  • Crown hereditaments;
  • and hereditaments, which are occupied by billing or precepting authorities.

Businesses that are eligible for other types of discretionary or mandatory relief are also not eligible. These include those where:-

  1. a) the ratepayer is a charity and the hereditament is wholly or mainly used for charitable purposes;
    1. b) the hereditament is occupied by a not-for-profit institution or organisation whose main object(s) is charitable or of a similar character;
    2. c) where the ratepayer is a registered community amateur sports club; and
    3. d) where the premises are used for recreation and they are used by a club, society or other not-for-profit body.

In May 2008 consultation commenced on the proposal to extend the SBRR provision beyond the basic relief for registered child carers, credit unions, petrol filling stations, public houses, restaurants, cafes, and certain shops, including those selling prepared food ready for consumption.

2.2. Other Reliefs

Although the primary purpose of this Practice Note is to consider the affect of SBRR on the rental market it is worth noting that other reliefs are available and may also affect a rental bid.

2.2.1. Rural Shops Relief

Local Government Finance Act 1988 (amended by s1 and sch1 of the Local Government and Rating Act 1997) provides a mandatory relief of 50% available to qualifying general stores, food stores and post offices situated in ‘rural settlements’ in ‘designated rural areas’ with a rateable value of less than £7,000 (2005 List). ‘Rural areas’ are defined by the Secretary of State and ‘rural settlements’ are those where the local authority believe the population to be below 3,000.

Local authorities are also able to award a discretionary relief of up to 100% for qualifying and other hereditaments in rural settlements used for the benefit of the local community provided the rateable value is less than £12,000 (2005 list).

A similar scheme, known as Rural Rates Relief, was introduced in Wales from 1st April 2005. From 1st April 2007, this was replaced by the Small Business Rates Relief Scheme, detailed above in 2.1.2

2.2.2. Former Agricultural Premises (this ended on 14 August 2006)

A scheme introduced by the Rating (Former Agricultural Premises and Rural Shops) Act 2001 provided relief for farmers diversifying the use of former agricultural land and buildings. The relief was 50%, although this could be increased to 100% at the discretion of the local authority.

The relief applied to land and buildings, which were wholly or mainly agricultural land or buildings, as defined for agricultural exemption, for 183 days or more during the year prior to 15th August 2001. This also applied if the farmer replaced the original building with replacement buildings. The relief applied for five years and was 50%, although this could be increased to 100% at the discretion of the local authority.

2.2.3. Charitable and non profit making organisation reliefs

Under s 43(6) of the Local Government Finance Act 1988 charities enjoy 80% relief for hereditaments used wholly or mainly for charitable purposes. If a property is unoccupied relief is also available if it appears that when next in use it will wholly or mainly be used for charitable purposes. This relief can be increased to 100% at the discretion of the local authority.

It is not sufficient for the hereditament to be owned or occupied by a charity; the hereditament must be used for carrying out a charitable purpose.

Under s64 of the Local Government Act 2003, the local authority also has the discretion to reduce the liability for hereditaments used wholly or mainly for recreation by clubs and organisations not established for profit and for hereditaments occupied in whole or in part by non profit making organisations whose main objects are charitable, philanthropic, religious or concerned with education, social welfare, science, literature or the fine arts. This also now applies to amateur sports clubs where the hereditament is wholly or mainly used for the purposes of the club or the club and other registered clubs.

2.2.4. Stud farms

Under Para 2A(1) Schedule 6 of the Local Government Finance Act 1988, where an hereditament is used for the breeding and rearing of horses or ponies the rateable value of the parts used for these purposes is reduced by up to £3,500 in England and £2,500 in Wales for the 2005 rating lists. This only applies where the stud buildings are occupied together with over 2 ha of land that is predominantly used as exempt agricultural land other than for the pasture of horses or ponies.

This is dealt with in more detail in RM Section 6: Pt 3:1005.

2.2.5. Relief from empty property rates

This is covered fully in RM section 6: pt 3 - Unoccupied Hereditaments and Completion Notices.

2.2.6. Hardship relief

In extreme cases of hardship, and where it is considered to also be in the interests of the local community, the billing authority is able to give up to 100% relief under S 49 Local Government Finance Act 1988 (as amended by the Local Government Act 2003).

2.3. Interaction of reliefs

Where SBRR and another relief is available to the occupier, then the occupier must ‘opt’ for the relief which they wish to benefit from.

3. Rent/rates equation

Equation theory is based on the concept that tenants are not particularly concerned with the amount of rent or with the amount of rates they pay, only with the combined figure of rent and rates. In other words, if tenants’ rates bills increase they will want to pay less rent and if their rates bills go down they would be prepared to pay more rent. The question that arises from this theory, is whether when tenants benefit from a rates relief do they adjust their rental bid leaving the combined figure the same, or do the tenants rental bids remain unchanged.

4. Categories to consider

The following have been identified as categories potentially affected by SBRR:

  • Guest Houses/Small Hotels
  • Holiday Lets
  • Beach Huts
  • Business Centres (including serviced offices)
  • Industrial Nursery Units
  • Agricultural Diversification
  • Kiosks and ‘Mobile’ Burger Van Pitches
  • Tertiary Shops
  • Rural Shops
  • Charity Shops/Offices.

It is important to remember that this list is not exhaustive.

Any property valued on a receipts and expenditure basis will have the impact of such relief reflected within its scheme of valuation.

Further detail relating to the rental market of some of these categories is provided:

4.1. Beach huts

These generally have very low RVs and the market is not necessarily fully exploited by local authority operators, who continue with relatively low rents despite holding long waiting lists.

Beach huts are excluded from SBRR in Wales.

4.2. Business centres

Where these are let on an inclusive of rates basis, SBRR is not often applied for, as the occupier must make the application to the billing authority but may have no incentive to do so as the Landlord pays the rates.

4.3. Small Industrial Units/Nursery Units/Tertiary Shops/Kiosks and Mobile Van Pitches (including converted agricultural buildings).

These markets are fairly unsophisticated and are likely to function on spot values rather than anything more complex.

4.4. Former Agricultural buildings

As this relief ceased on 14th August 2006, any impact may show as a reduction in rental levels as the rent/rate equation adjusts itself. Although in some cases, where the RV is below the ceilings described above, SBRR may be available to the occupier.

4.5. Charity Shops/Offices

Anecdotal evidence suggests that it is not uncommon for charitable tenants to agree higher rental levels than neighbouring tenants of similar properties. Caution should therefore be exercised when considering such rental evidence and appropriate weighting applied within the basket of evidence.

5. Conclusions

The limited evidence available suggests that where a relief relates to the occupier it is much less likely to have an impact on rental levels than if it directly relates to the property. A relief that is attached to a property, such as SBRR in Wales, is applied automatically by the billing authority and does not require any action by the occupier. Where a relief relates to the occupier, such as SBRR in England, there is a reliance on the occupier having knowledge of the relief and taking action to benefit from it. This appears to be the same whether the relief is mandatory or discretionary.

This may, in part, be due to a lower than expected take up rate for SBRR in England. Anecdotal evidence reported by the RICS and noted in the 2007 Lyons report suggests this is due to a lack of knowledge on the part of occupiers.

Although it is recognised that there is no significant or conclusive national evidence that reliefs related to the occupier, with perhaps the exception of charitable relief, have a measurable effect on rental bids, local evidence may show otherwise. It is possible that there may be isolated instances where eligibility for reliefs has influenced rental bids and impact is evidenced within specific markets.

When establishing whether a relief has had an effect on a rental bid, it is important to firstly establish whether a relief is in place to determine whether it might have been in the mind of the tenant at the time that he made the rental bid. In circumstances where a rental bid is believed to have been influenced by a relief, it is important to consider whether the hypothetical tenant can be envisaged as being affected by the likelihood of that relief. If most tenants coming to the market fresh would not have SBRR or other reliefs in their mind when making their bid then the relief should be ignored for valuation purposes. This will be evidenced by the rental bids within the same market. An example of this would be where one shop in a tertiary parade is occupied by a charity; their rental bid may be higher than the neighbouring shops as charitable relief is available to them. Where this is the case, appropriate weighting should be attributed to the rent within the basket of evidence.

Where it is considered that the market is influenced by the prospect of a rate relief, it is reasonable to assume that the prospect of the relief would also be in the mind of the hypothetical tenant when making a rental bid. An example of this would be where the agent letting a small development of low value start-up units includes in his particulars that SBRR may be available. Where this is the case, it could be envisaged that the relief being available would be in the mind of the hypothetical tenant and should therefore be reflected in the valuation.

It is therefore important when carrying out analysis of the rental market and considering valuation schemes that valuers are aware of the application and ceilings of the various reliefs, particularly SBRR, as it is possible that these may cause some artificial stepping in the rental market. It should also be borne in mind that in a falling market, a relief, such as SBRR, might help to artificially maintain rental levels. Notwithstanding its artificiality, if the effect is to alter rental levels paid this needs to be included in the RV.