There were plenty of issues with the current business rates system before the pandemic hit, but Covid-19 is raising new questions about business rates, alongside the future use of office space.
Recognising the disruption so many businesses face, the Treasury has postponed the next business rates revaluation until 2023. The thinking behind this is that it will give the Government time to assess the full impact of the pandemic accurately and make whatever changes it deems necessary to the business rates system.
But where does this leave business ratepayers?
The past 12 months have been marked by uncertainty and despite the rapid progress of the vaccination programme, this uncertainty is continuing. In fact, the postponement or the revaluation raises fresh questions:
- What impact will the Government’s business rates review have on it?
- What will it be based on?
A chicken and egg issue
In its call for evidence as part of the Business Rates Review, the Government wants to get a comprehensive understanding of how the rates system currently works, especially from those directly impacted by it. Its stated aim at this stage is to look at ways of reducing the burden on businesses and to improve the current rates system. The longer-term objective is to make more fundamental changes. However, the pandemic is not going away any time soon, and businesses are having to cope with both it and the current rates regime.
There is an element of chicken-and-egg about this: the Government has postponed the revaluation until it gets evidence for the review; but without a review the revaluation risks exacerbating current problems.
The problem with rateable values
Although a 2023 revaluation might seem a reasonable time away, it should, in theory, be based on rateable values as of April 2021. Obviously, that date is near enough to be imminent. Rateable values are based on open market rental values, but what do these look like in the current climate?
There are two major issues to consider here:
- There has been a lengthy moratorium for tenants on paying rent to landlords.
- Many tenants may wish to terminate rather than extend their leases in the near future.
Once the moratorium is lifted, tenants will face huge rental bills, which may mean renegotiating their monthly payments, thereby driving changes in lease terms and rental values.
There are also other consequences, with some of the impact of working from home likely to be permanent, there could be lots more vacant office space available, ultimately driving down rents. This only adds to the general air of uncertainty, but it also suggests that even a postponed revaluation may be on somewhat shaky foundations.
In the meantime, do businesses have any other means of reducing the business rates burden, particularly for those not in receipt of a business rates holiday and/or grants assistance?
Material change of circumstances
Normally, a material change of circumstances (MCC) comes under Schedule 6 of the Local Government Finance Act 1988. Under an MCC, a ratepayer can apply for a business rates reduction. But Schedule 6 does not explicitly allow for pandemics and drawing meaningful comparisons with other high-impact events is difficult. Past events have included 9/11, the 2007 London terror attacks and the smoking ban. How does the pandemic compare with those?
A critical factor in an MCC is a change in physical circumstances, so changes to footfall and traffic flow, declines in public transportation, internal use restrictions and social distancing requirements will be some of the factors.
As we return to some normality, and businesses get to grips with how things have changed, they might want to adjust their approach. For example, adopting a hub and spoke model, and reviewing what space they need. We have already seen the impact of increased working from home and of changes to the serviced office market.
There is an aspect of Covid-19 becoming psychogeographical in reverse: essentially the influence of mind or behaviour on the geographical environment.
There have been positive indications that there might be scope to make savings on rates. But, if considering a Covid-19 based rates appeal, businesses need to act fast in reviewing the situation, while the issue is current. Specialist professional rating advice could prove invaluable to determine if this is recommended for you.
Ultimately, businesses must hold on, and plan for a very different future, where, hopefully, business rates are fairer in responding to changes.