Specialists weigh in on what on-trade operators can do
MANY operators across the Scottish trade are facing a serious hike in non-domestic rates this spring, and both publicans and property specialists have offered staunch criticism of the current system for calculating licensed premises’ rateable values.
With the new rateable values (RVs) scheduled to come into force on April 1, the fight for fairer rates is not over yet and a number of firms specialising in commercial property and business rates have given their assessment of the ratings system at present as well as offering advice on what operators can do to challenge unfair rates.
Gary Louttit, head of hospitality and leisure at Shepherd Chartered Surveyors, said the current turnover-based system used by assessors “is unfair to the sector”.
“The simplest example of how unfair the system is would be the comparison of two adjoining properties with identical accommodation and size,” he said.
“For example, a shop adjacent to a pub would be assessed on a rate per square metre basis in line with rental evidence from other similar accommodation in the area.
“But the pub is assessed on its turnover, thereby often producing much higher RVs and punishing the operator for working hard.”
Business rates at a glance
Rateable Value (RV): all business properties in Scotland are given a rateable value provided by Scottish assessors.
Poundage aka Uniform Business Rate (UBR): a rate set by the Scottish Government used to calculate the final non-domestic rates bill from the RV. The UBR for 2017/18 will be £0.466 for RVs up to £51,000 or £0.492 for RVs over £51,000.
Non-domestic rates aka business rates: non-domestic rates are calculated by multiplying the rateable value by the UBR. A hypothetical property with an RV of £40,000 would pay £18640 per year (40,000 x 0.466) minus any business rates relief deductions.
Business rates relief: a number of businesses are eligible for discounts such as the Small Business Bonus Scheme (SBBS). It is proposed that for 2017/18 businesses with an RV of £15,000 or less may not pay any business rates. Businesses with an RV of £15,001 to £18,000 are eligible for 25% relief. These discounts are supplemented by the greater UBR for properties with a RV of over £51,000.
Sarah Fitzpatrick of Graham and Sibbald agreed that assessors have “difficulty valuing licensed trade property” as “turnover is by no means a perfect way of calculating rates”.
“Using a turnover calculation can lead to valuing the operator not the hypothetical market value and can be very unfair to good businesses,” she said. “In our opinion a rate per square metre basis would be better derived from rents.”
The current rates system may be unfair for licensees in the eyes of both on-trade operators and property specialists, but there are options.
From April 1, business owners will be able to appeal their new rateable value, but time is of the essence, according to Fitzpatrick.
“If the appeal isn’t made within the first six months then that appeal right is lost for five years,” she added.
“This can have serious consequences as the only static part of the rates bill is the RV. The rate in the pound goes up every year and the reliefs available can be withdrawn with little notice, leaving the ratepayer high and dry with no recourse.”
For those who are considering an appeal, Tony McRitchie of Montagu Evans suggested the first thing to do is take a look at the books.
“[Licensed trade ratepayers should] look to their trading at the year-end closest to the valuation date of April 1, 2015 and multiply total sales by 8.5% then that should give them an accurate estimate of what the assessor’s opinion of value would be and how that matches up with exactly what has been issued in the draft valuation roll,” said McRitchie.
If operators think they’ve been given an unfair rating then Douglas Lambie, licensed and leisure associate at Ryden, reckons getting the appeal wheels in motion promptly is crucial.
Your rateable value will stay in place for the next five years.
“It is very important to seek rating advice as soon as possible and instruct a rating surveyor, as there is a six-month time limit in which to appeal from April 1 until September 30 of this year,” said Lambie.
“If no appeal is lodged within this period you will then be out of time and barred from lodging an appeal.
“Your rateable value will stay in place for the next five years and you will only have a limited right of appeal under certain grounds such as a material change affecting the valuation of the property. A material change could be, for example, a competitor opening a similar establishment in close proximity to your premises which has an effect on turnover.”
Billy McKaig, director at WYM Rating, agreed that time is of the essence when it comes to challenging the rateable values.
Why are on-trade rates calculated differently?
“Historically rents were closely linked to turnover but more recently the market is much more fragmented with different types of pubs, restaurants, clubs, etc. that assessors value by the same methodology. Whilst these various types of premises may be covered by the same licence type, the open market valuation influences can be very diverse. I do not consider that these are properly reflected by assessors. Every time a case goes to valuation appeal committee, the standard case referred to by assessors is a case from 1912 regarding a pub in Leith!”
– Billy McKaig, WYM Rating.
“It should be recognised by valuers that the essence of the valuation scheme is based on the hypothetical achievable turnover. The scheme is designed to enable valuers to ascertain ‘the rent at which the lands and heritages might reasonably be expected to let from year to year’ on the statutory terms, by identifying a relationship between rents and turnovers which can then be used to arrive at net annual value. The turnover adopted should represent the annual amount considered to be the hypothetical achievable level in the year to April 1, 2015, having regard to the physical nature of the property and its location as at January 1, 2017, on the assumption that the premises will be operated by a competent operator seeking to maximise profits. The statutory hypothesis assumes that the letting takes place in an open market, which includes prospective tenants who would recognise past and/or current good practices and operating techniques, and seek to replicate them.”
– Scottish Assessors Association, Draft 2017 Practice Notes, Licensed Premises.
“The consequences are simple – the appeal right will be lost with the potential consequence of having to pay rates bills until March 2022 on the originally issued RVs,” said McKaig.
“This is the case even if the operator can subsequently prove that the assessor has an excessive RV in place. The only safe option is to appeal.”
Appealing in a timely manner may be key, but operators should still stop and seek professional advice or risk a further rates hike, Peter Darroch of CDLH warned.
“The first point to note is that a rateable value can increase as well as decrease on appeal,” said Darroch.
“It is crucial that a professional RICS (Royal Institute of Chartered Surveyors) registered firm is instructed to give proper and accurate advice.
“The assessor has a ‘Scheme of Value’ that they adhere to in calculating values. Any professional surveying practise should be able to review the new RV based on the scheme and the profit and loss accounts of the business to accurately calculate if the RV should be appealed.”
Compliance issues can cause an appeal to be dismissed.
Gary Walton of Businessratesadvice.com, a subsidiary of Walton HPC, agreed that it’s crucial operators turn to the experts when lodging an appeal.
“Your rateable value is supposed to be the council’s estimate of a fair rental value and therefore what has to be agreed with the assessor is a fair rental valuation of the property,” he said.
“If you were getting a valuation of your business, you would seek professional advice; this is no different. Rating valuation is also highly technical and is based around valuation theory and case law/legislation.”
The importance of appointing a professional to handle any rates appeal was hammered home by Louise Daily of Colliers International Scotland, who said it has “never been more important to ensure that the rateable value on property is accurate through a revaluation appeal”.
Building a better rates system
“By their nature, licensed premises are complex and differ greatly in profitability and rental value. A more equitable system would be one where the calculations are not based on a fixed percentage for all licensed trade businesses but where the assessors look at other factors such as operating costs and the range of facilities offered.”
– Douglas Lambie, Ryden.
“The RICS (Royal Institute of Chartered Surveyors) is clear in published papers that the most appropriate valuation of a market rental for licensed properties is to assess a split in the profit of a business as return to the landlord for rental and return to the tenant for operating the business after taking account of working capital. The issue with this revaluation (and all other previous revaluations) is that the assessor assesses the market rental or RV based on a percentage of net of VAT sales.”
– Peter Darroch, CDLH.
“Property specialists can ensure that the correct levels of value are applied to your property and that you do not pay too much in terms of rates,” said Daily.
“There are strict compliance issues, that can cause individuals to have their appeals dismissed if not represented by a professional. The necessary timetables must also be complied with, however, there are a number of different strategies that can be adopted, depending on the individual circumstances.”
Mary McGoldrick of Christie & Co agreed, adding that professional involvement “can quickly identify if there is any likelihood of a reduction” and save operators the time and effort of “perhaps going through the appeal process unnecessarily”.
If there is a case for appeal, then McGoldrick suggested pursuing it may not just be good for an operator’s business but for the trade as a whole.
“Failure to appeal could also create a ‘tone’ of acceptance across the sector in an area with the assessor assuming his approach and valuations are correct for all pubs in that area,” said McGoldrick.
“The assessor values pubs on the comparative principle by applying percentages of turnover. The principle is acceptable and utilised elsewhere in the industry for calculating rental levels.
“However the percentage adopted by the assessor should not be automatically accepted as being correct. Should a significant number of operators challenge the percentage applicable there may be scope for that to be moved.”