Andrew Altman outlines the latest changes in business rates and assesses their effects on your school estate

Business rates are a property tax based on rental values. Many schools are concerned that this may become a much greater cost to them if the charitable relief is removed. This article will discuss the latest changes in business rates, including the continued scope for appeals and the new ‘duty to inform’.

Many schools were able to make successful appeals against their business rates for the 2017 Rating List (1 April 2017 to 31 March 2023). A new national valuation scheme, agreed by three of the main firms advising in this sector, with the Valuation Office Agency (VOA), led to significant reductions in the rateable values for many schools which had engaged in the ‘Check, Challenge, Appeal’ (CCA) process. A new set of rateable values took effect on 1 April 2023 and with the figures only ever increasing, schools and their advisors are starting to consider how we can, once again, challenge the rateable values set by the VOA.

Wales has now followed England and has brought in CCA-based rules, including the need to open an account on the Government Gateway before valuation information can be requested and the appeal process started. There is currently no imminent deadline to commence the CCA process for the 2023 Rating List in England and Wales, which is likely to remain open until 31 March 2016. The appeal situation in Scotland is very different, with a very short appeals window which expired on 31 August.

Is a new approach to valuation needed?

In April 2023, with the revaluation, the average increase in rateable value across England and Wale was 7.1%. In the detail behind this there were some large swings in value – retail down on average by 10% for example, but industrial premises up by an average of 27%. The rateable value is intended to reflect a hypothetical rent on certain statutory assumptions and key to assessing the accuracy of the new rateable values, is the analysis of the rental markets at and around 1 April 2021 valuation date (a difficult date to value with some Covid restrictions still in place.

For schools in city centres, there’s often a clear rental market on which the VOA can base its assessments. However, most independent schools are valued on the ‘contractors basis’, that is, with reference to rebuilding costs. This approach is also adopted for universities, colleges, law courts, libraries etc. With consistent rises in building costs, those involved in advising schools are questioning whether some alternative approach may be more appropriate and sustainable. There is an argument that where there is limited market rental evidence, an income and expenditure-based approach may be more appropriate.

In this accounts-based model, the theory is that the surplus generated by schools may be indicative of the amount which they could afford to pay by way of a hypothetical rent. This approach has historically been adopted for trading premises such as hotels, cinemas and pubs. Interestingly, museums have traditionally been valued on the contractors basis, but recent case law has dictated nominal values in some cases (particularly where the building itself is the main attraction) and for most an assessment derived from analysis of income, expenditure and visitor numbers.

Adopting such a basis for schools may well result in winners and losers. It would also depend on the availability of data from ratepayers. It does seem reasonable to review whether assessments based on ever-increasing building costs can be justified. Will the financial pressure on schools, with the potential loss of charitable relief from rates, VAT exemption and other factors, suggest a fall in rental values?

What about the effects of Covid?

As discussions on the new rateable values commence in most sectors, one particularly tricky question is how Covid would have affected the rental bid of the ‘hypothetical tenant’ for the premises at the 1 April 2021 valuation date. For some sectors there have been marked and permanent changes in the use of and requirements for space. For others, such as schools, where the amount of rental evidence has always been limited, the question is what reasonable adjustments should be made to rents struck immediately before or after the main Covid period. For a tax which has been around for more than 400 years, it’s surprising how many new and potentially contentious issues can arise with each rating revaluation.

Unit of assessment

Where school sites are adjacent, save by the severance by a public highway, they have invariably been considered to be a single rating assessment. In some cases, the degree that parts are ‘functionally essential’ to each other has been argued under historic case law. For others, a single assessment has simply been the convention. A more recent court case on the linkage of floors within an office building, has resulted in a more rigid approach and changes to the law. In some cases we have seen examples where the VOA has been reviewing its approach and seeking to divide assessments for schools where buildings are severed by roads.

At present, the VOA potentially has the power to backdate as far back as 1 April 2017. However, unless in response to an appeal, the regulations mean that it can only do this if it take action before 31 March 2024. It will otherwise be restricted to an earliest date of 1 April 2023. In a rural area, the sum of the rateable values of two or three parts may not be very much greater than the whole, when valued on the existing basis. However, in urban areas the effect may be much greater.

Charitable relief

The potential loss of the 80% charitable relief continues to be of great concern, particularly when combined with other financial pressures on the horizon. From recent policy statements, it does seem very likely that this would disappear very quickly under a Labour government. This point was flagged by Rachel Reeves at the Labour Party conference in October.

Uniform business rate

The uniform business rate (UBR) for each financial year is the multiplier applied to the rateable value to calculate the basic rates liability. From this figure, charitable relief is deducted as appropriate and other adjustments may also apply – a slightly lower rate for small properties, ‘Crossrail Supplement’ in Greater London and transitional relief to phase in the largest increases resulting from the 2023 rating revaluation.

The UBR for large properties – with a rateable value of £51,000 or more in England – is currently 51.2p in the pound. This has not increased since 2020-21 as the government decided to waive inflationary increases to assist ratepayers during the Covid-19 pandemic and following the cost of living crisis.

Unless there is a revaluation, the government is only able to increase the UBR by a maximum of the increase in the Consumer Price Index to the preceding September. The CPI for the year to September this year was 6.7% and ratepayers and their trade bodies have been lobbying for another freeze for 2024-25. In the chancellor’s Autumn Statement on 22 November, it was confirmed that the UBR for larger properties for 2024-2025 will be 54.6p in the pound, putting yet more pressure on schools’ budgets. The chancellor did freeze the UBR for small properties though.

Duty to inform

The Non-Domestic Rating Act 2023 came onto the statute book just a few weeks ago. This included consolidation of a number of revisions and technical adjustments following the government’s review of business rates. Of particular interest to ratepayers though is a new ‘duty to inform’. This will put an obligation on ratepayers to declare relevant changes to their premises within 60 days (changes of occupation, tenure or physical factors) and also to make an annual declaration. The details will be confirmed by regulations and there is still uncertainty as to what will be involved. There is likely to be a requirement to register on a new portal, but the government has promised that the changes will not come into effect until it is “absolutely satisfied that ratepayers can reasonably and efficiently comply with it through the online service”. The Valuation Office records are not always up to date and of particular interest to schools will be to what extent they will be required to verify the data held by the Valuation Office and how any historic omissions might need to be declared.

Andrew Altman is a partner with real estate business Gerald Eve.

Andrew Altman