Are business rates “not fit for purpose”?

Business rates have always provoked strong opinions and none more so than in the last few days where a large number of opinions have been voiced over whether business rates should be amended, completely overhauled, or got rid of altogether. Commercial Property lawyer Rima Gasperas takes a look at recent comments made, particularly in relation to the retail sector.

Although the calculation of business rates has been controversial for some time, it has only in the last week or so become more of a hot topic; the Ratings Surveyors Association has only recently responded to a consultation paper in relation to empty property rates putting forward suggestions for change. This has triggered others to respond, not least the British Retail Consortium (BRC) which quotes the level of business rates as one of the main reasons why more shops on our high streets are closing down.

So what are the various proposals? Firstly, the BRC has suggested that business rates be varied for retailers only and based not on property size and space but turnover, similar to the turnover rent that many retailers pay. There have also been other suggestions based on energy usage, discounts based on employee value, and tying it in with a discount on a percentage of corporation tax payment.

This is not ideal for non-retail traders who do not have a turnover to calculate and although think a change is necessary have suggested that revaluations take place more often than every 10 years. Typically, leases (under which most businesses occupy properties) have rent reviews every 5 (or sometimes 3) years, and it has been suggested that more frequent valuation would show a much more accurate picture of the true value of today’s properties. For example, the most recent valuations in 2010 are actually based on April 2008 values, before the credit crunch even hit.

So the arguments and discussions continue and are likely to go on for some time. However, one word of warning when negotiating a lease: many prospective tenants look at rent, service charge, and insurance rent when calculating continuing expenses, with the only property-specific tax expense being Stamp Duty Land Tax, but the business rates also need to be looked at during the negotiation stage or you could end up paying up to 50% on top of your rent in some areas of England and Wales. Usually lease negotiations involve enquiries as to rateable value and current rates. You should be aware of these hidden costs as once the lease is granted, the only way to try and reduce these is a long appeals process with the Valuation Office.