On 1 April 2023 all commercial properties will be reassessed for Business Rates based on rental values as at 1 April 2021. At that time, the UK was in lockdown, with many businesses closed and large parts of the workforce required to work from home.

The Valuation Office Agency (VOA) is therefore having to value over 2 million commercial properties in circumstances which are highly unusual, and which might result in considerable scope to challenge the new 2023 List Rateable Values.

Business Rates are a tax on the right to use and occupy commercial property and are based on rental values. Rental values change over time and regular revaluations are undertaken in order to ensure that value changes are reflected in the non-domestic rates that occupiers and owners are required to pay.

The next revaluation will be the first for 6 years and will come into effect on 1 April 2023. In England and Wales, Rateable Values from this date will be based on rental values as at 1 April 2021 and in Scotland on rental values as at 1 April 2022.

The VOA in England and Wales and the Assessors’ Office (SAO) in Scotland are responsible for valuing in the order of 2.4 million properties with a combined Rateable Value of £73.5 billion. Current Rateable Values are based on rental values as at 1 April 2015 and since this date there have been several significant events which have impacted on property values, including Brexit and the Covid-19 Pandemic.

On average rental values for all properties increased in the order of 5% between April 2015 and April 2021. It is also clear from data that retail values have fallen over this period by, generically, about 15% whilst industrial values have increased in the order of 25%. This should come as no surprise bearing in mind the fall in demand for retail properties both before and during the Pandemic and the corresponding increase in demand for properties in the industrial and logistic sectors. It is likely that there will be a profound impact on retail and industrial property at the next revaluation. Across the retail sector as a whole, we expect properties will see a reduction in rates liabilities in the order of 20% whereas the industrial sector will be likely to experience an increase in the order of 20%.  Current data suggest that the office sector has experienced an average increase in rental value of approx. 12% and of the three main property sectors this level of growth is closest to the average of all properties and suggests that the impact of the revaluation will not be as profound for offices as it is for retail and industrial.

Whilst these figures reflect the national position, clearly the actual level of rental movement in different sectors and locations will vary greatly.

For properties that are rarely, if ever, let in the open market the VOA value on either cost of constructing replacement buildings or the trading performance of the property.

Properties that are valued on construction cost include schools, hospitals, universities etc. and the significant increase in the cost of labour and materials between 2015 and 2021 suggest that Rateable Values will increase significantly for properties valued using this approach.

Properties valued by reference to profits include hotels, pubs, livestock markets and petrol stations etc. as many of these properties were unable to trade due to Covid-19 restriction at 1 April 2021 valuation date, there is an argument to suggest that such properties should attract a nil or nominal Rateable Value at the forthcoming revaluation. The VOA is unlikely to accept such an argument but may adopt lower values for the leisure and hospitality sectors to reflect the impact of the pandemic.

The office sector will also present a real challenge for the VOA at 1 April 2021, where possible, people were required to work at home. Office workers were most likely to be able to follow these restrictions thereby suppressing demand for office accommodation. Furthermore, social distancing guidelines in place at the time mean that even when occupied offices could only operate at a fraction of full capacity. With this in minds, the Rateable Values for offices may be lower than the rental indices suggest.

The new 2023 Rateable Values are not the only factor that will affect rates liabilities from next April. Each year the multiplier used to calculate the rates payable for each individual properties can be increased by up to the rate of inflation in the preceding September. With inflation predicted to reach in excess of 10% later this year, this could result in a substantial increase in liability, even for properties where the Rateable Value has remained the same or reduced as a result of the revaluation.

Previously, a transitional scheme has been introduced by the government to soften the impact of substantial increases in liability at revaluation. Such schemes have been self-financing, meaning that those rate payers who benefit from significant falls in liability have to subsidise those who would be otherwise experiencing significant increases. If a similar scheme is introduced at the 2023 revaluation, rate payers in the industrial and logistics sector are likely to be subsidised by those in the retail sector. This is likely to be justifiably unpopular with the hard pressed retail sector. The full details of any such scheme will not be known until the end of the current year.

Although rental evidence and factors such as the increase in construction costs can assist us in identifying and forecasting the forthcoming revaluation for a particular sector and location within the UK, each property is unique. Rental values for a particular building can deviate significantly from the local trend and a low valuation for the 2017 rating revaluation could result in a much higher increase in 2023 than may have been expected. Whatever the position, expert rating advice will be required to provide a more accurate impact assessment of the 2023 revaluation, particularly for large individual properties or portfolios.

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