2017 non-domestic rating revaluation consultation on possible transitional arrangements: analysis of responses

Executive summary

Introduction

1. Between 16 August and 12 October 2016, the Scottish Government undertook a public consultation on possible transitional arrangements relating to the 2017 non-domestic rating revaluation.

2. Non-domestic rates (often referred to as business rates) are a property tax paid by occupiers, tenants or proprietors of most non-domestic properties. The tax is devolved to the Scottish Government. Local authorities administer the system and the funds raised are used to help pay for local services.

3. The rateable values of properties are determined by the independent Scottish Assessors, and are based on the rent a property would achieve on the open market at a fixed point in time (the 'tone date'). To ensure that rates bills remain up to date, the rateable values of properties are reassessed (usually every five years) as part of a process known as revaluation. The last revaluation in Scotland was in 2010 with a tone date of 1 April 2008. The revaluation scheduled for 2015 was postponed by two years, and will now take effect from 1 April 2017. This will be based on property values assessed as at 1 April 2015. As rates are linked to the demand for property, revaluation may result in individual businesses seeing either a rise, or a fall, in their business rates.

4. The Scottish Government has the option to put in place transitional relief arrangements to help those businesses facing large increases in their rates bills as a result of the 2017 revaluation. Transitional relief enables adjustments to rates bills to be phased in over a number of years. Transitional relief is funded entirely by businesses and is not a government subsidy. Thus, the relief can be paid for by businesses whose property values have decreased over a certain level. These businesses still see a decrease in their rates bills, but may not see their full savings until the transitional period is finished. Alternatively, the relief can be funded by a general supplement on all ratepayers. The transitional scheme may run for any number of years during the revaluation cycle.

5. Legislation is required to put transitional relief in place, and the current consultation sought views about whether transitional relief is needed for the forthcoming 2017 revaluation, and if so, how it might operate. The consultation contained three closed questions which asked: (i) whether the Scottish Government should introduce a transitional scheme for the 2017 revaluation; (ii) how long any transitional relief should be in place; and (iii) how transitional relief should be funded ( i.e. either through a cap on bill reductions or through a supplement on ratepayers). A fourth and final question invited other comments.

6. The consultation received 52 submissions, mostly from organisations. Respondents comprised: private sector organisations (24), public sector organisations (21), and other organisations such as professional bodies (4). Three individual respondents also took part in the consultation.

Views on whether a transitional relief scheme should be introduced

7. Nearly two-thirds (63%) of respondents were in favour of some form of transitional arrangements for the 2017 revaluation; 37% were not. Companies in the energy and renewables sector and NHS respondents were unanimously in favour of introducing a transitional relief scheme. There were more mixed views among local authorities and other private sector respondents, although a majority of local authorities were opposed, and companies responsible for managing large property portfolios were unanimously opposed to the introduction of a transitional scheme.

8. The main arguments given in favour of a transitional relief scheme were that it would give businesses time to plan for, and manage, their increased rates bills, and that the current challenging economic conditions made it difficult for businesses to absorb unexpected large increases in their costs. Respondents in this group highlighted: a) the length of time since the last revaluation (seven years, rather than the usual five), and b) the 'unprecedented economic fluctuations' seen during this period. Private sector respondents stated that any sharp, substantial increase in rates could lead to reductions in future investment, increased costs being passed on to customers and / or job losses. They also suggested that without a transitional relief scheme, Scottish businesses could be put at a competitive disadvantage compared to businesses in England and Wales which would have the benefit of a transitional relief scheme. Businesses in the energy and renewables sectors were concerned about the potential for large increases in rates bills at a time when a range of other revenue support mechanisms were being reduced or withdrawn entirely.

9. The main arguments given by those opposed to transitional relief were related to the principle of fairness: transitional relief was seen to be unfair and 'contrary to natural justice'. Respondents in this group commented that the purpose of a revaluation exercise is to re-distribute the tax base fairly. Transitional relief was seen to undermine the relationship between a property valuation and the amount payable as rates - since those businesses assessed as being on too high a rateable value are denied the benefit of a reduction in their rateable value in order to pay for a delayed increase in rateable value for businesses that have been assessed as more profitable. Respondents repeatedly emphasised that transitional relief 'distorts the tax system' and is detrimental to businesses. Respondents also emphasised that, given the challenging economic climate, and the length of time since the last revaluation, it was crucial that those businesses and properties which are due a reduction in their rates should have the full benefit of that reduction immediately.

10. Among respondents expressing support for a transitional relief scheme, some commented that, in principle, they were not in favour of transitional relief for non-domestic rates. However, given the current economic climate and the two-year delay in revaluation, they felt a transitional scheme was necessary at this time. This group advocated more frequent revaluations, or a mechanism for monitoring and adjusting rateable values in sectors where costs and revenues change dramatically between revaluations to avoid the need for transitional relief in future.

Length of transitional period

11. Among the respondents who were in favour of a transitional relief scheme, a slight majority were in favour of a three-year transition period (or less). NHS organisations comprised a large proportion of the respondents who wanted a longer scheme (four or five years). Those who supported a three-year transition period believed that this timescale would be long enough to allow companies to plan for their eventual rate, but short enough to deliver rate reductions swiftly to those who are entitled to them. This group thought that a longer transition period (of four or five years) would undermine the purpose of revaluation.

12. Those who wanted a 4- or 5-year transition period believed that a longer period was necessary to give protection to customers from increased charges. This group also thought that any transition scheme in Scotland should have the same duration as schemes in England (5 years) in order to maintain Scotland's competitiveness with the rest of the UK.

Method of funding transitional relief

13. A small majority of respondents favoured a supplement on all ratepayers as the means of funding transitional relief. Companies in the energy and renewables sector were divided on this question while other private sector respondents preferred a supplement on other ratepayers. Among public sector respondents, local authorities generally favoured a cap on bill reductions, while NHS organisations preferred a supplement on other ratepayers.

14. Among those favouring a cap on bill reductions, the main reason given was that a cap on reductions would enable the impact on those ratepayers most disadvantaged through the revaluation to be mitigated by those ratepayers who would be receiving the greatest benefit through revaluation.

15. Those who supported a supplement on other ratepayers generally argued that this was a fairer mechanism for funding transitional relief. In particular, it would allow the cost of funding the scheme to be spread across all ratepayers, rather than only those whose rates bills are reducing, and it would allow those businesses assessed at a lower value to benefit from their lower rates immediately.

16. Respondents who were opposed to transitional relief often stated that they supported neither a cap on bill reductions nor a supplement on other ratepayers. This group considered that a cap on bill reductions 'penalises those businesses who need assistance most', and that the imposition of a supplement was an 'indiscriminate' additional cost and therefore also unacceptable. However, nearly all of the private sector respondents who held these views went on to state that if transitional relief was nevertheless introduced, a supplement on the rate poundage would be preferable to a cap on bill reductions as it 'would dilute the impact across all properties'.

Other comments

17. There was a recurring view among respondents that any transitional relief scheme, if introduced, should not prevent necessary wider reforms to the non-domestic rates system currently being considered by the Barclay Review. Some of the reforms respondents wanted to see were: (i) more frequent revaluations with a tone date set no earlier than one year preceding revaluation; (ii) draft Valuation Rolls published at least six months before revaluation to allow businesses sufficient time to take action to mitigate large increases in their rates bills; (iii) better alignment with the non-domestic rates system in England to avoid putting Scottish businesses at a competitive disadvantage; and (iv) greater simplification of the system.