Non-Domestic Rates - decapitalisation rates for 2023 revaluation: consultation

Background

Non-domestic rating revaluation

Non-domestic rates (NDR), also known as business rates, are a property tax based on the rateable value of a property. NDR are levied on the basis of a national poundage, multiplied by the property's rateable value which is listed in the valuation roll and minus any relief the property may be entitled to. Some non-domestic properties are exempt from inclusion on the valuation roll such as agricultural lands and heritages or offshore electricity generators.

Rateable values are set independently by the Scottish assessors and derive from their estimate of the annual rent which a property would command on the open market at the tone date (the date at which all valuations are benchmarked against). To ensure that rateable values reflect changes to rental values in the property market over time and that the distribution of the rates burden between ratepayers remains equitable, properties are revalued periodically by the assessors.

The last revaluation was on 1 April 2017 based on rental values as at 1 April 2015 (the 'tone date'). The independent Barclay Review of Non-Domestic Rates which reported in 2017^[1] recommended the move to three yearly revaluations and a one-year tone date in order to reduce shocks that might otherwise take place at future revaluations. The Scottish Government accepted both of these recommendations and legislated for three yearly revaluations in the Non Domestic Rates (Scotland) Act 2020 and a one-year tone date in The Valuation (Postponement of Revaluation) (Coronavirus) (Scotland) Order 2020 (S.S.I 2020/418). The next revaluation will take place on 1 April 2023 with a tone date of 1 April 2022.

Table 1 shows the premises valued under the Contractor's Basis as at April 2021.

Table 1: Number Premises and Rateable Value assessed using the Contractor's Basis by Property Class

Property Class	Number of Premises	Rateable Value (£ m)
Public Service Subjects	8,240	£295
Religious	5,760	£52
Education and Training	3,110	£538
Care Facilities	2,180	£103
Leisure, Entertainment, Caravans & Holiday Sites	1,100	£89
Health and Medical	780	£187
Cultural	740	£39
Industrial Subjects	530	£149
Petrochemical	120	£114
Statutory Undertaking	90	£31
Other Subjects Classes	1,210	£35
Total Premises	23,860	£1,632

Source: Assessors Valuation Roll (April 2021)

Note: The number of premises is rounded to nearest 10, rateable value is rounded to nearest £1m.

Contractor's basis

In most cases, the Assessors use evidence of comparable rents to estimate rateable value. However, for some properties (such as oil refineries, hospitals and schools) there is little or no direct evidence of actual rents, and in these circumstances the Assessors may use an alternative method of valuation called the contractor's basis. In this method, the capital value (cost of rebuilding) of a property is estimated, then a de-capitalisation rate is applied to give an annual equivalent RV.

The Contractor's method consists of five stages:

• Stage 1 - Estimated Replacement Cost
• Stage 2 - Adjusted Replacement Cost to reflect obsolescence e.g. wear and tear
• Stage 3 - Land Value
• Stage 4 – Decapitalisation – this uses statutory decapitalisation rates and converts the "Effective Capital Value" of the property to initial Net Annual Value
• Stage 5 - Review ("Stand back and look") – this produces the final Net Annual Value from which RV is derived

Decapitalisation rates

Prior to 1990, assessors chose the rate and this, as it was not set in Regulations, could be appealed but difficulties were experienced in determining how the decapitalisation rate should be derived and at what level it should be set. This created uncertainty as to the rates liability of a whole class of ratepayers, those whose properties were valued using the contractors method, and ultimately also to non-domestic rates income.

Since 1990, the decapitalisation rates have been prescribed using regulation-making powers contained in The Valuation and Rating (Scotland) Act 1956. For the 2017 revaluation, the standard rate was set at 4.6% and the lower rate at 2.9%^[2] for educational establishments and church and healthcare properties.

The 2023 valuation roll

Whether to prescribe the decapitalisation rate

Setting decapitalisation rates within regulations ensures consistency in approach across Scotland for all properties being valued on the contractor's basis.

If the decapitalisation rates were not prescribed, the situation would be as it was prior to 1990, with likely the same complex appeals and concurrent uncertainty for both ratepayers and public finances.

The Scottish Government therefore proposes to continue prescribing the decapitalisation rate(s) to be used in relation to properties valued using the contractor's basis.

As with the 2017 revaluation, the Scottish Government proposes to prescribe a decapitalisation rate, or rates, only for those properties valued using the contractor's basis. A prescribed decapitalisation rate does not mean that the contractor's basis is preferred by the Scottish Government to any other method of valuation. The Assessors will continue to have discretion to choose the most appropriate method of valuation for the property concerned with regard to case law.

Prescribed decapitalisation rates should only be used where the contractor's basis is used. Scottish Ministers do not set in legislation any other decapitalisation rates in the context of rating which are therefore for the assessor to decide e.g. adjustments made to properties otherwise valued on the comparative principle.

Decapitalisation rates – Levels and Groupings

Since 1990, and subject to the rateability of Crown properties from April 2000, certain properties have been subject to a lower decapitalisation rate, set out in regulations. Since 2017^[3], these have been:

• church property;
• healthcare property;
• educational establishments (including day nurseries).

These groups were deemed to have special characteristics that merit separate consideration – for example, they may be funded from cheaper sources of public sector finance or charitable donations.

The standard rate applies to all other properties valued using the contractor's basis.

Appropriate rate(s) for the 2023 revaluation

The decapitalisation rate is only one of several factors which will affect a valuation made under the contractor's basis. Rateable values may also vary at revaluation because of changes in the value of land or changes in building costs as well.

Summary of questions on which views are sought

Q1. Should the Scottish Government continue to prescribe decapitalisation rates to be used for the contractor's basis method of valuation at the 2023 revaluation?

Q2. Should the Scottish Government continue to prescribe two decapitalisation rates?

Q3. If prescribing two decapitalisation rates, should the Scottish Government continue to maintain the current groupings of properties in each rate?

Q4. Do you have any further views on the decapitalisation rates for the 2023 revaluation?

Scottish Government

December 2021