Small-scale hydro plant and machinery review: report

Annex D: SAA Briefing Paper For Small Hydro Plant & Machinery Review

1.0 Introduction

1.1 This paper seeks to identify the philosophy that underpins the rating system in Scotland, together with an overview of the application of the existing plant and machinery regulations to small hydro schemes and the identification of various issues that arise in relation thereto. Its primary purpose is to provide background material to assist the Review Group in its consideration of what, if any, changes should be made to the Plant and Machinery Regulations.

2.0 The background philosophy of the non-domestic rating system in Scotland

2.1 General Background

2.1.1 The system of non-domestic rating system in Scotland has its roots in the Lands Valuation (Scotland) Act 1854. This Act set out that the statutory basis of rating assessment should be the annual rental value^[22] of all Lands and Heritages as defined in the Act^[23]. Broadly, the term "Lands and Heritages" relates to heritable property although it does include some incorporeal rights such as shooting rights. Despite the fact that there have been a number of modifications to the rating system over the years, this fundamental basis of the rating system, i.e. that it should reflect the annual rental value of all Lands and Heritages, has remained unchanged. Thus, since 1854 the liability for rates payments has remained as the assessed Rateable Value (i.e. the Assessor's estimate of rental value on the statutory basis) multiplied by the appropriate rate in the pound^[24]. The inherent "fairness" sought to be achieved by the underlying architecture of the system is that all occupiers should pay a "fair" share of the rating burden in proportion to the rental value of the subjects which they occupy.

2.1.2 The fact that parts of the original 1854 Act remain in use todayis testament to the efficient and robust nature of the rating system. The strengths of the system are generally perceived to be that tax avoidance is difficult to achieve as the subjects to be assessed are both immovable and readily identifiable, together with high tax collection levels and relatively low administration / collection costs as compared to other tax systems.

2.1.3 The rating system is relatively stable and that reflects the fact that, normally, property rental values tend to gradually rise or gradually fall over a number of years. Changes in rental levels are reflected for rating purposes by taking a snapshot at each General Revaluation, which normally takes place on a 5 yearly cycle. This stability, which compares favourably to, for example, corporation tax or income tax, means that tax receipts are relatively stable and, when considered as a part of the overall basket of different tax systems which together make up the national tax base, this stabilising factor has broadly been welcomed.

2.1.4 Flexibility has been achieved over the years by varying the period between revaluations to reflect abnormal circumstances. Therefore, the proposed revaluation in 1983 was postponed until 1985 and the proposed revaluation in 2015 was postponed until 2017. Recent announcements by the Scottish Government have indicated that revaluations will take place on a 3 yearly cycle with effect from 2022.^[25]

2.1.5 Further flexibility within the rating system is achieved by the introduction of various forms of rates relief (i.e. relief from payment of rate liabilities) introduced by Government under various initiatives – e.g. the Small Business Bonus Scheme, Charitable Relief etc.

2.2 Tax Assessment Based on Rental Value

2.2.1 The statutory definition of Net Annual Value (which unless modified by statute equates to Rateable Value) is:

"...the rent at which the lands and heritages might reasonably be expected to let from year to year if no grassum or consideration other than the rent were payable in respect of the lease and if the tenant undertook to pay all rates and to bear the cost of the repairs and insurance and other expenses, if any, necessary to maintain the lands and heritages in a state to command that rent."^[26]

2.3 Rating is based upon the level of rents - not turnover or income

2.3.1 Rating tax liability is based upon the assessed Rateable Value, which in turn is based upon the rental value of the premises in question. There is (save one exception noted in S2.4 below) no direct link between the level of rental value or Rateable Value of a property and the level of turnover or income generated by the occupier of that property.

2.3.2 Thus there is no comparison to be drawn, and indeed in practice no such comparisons are routinely drawn, between the ratio of rental or Rateable Value compared to the occupier's turnover or income and the ratio of rental or Rateable Value compared to the turnover or income of another occupier's property. See Armour S11-08^[27] and the quotations from Blackburn J.^[28]

2.3.3 It is true, of course, that differing property costs (including rent and rates) will produce, on a like for like basis, a competitive advantage between one trader and another, or one business sector and another, and this will generally result in a drive towards the most efficient use of property. It will also be true that, in general terms, some types of business may require more extensive use of property than other types of business. It will often be seen that, even within the same sector, competing businesses may employ different business models, different production techniques and / or different processes, which will make one occupier a more efficient user of property than another. This will inevitably result in variations in the ratio of rental or Rateable Value against turnover / income between different properties and different occupiers.

2.3.4 Whilst comparisons between the ratio of Rateable Values and turnover / profitability of different business occupiers does not form part of the rating system, some general points have been highlighted by organisations such as the Federation of Small Businesses, who have asserted that small businesses pay a far larger percentage of their turnover in rates compared to large businesses.^[29] Similarly much has been made of firms which use the internet heavily avoiding rates liability although, to date, little attention has been given to the marked increase in the Rateable Value of Telecom and Internet Providers such as British Telecom or Virgin Media.

2.3.5 Traditionally, such concerns have not been addressed by making fundamental changes to the basis of assessing Rateable Value. Governments at both the UK level and at the devolved Government level have preferred to address such issues by introducing various forms of relief (e.g. Small Business Bonus Scheme, Charitable Relief etc.) rather than altering the method of assessing Rateable Value. Indeed, the converse position has been adopted. As identified within the recent Barclay Report^[30], it is recognised that it is important that a common basis of assessment is applied equitably to all lands and heritages in the first instance. It is only by assessing all lands and heritages on such a common basis that Government can effectively identify properties, or categories of property, to which it wishes to provide relief in pursuit of legitimate policy aims. Further, it is only by having all heritable property assessed on a common basis that the costs and benefits of providing such relief to appropriate sectors can be identified and evaluated.

2.3.6 It is also the case that, should classes of lands and heritages, or parts of lands and heritages, be excluded from assessment for rating purposes, then the practical outcome is that records are no longer maintained for those subjects or parts of subjects. Real difficulties may subsequently be experienced if consideration requires to be given to those subjects, or parts of subjects, at a later stage – either with the aim of bringing them back into rating (as was the case recently with shooting rights) or indeed in quantifying the extent of relief being awarded – as is the case with agricultural subjects. In effect, once detailed survey records cease to be maintained by Assessors, it is extremely difficult to re-introduce these items to the rating system. For this reason alterations to the basis of assessing rateable value does not lend itself to short term fluctuations in government policy – such matters are better dealt with via relief schemes which can more readily be amended, on a year to year basis if required, to reflect particular circumstances.

2.4 Subjects valued in relation to profitability or income

2.4.1 It is noted above that there is one exception to the rule that turnover / profitability does not determine, or "drive" the level of Rateable Value. That exception applies to a specific category of properties which in Scotland have traditionally been valued on the Revenue Principle of valuation (now known as the Receipts and Expenditure Method of Valuation^[31]). This small category of subjects – which typically will include harbours, ski lifts and major utility undertakings – are those where the profits that can be gained from the property are so inextricably linked to the actual geography / topography of the precise location that the business could not be carried on elsewhere. Such subjects are rarely if ever let in the open market. The Receipts and Expenditure method of valuation is therefore employed to identify the income that may be achieved from the premises and deduct the costs of generating that income and certain other allowable expenses. The remainder (termed the divisible balance) will be apportioned between the amount required to attract the operator to undertake the business and the residue which will be attributed as rent to the landlord. The recognised methods of valuation for rating purposes are discussed in more detail in Section 5 below.

2.4.2 The small category of subjects described in S2.4.1 above should not be confused with certain other subjects (e.g. public houses, hotels, petrol filling stations) which are valued on the comparative basis of valuation using rental values but for which the method of comparison is turnover or trade levels. For these the subjects principal driver in arriving at Rateable Value is the level of rents passing in the open market. An analysis will be undertaken of those open market rents and these rents will be compared to the hypothetically achievable turnover for the subjects in question. The resultant ratio between turnover and rental levels can then be applied to other similar subjects. Typically, licensed subjects such as hotels and public houses will fall into this category.

2.4.3 It will be noted from above that in the majority of instances turnover or income plays no part in the assessment of rateable value and Assessors have no need of, nor access to, the turnover or income for the vast majority of business premises in Scotland. Whilst no such figures have been collated it is considered that Assessors will have details of the turnover for less than 10% of subjects entered in the Valuation Roll. In many cases it will not be possible for turnover figures to be sourced at all – either because the premises are occupied for non-commercial purposes (e.g. schools, hospitals and other public authority subjects), or because the premises are occupied as part of a larger business which undertakes accounting across a number of different premises.

2.4.4 From the limited number of examples in which of information relating to the ratio between Rateable Value and the level of turnover is available to Assessor, some details are noted below:

Hotels: Accommodation percentages to NAV range from 7.5% to 18.00%. Catering and Liquor percentages to NAV range from 6% to 10%.^[32]

Guest Houses: Percentages to NAV range from 12.5% to 14%.^[33]

Public Houses: Percentages to NAV range from 6.5% to 8%.^[34]

It is understood that the relationship of NAV to turnover for Self Catering Units is frequently in excess of 20% with some specific examples being in the order of 60%+.

It is understood that the relationship of NAV to turnover for multi storey car parks can often be in excess of 30%, again there may be examples in excess of 50% or 60%.

Some private leisure centres may demonstrate relationships in excess of 30%.

It is also understood that a number of Retail Units (e.g. within shopping malls or food courts), operate a system of turnover rents whereby a base level of rental value is agreed which will be replaced by a % of turnover calculation where this generates a higher level of rent. The percentages applied in these situations may vary but will be between 5% and 25%.

2.5 The Role of Model Valuation Schemes

2.5.1 It is extremely rare that two properties will be exactly identical. Generally speaking the location will always be different unless properties are situated side by side and, even where premises are adjacent it may be that one benefits or suffers from closer proximity to some external factor. Further, it is rare for two properties to be exactly the same in terms of their construction, dimensions and physical characteristics. The nature of the rating system is that each property should be individually assessed at the precise Rateable Value that reflects the Assessor's estimate of that subject's rental value on the statutory terms.

2.5.2 There is no provision for a scheme of valuation to be applied that would detract from the unique Rateable Value that each individual property should have. Notwithstanding this however, model schemes of valuation can be, and frequently are, employed in valuation for rating. Such models schemes can be extremely beneficial in providing pragmatic, consistent, valuations that are in harmony across different jurisdictions. It is critical however that any model scheme makes adequate provision to fully reflect the location and physical differences between different properties in arriving at the Rateable Value for each subject.

3.0 An explanation of the traditional application of the existing plant and machinery regulations

3.1 General Background

3.1.1 Certain Elements of plant and machinery have been recognised as being rateable since rating was introduced in Scotland in 1854^[35]. A number of issues have arisen over the period reflecting changes to the industrial landscape and the development of new technologies. In response reviews have taken place to consider such changes and, where necessary, new legislation has been introduced to accommodate changing circumstances.

3.1.2 A full history of the various changes to the rating of plant and machinery is given within the Wood Committee Report 1993^[36] and it is not proposed to recite that history here. Suffice to say that the underlying premise is that, in principle, investment in significant items of plant and machinery, particularly in the civil construction elements of plant and machinery, is no different to investment in buildings and other lands and heritages. It has always been considered that such investment should be subject to rating in the same way as buildings.

3.1.3 Having said the above, a balance requires to be struck in order to achieve a similar rating burden for investment in plant and machinery as for buildings, while at the same time providing a regime which can be applied in the face of increasing complex technological changes and one which does not unduly impede investment. These are the issues that have been considered in the various reviews.

3.1.4 The last two reviews of the rating of plant and machinery were undertaken under the Chairmanship of D Wood QC. The first review was undertaken in 1993 with the express intention of harmonising the rating of plant and machinery across the United Kingdom. The changes brought about by that review were implemented at the general revaluation in 1995. The second review was undertaken in 1999^[37] in order to ensure that the Regulations were fit for purpose when utility subjects (Electricity, Gas, Water, Railways & Large Ports) were returned to conventional valuation (previously these had been valued on an artificial formula basis by Government officials). The Review Group may wish to give detailed consideration to each of the Reports. Ultimately, the 1993 Report gave rise to the Valuation for Rating (Plant and Machinery) (Scotland) Regulations 1995 and the 1999 Report gave rise to the amended Valuation for Rating (Plant and Machinery) (Scotland) Regulations 2000, which are still in force today.

3.1.5 Since 1995 it has been considered to be of paramount importance that a harmonised approach be taken to the rating of plant and machinery across the United Kingdom. This was largely driven by the demands of industry who considered that a level playing field should apply in rating assessments north and south of the border. Further, as many affected businesses operated in both Scottish and English jurisdictions, it was essential that assessments were approached under a common, transparent, framework. These considerations were fully adopted by the Wood Committee and the Regulations subsequently enacted in Scotland and England are almost identical.^[38]

3.1.6 In constructing a harmonised basis for the rating of plant and machinery, the Wood Committee took as its starting point the framework and procedures adopted in England, and amended these as appropriate. That framework had been in operation in England in a similar form since at least 1925 (See S4.2.4 below) and thus a significant amount of English case law and legal precedent is available and of assistance in determining how the new regulations should be applied. By comparison, there is relatively little Scottish case law and legal precedent since 1995 which is of assistance in interpreting the current Regulations.

3.1.7 It has recently been stressed by the Lands Valuation Appeal Court in Scotland^[39], that the express purpose of the Regulations is to bring about similar outcomes north and south of the border and that it is appropriate to make reference to English cases to assist with the interpretation of the Regulations in Scotland.

3.2 The basis of Plant and Machinery Regulations

3.2.1 The Plant and Machinery Regulations have been carefully structured over a long period of time. They are designed to apply in the form of four distinct classes of plant and machinery. Whilst the precise terms of the Regulations^[40] should be considered in detail, these are broadly stated as:

Class 1 Power: Plant and machinery used or intended to be used mainly or exclusively in connection with the generation, storage, primary transformation or main transmission of power in or on the lands and heritages, together with associated list of accessories.

Class 2 Service Plant: Plant and machinery used or intended to be used in connection with services to the lands and heritages or parts of them (other than those used mainly or exclusively as part of manufacturing operations or trade processes), together with associated list of accessories.

Class 3 Conveyance / Communications / Distribution: A collection of items ranging from railway lines to electricity cables and pipelines.

Class 4 Items that are, or are in the nature of, a building or structure: Two tables (Tables 3 and 4) contain lists of items from which, if the item is considered to be a building or structure, or in the nature of a building or structure, it will be rateable. Note items contained within Table 4 only are further qualified such that the named items are rateable unless they are less than 400 cubic metres and are readily capable of being moved from one site and re-erected in its original state at another without the substantial demolition of any surrounding structure.

3.2.3 The various classes within the plant and machinery regulations are not mutually exclusive, each item of plant must be separately tested against each and every class and, should it fall within any one of the four classes, it will be considered as rateable.^[41] Thus, the method of applying the above classes is to separately consider each item of plant, or parts thereof, in turn against each of the four classes. Therefore, an item of plant such as a boiler should firstly be considered as to whether it falls within class 1 (i.e. it is used for the generation of power); followed by class 2 (whether it is used as service plant); followed by class 3 (whether it is used for any of the specified purposes); followed by class 4 (whether it is a listed item and whether it is in the nature of a building or structure).

3.2.4 The classes are carefully structured to capture specific items and elements of plant and machinery within the different classes. Thus, taking our boiler example, should it be rateable under class 1 then the various elements listed in Table 1 together with items listed in the List of Accessories will all be rateable. If it is considered to be rateable under class 2 the various elements listed within Table 2, together with items listed in the List of Accessories will all be rateable. If it is not rateable under class 1 or 2, but is rateable under class 4 then only the parts of it which satisfy the test of being in the nature of a building or structure will be rateable.

3.2.5 Note also, in considering items of plant and machinery under the different classes, valuers are not constrained by narrow, technical description of items. Rather it will be appropriate to apply a wider, non-specialist, application of language to items of plant and machinery. Further, it should be noted that the regulations do not attempt to define plant and machinery by reference to particular industries.^[42]

3.3 Class 4 – Items which are, or are in the nature of, a building or structure

3.3.1 In considering class 4 and whether items of plant and machinery are to be considered as in the nature of a building or structure there are generally 4 tests that will be applied.^[43]

(i) The way in which the item is constructed.

(ii) Its size and weight

(iii) The degree of attachment to the land or other structures and

(iv) Its degree of permanence.

3.3.2 Generally works of a civil engineering nature – including items constructed on site from concrete / brick / stone are considered to satisfy the tests (foundations, settings, supports etc. as listed in Table 3) and will be regarded as rateable under class 4 regardless of size.

3.3.3 Note also that parts of an item of plant and machinery may be considered as being in the nature of a building or structure even though the principle item is non rateable^[44] (e.g. the foundations for tanks which may, in themselves, not be rateable).

3.3.4 It is important to note that the concept that plant and machinery which is in the nature of a building or structure should be subject to rates in the same way as a building was recognised and endorsed by the Wood Committee – see the Wood II Committee Report S5.35

"On the grounds of fairness, therefore, we conclude that a "tools of the trade" exemption ought to be introduced in respect of generating plant and machinery belonging to power generators. However, Class 4 should continue to apply and some of their tools of the trade will be brought into rateability under that class. This would achieve equality of treatment with other industrial undertakings. Since some of these items are not specifically mentioned in Class 4, the 1994 Regulations will need to be amended to incorporate them under Tables 3, or 4, as appropriate."

3.4 Exemptions to the P & M Regulations

3.4.1 It will be noted that a number of exemptions have been built into the plant and machinery regulations over the years. These include e.g. plant and machinery which has micro generation capacity – exempted from all classes, and excepted plant and machinery (i.e. plant and machinery for the generation, storage, primary transformation of power or the main transmission of power) used or intended to be used mainly or exclusively for sale to consumers – exempted from class 1. Great care requires to be taken with the application of these exemptions and the precise wording and circumstance of every situation will have significant effect.

3.4.2 Clearly, the application of these exemptions gives rise to a number of inconsistencies in the rating burden. Micro generating plant with the capacity to produce 50 kilowatt of electricity will benefit from exemption whereas similar plant with a capacity to produce 51 kilowatts will not. Generating plant which produces electricity wholly or mainly for distribution to consumers (i.e. is supplied to the grid) will benefit from exemption from class 1 whereas the same plant generating electricity for a single user, or for the occupier's own use, will not.

3.4.3 An example of the above may be considered in relation to wind turbine generators. For sites which are generating electricity for distribution to consumers, the elements which will be rateable are; the site, buildings, site improvements (fencing, paths, roads), all works associated with connection to the grid,the foundations and the tower. The nacelle (the rotating element at the top of the tower that houses the generator), the generator and the turbine will be considered to be non-rateable. Where the same facility generates electricity for a single user (e.g. to power a factory) all the elements, including the nacelle, generator and turbine, will be considered to be rateable and thus attract a significantly higher Rateable Value.^[45]

4 The issues that arise with the application of the P & M Regulations to the various components of a small hydro scheme

4.1 General

4.1.1 One general point noted above is that all civil engineering components are normally considered to be rateable and this tends to be taken "as read" by all parties in the rating sphere. That specifically applies to all foundations, settings and supports as identified in class 4 table 3. Clearly, in the case of hydro schemes a significant proportion of the capital expenditure is in civil engineering.

4.1.2 A second general point noted above is that the exemption in class 1 for "excepted plant and machinery" only applies where "the power is mainly or exclusively for distribution for sale to consumers". The effect of this restriction is that, should there be an example of a small hydro scheme supplying a single user, or where more than 50% of the electricity is used for internal consumption rather than being exported to the grid, then that exemption will not apply. Typically in the case of wind or solar that results in more parts being rateable (and of course higher rateable values being produced) if the turbine or panels mainly serve the occupier's own purposes such as may be the case in a factory. It is not known if this situation arises in the context of small hydro schemes.

4.1.3 A third general point that arises is the interpretation on the exemption contained within class 1 of the plant and machinery regulations. This issue revolves around the fact that the exemption, as expressed related to plant and machinery used or intended to be used "for" the generation of electricity wholly or mainly for the sale to consumers. In contrast, in order to be considered rateable, the items within the list of ancillaries set out within Table 1 of the Regulations applies to plant and machinery are those … used… "in connection with" ….. It is not clear whether there is a distinction to be drawn between the two terms.

4.2 The main elements of a small hydro scheme and the issues that arise:

4.2.1 Whilst recognising that each hydro scheme will be significantly different due to the topography of each individual site, there are a number of elements that will be common to all sites. These are identified below, together with the appropriate treatment under the current plant and machinery regulations:

4.2.2 The dam or weir (and if there is more than one water collection point the pipes connecting one to the other):

Clearly the dam or weir is rateable as a structure, together with all the civil works attached to it. In terms of class 4 a dam is specifically listed in table 3 [a weir is defined as a type of dam]. Any pipes connecting one collection point to another will be rateable under class 3 (g).

4.2.3 The intake chamber (header tank) and trash screens / filters etc.:

The intake chamber / header tank will be a reinforced concrete tank, poured in situ and buried underground. It is clearly in the nature of a structure in terms of class 4 (tanks, chambers and vessels are all listed).

The trash screens and filters, if they are metal and removable, would not, in themselves, be considered to be in the nature of a building or structure and would not be rateable under class 4.

4.2.4 The pipeline (penstock):

The pipeline or penstock will be a length of pipework (normally of HDPE, GRP, uPVC or, especially in the lower reaches, metal) which will usually be buried underground in lined bed up to 10 feet below the ground surface. Each small hydro scheme will require a different length and specification of the pipeline / penstock depending upon the length of run, the number of direction changes and the fall in height of that location as this will affect the forces that the volume and pressure of water will create.

This is one of the significant areas of debate in the rating of small hydro schemes. Assuming the exemption to class 1 applies then, if taken to be a penstock, it is arguable the pipe / penstock should not be rateable. A penstock is not a named item within class 4.

The contrary argument is that "penstock" as originally applied to the regulations in 1925 (in England and subsequently adopted in Scotland) was intended to represent a "sluice gate" or "valve". It seems to have been only in the 1980s that the term penstock was adopted to apply to a pressurised pipe leading to a turbine – firstly in America and latterly in the UK within the hydro industry. There is no recorded detail of this changing use of language being picked up and there has been no change to the use of the word "penstock" in the regulations since 1925.

In terms of BS7775, penstock is defined as a piece of equipment used to isolate and/or control the flow or level of a liquid consisting of a sliding door moving over the aperture in a frame which is secured onto a structure. Per Ham Baker, a company established in 1884 and acknowledged as a leading designer and manufacturer of penstocks and flap valves, a penstock is a sluice gate.

The only reference to penstock in the Wood II Report is in the context of the water industry in Table 5 which includes "Valve and Penstocks".

If not a penstock (or perhaps even if a penstock) it could be the case that as a pipe conveying water, the pipe would be rateable as a pipe or pipe-line under class 3 (g).

Note, it is difficult to see a difference between the pipeline / penstock conveying water to a turbine and any number of other pipes that are clearly rateable e.g. those carrying oil from the North of Scotland to refineries in the central belt.

Note also, in larger hydro schemes the penstock may be of concrete construction and an integral part of the dam.

4.2.5 The thrust blocks and other civil engineering aspects required to contain / support the pipe or penstock (including any pigging chambers etc.):

Thrust blocks are blocks of reinforced concrete poured in situ. These are individually designed and specifically constructed to suit their particular location along the length of the pipe / penstock in order to support it and to contain the pressures generated. In particular, thrust blocks are used where the pipeline changes direction. Each small hydro scheme will be different in the number, location and design of the individual thrust blocks required.

These are clearly in the nature of a structure (foundations or supports) and rateable within class 4.

4.2.6 The powerhouse or turbine house, including the foundations which may serve as a thrust block and will be designed to accommodate both the pressures of the penstock and also support / retain the turbines and generators:

A power or turbine house will be constructed at each site. Whilst in some cases these may appear to be basic structures this is not the case. The foundations and supports require to be substantial to support the turbine & generator and to contain the forces of the water exiting the pipe / penstock at high pressure and turning the turbine. Each powerhouse will be specifically designed to suit the circumstances of that particular situation. In many cases the powerhouse will require, for environmental impact reasons, to be of a sophisticated design, and frequently either fully or partly buried underground. Noise reduction measures may also be required.

A powerhouse is clearly rateable as a building (including the foundation / thrust block, which is an integral part of the building). Buildings are the one of the fundamental components of the definition of "lands and heritages" as defined in S42 of the 1854 Act. It is difficult to see how a powerhouse could be excluded from rating by any change to the plant and machinery regulations without further legislation to amend the definition of lands and heritages.

Even if the substantial thrust block element of the foundation were not rateable as part of the building it would be rateable in its own right as being in the nature of a structure under class 4.

4.2.7 Service plant serving the power house (i.e. heating, ventilation, electrics etc.):

Any such service plant contained within the powerhouse will be rateable under class 2.

4.2.8 The turbines and generators:

Turbines and generators will be designed and fitted within each site. They will be mated to the floor and supporting foundations of the powerhouse, which will be specifically designed to receive that particular type of turbine / generator.

Typically, turbines and generators have a long life expectancy (circa 70 years) with limited maintenance. In some instances it will be possible to remove the turbine / generator should major repair or replacement be required and in these situations it will be common for a crane or gantry to be incorporated within the design of the power house to facilitate their removal.

In other situations the turbine and generator may be installed and mated to the foundations of the power house during its construction and the walls and roof of the powerhouse built around them. In these situations it is not possible to remove the turbine or generator and any maintenance or repair must be undertaken in-situ.

This is the second significant area of debate in the rating of small hydro schemes.

Turbines and generators may be either rateable or not depending upon the individual circumstances. Turbines and generators are listed in class 4 table 3 so (assuming they are exempt under class 1 as "exempted plant and machinery") they may nevertheless be rateable under class 4 if they are in the nature of a building or structure.

The tests for what is in the nature of a building or structure are noted in S3.3.1 above. Turbines and generators are clearly designed to have a long life and are commonly expected to be in situ for 70 years or more. They are mated to purpose designed and built foundations specifically intended for that turbine / generator in order to secure the turbine / generator and deal with the forces exerted on / by it. The turbine / generator may or may not be removed for servicing over their 70 year life span and indeed in a number of cases they cannot be removed at all – e.g. where they are installed and the power house is built around them.

There is a judgement to be made in each individual case as to whether the turbine / generator meets the test of being a structure and it may be that different situations give rise to different outcomes.

4.2.9 Switchgear etc. within the power house:

Transformers, switchgear etc. are generally considered to be non-rateable.

4.2.10 The Tailrace:

The tailrace is a pipeline that takes the water (once it has passed through the turbine) and returns it to a river or burn. Generally, these will be of concrete construction and of quite wide bore as it is desirable that the water is not under pressure when it is returned to the river / burn. The distance from the powerhouse to the point where it returns to the river / burn will vary from location to location.

The tailrace may be an integral part of the foundation of power or turbine house and that element will be rateable either as part of the building or as a foundation / setting / support. In so far as the tailrace may extend beyond the powerhouse it will be rateable as a pipeline under class 3(g).

4.2.11 Wires / poles (and any foundations & supports for them) that transfer the electricity to the grid:

A set of wires, either underground or supported by poles is required to transfer the electricity generated to the grid. The distance from the powerhouse to the nearest possible grid connection will vary from location to location.

The treatment of the wires /poles etc. transferring electricity from the powerhouse to the connection into the grid is the third significant area of debate in the rating of small hydro schemes.

There is no question that the wires / poles etc. are rateable under class 3 c) and d). The area of debate is who is the rateable occupier? Are these in the occupation of the hydro operator or are they in the occupation of SSE or another electricity company? There seems to be a lack of clarity over the terms of agreements with electricity companies and it is not clear whether all hydro schemes have the same type of agreement. Responsibility for wayleave payments may be of assistance.

NB this is primarily a question of who is the rateable occupier rather than an issue that can be addressed via the plant and machinery regulations.

5 The possible methods of valuation that may be applied to hydro schemes of valuation and issues arising there-from:

5.1 General

5.1.1 There are three recognised principles upon which valuation for rating purposes may be undertaken. These are the comparative principle, the contractors principle (now known as the contractor's basis) and the revenue principle (now known as the receipts and expenditure method). Each of these principles is described in more detail below. The issues that arise in relation to the valuation of small hydro subjects are also set out in each.

5.2 The comparative principle

5.2.1 The comparative principle is based upon the proposition that a figure of rent which has achieved wide acceptance in the open market is the best indication of the annual value of the subject to which it relates. It is widely accepted that, where sufficient comparable evidence is available, which can be appropriately adjusted to equate to the statutory terms, and for which reasonable adjustments can be made to equate the property with the subject under consideration, it will provide the most reliable estimate of rental value for that subject.^[46]

5.2.2 It is the hypothetical rent of the subjects on the statutory terms that is being sought. Therefore, the actual rent passing on the subject concerned, although of significance and an important consideration, is not determinative of the Rateable Value. Rather a basket of evidence should be analysed to arrive at the rent which a hypothetical tenant would pay to a hypothetical landlord for the subject concerned.

5.2.3 Appropriate adjustments should be made to each rent being considered to bring it in line with the statutory assumptions. Further adjustments should be made to reflect any differences between the subject for which the rent is passing and the subject to be valued for rating purposes (i.e. both differences in location and in terms of the physical characteristics) before appropriate comparisons can be made.

5.2.4 It is of critical importance in undertaking any valuation for rating purposes that it is the annual value of the whole of the rateable lands and heritages that should be assessed. Therefore, any rent for a comparative subject which does not reflect all of the rateable elements of the subject under consideration must be suitably adjusted to reflect the presence of those elements.

5.2.5 It appears to be accepted by the British Hydro Association that there are no rents available for complete hydro schemes which cover all of the rateable elements. The rents which are available appear to relate only to land and the right to extract water from the river / burn. There is no element of rateable plant or indeed the powerhouse whatsoever included in these rent being paid and clearly additions will require to be made to these rents to reflect any rateable plant and machinery.

5.2.6 In some cases the available rents may suffer from one or more of the following deficiencies:

(i) A number of the available rents do not cover the whole of the land and / or water extraction rights required. This is frequently the case where the hydro operator has developed the scheme on some or all of the land which he already owns. Leases may only be entered for the parts of the land and water rights that are not already in the occupation of the operator.

(ii) A number of the available rents are not arms-length agreements and have not been tested on the open market. Rather a significant number of rents are between related organisations, often with common directors – particularly where the land owner has established a trust to operate the hydro scheme.

(iii) Some of the rents demonstrate a two-tier level of ratio to income generated. These rents may adopt a lower percentage – say 5% or 8% for the first 5, 10 or 15 years (whilst the operator recovers some of their investment) with a higher percentage thereafter. This scenario, which presumably derives from the related nature of the parties to the agreement, is not one which matches the rating hypothesis – i.e. that the subjects are complete and vacant at the point at which they are made available to the open market.

5.2.7 Whilst the above deficiencies will require an individual rent to be treated with caution (or perhaps suitably adjusted), it is not suggested that these rents could not, potentially, assist to establish the rental value of the site.

5.2.8 The British Hydro Association has indicated that where rents are available (i.e. for land and water extraction rights only), these tend to demonstrate that rents equate to 10% of income generated. However, rents which have been made available to Assessors demonstrate rates between 5% and 20%.

5.2.9 It is not uncommon to determine the rateable value of a subject by adopting a land rate from available rental evidence and adding the value of the other parts, which may be determined on the contractor's principle as set out below.

5.3 The contractor's principle

5.3.1 The contractors principle of valuation (or contractor's basis of valuation) is frequently employed when there is insufficient rental information on which a comparative valuation may be based. The purpose is "to see what it would cost an owner to produce the hereditament in its present form and then to see what a tenant, who had not himself the money to be an owner, would give the owner yearly, it being assumed that that sum must bear some relation at ordinary rates of interest to what has been spent."^[47]

5.3.2 There are 5 steps involved in the modern application of the contractor's principle^[48]. These are:

(i) Stage 1 – Estimate the replacement cost of the site works, buildings, rateable structures and rateable plant and machinery.

(ii) Stage 2 – Apply any appropriate adjustments and allowances to reflect the difference between cost and effective capital value (ECV).

(iii) Stage 3 – Add the value of the land to arrive at total ECV.

(iv) Stage 4 – Apply the appropriate decapitalisation rate to the total ECV.

(v) Stage 5 – Stand back and look at the result of Stage 4 and make any further adjustments considered appropriate.

5.3.3 In previous revaluations much debate has been generated over the appropriate decapitalisation rate to be applied at stage 4. Since 1990 decapitalisation rates have been set in statute with the current provisions being contained within The Valuation for Rating (Decapitalisation Rate) (Scotland) Regulations 2016.

5.3.4 Whilst no detailed discussions have been undertaken with the hydro industry on this aspect, it may be feasible to undertake a valuation based upon an element derived from passing rental values for land and water extraction rights with the various items of rateable plant and machinery (and buildings) being valued on the contractor's principle (i.e. an adjusted rentals valuation).

5.4 The Receipts and Expenditure Method (formerly known as the Revenue Principle)

5.4.1 As noted within S2.4. above, the receipts and expenditure method of valuation is applied in some situations where there is no comparative rental evidence available. The traditional explanation of the receipts and expenditure method of valuation is 'A method to ascertain the rental value of a property, for the purposes of rating, by reference to the receipts and expenditure, adjusted as necessary, of an undertaking carried on at that property'^[49].

5.4.2 The methodology involves the following steps^[50]:

(a) Gross Receipts should be determined by taking into account all income reasonably able to be derived from occupation of the property.

(b) The proper Cost of Purchases made in order to produce those receipts should be deducted to determine the Gross Profit.

(c) From the Gross Profit the Working Expenses should be deducted to determine the Divisible Balance.

(d) The Divisible Balance is the sum available to be shared between the landlord and the tenant. It comprises two main elements:

(iii) The Tenant's Share – to provide a return on any tenant's capital employed and a reward to the tenant for his venture reflecting the extent of the risk and the need for profit. This is deducted from the Divisible Balance to leave:

(iv) The Landlord's Share, i.e. the rent payable (which becomes the rateable value).

5.4.3 It is considered particularly appropriate to use the R & E method where receipts are derived from some monopoly attaching to the property. Monopoly value may be derived from law, e.g. by way of licence, or from geographical location or sometimes from a combination of both.^[51]

5.4.4 It may be considered that small hydro subjects are well suited to valuation by means of the receipts and expenditure method. This is particularly the case as the income that may be generated is inextricably linked to the geographical and topographical features of the site. These geographical and topographical features will directly determine the volume of water which can be collected and diverted through the hydro system. The fall in height between the header tank or intake chamber and the powerhouse will determine the force at which the water can power the turbine and thus the amount of electricity generated.

5.4.5 The extent of infrastructure which is required to produce the income, and the cost of installing that infrastructure, will be also be determined by the geographical and topographical features of the precise location. This will include; the nature and cost of constructing the dam or weir required, the length and specification of the pipe-line or penstock required, the number, size and location of thrust blocks required, the location and design of the power house, the length of the tailrace and the length of posts / wires required to connect the scheme to the national grid.

5.4.6 It is the above features which suggest that the receipts and expenditure method of valuation is the most appropriate method in the case of small hydro subjects.

Alastair Kirkwood
Assessor and Electoral Registration Officer
Tayside Valuation Joint Board
30 May 2018