Rates: complex, convoluted and in need of radical change

DEREK CONNERY explains the anger and resistance to plans for a massive increase in the local taxes paid by businesses

AS SOME of you will be aware there has been a review of the non-domestic rates (NDR), but what actually does that mean?

Basically, the NDR is a ‘tax’ levied on businesses in much the same way as council tax is levied on private households.

So what does NDR actually mean? Well, periodically ‘assessors’ ascribe a value to all non-domestic premises in the country (and, believe it or not, that includes noticeboards). That value is used along with a number called ‘poundage’ to work out how much money each business should pay to the Scottish Government as a property-based tax.

Fairly straightforward? If only. A commercial surveyor once tried to explain the system for valuation to me, but he might as well have been speaking Greek.

The starting point is what sort of rental value could your property attain. Then there is square meterage (swm).

So, for example, there is a shop in Oban on one level with a total 180 sqm. However, actually, this consists of 120 sqm of prime retail space (up to 9m from the door) which attracts a rental value of £120 per sqm, and then 60m of class B retail (more than 9m from the door) which has a value of £60 per sqm. So multiplying through the square metres gives you, in part, the potential rental value. There are still a number of other factors to consider: for example, if there are stairs to get into the shop, a discount is applied.

Added to that, the previous valuation was carried out in 2010, but it used 2008 rental values (pre-financial crash) and, as a result, business rates for the past seven years have been based on rental figures from before arguably the biggest financial crisis the country has seen.

Sticking with retail for the moment, since 2008 the increase in online shopping has put the high street under pressure, so now lots of towns are seeing empty shop units and rental rates falling owing to the highly competitive nature of the retail market.

But the shops remain empty due in part to the fact that even if your rent was virtually nothing, you would still be lumbered with a rates bill based on information that is nine years out of date. So, roll into 2017 and we would all agree that there needs to be a review of the rateable values on business properties. Yes?

It is irrefutable that the Scottish Government needs to raise money by taxation in different forms and, as time passes, inevitably taxes rise as costs rise. Equally, none of us likes paying tax, but if we didn’t then we really would be in a bind. Regardless of what government – local, national and central – does with tax rises or cuts, there is a still an amount that is required to be raised in order that they can pay their bills. Also, I think most people would agree that your taxes should reflect your current situation and not be based on your historical situation. Just like investments, earnings can go down as well as up.

Now we reach the revaluations. Assessors apply a very complicated (at least for me) series of rules and assumptions to a property to ascertain its rateable value. Given the changing world since 2010, it fair to assume there would be some re-alignment of rates to more evenly spread the burden of taxation across businesses and sectors.

This has, indeed, happened and there have been some winners and losers. The problem is the scale of change that some businesses have been exposed to and the fact that the accommodation providers would appear on the surface to be the hardest hit.

One local business has seen a doubling of its rateable value (from around £ 37,000 to £61,000), which equates to an annual increase in its operating costs of around £12,000. To put it more simply, this is almost a full-time job or requires an increase in turnover of in excess of £100,000. That is a big ask.

That example was for a modest hotel. When you dig deeper and look at some of the rises for larger hotels, you get to a stage where you can perhaps understand why an owner might not wish to continue trading.

Bizarre, given that tourism in Scotland is one of our biggest industries and is currently in growth. To put in barriers and almost force closures would seem counterproductive, not just in the reduction in available rooms and jobs but also the impact to the other businesses that both serve and benefit from visitors.

It is important to point out that a solution will not be easy to find. However, when a methodology is so clearly flawed, surely to persist with it is madness. The best way to illustrate this is with three real examples actually in Oban.

1. A 24-bedroom, three-star hotel – current rateable value (RV) £ 37,000, new RV £61,000.

2. A distillery – current RV £ 50,000, new RV £74,000.

3. Large high street chemist – current RV £ 83,000, new RV £ 85,000.

This is nothing to do with the businesses, but illustrates the disparity the system creates. Equivalent to a modest family saloon, a larger executive car and an articulated lorry all being judged by a system to be of comparable value. Derek Connery is chief executive of Bid4Oban.