Valuation Office Agency’s high level estimates of non-domestic rental and rating assessment movements for England

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On 18 October the Government introduced a new Growth and Infrastructure Bill into the House of Commons which included measures to postpone the next business rates revaluation in England from 2015 to 2017.

The Valuation Office Agency (VOA) provided its high level aggregate estimates of rental and rating assessment movement in England since the last revaluation, based upon its professional valuation judgement informed by the limited rental data held as at the end of January 2012. We committed to publishing these details and the background to this.

Background on our rating work and the revaluations

The rateable value assessed by the VOA and shown in a rating list is broadly the open market rental value (Local Government Finance Act 1988) at a valuation date set by Regulation. This set valuation date (known as the Antecedent Valuation Date or AVD) is normally two years before a rating list comes into force, so 1 April 2008 was the AVD for the current rating lists that came into force on 1 April 2010. All non-domestic properties (hereditaments) are assessed on this basis, even new properties, so they are valued on a fair and consistent basis. The business rates bill is calculated by multiplying the rateable value of a property with the multiplier (tax rate) set by Government.

A cycle of 5 yearly revaluations has existed since 1990 in England & Wales. The aim of each revaluation is to redistribute the same overall business rates bill to businesses, based on the relative changes in property values since the last valuation date; revaluations do not raise any extra revenue.

To carry out rating valuations, VOA collects rental data and analyses this to enable comparisons to be made and a value to be applied, especially as some properties are not rented. Other different valuation methods are sometimes applied on certain classes of property, where rental data is not readily available or there is not a recognisable rental market, for example an income and expenditure approach is used to value large hotels and theme parks and the contractor’s basis approach (using costs of construction) to value schools and hospitals. All the valuation approaches used by the VOA are the standard and accepted methods of valuation applied by surveyors generally and recognised by the Royal Institution of Chartered Surveyors.

Background on the estimates in this report

The indicative aggregate estimates of movement in rental values, and therefore implied tax changes (estimated changes to business rates liability) in this document were compiled as a result of a specific, one-off, exercise by the VOA.

The high level estimates of rental value movement were based on a combination of limited available rental data and best valuation judgements by VOA, as at the end of January 2012. They are not forecasts; at this stage of the revaluation cycle and process it was only possible to provide high level estimates as at January 2012 and are not a projection to the assumed 2015 revaluation AVD of 1 April 2013.

The estimates are based on limited rental evidence and informed by professional judgement of the movement in property values since the last revaluation in 2010 as at January 2012. These were provided well ahead of any detailed work, which the VOA would not do at this early stage in a revaluation cycle. To do the full, detailed calculation VOA would need to go through the full revaluation procedure. Neither the rental data nor the judgements have been subjected to the rigour of moderation and validation that we would expect to apply during a normal revaluation exercise. It has been assumed that the statutory rate used in contractor’s basis valuations would remain unchanged. In making our high level estimates we have not had regard to those properties which appear in the Central Rating List for England and as such any movement in the value of these properties is not reflected.

Bulk class properties

Bulk properties make up the majority of non-domestic properties in the rating lists and fall in three broad classes: retail (shops and similar retail property); offices; and industrial (factories and warehouses).

Table 1 below shows a breakdown by property class and region of rateable value (RV) and the number of hereditaments (rateable non-domestic units of assessment) in the current 2010 rating lists. The estimates of RV are based on the 2010 RV with the indicative assessment of value change, based on the rental data available when produced, to give an implied RV as at end-January 2012. Given the way that properties are valued, a more detailed assessment of the likely impact of a revaluation could only be done by completing the revaluation exercise.

Table 1: estimates of rateable value and numbers of hereditaments by property sector and statistical region (as at 31/01/2012)
Number of hereditaments Average Rateable Value (2010) (£) Total Rateable Value (2010) (£m) Estimated Percentage Change Implied Total Rateable Value (as at 31 Jan 12) (£m)
1 Figures may not sum due to rounding
North East 23,000 29,000 674 -17% 560
North West 72,000 28,000 1,991 -17% 1,659
Yorkshire & Humber 51,000 26,000 1,325 -15% 1,130
East Midlands 37,000 24,000 872 -9% 797
West Midlands 48,000 27,000 1,309 -13% 1,139
East 43,000 35,000 1,511 -15% 1,282
London 89,000 39,000 3,511 -8% 3,237
South East 68,000 35,000 2,388 -14% 2,051
South West 47,000 30,000 1,442 -15% 1,219
England1 478,000 31,000 15,024 -13% 13,073
North East 13,000 23,000 304 -15% 258
North West 43,000 24,000 1,033 -18% 849
Yorkshire & Humber 30,000 23,000 691 -15% 584
East Midlands 22,000 16,000 350 -4% 335
West Midlands 30,000 24,000 716 -19% 579
East 32,000 27,000 864 -17% 717
London 82,000 91,000 7,490 -26% 5,560
South East 52,000 31,000 1,612 -11% 1,436
South West 28,000 24,000 663 -15% 566
England1 332,000 41,000 13,722 -21% 10,883
North East 18,000 21,000 386 -13% 337
North West 59,000 24,000 1,426 -15% 1,219
Yorkshire & Humber 46,000 24,000 1,129 -14% 973
East Midlands 41,000 29,000 1,162 -12% 1,028
West Midlands 52,000 27,000 1,423 -16% 1,202
East 49,000 29,000 1,407 -16% 1,180
London 47,000 30,000 1,430 -13% 1,239
South East 63,000 28,000 1,738 -14% 1,491
South West 48,000 20,000 954 -11% 846
England1 422,000 26,000 11,056 -14% 9,513
England1 528,000 33,000 17,411 -10% 15,669
All England1 1,760,000 32,000 57,213 -14% 49,138

Summary of high level estimates of non-domestic rental and rating assessment movements for England as at 1 January 2012

This indicative assessment suggests that the rateable value of non-domestic hereditaments in England would fall from around £57bn on the 2010 list (based on April 2008 AVD) to around £49bn (based on Jan 2012 AVD). For the purposes of our estimates we therefore assumed the RV multiplier would have to rise by around 16% to enable the same amount of tax to be collected (assuming that the number of properties in the list does not change and not allowing for inflation or for the impact of changes to the total RV due to appeals).

The actual increase in the multiplier is forecast by DCLG to be higher than the 16% used in the following parts of this report. This is because the actual multiplier for 2015/16 would have had to include both the effect of inflation and also an adjustment required by law to offset the estimated effect of future appeals. As a result, DCLG forecast that the multiplier would have increased in 2015/16 by 20%. It follows that, by applying that multiplier, ratepayers would have faced higher cash increases in rate bills in 2015/16 than suggested by tables 2 and 3 below.

Implied change in tax by region and by broad property classes

Table 2 below shows the implied tax amounts by property sectors and regions by applying that multiplier to the January 2012 RV estimate. For ease of reference the cells have been colour coded and an absolute change of up 2 per cent has been assumed to equate to ‘no change’ in order to allow for approximations in the data being used.

Table 2: Potential impact of revised RV (as at 31/01/12) on tax paid by property sector and statistical region
Sector Category All England North East North West Yorkshire & Humber East Midlands West Midlands East London South East South West
Tax payments rise by more than 2%
Tax payments fall by more than 2%
Tax payments unchanged (within 2% bound)
Retail Tax before (£m) 6,505 292 862 574 378 567 654 1,520 1,034 624
Tax after (£m) 6,591 282 836 570 402 574 646 1,632 1,034 615
% change 1% -3% -3% -1% 6% 1% -1% 7% 0% -2%
Office Tax before (£m) 5,942 132 447 299 151 310 374 3,243 698 287
Tax after (£m) 5,487 130 428 295 169 292 361 2,803 724 285
% change -8% -1% -4% -2% 11% -6% -3% -14% 4% -1%
Industrial Industrial 4,787 167 617 489 503 616 609 619 753 413
Tax after (£m) 4,796 170 615 491 518 606 595 625 752 427
% change 0% 2% 0% 0% 3% -2% -2% 1% 0% 3%
Other Tax before (£m) 7,539                  
Tax after (£m) 7,899                  
% change 5%                  

Table 3 below indicates the differential impact that may be experienced by groups of hereditaments in different property sectors and regions as a result of these changes.

Table 3: Potential impact of revised RV (as at 31/01/12) on numbers of hereditaments by property sector and statistical region and numbers of hereditaments (thousands) 1
Sector All England2 North East North West Yorkshire and the Humber East Midlands West Midlands East London South East South West
1 Categorisation of figures (change greater or less than 2%) uses unrounded percentages from table 1
2 Figures may not sum due to rounding
Retail 480 20 70 50 40 50 40 90 70 50
Office 330 10 40 30 20 30 30 80 50 30
Industrial 420 20 60 50 40 50 50 50 60 50
Other 530                  

Summary of VOA high level estimates of tax changes by region and property classes

This indicative assessment suggests that around 800,000 hereditaments would fall in to categories that would see an overall rise in tax payable, despite most of those seeing a fall in their rateable value, and around 300,000 would fall in to categories which would see an overall fall in tax payable (although this is exclusive of any impact of transitional reliefs). Around 650,000 hereditaments would fall in to categories which would see no significant change in their tax payable.

It is not possible to translate these figures in to the tax impact on individual businesses (or on categories of business defined by size, economic viability or competitiveness) as impacts on individual hereditaments within each of the property sectors and regional categories will have a greater range than the whole category impact suggests, with some hereditaments having exceptional changes in RV for the category and hence tax payable. So, for instance, in some cases where a sector is showing an overall fall in tax payable, individual properties could actually pay more.

There is not an exact match between numbers of hereditaments and numbers of businesses and this analysis does not assess the extent to which a change in tax payable on each hereditament would impact on any individual business.

Supplementary information on estimated Rateable value changes as at 31/1/12

It is not possible to provide a full distributional analysis of the likely impacts of a revaluation. However where a supplementary judgement on the likely impacts of the revaluation for some notable property sectors and regions was made, this is set out in full below. The commentary is based on expert market knowledge of lead valuers in particular sectors.

It should be noted that the changes suggested are estimated changes in the rental value – and hence rateable value of the properties - since April 2008. Since the overall change in rental values is -14%, a fall in rental values would in many cases translate to an increase in rates payable. The changes are expressed in terms of change in rateable value between 1 April 2008 and 31 January 2012.

  • In the retail sector, London is likely to have the highest tax increase overall and it is the principal West End locations that would see the biggest change. Across the country the food retail sector (convenience stores, food stores, supermarkets and hypermarkets) is likely to see significant tax increases, against the general retail sector trend of unchanged payments. Overall the retail sector is judged -13% RV change; implied +1% tax change.
  • In the office sector London is likely to have the largest reduction in tax overall and the very high value principal West End locations would see the biggest change. City of London locations would also see reduced tax, but not to the same extent. Overall, the office sector is judged -21% RV change; implied -8% tax change.
  • Hotels throughout central London are likely to experience tax increases reflecting significant increased demand throughout that sector (judged +2% RV change). Outside London this sector is weaker and likely to experience lower/neutral tax changes (judged -15% RV change). The budget hotel sector is expanding significantly putting pressure on the independent sector. Overall, the hotel sector is judged -9% RV change; implied +6% tax change.
  • For similar reasons, pubs throughout central London are also likely to face higher tax payments (judged +10% RV change). Outside central London it is anticipated that the pub sector as a whole would experience higher bills (judged -6% RV change), but this outcome is likely to be heavily influenced by the performance of properties in the city centres as against those in peripheral locations. Overall, the pub sector is judged - 5% RV change; implied +11% tax change.
  • Theatres within central London are likely to experience higher tax, reflecting the better than average performance of this sector (judged +20% RV change). Overall, the theatre sector is judged +7% RV change; implied +25% tax change.
  • The self catering industry in general, including caravan parks/chalet sites, is likely to experience higher tax payments overall reflecting the increased demand for cheaper stay at home holidays (judged +11% RV change; implied +29% tax change), but there is likely to be significant variation depending on type of property and location.
  • It is likely that the sports and leisure sector would experience lower tax overall, reflecting an industry which is struggling in the current financial climate (judged -14% RV change; implied 0% tax change).
  • Although there is evidence of petrol forecourts closing, there is also the prospect of improved profits generally feeding through to higher values (judged +10% RV change; implied +28% tax change). Although there would be very significant variations between property types and locations, it is anticipated that the petrol retail sector generally would experience higher tax.
  • For a range of property types where a rental basis for valuation is applicable but where we did not have data readily available to analyse, the same overall average change as the bulk classes (i.e. retail, offices and industrial combined) was assumed (-15% RV change; implied -1% tax change). The most populous or highest RV examples of these include: guest & boarding houses; markets & pitches; stables, riding schools and kennels/catteries; ATMs; police stations; golf courses; night clubs & discos; car washes; cinemas, casinos and bingo halls.
  • For a range of property types where a contractor’s basis of valuation is applicable, regard was had to lower construction costs evidenced by the Building Cost Information Service (BCIS) tender price index and it was assumed that the statutory de-capitalisation rate would remain unchanged (judged -8% RV change; implied +8% tax change).
  • Some property types use a combination of valuation approaches and require data which was not readily available. To reflect this mixed approach, when arriving at estimates for communications stations (judged -13% RV change; implied +2% tax change) and minerals properties (judged -7% RV change; implied +8% tax change), regard was had to both the estimated change for properties valued on the contractor’s basis valuation and the 'Other' rental classes in combination.
  • For a range of other property types where other bases of valuation are applicable it was assumed that there would be no overall RV change; implied +16% tax change. More notable examples of these include: car parks; hostels; stately homes, tourist attractions and theme parks; telecoms networks; motorway and major road services; docks, harbours and marinas; holiday centres; conference centres.