Business as usual? Business rate bills are about to change and while some face a hefty increase, others could be in line for a reduction. It's complicated though, as David Harris discovers
Are you dreading your business rates bill this year? In April new bills will drop on doormats all over the country after the first revaluation in seven years. So how bad is it going to be for hospitality businesses? The short answer is that it depends where they are.
Talk to operators in central London, who face hefty increases, and the answer is likely to be "very bad indeed", but in the regions some bills are going to fall.
In many places, say property specialists, rates bills should go down because the rentable values on which rates are based have fallen since the last revaluation in 2010. The rateable values may not fall by as much as some operators think they should, but they will drop.
However, this will be little comfort for those, such as Serena Von der Heyde, whose family owns the Georgian House hotel in London's Victoria. Here the difficulties posed by the imminent rates increase are both severe and frustrating.
She says: "We belong to a group of hotels in our area and for nearly all of them what they are being asked to pay from April is double what they paid before."
Given that business rates are usually taken to be the third-biggest outgoing for hospitality operators, after staff costs and rent, a doubling is a serious amount of money, both in absolute and proportional terms.
Von der Heyde says that a £30,000 annual rise in rates is not unusual among the hotels in her area, with such increases often knocking 10% off profits at a stroke. In some cases the figures are much worse (see panel on the Eccleston Square hotel, p31) and she knows of one hotel that is likely to be put up for sale as a result of the rates rise. Job losses are also likely as hotel operators struggle to balance the books.
A particular gripe is over the transitional relief, intended to keep rates down in the first couple of years in order not to put too much financial strain on businesses too quickly. For what the government defines as small to medium-sized businesses the transitional relief is considerable.
No small property (under £28,000 rateable value in London and under £20,000 elsewhere) should see more than a 5% increase in April. Medium-sized businesses (everything else up to £100,000 rateable value) will be capped at 12.5%.
For businesses with a rateable value of more than £100,000, the help is not so generous. Their maximum increase is capped, but only to 42% in year one and 32% in year two.
It does not help that the Department for Communities and Local Government (DCLG) has still not finalised the regulations on the appeals process for businesses that think their rates bill is unfair. Difficulties arose at the last rates revaluation because some appeals took years to resolve (some are still not sorted out) so the DCLG wants to limit the right to appeal, but any limit is likely to be challenged as well. Suggestions at the end of last year that a margin of error under 15% in a rates bill would not be grounds for appeal went down predictably badly with industry organisations including the BHA.
Following a consultation on this, the DCLG has still not decided exactly what will happen about appeals in April. At the time of writing, just a couple of months before rates bills arrive in the post, its official position on the consultation was still that it would "publish our response in due course".
An unclear future
All of this means that hospitality businesses in areas where property is more highly valued are not only being hit hard but still don't know exactly how things are going to work.
So for hotels such as the Georgian House, the increases might be eye-watering and potentially difficult to challenge. This is particularly tough for a family-owned hotel which has no intention of selling and therefore has no means of profiting year to year from the increasing rental (and capital) value of the building.
Outside London, increases might be less but this doesn't mean that they are not potentially worrying. There are plenty of operators who still don't know what their increase will be and are edgily awaiting the news. This includes Hampton Manor hotel near Birmingham, the restaurant of which, Peel's, won a Michelin
star in 2015.
Managing director James Hill says that he has submitted the last three years' accounts to the Valuation Office Agency (VOA), which will be part of what is used to arrive at the final rates figure. Hill is expecting a rise but hoping that it won't be too great. If it comes out too high, he can appeal, but Hill appears to dread those offering to help with this process almost as much as the rates rise itself.
He says: "As soon as we get told I know I'm going to get endless calls from those companies that say they can save us a lot of money. To be honest, I never like those."
Property agents, predictably enough, are a little more phlegmatic about the forthcoming increases, although many are critical of the way in which the latest revaluation is being handled by the government. Richard Wackett, rating partner at Montagu Evans, says the firm's research indicates that the median increase nationally is going to be around 17%, with London hotels seeing an average 37% rise and restaurants 36%.
Along with other agents, Montagu Evans is dissatisfied with the information available about how the new rating system will operate.
Its latest briefing note says bluntly that "the lack of any clear guidance as to how the rating regime will function from April is not ‘good news'."
It adds: "It is unlikely that even the valuation officer will understand the ramifications of reform and for the rest of us the best chance is an educated guess."
Adam Brooke, head of rating at Christie & Co, also says it is already far too close to the time new rates bills are issued for details on appeals to remain hazy. He says: "It's very late in the day for this and I am not sure whether the VOA has
enough staff or the IT capacity to deal with things after 1 April."
Brooke also points out that hotels and restaurants are different from many other buildings or which the VOA carries out valuations, such as office buildings.
He says: "In a way it is simpler for offices because the valuation works on more straightforward factors: how old the building is, what air conditioning and heating it has.
These are all things that affect the rent it might get. Hotels are different, which is why they often look at turnover."
This can account for the big variety in rateable values for hotels even when they are in similar locations, says Brooke. While some hotels will see falls in rates this year, he has heard of one London hotel that is facing an increase of 427% in its rates. This level of increase is typically explained by the VOA as resulting from an undervaluation in the last rating assessment.
Several agents say that this uncertainty is particularly marked over the appeals process, which is causing some concern because of new restrictions that appear likely to be placed on how easy it is to appeal against a VOA figure.
John Webber, head of rating at Colliers International, believes that as soon as a large organisation falls foul of these new appeal restrictions, then things will have to change. He says: "I don't think that big companies will tolerate an overcharge of 5%-15%, so that would almost certainly result in litigation."
More importantly, Webber believes that rateable values might not only be going up too much in London, but down too little in areas where there are falls.
He says: "Some depressed parts of the UK should be expecting 40% reductions in business rates: these latest proposals mean they will only see a fall of 2%. Likewise, we were expecting increases in London, but our models didn't include three-digit increases in two years for some parts of central London."
Webber is not just critical of the way transitional relief is not more generous, but also questions why those whose rates go down will have to wait several years to see the full benefits (transitional ‘relief' works both ways) .
He says: "By limiting the downward transition for much of the country, depressed areas already buckling under their business rates bills will struggle to see the much-vaunted government ‘fairness' in these business rates figures."
Webber's words reflect a long-held dissatisfaction by both businesses and property specialists. Clearly nobody likes paying hefty bills, whether for rates or anything else, but there has long been a sense of unfairness about rates. This is largely because current rates levels were set in April 2008. This preceded a widespread drop in rents in the wake of the financial crisis, which meant that a lot of hotels and restaurants, along with other businesses, felt they were paying more than they should for several years.
David Sutcliffe, director and head of professional services at Fleurets, says: "Part of the difficulty is that we have had a seven-year cycle this time. The two valuation dates are April 2008 and April 2015; London has been a bubble on its own, and the arrangements on transitional relief and the right to appeal are not particularly clear."
Not only is the revaluation likely to be costly for some in the hospitality business, but it seems it is to be confusing for just about everybody.
How business rates are calculated
Business rates are simple in principle but complicated in practice. The simple part is that they are straightforwardly based on what the Valuation Office Agency (VOA) believes is the rental value of the building you occupy. This is why a bigger building in a more prestigious area pays more rates than a small building in a poor one.
But it quickly gets more complicated. The VOA looks into business turnover and the type of service provided by hotels. If turnover is higher and services are more comprehensive it is likely to conclude that the rateable value will be higher than it otherwise would, even if the hotel is in an area that doesn't normally charge high rents.
The timetable of how business rates are assessed can also be less than straightforward. They are changed, in theory, every five years. But the government can delay business rate changes and it did so this time around, so the new business rates this April will come into force after seven years, not five.
A further complication is that the rate you pay is not based on the rental value of your building now, but as of a specified date in the past.
Assessment is also a variable process, even if the aim is just to see what your open market rentable value might be. The variability is because the VOA can look at various measures to assess what that rent might be. This includes trading potential, so your rates bill will take account of the number of bedrooms you have and whether you offer a bar and restaurant as well as just bed and breakfast.
Once the rateable value is arrived at by the VOA those values are used by councils to calculate bills for each building. Those who face a large increase may be eligible for a lower payment for two years (this is known as transitional relief) and if your rentable value is judged to be less than £1,000 a month you may be able to avoid rates altogether through small business rate relief.
If a ratepayer believes that the valuation is wrong, they will be able to challenge it from 1 April.
Eccleston Square hotel
Running a hotel in an elegant building in central London has obvious attractions, but it also has its price. In 2017 that can include the doubling of business rates, as the 39-bedroom Eccleston Square hotel in Belgravia is discovering.
Family-owned and run day-to-day by brother and sister James and Olivia Byrne (above), the hotel will see a 122% increase in its bill over the next five years. In absolute terms that means an increase from £63,000 this tax year to £139,880 in 2021.
As James points out, there is not even the comfort of transitional relief limiting the increase any more. Because of the rise in the rateable value of the hotel, its transitional relief rate has now been put up to 42%, which means that the initial jump in the rates bill will be from £63,000 to £96,000 in year one.
He says: "This is going to have catastrophic effects not just on individual businesses but also London as a whole."
For the Eccleston Square hotel it means that the wages bill will have to be cut, with six or seven staff being made redundant, more than a third of the current workforce. "The rise in business rates is by far the scariest, biggest worry we have going forward," adds James.
Even though he loves London, he says that it might mean the family considers
operating in another country, perhaps the US, where the tax regime is a little friendlier to entrepreneurs.
The family have already moved their business once. Until 2007 they were hoteliers in Paris, when they sold up and came to London.
James says: "Yes, we are considering moving from London. In one way I wouldn't want to because I love it; it's a global city and it's a magnet for everyone and everything. But there seems very little appetite to support small businesses in any way, so we have to be realistic. And entrepreneurs like us do have choices nowadays. It's an increasingly global world."