Some good news (at last) for business rate payers in England
21 January 2019
On 1 November 2018 the Rating (Property in Common Occupation) and Council Tax (Empty Dwellings) Act 2018 (Act) received Royal Assent. The Act will apply to England only. It was introduced in response to the controversial decision of the Supreme Court in Woolway v Mazars in 2015. The title of the Act doesn’t sound exciting but it may save some businesses money by reversing potential increases in their liability to business rates. Before we look at what the Act does, let’s remind ourselves as to why the Government felt compelled to step in and legislate
The position before Mazars
Prior to the Mazars case, the valuation officer’s (VO) long standing rating practice (which was widely accepted and understood) was to generally treat contiguous properties as a single hereditament when occupied by the same person and non-contiguous properties as separate hereditaments. So if a business occupied two adjoining floors of a building or two rooms separated by a wall only, they received one rates bill. If it occupied two floors separated by another floor used by another business or they occupied two rooms on either side of a common corridor, then they got two bills.
There were some exceptions to these general principles. For example, if contiguous properties were used for wholly different purposes they could be treated as separate hereditaments and two non-contiguous properties separated by a common area could constitute a single hereditament if a sufficiently strong functional connection (which could be tested by asking whether the two properties could reasonably be let separately or not) could be shown to exist between the two. The Mazars decision did not alter these exceptions.
The Mazars case
The case involved an eight storey office block with a covered atrium, a common reception area on the first floor and a central lift serving floors one to seven. Mazars occupied two floors (levels two and six) under two separate leases.
The VO entered each floor in the rating list as a separate hereditament; with floors separated by other floors in different occupation, this was in line with then normal practice. Mazars applied to the Valuation Tribunal (VT) to have the floors entered as a single hereditament, claiming they were functionally interdependent. The VT agreed that the two entries should be merged and treated as a single hereditament. The VO therefore appealed to the Upper Tribunal (Lands Chamber) who upheld the decision of the VT. The Court of Appeal followed suit so the VO appealed to the Supreme Court.
Introducing the ‘staircase tax’
The Supreme Court sided with the VO, but it was its broader analysis of the treatment of contiguity which led to the controversial change in VOs rating practice.
The Court took the view that the starting position should be that separate units of properties in a shared building should be treated as separate rating units and receive their own rates bill irrespective of whether they are in the same occupation and are contiguous.
Lord Neuberger said “Normally at any rate….a hereditament is a self-contained piece of property (i.e. property all parts of which are physically accessible from all other parts, without having to go onto other property), and a self-contained piece of property is a single hereditament”.
The Court referred to a primary test in determining what a hereditament is for rates purposes as being the geographical nature of the properties and whether those properties would form a single unit on a plan. The other test which may, in certain circumstances, be relevant is functionality which can depend on the use that is or might be made of the properties. This could enable two spaces, whilst geographically distinct, to be treated as a single hereditament where the use of the one is necessary to the effectual enjoyment of the other.
The impact of Mazars
Following the decision, VOs were generally obliged to assess two contiguous properties in the same occupation as a single hereditament only if both parts were physically accessible without having to go onto other property or through common parts. As a result, many businesses who had properties previously valued as one suddenly found themselves having to pay business rates on more than one property.
There were further damaging implications arising from the decision:
- the valuation of linked properties as a single hereditament often results in a ‘quantity discount’ for the ratepayer. Many of the businesses whose overall ratable value had risen will in effect have lost a quantity discount; and
- small business relief is only available on one property per business which meant some businesses had to pay business rates on additional properties even if there had been no occupational change.
The local authorities, on the other hand, found themselves with an unexpected windfall of additional rates.
The decision received widespread negative media coverage and quickly become dubbed the ‘staircase tax’. As a result, in the Autumn 2017 Budget, the Government sought to address the situation by reversing position.
What does the Act do?
It retrospectively reinstates the position on business rates for contiguous properties which applied before the Mazars decision. VOs will now apply one rating assessment to contiguous business properties occupied by the same ratepayer, provided that they are not used for wholly different purposes.
In order to be considered contiguous under the Act, some or all of a wall or means of enclosure of one must form part of a wall or means of enclosure to the other, or if on consecutive storeys of the same building some or all of the floor of one must lie directly over the ceiling of the other.
Buildings which have more than one occupier, and where the parts in the same occupation are not contiguous will continue to be treated as separate hereditaments.
Affected businesses can ask the Valuation Office Agency to recalculate valuations so that their bills will be based on previous practice backdated to 1 April 2010.
The decision in Mazars caused disparity between businesses occupying the same amount of space depending on how they occupied it.
The response by the Government is certainly a welcome victory for business ratepayers, although the issue of whether or not properties comprise a single hereditament or not for the purpose of business rates will still turn on the facts of each case.
VOs must follow legislation and case law (which will continue to play a significant role due to the very general statutory definition of a hereditament) in considering how they arrive at a rateable value for a non-domestic property and also how they determine the dividing line between one property and another. The Act, however, means it is more likely that they will now be treated as one property than was the case post Mazars.
We await to see whether the position in Wales will change in the future in line with the Act. Until it does, the principle in Mazars relating to contiguity will continue to apply in Wales.