Non-Domestic Rates (Coronavirus) (Scotland) Bill

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The Non-Domestic Rates (Coronavirus) (Scotland) Bill was introduced in the Scottish Parliament on 14 December 2021.  The Scottish Parliament’s Local Government, Housing and Planning Committee has been designated as the committee that will lead Parliamentary scrutiny of this Bill.  The Bill is accompanied by a Policy Memorandum, Explanatory Notes and a Financial Memorandum

This blogpost considers the context for the Bill and its purpose.  It also considers the related secondary legislation that has already been passed by the Parliament.

What are non-domestic rates?

Non-domestic rates (NDR) (or “business rates”), are a property tax based on the rateable value of a property.  The rateable value is derived from the net annual value which in turn is based on the annual rent that a property would attract on the open market.  NDR are payable on most non-domestic properties, although many will be eligible for reliefs which will reduce the amount payable (and can reduce the rates bill to zero).

The net annual values and rateable values for non-domestic properties are assessed periodically to reflect changes in the general level of rents including those caused by economic factors.  These revaluations are undertaken by independent assessors.  For the vast majority of properties, the rateable value is based on net annual value, but some adjustments are made for special provisions apply to some particular types of property, including mineral subjects and stud farms.  

Current rateable values are based on the 2017 revaluation, which was based on property values as at 1 April 2015.  The next revaluation will take effect on 1 April 2023, based on property values as at 1 April 2022.

All non-domestic properties in Scotland are registered on the valuation roll.  The valuation roll is a public document and includes details of the proprietor, tenant or occupier as well as the property’s rateable value.  There are over 250,000 non-domestic properties registered on the valuation roll.

NDR are an important source of revenue for local authorities.  In 2022-23, they are estimated to raise £2.8 billion, although this includes the effect of a continued package of rates reliefs reflecting the ongoing impact of the coronavirus pandemic.  In future years, they are estimated to generate in excess of £3 billion in revenue.

Appeals to property valuations

If an owner, tenant or occupier disagrees with the rateable value that has been entered on the valuation roll for their property, they can lodge an appeal.  This can be done within six months of the revaluation date, or within six months of a change of ownership or change to the rateable value.  If it is more than six months since a revaluation, change of ownership or change to the rateable value, then an appeal can only be lodged on the grounds of a “material change of circumstances” (MCC) or an error. 

MCCs are defined in section 37 of the Local Government (Scotland) Act 1975. Examples include physical alterations to the property (e.g. extensions or demolitions) or major alterations in the local area such as the Edinburgh Tram Works.  Under changes introduced by the Non-Domestic Rates (Scotland) Act 2020, the definition of MCC  was amended with effect from 2 April 2020 to exclude changes to general economic circumstances, meaning appeals can no longer be considered on these grounds.  The rationale is that the impact on property values of general economic factors is taken into account at revaluations, which are now undertaken every three years (rather than every five years, as previously).   Also the ‘tone date’ for revaluations (the date at which property values are assessed) is now just one year prior to the date at which the revaluation takes effect (rather than two years, as previously) which means valuations are more closely aligned to current market values.  For example, the revaluation that will take effect on 1 April 2023 will be based on property values as at 1 April 2022.

Appeals data indicate that properties with a higher rateable value are more likely to be the subject of appeals.  Professional advisers often handle appeals for clients in relation to property portfolios.  

Appeals during the coronavirus pandemic

Since the onset of the COVID-19 pandemic, there have been a large number of MCC appeals lodged and it is assumed most of these are on the basis that COVID-19, or COVID-19 restrictions, have had an impact on the value of the property.  Such an appeal might, for example, be on the grounds that social distancing measures, requirements to close businesses, or increased home-working have affected the property’s valuation, either permanently or temporarily. 

According to the Policy Memorandum that accompanies the Bill, appeals relating to around 49,400 non-domestic properties have been lodged since the outbreak of the pandemic.  (Note that the total number of appeals is considerably higher, but many of the 2020-21 appeals related to properties that had already had an appeal lodged in 2019-20, so the 49,400 figure adjusts for any double-counting.)  By comparison, in 2018-19 only 5,774 ‘running roll’ appeals were lodged (that is, appeals that are not based on the 2017 revaluation).  Although some of the 49,400 appeals might not be linked to COVID-19, the Scottish Government consider it likely that the majority will relate to such factors, given that the volume of appeals is so significantly higher than in the previous ‘non-COVID’ period.

The 49,400 properties that are the subject of appeals have a combined rateable value of £3,929 million.  The Financial Memorandum that accompanies the Bill estimates that these properties correspond to  an estimated total of £1,117 million in net rates income in 2020-21.

Appeals need to be considered within certain timescales (and these timescales were amended in the light of the pandemic).  For MCC appeals lodged between 1 January 2020 and 31 March 2021, these extended deadlines mean that a decision could be expected to be reached by 31 December 2022.  Some professional advisers had been encouraging ratepayers to consider lodging such appeals, although some had also noted some uncertainty as to whether these would be successful. 

What is the purpose of the Bill?

This Bill, if passed, would mean that no account can be taken of any matters relating to coronavirus when determining the net annual value or rateable value of a non-domestic property.  This means that, for any appeals lodged, a change in rateable value could not be considered on the grounds that the valuation of a property has been affected by the coronavirus pandemic with effect from 2 April 2020.  This is the same date from which the change to the definition of an MCC became effective and MCC appeals on the grounds of general economic circumstances were ruled out.

The Scottish Government is of the view that any impact on rental values arising from COVID-19 or COVID-19 restrictions forms part of general market conditions and therefore should be considered as part of the wider revaluation.  As noted above, the next revaluation will take effect on 1 April 2023, based on property values as at 1 April 2022.

The ruling out of coronavirus considerations does not apply to changes to the physical state of a property. The Policy Note gives the example of someone who started working from home during the pandemic and created an ‘office’.  Decisions on whether this is a rateable non-domestic property would not be affected by this legislation despite the fact it would not have occurred had the pandemic not occurred.  Similarly, an extension to a non-domestic property carried out during the pandemic may still lead to a change in the rateable value.

Related secondary legislation has already been passed by the Scottish Parliament

The Valuation and Rating (Coronavirus) (Scotland) Order 2021 (S.S.I. 2021/445) was laid in the Scottish Parliament on 22 September 2021 and came into force on 1 December 2021. This Order specified that the rateable value of properties in the 2017 valuation roll cannot take account of any matter arising on or after 1 April 2021 that is directly or indirectly attributable to COVID-19.

However, the secondary legislation (a Scottish Statutory Instrument) could only apply from 1 April 2021.  For dates prior to 1 April 2021, primary legislation (an Act of the Scottish Parliament) was required.  This Bill therefore makes similar proposals to the secondary legislation, but covers the period from 2 April 2020.  The 2021 Programme for Government had set out plans to introduce such legislation.  Primary legislation is also required to extend the effect of the changes to net annual values, as well as rateable values. (The secondary legislation only referred to rateable values.)

The Scottish Government took the unusual decision to introduce secondary legislation prior to this Bill.  Secondary legislation can progress through the Scottish Parliament to a much shorter timescale than primary legislation and was intended to provide clarity and certainty for ratepayers  until primary legislation could be introduced and passed.  However, under Section 6 of the Local Government (Scotland) Act 1975, the secondary legislation could only apply in-year and therefore with effect from 1 April 2021

The secondary legislation was scrutinised by the Scottish Parliament’s Local Government, Housing and Planning Committee at three evidence sessions (26 October 2021, 9 November 2021 and 16 November 2021).  A report was published by the Committee reflecting the outcome of its scrutiny.  The main issues raised are highlighted below.

The primary legislation (if passed) will apply for all dates from 2 April 2020, so it will effectively supersede the secondary legislation, which applied from 1 April 2021.  As such, Section 4 of the Bill revokes the Valuation and Rating (Coronavirus) (Scotland) Order 2021 (S.S.I. 2021/445).

The Scottish Government rationale for changes proposed

As the Policy Memorandum explains, the Scottish Government consider that economic factors that have widespread implications on rental values across a range of sectors and business types should not be dealt with mid-way through the revaluation cycle.  Allowing such factors to be considered during the revaluation cycle would lead to potentially thousands of adjustments to the valuation roll and effectively amount to a ‘shadow’ revaluation.  The Scottish Government argue that such widespread factors form part of the general market conditions which should be dealt with at revaluations when the impact across all properties will be taken into account.

The Scottish Government further argues that coronavirus restrictions have changed so frequently (and continue to evolve) that, if appeals on the grounds of coronavirus were allowed, then rateable values would need to be revised constantly to reflect changes, including for any COVID-19 related intervention or restriction affecting the use or enjoyment of property or the locality. This would create a huge volume of work for assessors.

Furthermore, the Scottish Government note that it has provided a targeted package of business support measures in response to the pandemic, that has been a far more effective and speedier way of targeting support to those businesses affected by the pandemic, including smaller businesses less likely to be able to access the support of professional rating advisers.  In its Policy Memorandum, the Scottish Government states:

“The Scottish Government responded quickly to the coronavirus pandemic to provide, within its devolved powers, a tailored package of financial support for business, including non-domestic rates reliefs, of more than £4.4 billion as at October 2021 . This has provided a quicker, more tailored, coherent and proportional allocation of support than is likely to have resulted from the appeals system given the complexity of the property market, the uncertain nature of the outcome of any COVID-19 appeals in the absence of legislation ruling them out and the potentially long timescales attached to any outcome, the absence of necessary correlation between the property market for a given property and the success or otherwise of the business occupier, and the likelihood that potential successes at appeal would be skewed towards well-resourced ratepayers with professional representation.”

It is also worth noting that, for 2020-21 and 2021-22, all retail, hospitality and leisure businesses received 100% rates relief, so a reduction in their rateable value would confer no benefit for this period.  These businesses will also have received support through a range of other support schemes introduced in response to the pandemic

Finally, it is worth noting that many smaller premises benefit from 100% rates relief through the Small Business Bonus Scheme, so would also gain no benefit from a reduction to their rateable value.  However, premises that are just over the threshold (£15,000) for the Small Business Bonus Scheme 100% relief could stand to benefit from a downward revaluation that would make them eligible for the highest level of relief.

What action has been taken in the rest of the UK?

As explained in the Policy Memorandum, similar action has been taken in other parts of the UK.  In England and Wales, secondary legislation also preceded related primary legislation.

In the Written Statement that announced the UK government’s decision to legislate to exclude Covid-19 from MCCs, the UK government also announced an additional £1.5 billion to fund further reliefs from business rates in the 2021-22 financial year.  The Scottish Government received £145 million in Barnett consequentials as a result of the UK government announcement, which it was able to use as it chose.  These consequentials have since been confirmed, but in advance of the Barnett consequentials being confirmed, the Scottish Government said:

“We anticipate that this will result in consequential funding for the Scottish Government, but at this point we are still waiting for confirmation of when this will be received. Once that confirmation is provided, we remain committed to passing on all business support consequentials through a tailored package of measures for Scottish business during the recovery period.”

As there have been other Barnett consequentials announced since then (in particular, in response to the Omicron wave), it is not possible to directly identify measures that have been taken that specifically relate to this additional funding. In responding to the call for views issued by the Local Government, Housing and Planning Committee, the Scottish Property Federation said:

We believe it is important that the government…uses UK consequential funds flowing from business support schemes, to seek to support businesses impacted heavily by the pandemic, yet thus far unable to benefit from Retail Hospitality, Leisure and Aviation (RHLA) rates relief.

What concerns were raised in relation to the secondary legislation?

Lack of consultation

There has been no specific consultation on this Bill.  The Policy Memorandum refers to extensive consultation with businesses and representative bodies, but this consultation was of a more general nature and not specific to the provisions of this Bill:

“The Cabinet Secretary for Finance and the Economy, the Minister for Public Finance, Planning and Community Wealth, and the Minister for Business, Trade, Tourism and Enterprise have concluded an extensive consultation and engagement exercise with all the major business representative bodies as well as a large number of businesses from a diverse range of sectors and regions across Scotland. Although these meetings were not specifically intended to discuss COVID-19 appeals, they nevertheless presented a comprehensive and constructive opportunity to discuss the Scottish Government’s approach to supporting businesses during the COVID-19 pandemic and the priorities in terms of the next stages of re-opening and recovery.”

In written and oral evidence given to the Local Government, Housing and Planning Committee during their scrutiny of the related secondary legislation, a number of stakeholders raised concerns over the lack of consultation prior to the introduction of the secondary legislation and the Committee reflected these concerns in its report.  The Scottish Chambers of Commerce reiterated this point in written evidence submitted in response to the Committee’s call for views relating to the Bill.

Principles of taxation

This legislation, if passed, will clarify the criteria for NDR MCC appeals mid-way through the revaluation cycle.  During scrutiny of the secondary legislation, many stakeholders raised concerns around this. 

In its written submission responding to the Committee’s call for views relating to the Bill, the Scottish Chambers of Commerce (SCC) referred to its concerns regarding the secondary legislation that has already been passed:

“SCC’s fundamental opposition to the approval of the Order relates to the principle of retrospectively changing legislation to alter the business rates regime which is both inappropriate in the context of a modern and taxation regime and directly counter to the Scottish Government’s own proposals for Scotland’s first Framework for Tax. This view was also shared by the Scottish Property Federation, the Royal Institution of Chartered Surveyors, the Institute of Revenues, Rating and Valuation, CBRE and WYM Rating, collectively representing thousands of Scottish businesses.”

In written evidence submitted in relation to the secondary legislation, the CBRE said:

“To introduce retrospective legislation now to invalidate MCC appeals already made in accordance with the Court’s precedents and decisions seems to me to be a cynical ploy to prevent many ratepayers from receiving some desperately needed financial relief which they would otherwise be entitled to because the basis of rating as a tax is beneficial occupation of property, not business profitability.”

In a letter to the Cabinet Secretary for Finance and the Economy dated 2 August 2021, the Scottish Chambers of Commerce said that, in the view of its members, the policy:

  • is completely at odds with key principles of certainty and fairness in a modern taxation system
  • goes against the main aim of the Barclay review to design a rates system that better reflects changing marketplaces

The SCC had previously described similar action in England as “a fundamental breach on the rights of the ratepayer”.

The Scottish Government’s consultation on Tax policy and the budget, referred to by the SCC in its written evidence sets out the six principles that the Scottish Government consider should underpin its tax policy.  These six principles include ‘certainty’ and ‘engagement with stakeholders’.  The consultation document defines these as follows:

  • Certainty: Taxpayers must know if they are liable to pay tax, the amount to be paid and when it is to be paid. Changes to the tax system should be justified and, where possible, follow a predictable fiscal cycle or published roadmap.
  • Engagement: The public and businesses should understand the tax system and governments must be open and transparent about tax policies and their decision-making, consulting widely. This is crucial for accountability and trust.
Workload issues

A further consideration is that allowing consideration of a large volume of MCC appeals relating to coronavirus would have significant workload implications for the assessors and for the Valuation Committees that consider appeals.  This additional workload would come at a time when assessors are beginning the process of revaluation.

In responding to the call for views issued by the Local Government, Housing and Planning Committee, the Scottish Assessors Association (SAA) noted that there was still scope for considerable additional workload for assessors if property owners chose to appeal for the period prior to 2 April 2020. Prior to 2 April 2020, a different definition of MCC applied (which included general economic circumstances), so this earlier period is not covered by the legislation. The SAA notes that a substantial volume of appeals were lodged in the period prior to 2 April 2020 (including appeals covering the first lockdown period of March 2020). According to the SAA, appeals relating to 40,900 properties with a total Rateable Value of £3,492 million were lodged across Scotland in the period shortly before 31 March 2020.

Appeals on coronavirus grounds that cover the period prior to 2 April 2020 would remain valid, although any changes to valuations that were agreed in relation to these appeals would only apply for the short period to 2 April 2020. From 2 April 2020, the former property valuation would be re-instated. As a consequence, property owners (or their professional advisers) might not consider them worth pursuing.

Financial implications of the legislation

As outlined in the Financial Memorandum for the Bill, allowing MCC appeals on the ground of coronavirus could have a significant impact on NDR income.  The exact impact is difficult to determine as it would depend on the success of COVID-19 appeals. 

The Financial Memorandum notes that the combined rates bill of all the properties for which appeals have been lodged is an estimated £1,117 million in 2020-21.  On this basis, a 50% reduction in rateable values would reduce NDR income by £558 million, while even a 5% reduction would reduce revenues by £56 million.  These are purely illustrative figures as there is no way to determine what the outcome of the appeals would actually be.

However, as the Scottish Government provides a guaranteed amount to local authorities comprising the general revenue grant plus NDR income, any reduction in the NDR income e.g. through successful appeals would require the Scottish Government to provide additional funding to local authorities via an increased general revenue grant to compensate for the reduced NDR income.

In the Programme for Government, the Scottish Government stated that:

“Ruling out COVID‑19 appeals will ensure that the limited public resources that are available are efficiently targeted to support the most affected businesses and sectors in the recovery period.”

The Bill, if passed, would therefore protect the Scottish Government from the risk that successful appeals would reduce NDR income and require the Scottish Government to provide additional funds to compensate local authorities for this loss of income.

Nicola Hudson, Senior Analyst, Financial Scrutiny Unit