In August 2017 a number of articles appeared criticising a development dubbed the ‘staircase tax’. The BBC reported:
- …business rates in England and Wales are being set depending on how many rooms are being used and how they are linked.
- Those with more than one office linked by a communal lift, corridors or stairs are being charged more.
What is the ‘staircase tax’?
The case affects how the Valuation Office Agency (VOA) values properties in England and Wales. Where a business occupies, for instance, more than one floor of an office block, and access between the floors is via communal areas, the VOA must treat those two floors as separate properties for business rates purposes. They must have their own rateable value (the value assigned to a property to calculate its business rate liability) and rate bill. All non-domestic properties in England have their own rateable value: see our Business rates briefing for more details. The judgment can also impact on adjoining offices or even meeting rooms linked by a communal corridor.
Previously, valuation officers had the discretion to value such areas as a single property, if this reflected the actual use by the occupier. They could also choose to value two areas separately – for instance, if separate leases were in place. The judgment removes this discretion.
This issue has come into particular focus in late 2017 for two reasons. First, in April 2017, the VOA’s latest revaluation took effect. The VOA applied the effects of the judgment when setting new rateable values for properties in England and Wales; it cannot make further adjustments in England after 31 March 2018 (without the assent of the ratepayer).
Second, the VOA has managed to identify the likely extent of the change’s impact. On 13 September 2017, in response to a letter from Nicky Morgan MP, chair of the Treasury Select Committee, the VOA stated that:
- 50% of affected businesses have seen their overall rateable value rise
- 13% have experienced a rise of over 10%
- 32% have seen their overall rateable value reduce
The VOA has produced guidance for ratepayers on the implications of the case, including a number of examples of consequences of the ruling for particular situations.
What effects has the case had?
Possible impacts of the court’s decision include the following:
- Many ratepayers will find themselves with separate valuations for properties that had previously been valued as one. For instance, where a retailer rents a shop and a car parking area a short distance away, these may have been valued together previously
- Valuation of linked properties as a single ‘hereditament’ (unit of property) often results in a ‘quantity discount’ for the ratepayer. Many of the 50% of businesses whose overall rateable value has risen will, in effect, have lost a quantity discount
- Small business rate relief is normally only available on one property per business (any extra properties must be comparatively low in value)
Thus a business that was eligible for small business rate relief, but is now deemed to occupy more than one property may, as a result of the judgment, have to pay business rates on its additional ‘properties’ even if there had been no physical change. Similarly, a property that is ‘newly created’ because of the change might not be eligible for other reliefs that the previous property received.
In law, the change took effect from 29 July 2015 (the date of the judgment). This means that, in addition to changes going forward, in many cases backdated bills have been issued to replace single valuations with multiple ones as of that date (or other dates, depending on the circumstances).
Could the situation be reformed or reversed?
A number of commentators, and some MPs, have called for the effects of the judgment to be reversed. This is not straightforward. The VOA is an independent public body, and the Government cannot instruct it to ignore case law. A reply to a Parliamentary Question in October 2017 stated:
- The Government is aware of the change in the Valuation Office Agency’s approach to assessing units within buildings of multiple occupation, which follows the Supreme Court judgement in the Mazars v Woolway case. The Government is considering the implications of this judgment.
This judgment affects how the VOA values properties. The responsibility for billing and collecting business rates remains with ‘billing authorities’ (district and unitary councils). It would be possible in theory for billing authorities to give discretionary discounts to businesses struggling as a result of the change – or for them to write off or reduce backdated bills. But such a decision must, in law, “have regard to the interests of persons liable to pay council tax set by [the authority]”. This may be too high a bar for most billing authorities to offer discounts.
It would be possible to adjust legislative provisions to allow a broader interpretation of valuation practice. For instance, in Northern Ireland, article 38 of the 1977 Rates Order provides that the valuation officer has discretion to value contiguous properties as a single property if they are occupied by the same business. Moreover, comments in the original judgment suggest that there may be scope for further case law developments in the future concerning adjoining units of property.
At the 2017 Budget, the Government committed to legislating to reverse the impact of the case:
“[The Government will legislate] retrospectively to address the so-called “staircase tax”. Affected businesses will be able to ask the Valuation Office Agency (VOA) to recalculate valuations so that bills are based on previous practice backdated to April 2010 – including those who lost Small Business Rate Relief as a result of the Court judgement. The government will publish draft legislation shortly… [Budget, p34]”
Thanks to Andrew Hetherton, Gary Watson and Steve Perkins for comments on an earlier version of this blog.