When Finance Minister Derek Mackay announced his 12.5% cap on business rates for the hospitality sector back in February, it was certainly welcome news. The move offered a bit of breathing space to those facing major hikes and the prospect of financial difficulty – and it showed that the Scottish Government had listened to the concerns being voiced by many.
But as with most things in life, and certainly, in business, the reality has not been quite so straightforward. Firstly, the 12.5% cap is actually 14.75% in real terms (with the addition of inflation). Whilst this was stated in a background paper released at the same time as the announcement was made, it only became apparent several weeks later.
The second issue is that the cap is not automatically granted to hotels and licensed premises – it has to be applied for by each business under European Union rules on State Aid. This will have come as a surprise to many as it was also not made clear initially but only came to light around the time people were starting to receive their new rateable values (RVs).
There appeared to be a lack of consistency in terms of how the application process would work in different local authority areas. Guidance on implementing the cap was only issued to councils on March 16 – leaving them just over two weeks to prepare before the new RVs came into force on April 1. In the meantime, some had created an online application form, while others were advising people to write a letter.
“In some cases we are looking at a three-fold increase and even for a multi-national chain of hotels that is a shock that is very difficult.”
Concerns have also been raised about whether hoteliers would be expected to pay at the new rate until the relief was applied – which would have left many people in just as bad a situation as they faced prior to the announcement of the cap. Initially, some local authorities said they anticipated recalculating bills once applications had been made, with any reduction reflected in future payments. However, the Scottish Government has since stated, “While it is for councils to administer the rates relief scheme, we anticipate that businesses will be able to apply for the relief and have this applied to their bills before they have to pay any portion of their business rates…We have been clear from the outset that it was a 12.5% real terms cap, which equates to a 14.75% cash increase.”
So what do the industry experts make of the situation?
Martin Clarkson, a partner at international property consultants Gerald Eve, says the cap is unprecedented – and that it suggests the revaluation process is not working as it should do.
He says, “This is pretty unprecedented in terms of a relief that’s been granted only to a specific sector and that in itself tells me that something has broken down in the process in terms of the revaluation of hospitality subjects. The starting point is turnover and that is a flaw.
“Turnover might be on an upward trend but costs and other factors are also on a steep trend upwards. If turnover is up by 50%, that doesn’t mean to say that the business is 50% more profitable and in fact, profit margins are probably less than what they were in 2008.
“In some cases, we are looking at a three-fold increase and even for a multi-national chain of hotels that is a shock that is very difficult, if not impossible, to absorb. Hotels are a main driver of wider business activity and, particularly in places like Edinburgh, one of the main drivers of growth and they feel that they are being penalised.”
He adds, “We are one of only two agents who have been dealing with the Scottish Assessors Association at a national level in terms of the valuation approach on hotels. We’ve been working very much at that level as well as getting our files ready for individual client cases.
“There have been two misconceptions in the sector: firstly that this relief lasts for the whole of the revaluation but it doesn’t – it only lasts for one year – and secondly that, because of this cap lasting for a year that people can sit on their hands in terms of the appeals but again that is not the case. Any appeals will have to be lodged before September 30 this year or the right of appeal will be lost. That deadline has not been shifted so if people miss it they could be in for a shock for the following four years.”
Martin underlines the importance of using hotel specialists when it comes to challenging the new RVs. He says, “Hotel business rates are typically the second highest outgoing after salaries. A dedicated hotel rating specialist is critical. Our clients retain us for our professionalism and ability to undertake a rigorous review of their hotel’s rates liabilities.”
Tim Bunker, a Rating Consultant at chartered surveyors Graham + Sibbald, agrees that hoteliers were left shocked and seriously concerned by the new RVs. He also emphasises the fact that the most recent revaluation was carried out in very different economic conditions compared to the previous one in 2010. This is nowhere more clearly illustrated than in Aberdeen, which has been badly hit by the oil and gas downturn in the interim.
Tim says, “The initial draft rateable values announced by the Assessors towards the end of 2016 caused a considerable scare in the hospitality sector, particularly hotels. The cancellation by the Scottish Government of the 2015 Revaluation had led to the previous rateable values being considerably out-dated. The rental evidence adopted by Assessors is set by statute as being two years prior to the effective date of the new values. Therefore the 2010 Revaluation was based on 2008 rents and the 2017 Revaluation is based on 2015 rents – two very different market periods.”
The announcement of the cap is, Tim says, good news in the short term.
He adds, “Initial confusion on those who qualify has been clarified following the release of the Non-Domestic (Transitional Relief) (Scotland) Regulations 2017 which confirmed the specified purposes as including Bed & Breakfast accommodation, chalets, guest houses, hotels, self-catering and timeshare accommodation, as well as public houses, amongst others.
“However, the relief is only available for one year and there has been no confirmation of the position next year. It is also subject to the EU State Aid rules, limiting overall aid to 200,000 Euro. This may cause issues for some operators who receive other State funding.
“Each ratepayer who receives a Valuation Notice can appeal the new value prior to the end of September 2017. With the unknown issue on further rates relief, it is vital that the base level of the rates liability, that is to say, the rateable value is challenged to ensure it is fair and reasonable as it will remain in place, probably until 2022.
“The input of our Licensed and Hotel team is invaluable in challenging rateable values, and the Assessors basis of valuation, where market evidence is related to the turnover potential of the business.”
Peter Seymour, Licensed Trade Specialist at Graham + Sibbald agrees, adding, “It is vital the ratepayer seeks the advice of an expert in appealing their rateable value as this is the only element of the rates liability that is open to challenge”.
Graham + Sibbald have been involved with submissions on behalf of the hospitality sector to the Barclay Review in line with other sectors, but Tim believes the Review is unlikely to have a significant effect on this Revaluation timetable, or values because it is not due to report until July.
Willie Macleod, British Hospitality Association Director for Scotland, sees the cap as a positive indication that the Government has listened – and more importantly acted on – the concerns raised by the hospitality sector.
He says, “We are very pleased to have had the cap and have advised all our members that they should make application to their local authority for it.
“There has been a bit of a backlash in some quarters about the figure being 14.75% instead of 12.5% and I think it is unfortunate that wasn’t made crystal clear at the time. However, I think to get a cap even as an interim measure for this year can only be regarded as successful and positive in that the government has clearly listened to the concerns expressed by the industry through BHA and others.”
He adds, “There is an ongoing dialogue and we await the output of the Barclay Review this summer and we would hope that the report takes account of our concerns, which we believe are valid. If Barclay agrees with us that these concerns are valid we would hope that the Scottish Government will take steps to ensure we don’t find ourselves in the same position at the beginning of the 2018/19 financial year.”
Whatever uncertainties the future holds and however this issue plays out over the next few months, two things are clear at least.
“Any appeals will have to be lodged before September 30 this year or the right of appeal will be lost. That deadline has not been shifted so if people miss it they could be in for a shock for the following four years.”
Firstly, hoteliers must apply for their 14.75% cap and secondly, anyone who is not happy with their new RV must get their appeal in before September 30 – or face the fact that they may be stuck with it until 2022.