Serviced office operators left in rates uncertainty

Business rates as a topic has a bit of a reputation for being dull, with rating surveyors living in a hypothetical world of ancient caselaw and legislation that barely changes from rating list to rating list, right?

How wrong you are. We’re in a continued period of change with some very interesting case-law developments and new legislative requirements on the horizon.

First up is Ludgate House…

I’ve written about this previously; it relates to an empty rates mitigation case where the landlord ‘let’ the building to a company that then occupied the building with live-in guardians in an effort to remove empty rates liability from the landlord and instead pay council tax at a much lower cost.

To cut a very long story short, the courts ruled in 2021 that the owner remained liable for full business rates. The case has had rather an unexpected twist and is now being used to support a change in policy on serviced offices.

Serviced offices typically have separate assessments for each lettable room. This allows the majority of tenants to secure Small Business Rates Relief. The landlord gets the benefit of empty rates when the room is vacant and the overall rates liability on the building is kept as low as possible to help reduce operational cost.

So what’s changed? The Ludgate case brought into question who was in paramount control of the building, and it was deemed to be the landlord. The Valuation Office has now used this precedent to argue that the serviced office operator remains in paramount control of the entire space and should therefore be liable for a single rating assessment. This massively increases operating costs and reduces the ability to claim empty rates relief, which will ultimately lead to an increased cost for tenants.

The fallout from this is much wider than just a changed rates bill

The VO has a statutory obligation to maintain the rating list and follow case law, and so is compelled to backdate the reconstitution of rating assessments to 1 April 2017. The operators obviously don’t want this as it creates a large, backdated liability. The council’s don’t want it either, because despite increased revenue they will have to deal with the car crash of amended bills over six years and refunds to occupiers.

The common-sense approach would be to merge the assessments from 1 April 2024, the start of the new rating list, but the VO’s statutory obligation gets in the way of this.

If the VO amends the 2023 list then they are compelled to backdate. The VO has an extra 12 months to amend the 2017 rating list so any action whatsoever would need to be delayed until after 1 April 2024 to prevent backdating into the 2017 list.

Where does that leave serviced office operators?

Simply put: in a period of uncertainty until after 1 April 2024.

There could be a way to argue that they should remain as separate assessments which we’re exploring with our legal team.

This leads us nicely to another proposed change. The VO has announced that owners/ratepayers will have a statutory obligation to report property alterations, occupation changes and rent changes within 30 days, plus sign an annual confirmation statement to confirm everything is correct. Fines will apply for non-compliance.

This is to be introduced “some time over the duration of the 2023 rating list”. This is all designed to maximise rates revenue so why the delay? It’s because of the VO requirement to backdate – much easier and cleaner to introduce the obligation after 1 April 2024 as it simplifies how far back the VO can go.

This would actually be very sensible. Famous last words. The devil’s in the detail so let’s see….

And finally, the case of Ascot House, Maidenhead

There has been discussion underway for years around the impact on CAT B fit-out costs on rateable values. New or substantially refurbished buildings are typically finished to CAT A spec only, requiring tenants to come in and fit out their own CAT B work – partitioning, kitchens, server rooms, meeting rooms etc to their spec.

The tenant at Ascot House spent £3.4m on fit-out including furniture, £1.6m of which was alterations to the building. The VO argued that this should increase the rateable value. This case has wound its way through the system until eventually the Upper Tribunal agreed with the VO and have increased the RV to reflect the expenditure. You can see where this is heading when combined with a new statutory obligation to divulge improvements.

See… business rates is the rock ‘n’ roll of the surveying industry really…