Alan Cook: Proposed rates reforms a boon to the commercial property sector

Alan Cook

Scotland’s commercial property sector stands to benefit from proposed reforms to business rates – on which the Scottish government is currently consulting, writes Alan Cook.

The Scottish government’s consultation paper sets out its proposed approach to various aspects of the Barclay Review of Scottish business rates which require primary legislation. These include a move to three-yearly revaluations, which will be based on the property’s rateable value one year before the revaluation takes effect; a pilot scheme giving certain local authorities a new power to increase rates paid by out of town or predominantly online businesses; and the removal of automatic charity rates relief for independent schools.

The government is also seeking views on whether to include the new ‘business growth accelerator’ scheme in primary legislation, or whether to continue to renew this annually by way of secondary legislation. One of the central recommendations of Ken Barclay’s review, the business growth accelerator scheme exempts new Scottish commercial properties from business rates until one year after the property is occupied by its first tenant.

Finance secretary Derek Mackay said that the measures set out in the consultation would “ensure we maintain a competitive advantage for Scottish ratepayers”. The minister said the Barclay recommendations strike the right balance between offering a competitive and sustainable taxation environment while delivering sufficient resources to fund public services.

In April, the government introduced a number of measures which it claims will underpin that competitive advantage. The growth accelerator and 100 per cent relief for new build properties until first occupied is aimed at supporting speculative development and encouraging improvements to building stock, and it is hoped will not only attract new investment into Scotland, but also incentivise new developments.

This concession responds to concerns from the commercial property industry that speculative developments were being hampered because developers were concerned that, if tenants were not secured quickly, they would be liable for paying rates on an empty building.

Another significant proposal is reducing the rates revaluation cycle on business premises to three yearly. Non-domestic premises including shops, offices, warehouses and factories have traditionally been revalued for rates purposes once every five years, based on rental values at a date two years before the date the revaluation takes effect. From 2022, as recommended by the Barclay Review, the Scottish government intends to increase revaluations to once every three years, based on rental values at a date one year before the revaluation takes effect.

This is viewed as a welcome attempt to reduce the disconnect between rateable values and real-life property values. Following the financial crisis, many business owners complained of an alarming disparity in rates they had to pay based on older property valuations compared to post-crash values and the impact this had on cash-flow. A shortening of the revaluation timeline will provide a closer correlation between rates payable and current property values and should avoid some of the nasty financial shocks which have emerged after less frequent revaluations took place.

Business rates relief will be restricted for listed buildings to a maximum of two years from 2020, as recommended by the Barclay Review, “to encourage bringing empty property back into economic use”. After two years, 90% rates will be payable in line with other types of empty property, while listed buildings will at least not suffer the 10% surcharge which will be applied to other properties which have lain empty for longer than five years.

The government’s Barclay Review implementation advisory group recommended that property in the planning process be excluded from these changes; however, the government has ruled out doing so. It believes “this could have consequences if the planning system were abused with properties ‘parked’ in the system to avoid payment of local taxation”. Instead, local councils could be given discretion on whether to apply the changes in order to reflect local circumstances and the consultation is seeking views on this proposal.

We await to see what emerges from the consultation process and makes it on to the statute book, but on the whole, the Scottish government’s refresh of our business rates system is to be welcomed.

Alan Cook is a partner at Pinsent Masons