UK: When Two Does Not Become One

Last Updated: 28 October 2015
Article by Claire Haynes

The recent Supreme Court decision in Woolway (VO) v Mazars LLP is likely to increase the business rates burden for occupiers of premises on multiple floors of a building or in adjoining units.

Business rates are a tax on property and not persons or businesses.  Each property is individually identified in the rating list and assessed separately.  Mazars demonstrates that this rationale is at the heart of the current business rates crisis and its detrimental effect on businesses. 

Until the Mazars case, a ratepayer holding two or more leases of floors within a multi let building would expect the interest to be listed as one hereditament on the ratings list if an essential functional link existed between the floors, for example the same business was being carried out on each floor of the building. This was the case whether or not the floors adjoined each other. Consequently the ratepayer received a discount in respect of their rates liability which was less for one large hereditament than two separate smaller hereditaments.  The case which established the law in this area involved a bakery business operated from two properties on different sides of a street.  It was ruled that both premises comprised one hereditament for the purpose of the rating list. 

The Mazars case has changed the legal tests to establish the ratepayer's liability for premises occupied by one business on multiple floors of a building or in adjoining units. In Mazars the tenant occupied the second and sixth floors of a London office block under separate leases.  There was a common reception area on the first floor which contained lifts to the other floors.  The Valuation Officer initially entered the two floors as two separate hereditaments on the rating list.  This was appealed by the tenant and the matter was challenged by HMRC all the way to the Supreme Court.  The Supreme Court unanimously ruled that the floors demised in the two leases should be treated as two separate hereditaments.  The Court set out criteria to determine whether or not a tenant in occupation of two or more leases of non-contiguous floors in a building is a ratepayer for one or more hereditaments. 

Three tests were established by the Court:

  • The geographical test – if the premises can only be accessed through another property (such as a lift in the common parts) then they are separate hereditaments.
  • The functional test – this enables two spaces that are geographically distinct to be treated as a single hereditament where the use of one is necessary to the enjoyment of the other.  The key question is whether the parts of the property could be used without each other, for example, could the premises be let separately?
  • The objective necessity test – the character of the property and whether the property itself constitutes a number of hereditaments.  This is to be determined by the Valuation Officer on an objective basis.

The Court clarified that premises without an interconnecting staircase or lift passing between two floors on consecutive levels are to be treated as separate hereditaments in the same way as premises which are not on consecutive floors.  The result is that premises which do not interconnect directly are likely to be listed as separate hereditaments on the ratings list.

The decision in Mazars is detrimental for tenants as it is likely to produce higher rates liabilities.  The case also creates an artificial distinction rather than a holistic approach to the way in which businesses are occupying their premises. 

Following this case, if there are large savings to be gained on rates liabilities from an assessment that several floors or units are a single hereditament, tenants may consider altering properties on adjoining floors so that they are directly interconnected.  In the case of an office block, this could be through the installation of staircases or lifts which interconnect different floors of the business and which cannot be used by the tenants of the building.  Tenants may also choose to take a demise of certain staircases if the layout of the building lends itself to this, in order to demonstrate that the premises are geographically interconnected.  This might prevent the premises from being let separately which was an important consideration in the Mazars case.  It is hoped that the Valuation Office will issue guidance on the detail as to what can create a direct interconnection between premises.

Many businesses such as traditional retailers with a strong presence on the High Street are calling for major reforms to the non-domestic business rates system.  Business rates are now such a significant overhead they are causing some businesses to close down and many businesses which are dependent upon having a wide network of properties are struggling to survive.  Often online businesses have a small number of properties and so there are complaints that our antiquated business rates system is no longer fit for purpose as it does not create a level playing field on which online businesses and businesses with a large property portfolio, such as High Street retailers, can compete equally and both thrive.

The Government is currently considering evidence following its review of the business rates system and we are promised the results by the 2016 Budget.  The Conservative manifesto said that they would overhaul business rates by 2017 and so we eagerly await the details of the outcome of their review.  It is by no means an easy task to produce a system which fairly and sustainably taxes businesses based on property values rather than a business based tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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