The Valuation Office Agency (VOA) recently announced a change to the way in which commercial property will be valued for business rates purposes where a business is in occupation of two or more separate spaces within a building. This change is likely to result in a business rates increase for affected businesses and will be applied retrospectively.
How do business rates work?
Business rates are a property tax which is assessed on the basis of the number of property units which a business occupies. Where premises are assessed as a single unit, quantum allowances are available. This can significantly reduce the overall rates liability. Businesses are therefore keen to have their premises assessed as a single unit whenever possible.
The decision in Mazars v Woolway
Mazars occupied the second and sixth floors of an eight-storey tower block. They argued that these two floors should be treated as a single rateable unit for business rates purposes. The VOA contended that, as the floors were not contiguous, they should be treated as two separate rateable units.
Overturning the decisions of the Upper Tribunal and the Court of Appeal, the Supreme Court agreed with the VOA that the two floors should be rated separately. In obiter comments the President of the Supreme Court stated that "where premises consist of two self-contained pieces of property" it would require "exceptional facts before they could be treated as a single hereditament". The effect of this is that wherever separate floors are capable of separate occupation and the occupier needs to travel over communal areas to reach another floor, these floors should be rated separately.
What are the practical implications of this decision?
It is clear from the decision in Mazars v Woolway that where a tenant has a lease of non-adjacent floors in a building, these will be rated separately.
A far more common arrangement is where a tenant takes a lease of several adjacent floors of a building, with the access between these floors being over communal stairs and lifts. For business rates purposes the VOA has previously valued all of the adjoining floors held by a single tenant as one property.
However, the VOA has now stated that, in light of the decision in Mazars v Woolway, it will treat different areas of the same building, where these are connected only through communal areas, as separate premises for business rates valuation purposes. This also applies to unconnected adjacent units, for example two neighbouring warehouses on an estate where access between them is over a communal yard.
The following diagrams illustrate how this is expected to be applied in practice:
If a building has a single occupier it is treated as a single property for business rates purposes, even if the property is let on multiple leases of separate floors.
However, where a building has an owner/occupier who lets out one floor to a tenant (and the owner/occupier gets between the floors he has retained using stairs and lifts which are now used communally with the tenant) each floor is treated as a separate property for business rates purposes.
If a building has two or more occupiers, and their access between floors is over communal areas only, each floor is treated as a separate property for business rates purposes.
However, where an occupier is able to access its other floors through a private staircase or lift, these floors are treated as a single property for business rates purposes.
What may this mean for your business?
If your business occupies multiple areas within a building, which can only be accessed through communal parts of the property, you will now be issued with a separate bill for each of the separate areas. As each area will have been valued as a separate unit this will almost certainly result in an overall increase in the amount payable. For occupiers of a large number of floors within a building this increase could be very significant.
This increase is being backdated to 1 April 2015 in England (and 1 April 2010 in Wales) so there may also be an increase to rates which have already been paid.
No action need be taken by businesses until they are contacted by the VOA; however, consideration should be given now to the potential financial impact as you may need to find the funds to pay a large additional bill.
In future businesses should be aware of the new VOA practice when taking a lease of multiple floors, with thought being given as to whether private access between the floors can be achieved.
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.
