Amazon’s victory in a business rates appeal means one Staffordshire council will have to dip into reserves. Richard Harbord discusses the trouble with appeals.
The headlines about Cannock Chase District Council and the need to use its reserves to meet the outcome of a business rates appeal by Amazon, the world’s biggest retailer, underlines yet again that rateable values continue to be a major risk area for finance directors.
If it wasn’t for the huge amount of time and trouble that Brexit has absorbed, I suspect the matter would now be the subject of legislation although, it has to be said, some local authorities have reservations about new law and prefer to continue bearing responsibility for their own appeals.
Nevertheless, business rates appeals and the risk they present have been a long-running problem. Sadly, there seems to be no early solution in sight.
Risky
Business rates are a particularly risky part of local authority budgeting for two reasons. Firstly, an accurate forecast of the amounts involved in an appeal is impossible. Secondly, the date the appeal is resolved is impractical to judge.
And rates appeals are an unending topic of discussion. When I was a member of the Business Rates Retention Working Party we spent hours debating them and their implications.
Cannock Chase Council is not alone in hitting a problem. In fact, it is just one of many cases where local authorities have been faced with very large refunds on the back of a successful appeal. If a council has a number of high value assets under business rates, or even a single property, it is obviously vulnerable. Previous appeals have involved assets as large, and as significant, as power stations and airports.
Provisions
To recap on what is supposed to happen in the appeals process. On the 31st March each year each authority gets from the Valuation Office a list of outstanding appeals. The authority can then take a view on their outcome. There are various commercial firms who manage this well, as they can look at other cases resolved elsewhere, but the second part of this is to forecast when the appeal will be resolved. In recent years the backlog has been considerable and this has made planning difficult.
Once an estimated value of the appeal has been ascertained it should then be provided for in the balance sheet, this being part of having a legal balanced budget.
However, for some local authorities in recent years these figures have been extremely large with big implications: Including a big provision means increasing the savings needed elsewhere in the budget.
Many authorities have then taken a further view on the sums they should hold as a provision and are willing to risk a shortfall having to be met from reserves.
External audit—although it invariably asks how a provision has been arrived at—has not, in a majority of cases, raised queries on the adequacy or otherwise of provisions.
Although the provision minimises risks, the whole system is so uncertain that risk cannot be eradicated completely.
Solutions
During the time of the Business Rates Retention Working Party, central government suggested a number of possible solutions to resolve the issues surrounding appeals.
The first was that central government would meet losses on appeal where they are caused by an error on the part of the Valuation Office.
The working party rejected this for a number of reasons. The acceptance of central government funding would only be revealed retrospectively and so a provision would still be needed.
The other, more fundamental, objection was that the appeals process is not about errors but about a difference of judgement between different parties: One wishes to maximise value and the other minimise cost. It was felt, therefore, that the number of cases clearly meeting the definition of “error” might be few and far between.
The rejection of this option led to a further proposal to pool all losses on appeal and apportion them in some way to all authorities in the next financial year. As you might expect, local authorities were very split on this.
A number, dealing with a relatively low number of appeals, preferred to stick with the current system and make their own provision. Others, no doubt those with high value assets, would have gone for a pool system. That would mean every authority would pay something but it would have no link to their own business rates base. There would still be uncertainty but it would be minimised.
Mezzanines
In the event the legislation was never finalised and when the working party reconvenes the discussion will continue. In the meantime we have to accept the risky nature of the system.
There are other variables in the Cannock Chase example one that might provide a sequel. I understand that when the Valuation Office valued the premises they included a considerable value for mezzanine floors. On appeal the Valuation Office had to remove those values because the elements had included were movable platforms and not Mezzanine floors.
It’s possible the local authority will now be asking the Valuation Office to value these platforms as movable plant and machinery under the Plant and Machinery Orders, so eventually there may yet be a happier ending for Cannock council.
As for now , one advantage we have is that data from the current system will reveal whether the pattern of appeals has changed.
That said, I see little chance of speedy legislation to resolve the problem. We seem to have another year of everybody working on Brexit to work through.
Richard Harbord is former chief executive at Boston Borough Council.
