Business rates revaluation 2023 will hit small retailers hardest

All non-domestic properties usually have their business property Rateable Value (RV) revalued every five years by the Valuation Office Agency. The next revaluation is due to take place on 1 April 2023.

What is Rateable Value?

The value is determined by the Valuation Office Agency, a branch of HM Revenue and Customs HMRC). The rateable value is based on an assessment of the annual rent the property would rent for if it were available to let on the open market at the fixed valuation date.

The rates payable are calculated by applying a multiplier, before any relief is applied. The multiplier is set each financial year by the government. In 2022 the multiplier for premises over £51,000 rateable value is 51.2p.

Until the revaluation 31 March 2023, the rateable values will be based on a valuation date of 1 April 2015 and from April 2023, the rateable values will be based on a valuation date of 1 April 2021.

It’s important for business rates payers to submit your rental information to make sure your business rates are accurate. HMRC says that revaluation is not designed to raise extra revenue overall, but the changes can mean significant changes for individual districts and properties.

A long awaited reform

Retailers have welcomed long-awaited business rates reform which is widely expected to reduce retail ratable values throughout England and Wales by around 10% when the changes come into effect on 1 April 2023. Rates will varying across different geographies, sectors and retail categories and it is expected many large retailers will see big reductions.

The changes will potentially save some of the large retailers many millions of pounds and coming at a time when other costs of occupation, particularly energy cost rises, this will be very welcome. According to property agents Savills, the revaluation will favour larger stores – these are likley to see rates reductions in the region of one-third, whereas with smaller stores any reductions will be more likely under 10 per cent.

The news has generally been met with positivity, and as a consequence, “we have seen an up-tick in landlord and tenant activity since the announcement, with expansionist retail occupiers gaining confidence despite ongoing economic and occupational headwinds,” says Savills.

Tom Whittington, Director, Commercial Research at Savills says:

“The revaluation favours larger stores (> 1,850 m2), which will see rates reduce by more than a third, compared to small stores (< 750 m2), with reductions of 8%. This should benefit prime units for fashion and comparison goods and has been met with enthusiasm within the shopping centre market, where stores with larger footprints tend to account for a greater proportion of revenue than non-prime high street units. The challenged department store market has been granted significant respite with a 30–40% reduction; a silver lining that could support a recovery for those operators still active.”

Meanwhile agents, Colliers International’s Head of Business Rates Team, John Webber says:

“Colliers has been highly vocal in its call for reform of the business rates system, which unfairly penalises the retail sector who pay over a quarter of the total £26 billion (net) business rates tax bill, but whose gross value is less than 10% of the UK economy. High business rates have been cited as one of the key factors in the decline of many of the UK’s high streets.”

Some key points highlighted by Savills:

The key points are:

• Falling RVs for much of the sector nationally, reducing by an average of 10% for retail and 2.2% for leisure, but with far more significant changes apparent when drilling into specific assets and locations.
• No downwards phasing of liabilities – this means that a property will have its entire reduction in rates payable from day one. This was unexpected but very good news. Increases will remain phased.
• Rate reductions appear to favour larger units and prime retail and leisure locations, with some off-pitch, local and independents biased locations significantly worse off.
• However, a continuing benefit to small businesses is the 50% relief being given to retail, leisure and hospitality occupiers in 2022 as a result of coming out of Covid. This will be increased to 75% relief in 2023, but subject to a cap of £110,000 per business (not per property)
• A cap on the annual multiplier – it was set to increase by inflation (10.1%), but for 2023–24, it will be frozen at the current level.
• Encouragingly, we’re seeing deals that were teetering on the edge now progressing as a consequence to lower RVs and savings softening the blow of other increases to occupational costs.
• The relief felt by retailers is tempered for those exposed to large tracts of logistics space, which are seeing an average rates increase of 38%. However, most retail brands’ store portfolios significantly outweigh their storage space.

*Transitional relief traditionally aims to phase in changes in liability so that an occupier facing a large increase in rateable value doesn’t immediately bear the full brunt of an overnight increase in liability. However, this usually works two ways: While the transitional relief limits increases, it also limits decreases. The treasury says it should be fiscally neutral so that downward transition pays for upward transition, and therefore affecting individual businesses differently. The good news is that downward liability phasing will no longer apply this time.

What will be the impact of the 2023 revaluation on different parts of retail and leisure?

Savills has concerns that the benefits of the 2023 revaluation appear to favour larger, prime and mainstream retailers, so there is risk at local high street level. Secondary or non-prime retail may have received a bit of a raw deal as some of the largest increases that Savills has identified are in convenience, retail services and independent-biased locations. These are categories that the agent has championed as “important differentiators and a potential antidote in ‘failing’ high streets and shopping centres.”

“Some businesses that typically serve communities and have proven resilient during the last few years against a backdrop of severe headwinds may now find themselves being punished for their success. Yet the backdrop to challenging market conditions and oversupply remain ever-present.

“Given rising occupational costs, any increase in business rates risks market failure, which would speed up the urgency for repurposing in some markets. Part of the rationale for seemingly high increases for smaller businesses could be from the lack of adequate evidence or previously low rates being rebalanced. Even if deemed ‘fair’, the scale of the uplift in some areas could be extremely damaging. The counter-argument to this, however, is that small businesses continue to benefit from rates relief, at least in the short term,” says Savills.

Business Rates revaluation 2023