Making business rates less taxing for pubs
Business rates are the third-largest cost for many small companies, but how are rates set and how can you ensure you aren't paying over the odds? Phil Mellows reports
Business rates are a recurring nightmare for many pub operators. Not only do they mean one more bill to contend with; they also frequently leave us scratching our heads at how they've reached that figure at the bottom.
A survey by licensed property agent Fleurets suggested tenanted and leased pubs faced an average hike of 23% in rateable value at this year's revaluation.
It was offset to varying degrees by a drop in the multiple used to calculate the final bill, and thanks to measures in the last Budget, some 4,000 smaller pubs are enjoying a year-long rates holiday while others have had their discount doubled.
Still, within a few months of the new rateable values taking effect in April 2010, nearly 5,000 pubs had appealed against their valuation.
The trouble with appealing, of course, is that your rateable value can go up as well as down. Getting expert advice is vital before you take that risk. And it's probably also worth acquiring a little understanding of the arcane methods used to set your rateable value.
In fact, the Valuation Office Agency (VOA) takes two different approaches towards pubs. For most houses it's based, like rents, on fair maintainable turnover. Yet if you're in the high street, among other retail outlets, it could be based on floor area.
Multiple operator Alex Reilley, who runs 14 Loungers café-bars and three wet-led locals under the Flatcappers name, pays both ways, and believes the system is "grossly unfair" on community pubs.
"Business rates for Flatcappers have increased from £13,500 to £50,000 a year since we spent money on the pubs and turned trade around," he explains. "It seems that the more successful you are, the more you're penalised by the VOA."
In contrast, he adds, the food-led Loungers bars are rated according to floor area, so are not taxed for their success.
What's the explanation? The 23-page Valuation of Public Houses Approved Guide, drawn up in 2008 for the current round of valuations, is the valuation officers' bible, and may help to shed some light on the situation.
It makes it clear that, unlike most businesses, the default position for pubs is a rateable value based on turnover at April 2008, "on the assumption that the business will be proficiently carried out by a competent licensee responding to the normal trading practices and competition of the locality".
This will be a familiar formulation to those whose rents are similarly set according to fair maintainable trade, and is intended to remove from the equation the variable skills of the operators themselves. Whether you're brilliant — or rubbish — at running a pub should make no difference to your rateable value.
After taking geographical area into consideration, wet and food sales are dealt with separately.
For drink, pubs are assigned one of three valuation bands based on "trading locality, the physical characteristics of the house and the style of trade".
So a pub in a good location, fitted out to a high standard without large ongoing overheads, such as for entertainment, will fall into band one, while a local with lots of competition, high overheads, little daytime trade and no outdoor space for a smoking area, goes into band three.
For food sales there are two valuation bands. Band A is for "high-profit concept operations… not requiring employment of specialist personnel". Band B is for both pubs that sell simple food like sandwiches to complement a largely wet trade, and those at the other end of the scale with a restaurant and high running costs.
For pubs with six or fewer letting rooms, income from accommodation is added to food sales. For operations with more than six rooms, a separate calculation is made.
Yet, after all that, the measure on which rateable value is based in "exceptional circumstances" is not turnover, but floor area.
This appears to be the result of the late-1990s high-street bar boom, when many former shop premises were converted into pubs. The problem faced by the VOA was that if theystart valuing these places differently to the shops next door, it would create an anomaly. Hence the decision to base rateable value on floor area rather than turnover.
Arguably, this merely shunts the anomaly across to the pubs and bars sector, leaving operators like Alex Reilley wondering how it can be fair.
Jim Yarwood, rating surveyor at Fleurets' Birmingham office, has some sympathy. "If you run a very profitable business, a valuation on the basis of square metres can be favourable to you compared to other pubs," he says. "But the rateable value is an estimate of rental value, and if the pub isn't purpose-built, and the premises could have multiple uses — if it could still be a shop — then that's the basis of the rent."
Brock Jones, an associate at surveyor Gerald Eve, believes there is often confusion around the concept of fair maintainable trade, too.
"For valuation purposes it's assumed the pub is properly run at all times," he explains. "This might be seen as penalising success when you take on a run-down business and get trade back up, but for the VOA, the pub has always been like that.
"If you've invested in the pub, the valuation has to ask what the rental value is in its improved state. It can seem unfair, but you can only value a pub on what's there, not what used to be there."
Steve Perkins at the VOA also defends the valuation scheme.
"It was arrived at following detailed discussions with professional representatives of the industry," he says. "This methodology is agreed with the industry and is a tried-and-tested way of valuing public houses."
Unhappy with your rating valuation? Then you still have time to appeal
It's not too late to appeal your 2010 rating valuation. In fact, you've got until March 2015.
This March saw a last-minute rush of appeals against the 2005 valuation, and officials are currently working through the backlog. This means they haven't even started on the 2010 appeals yet, which probably won't be programmed in until the new year.
The longer you leave your appeal the longer it'll take to get a ruling, of course, but you certainly don't want to be rushed into a bad decision.
Brock Jones at Gerald Eve warns that licensees should beware of cold-callers claiming they can reduce your rates.
"They are less professional, have less expertise, and they charge more," he says. "They might well be able to get a reduction, but it may not be as much as you could get — and there are examples where an appeal has resulted in an increase in rates.
"No professional firm will cold call."
If you're a tenant or lessee, your pubco or brewer will have a specialist ratings advisor, so you should contact them first.
If you're a free-trader, make sure you get advice from an accredited expert. You can get a list from the Royal Institution of Chartered Surveyors.
And don't be bashful about asking whether you've got a case — it's better to be safe than sorry.
"It's important that pubs don't pay more than they should," says a British Beer & Pub Association spokesman.
"As rates are based on 2007/8 turnovers, operators are absolutely right to appeal if they think the rates don't reflect their current situation."
Business rates: cutting through the red tape
Last month the Morning Advertiser reported that hundreds of pubs will benefit from automatic business-rate relief, under new Government plans.
Local-government secretary Eric Pickles said that those who qualify for small-business rate relief (a rateable value below £18,000) will no longer have to apply for the discount.
The new legislation, to be included in the upcoming Localism Bill, also sets out a ballot scheme where small businesses can vote for how their money will be used.
Business rates are the third-largest cost for many small companies, but a lot are unaware that they are entitled to rate relief,
