An Interesting Debate over Rates, essential reading. (42)

By | November 26, 2020

BII Rating Road Show, Yate

One from the Archives

The BII had a Rating Road Show, unfortunately it had a limited attendance of about 50 for such an important issue.

The show was hosted by Michael Yass, Fleuret’s leading Rating Valuer with a learned colleague from the Inland Revenue Valuation Office.

Michael Yass opened with a brief introduction to the vagaries of rating and then introduced the Valuation Officer, who proceeded to discuss the basis of rating valuation.

It all had a similar feel to the Rent Road Show presentation.

Previously various so called knowledgeable people had stressed at great length that rent had no relation to rates.

I have had three lengthy debates with Valuers who have tried to convince me that my freehouse rates were linked to Pub Co rents, I, on all three cases agreed a reduction in rates.

The Valuation Officer stated that there was a direct link between rates and rents, he then said that rents were based on a Competent Operator.

Having questioned the RICS previously on the definition of Competent Operator, I asked for an accurate definition of Competent Operator, both speakers said a Reasonably Efficient Operator and were totally unable to define anything else, in fact they were both stuck for words.

The BII definition of a Competent Operator was someone with three years profitable trading and advance qualifications or five years profitable trading with minimal qualifications, which equates to full membership of the BII.

There are very few that meet that criteria signing new leases and tenancies.

This suggestion caused a very red faced pause and a degree of agreement from the Valuation Officer.

The speaker then turned to FMT (Fair Maintainable Trade) and the use of comparables.

I then pointed out that by using this method an assumption is made that business is infinite, it is not and is finite and any growth is at the cost of another business, would they therefore go to the other business and reduce their rates.

A further red faced pause as the reality struck home, the Valuation Officer conceded that I was right, Michael Yass said that they had all the records and admitted that they did not have the total available business in an area, but they did have records of the rents for comparables.

I then pointed out that in a court case in 1986 an assumption based on an assumption had no legal standing, which makes the repeated use of Comparables seriously flawed.

By now everyone was asking questions and the host suggested that they should leave any further questions until the conclusion, this did not stop the questions, the presentation concluded taking somewhat longer than scheduled.

At the conclusion I spoke to the Valuation Officer and we had a good discussion and he agreed that assuming business was infinite by the extensive use of comparables raised serious questions and the fact that business was finite needed raising and clarifying.

I did say that I had already raised these issues with the RICS and said that the rating basis was equally as flawed as the rental system.

The rating calculations are based on turnover linked to rental values, profitability is ignored, I stressed that failure to consider profitability would cause extreme hardship with lower turnover pubs since a £100K compared to £200K overheads were probably similar, yet the profitability at the lower turnover would be minimal, with higher turnover pubs the percentage net profit was very similar.

Assuming that the vagaries of the perceived ability of a Competent Operator are ignored and the realistic profitability of any operator are considered based on business being finite, we may have a better rating system.

He also said that they assume rents to be 12.5% of turnover, I said this was too high, certain brewers are now suggesting that rents should be 8% of turnover which I still consider to be too high.

If tied rents are to be linked to turnover they should be between 4-6% of turnover when pubs were viable and a career for life, I said my commitment was to try and achieve this, which may be putting the clocks back, but the system worked.

We discussed other issues which he said he would raise in the right place and in spite of putting two speakers on the spot, it was a very interesting discussion.

If anyone has an opportunity to go to a Rating Road Show please do and ask these questions and I will also be delighted to add a few more which time excluded.

The unfortunate aspect is that the rateable values have been raised and the amount payable per rating pound has been reduced and according to my calculations would involve a 1.6% overall cost, yet didn’t work out to that from the figures shown, which made me wonder.

If the Valuation Office do assume correctly that business is finite and any growth is at the cost of another business, the rating distribution would be fairer and the Rateable Values would fall across the board since the 12.5% basis would be substantially reduced.

Sadly they are unlikely to reduce the amount of money that they require from the Pub Industry, but if rents come down they may just have to do that, they cannot have a two tier rating pound, one for pubs and one for commercial property, but the rating assumptions are very much akin to the rental assumptions, which are now flawed and being investigated by the RICS.

3 thoughts on “An Interesting Debate over Rates, essential reading. (42)

  1. Interested observer

    Excellent article, thank you for taking the time to document the meeting. Tied pubs are usually based on 15% of turnover + the beer tie. In reality tenants are looking at trying to pay the pub company 30% of their turnover and people wonder why pubs are closing.

    Reply
  2. Karl Harrison

    This is starting to go in the right direction. Of course what has happened on the ground is possibly an attempt to steer the rating system for pubs on behalf of the BBPA and its members back in 2002/2003 and ahead of the new Rating List in 2005. The steering was carried out by Chris Tattershall of Lawrence Tattershall, “ably” assisted by the likes of Rob May – then “Pub Expert” and now, of course, National Rent Controller for Enterprise Inns plc.

    According to the Local Government Finance Act 1988 a Rateable Value needs to equate to the rent at which the subjet property would let on the Relevant Date – the date in April two years before the new Rating List comes into effect. The pubcos, the BBPA and their surveyors were, as we now know, were intent, by their actions on adapting the rent valuation guidance for pubs in their own favour and away from tenants. The last thing they wanted was the pesky old taxman following the same guidance and ending up with the same result.

    So, Mr Tattershall went into see the Valuation Office Agency man, charged with selling a system of calculating RV’s that would understate the actual rental market at that time. If he achieved this then there would be lower rateable values and:-

    Lower RV’s = Lower Rates Payable = Higher Divisible Balance = Higher Rent.

    What a wheeze they must have thought!

    It sounded on paper good for everyone, the original concept, but the reality was somewhat different.

    Crocker bought it lock, stock and barrel and so we have the VOA’s chartered surveyors assessing rents for pubs based on a percentage of turnover and an entirely different basis – the profits method – being used to assess rents in the pub market at review by, er , chartered surveyors.

    The obvious happened, pubcos used the lower rates payable to inflate rents (at the expense of the taxpayer some might say)and there started to appear quite a disparity between RV’s and rents between 2005 and 2008 or so. Lots of backslapping all round and seats at the table of the Trade Related Valuation Group for the likes of Tattershall, May etc. This is the group where they write valuation guidance for RICS members to use when assessing pub rents, except if you are an RICS member working for the VOA in which case they recommend a completely different method.

    So here we are in 2010 with a new rating list and everyone is moaning about the increases. Mr Crocker has moved on to consultancy roles anew and Mr Tattershall is working for Enterprise Inns touting free rates advice to try to get tenants off the hook he created for them.

    The Valuation Office had lots of juicy information to choose from this time round of course. They could look at nice healthy peak of the market April 2008 turnover figures and apply Mr Tattershall’s natty little scheme or they could revert to the Act and then use the inflated pubcos rents achieved using the profits method.

    If of course, back in 2002/2003 the BBPA boys had actually had their brains in gear they might have considered explaining to the VOA the basis upon which rents in the pub sector were actually going to be calculated but that would have led to lower rents and higher RV’s. The tenant would probably have been marginally better of, of course, as the VOA would have been unlikely to drive the profits method to the greedy extremes of the pubcos.

    Yet another BBPA/pubco cock-up, some might say.

    Reply
  3. Editor Post author

    The duplicity of the industry is filtering through to every corner.
    Is there any way that we can revert back to an honest industry, where people treat people fairly and with respect.
    Not screw the last sou from every activity.
    I have seen confidential correspondence on the above and have no reason to doubt the authenticity of the comment.

    Reply

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