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Temporary sticking plasters not enough to cure un-fit-for-business rates on small-scale Scottish hydro power sector | Galbraith

Temporary sticking plasters not enough to cure un-fit-for-business rates on small-scale Scottish hydro power sector

27 April 2017

A rating revaluation is never welcome, but the system which came into force on 1 April this year has caused more unrest than its predecessors. Calum Innes reports.

Whilst some sectors face reducing values, reflecting lower rents post-recession, others, such as renewable energy operators, are dealing with unprecedented increases – in some cases of up to 600%. 

An outcry persuaded the Scottish Government’s Finance Secretary Derek Mackay to announce a range of reliefs covering limited property sectors, including small-scale hydro electricity generation. 

But these are simply a one-year discount – a sticking plaster instead of a solution to a widening disparity.  For hydro generation the disparity is even wider due to an upper limit of 1MW on eligibility to claim. So a scheme of 999kW is granted relief while one with a couple of kW of additional capacity is excluded. 

There is increasing concern that the rating system is no longer fit for purpose. Established in the mid-19th century, the current framework has been adapted to meet social, economic and political aspirations. 

Manufacturing, for example, was treated favourably in the earlier part of the 20th century to encourage economic activity, but such benefits have now ceased, whilst agriculture enjoys exemption, presumably due to historic concerns about food security. 

Disparity in the treatment of certain property sectors is further distorted by a complex range of reliefs and penalties applied by the rating authorities responsible for collecting the tax. 

Of course, these taxes have their place in the Chancellor’s toolbox.  Property is an easily identified, immovable asset, making collection relatively simple and inexpensive. 

However, rates appear to be increasing to the point where they are an overly punitive burden.

Government incentives and encouragement persuaded developers and landowners to invest in hydro generation, generally incurring substantial debt to do so. 

Rate increases have left many schemes with insufficient free cash, after debt obligations, to pay the rates demanded.  This impacts on banking covenants as the increases are beyond reasonable forecasting. 

There is no easy fix.  Doubtless hydro operators will appeal, but the process is likely to be slow to resolve.  The pressure will be to deal with shops, offices and industrials where the evidence is greater and the process more straightforward. 

Complex issues such as hydro generation may be left until much later in the process, possibly years. In the meantime the tax must be paid. 

A further flaw in a system designed to maximise the tax-take is that vacant property, previously exempt from rates, is now liable even without beneficial occupation. The Government claims this will encourage landlords to make property available for let, but lack of tenant demand results in vacancy, not landlords withholding property from the market. 

The result is the destruction and demolition of property to avoid punitive tax. As with roofless rural cottages that were a legacy of a similar historic rating regime, surely it can’t be in society’s interests that potentially useful property is destroyed. 

The Scottish Government has tasked Ken Barclay, former Chairman of the Royal Bank of Scotland, with reforming business rates to better support business growth and long-term investment. Will his recommendations be sufficiently far-reaching to restore an equitable tax burden? 

Public services require ever-increasing levels of funding and Government wrestles with how to raise the necessary taxes, but property is already worse off than other potential sources. Land and buildings are a ‘sitting duck’ and adding a further catastrophic burden can only hasten the demise of the high street, manufacturing, hospitality and real estate in general, with all the social implications. 

Tinkering by successive legislators means the tax burden is shouldered by fewer enterprises that also pay a surcharge to cover the shortfall, resulting from fewer subjects being granted relief.  

For the current rating system to persist and be equitable, it must be less punitive and shared more widely among businesses. 

Tax on housing also has glaring inconsistencies. Council Tax – introduced after the ill-fated Community Charge replaced domestic rates – is based on capital values in 1991 and is now seriously out of date.  Government is unwilling to improve transparency or reconsider anomalies, such as no change in liability resulting from improvements until a property changes hands. One argument is that all property be put back into a single ‘pot’. 

Don’t expect changes any time soon. Meanwhile, property owners and occupiers who received Valuation Notices advising of the assessment to be entered in the roll before 1 April 2017 should note there is a six-month window to lodge an appeal to ensure their proportion of the tax burden is appropriate.

Partner, RICS Registered Valuer

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