HU LAYS OUT THE CASE AGAINST UNFAIR BUSINESS RATES INCREASES

 

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Following a number of emergency meetings between the organisation’s officers and board with regard to unfair business rates increases in the industry as part of Land & Property Services’ 2020 Reval, Hospitality Ulster is calling on the Finance Minister to:

 

  1. Instruct LPS to obtain the available rental evidence for Public Houses in Northern Ireland and use this to create a rentable value ceiling that can inform the tone of the list for the sector throughout Northern Ireland.

 

  1. Require LPS to reengage with the representative organisations to develop a fair R&E methodology before requiring individual businesses to supply trading accounts for revaluation.

 

  1. Introduce a transition relief scheme to help business faced by an above average increase to their NAV. The cost of the scheme funded from the 6.8% increase in the value of the list.

 

  1. Introduce that same level of rate relief enjoyed by small businesses in England (currently 33% for businesses with a NAV of £51,000 or less), funded from the Barnet consequential.

 

  1. Introduce the additional £1,000 rate relief provided specifically for pubs by the Chancellor in January 2020, funded by the Barnet consequential.

 

  1. Urgently bring forward proposals to fix the entire non-domestic rates system, which is no longer fit for purpose.

 

IN DETAIL

Non-domestic rates in our sector are already some of the highest in any UK region and now many of these businesses face further significant increases.

Hospitality Ulster believes each of its members should contribute fairly to the non-domestic rating system, however when these costs are unfair or excessive. It can have a very real impact on the ability of a business to continue as a going concern, leading to wider economic consequences.

Currently the rates on Public Houses and Hotels in Northern Ireland are calculated on a Receipts & Expenditure (R&E) basis to obtain a NAV or perceived rental value.  LPS state that there is insufficient rental evidence available to use comparable properties to make NAV assessments.

Whilst there are crosscutting themes within the R&E methodology used for Public Houses and Hotels relating to food and beverage revenues. Hotels have an additional accommodation revenue stream included in their R&E calculations.

In engagement with LPS, Hospitality Ulster leads regarding the revaluation of Public Houses and the Northern Ireland Hotel Federation leads on Hotels, with both organisations working closely on the crosscutting issues.

 

PRE-REVALUATION

Prior to the revaluation process, Hospitality Ulster engaged extensively with LPS to highlight that the methodology and assumptions used in R&E model for Public Houses were no longer a fair representation of rental tone, and in the majority of circumstances were unfair on the rate payer.  Whilst some progress was made in relation to the formula used for Public Houses serving food, LPS’s insistence on obtaining a range of trading accounts and the individual businesses reluctance to provide these in advance of a fairer model being agreed, we were unable to agree a revised formula. Resulting in LPS continuing to use the existing flawed R&E methodology for the revaluation process.

 

THE RESULT OF USING R&E FOR THE REVALUATION

Economy Impact

  • NI pubs account for around 0.8% of value added to the Northern Ireland economy (GVA) yet account for 1.8% of business rates – the sector therefore contributes more than twice as much in business rates as its contributes to the value of the economy

Revaluation Impact

  • The average Pub’s NAV has increased by +20% through the revaluation – this compares to the average +6.8% for NI. The Pub valuation has therefore increased at a rate almost 3 times higher than the Northern Ireland average
  • The Pub increase is also substantially higher than other sectors including Retail (-1%), Manufacturing (+2%), Warehouses (+2%) and Offices (+8%)
  • It means that Pubs now account for a larger share of the valuation – 1.8% compared to 1.6% under the old valuation
  • The more significant uplift in Pub valuations also means that a greater share of pubs will be paying above the 6.8% NI average increase – 50% of Pubs compared to 40% for all premises in NI

Small Business Rate Relief

  • A net of 89 fewer Pubs, 7% of the total, will qualify for Small Business Rate Relief (SBRR) because of the revaluation
  • 94 Pubs will lose out on the SBRR and only 5 Pubs will qualify as a result
  • Those losing out of SBRR therefore outweigh those qualifying for it by a ratio of 19 to 1
  • This means that 60% of Pubs will now qualify for the relief compared to 67% under the old valuation

Largest Impacts

  • 8 premises have seen their valuations increase by £100k or more
  • 1 premise has seen its valuation increase from £28k to £251k – a 9-fold increase!
  • 58 Pubs saw their NAV double or more as a result of the revaluation – only 17 of those (29%) were based in Belfast with the others spread out throughout Northern Ireland
  • The reductions were much more modest – for example, just 7 Pubs saw their valuation half or more!

 

Table 1: Pubs Rate Revaluation Summary

 

Pub Premises

NI Premises

% of NI

 

Number

1,233

74,000

1.6% approx

 

 

 

 

 

 

 

Old NAV

New NAV

% Change

Difference (value)

Pubs Total

£25m

£30m

+20%

+£5m

Average per premises

£20k

£24k

+20%

+£4k

 

 

 

 

 

 

Old NAV

New NAV

% Change

 

% Share of NI NAV

1.6%

1.8%

+0.2% points

 

 

 

 

 

 

 

Number of pubs above 6.8% increase

% Pubs above 6.8%

% NI premises above 6.8%

% point difference

(Pubs vs. NI)

Above NI 6.8% increase

617

50%

40%

+10% points

(note: figures subject to rounding

 

Table 2: Small Business Rate Relief Impact for Pubs Through Reval 2020

Qualifying Relief

NAV Band

SBRR – Old NAV

SBRR – New NAV

Diff.

% pt diff.

 

Number accessing SBRR

830

741

-89

 

 

% of total pubs eligible for SBRR

67%

60%

 

-7% pts

   

Number

Number

 

 

50%

Less than or equal to £2k NAV

29

27

-2

 

25%

Greater than £2k and £5k or less NAV

239

204

-35

 

20%

Greater than £5k but not more than £15k

562

510

-52

 

   

830

741

-89

 

 

 

 

 

 

 

   

Moving Out of SBRR

Moving In to SBRR

Net Change

 

 

 - Greater that £2k and less than £5k

-4

0

-4

 

 

 - Greater than E5k but not more than £15k

-90

+5

-85

 

 

Number moving out of SBRR in New Reval

-94

+5

-89

 

 

FLAWS IN R&E METHODOLOGY

The fundamentals of this methodology ultimately result in an additional corporation tax for the business of approximately 30% as opposed to a non-domestic rate reflective of deemed rental value.

Penalising good performance

The output NAV is based on financial performance, so despite two public houses being next door to one another, both having similar square footage, having the same liquor license and the same hours of trading – their NAV could be substantially different if their trading performance differs.  Their financial performance could be very different for numerous reasons: -

  • Capital investment incurred by a business, is not accounted for in the R&E calculation, ultimately this expenditure cost needs to be repaid and serviced
  • An effective or entrepreneurial management team vs weak management. This affects business performance, ultimately a business appears to be penalised for operating well.

Competition

Both off-licences and licensed restaurants NAVs are assessed a rental comparable basis.   With minimal exception this cost is significantly lower than the NAV that has been calculated in adopting the pub model.  As a result, neighbouring assets retailing the same products will have a competitive advantage.  This may be one reason why so many pub closures have been witnessed and their licences recycled for off-sales.

Assessment Cycle

Reval tends to occur each 5 years at the point in time 3-years accounts are requested which will dictate the tone of future NAVs.  The hospitality industry is fickle in that it encounters many peaks and troughs over a period of time. Leases, however, tend to be at an established level for a longer term – up to 25 years.  Given this a rental tone is a much more stable option which would ride the trading peaks and troughs.  The point in time R&E calculation does not provide that balanced long term view.

 

RENTAL EVIDENCE

In Belfast city centre alone, there is a clear and visible disconnect between the tone in the Valuation List and the actual tone evidenced by the numerous pub rents that now exist. 

 

There is a substantial “basket of evidence” of leasehold transactions in Belfast clearly demonstrating a tone in rents ranging from £15,000 per annum to £225,000 per annum.  A variety of factors including the location of the property, the size of the premises and the trading performance / potential will ultimately influence these rents and we appreciate that there is a significant range.  It cannot be disputed however that the highest rent achieved in an open market letting is the £225,000 paid by UK multiple Revolution De Cuba in 2016 for a 20,000 sq. ft. former bank premises in Arthur Street at the heart of the city centre. Indeed, so attractive does this level of rent appear to be that another UK giant, Wetherspoons, bought the freehold with the tenant in place.

 

It is our belief that this demonstrates a rental ceiling that agents report is very prevalent when negotiating with licensed premises operators on leasehold transactions.  The perceived risk to the tenant around the long-term sustainability and profitability of such pubs, plus the need for significant refurbishments over time, restricts rental bids and we don’t see any exceeding this level.  The notion that any of these premises would rent on the open market for a figure in excess of this level is, in our opinion, unrealistic. 

 

POTENTIAL CONSEQUENCES OF THE DRAMATIC INCREASES IN THE DRAFT LIST VALUES

The question needs to be asked, what, when faced with such a significant increase in rates does the licensee do to maintain profit levels?

 

There are really only three options open, cut costs elsewhere, increase prices, or, suck it up and take the hit to profit.

 

1) Cutting Costs - Looking firstly at the cutting cost option, the most significant cost to all licensees is wages. It is unlikely that a large enough saving could be made in any other category. It is therefore likely that the first action will be to cut staff.

But how many? If we take Northern Ireland’s towns and city centres as an example, an average weekly rates increase of £1,500 per licensed premise would require a cut in staff of some four full time members should all licensees take this option. Across the Province, this could easily translate into job losses totaling more than four figures. Numbers similar to the job losses seen at other high profile casualties which have made the news over the last number of years.

Further, if this is the chosen path, licensees could find themselves with insufficient staff to run the business. How do they address this? There are a number already considering not opening on Monday’s and Tuesday’s. How will this look to visiting tourists that our businesses are closed during the week and how does this fit with our goal as an economy to have tourism as a key driver?

Belfast City Council are encouraging us to work with them to improve the vibrancy of Sunday’s in the City whilst we are looking at reducing our opening times to save cost. There is a dis-connect here in the Northern Ireland plc strategy.

 

2) Passing on the increased costs – Could the increase in rates be passed on to customers through an increase in prices? A modest increase in the cost of rates could be passed on, but not something of the scale of increases faced by many licensees. Combined with the planned increases in the Living wage and pension costs, such increase would require an increase in excess of £1 per beverage. Unstainable in a market dependent on domestic consumers, with half the disposal income of the rest of the UK, and again, out of step with the strategy of selling ourselves as an affordable, attractive tourism destination.

 

3) Reduction in Profit – a business could take a reduction in profits in the short term and, for a year or so, things will trundle on, until the annual review with the Bank. What has to be recognised is that profit is calculated before all taxes, interest and capital repayments on bank loans and any capital investment on premises.  Many of the assets which have witnessed rises run parallel with periods of significant capital investment in their premises to remain competitive.  This risk here is that the business will now be unable to service their loans with the bank or continue to reinvest in their premises to remain competitive.

These are scenarios based on the initial reaction we have been given by the trade. None paint a pretty picture. It is inevitable, with such high increases, the number of licensed businesses within the Hospitality Industry will decline, along with the disappearance of a significant number of jobs. Strategically, this cannot be what is desired if we are serious about growing Tourism as an economic driver.

Hospitality Ulster has grave concerns on the use of R&E method when it does not appear that the LPS have sought to consider plentiful comparable rental evidence in our local market. Discussions with commercial agents would suggest a third of all Public Houses are leased, with this level increasing to a two-thirds majority in Greater Belfast.  Our understanding of the scheme is that the receipts and expenditure method is only employed in the absence of rental evidence.  We would ask LPS to reconsider the rental evidence available to them.

 

For the time being, HU Members should check their draft valuation on the list and if you have any concerns, we would encourage you to contact our Property & Rates specialist Mark Carron at Osborne King before doing anything. There remains the possibility that upon appeal, rates could increase as well as decrease.

Email: mark.carron@osborneking.com
Tel: 07980999149