In the UK, hotel owners brace for business rate increases

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A ruling from the UK’s Supreme Court could see the occupier-related real estate tax known as business rates reduced when properties are undergoing development works.

The news came as the British government promised a review of business rates relief after vociferous objections ahead of the impending changes to the way the tax liability for occupiers is calculated. 

The Supreme Court’s decision was made in relation to a property in Sunderland, where the court ruled that the building should have been valued at the nominal sum of £1, as it was not fully usable during refurbishment. The Valuation Office Agency will now consider the implications of the ruling.

The victory was celebrated as changes to business rates were due to come into effect on 1 April, seven years after the last revaluation, with observers warning that hotels, specifically, would be “hammered,” likely causing them to defer or cancel scheduled CapEx projects. The budget reading on 8 March will see Chancellor of the Exchequer Philip Hammond reveal whether an additional fund for transitional rates relief will also be increased.

According to the BBC, the government has established a £3.6-billion transitional fund to help businesses facing big jumps in rates.

The government has faced increasingly vehement attacks from the business community in recent weeks, objecting to claims that most businesses would be unaffected. The revaluation normally occurs every five years, but was delayed to avoid disrupting the general election. Annual rates increases have been capped at 42 percent, up from the 2008 cap of 12.5 percent.

Business rates are a tax on the occupation of non-domestic property. 

According to a survey from the Federation of Small Businesses (FSB), 36 percent of small firms expect to see their business rates increase, with 44 percent of those businesses saying their rates are set to rise more than £1,000.

Of those facing a rise, 55 percent plan to reduce, postpone or cancel investment in their business. A further 19 percent of those firms say they will go to the extreme and consider closing down or selling as a result of the hikes.

What it means for the hotel industry

According to John Webber, head of ratings for Colliers International, hotel owners are especially going to feel the pain of the new rate increases. 

“Hammond has said all along that there is no extra money, so this is likely to be paid for by large businesses. I can’t see that they’re going to offer relief for the hospitality sector because it’s so big. The feeling is that hotels and plenty of pubs are going to get hammered,” Webber said. 

“We’ve been banging on about what the government should do and what they haven’t been doing over the past few months and it’s only the recent noise over the past few weeks that has meant that they are now looking to alleviate the pain. What they had been saying is that ‘you win some, you lose some, get on with it.’ I think they are shocked by the level of response.

“We told them in 2012 that this was going to happen if you kicked the can down the road. What they’re finding is that, with business rates being kept artificially low, rents have gone up. Which is fine until there’s a revaluation—that’s why it’s a disaster to have a seven-year revaluation cycle, that’s what has distorted the market.

“The problem that the government has got itself into is that they promised to help small businesses. They made a big deal of telling small businesses that they will pay no more than 5 percent of what they pay today. That’s not true, because some pay nothing or very little. Below £6,000 you pay nothing but if you are revalued at £15,000 that means you will go from nothing to £7,500 a year, which is more than 5 percent."

Webber’s colleague, Marc Finney, head of hotels & resorts consulting for Colliers International, said the government tries disguising these raises to stay in office. "Governments have worked it out that if you increase income taxes, no one will vote for you; instead, they raise other taxes and the biggest one for hotels is business rates."

Two decades ago, Finney said that when performing a feasibility study, "you would be forecasting that rates would be around half a percent of revenue, today it’s nearly 5 percent of revenue and 20 percent of profits—and for what? They are sucking money out of businesses, which makes it very hard to reinvest.”

There are those on the edge of the market who will escape. Holiday homes available for let for fewer than 140 days per year in England are not valued for business rates. Webber pointed to the holiday homes that are avoiding the hike, “which means they won’t be paying a penny in rates, but some of these properties are worth over £1 million." 

With the sector facing a rising challenge from Airbnb and its colleagues, every advantage will help.

According to The National Law Review, this revaluation is politically controversial with rates bills for some businesses possibly increasing by more than 100 percent. However, as the Law Review writes, "the revaluation will not just affect those who pay business rates, it also will directly affect landlords who pay statutory compensation to a tenant in England and Wales under the Landlord and Tenant Act 1954. As such, a landlord who wants to regain possession of its commercial premises under the 1954 Act (perhaps for a redevelopment or because they want to occupy it themselves) should consider now whether or not they can avoid—or even exploit—the consequences of the business rates revaluation."

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.