Legislation to reverse the “staircase tax”

In the Autumn Statement 2017 the Chancellor announced that the Government proposed to introduce legislation to reverse the effects of the decision of the Supreme Court in the case of Woolway (VO) v Mazars LLP (2015) UKSC 53. We now have details of how it is proposed that should be done, in the form of a consultation paper published by Department of Communities and Local Government and the draft legislation to enable the change. Both the original Supreme Court decision and the Chancellor’s Autumn Statement announcement have been covered in these News pages but, in summary, the effect of the Supreme Court’s decision was that fifty years of established practice as to whether a property should comprise a single assessment (or “hereditament” as they are known) or more than one hereditament, was overturned.

The result was that parts of property that adjoined each other, but did not intercommunicate directly with each other, were to be treated as more than one hereditament. Examples of this included adjoining office floors where the communication between the floors was by a common staircase – hence the press dubbing it the “staircase tax”. The Valuation Office Agency (VOA) began investigation 70,000 properties that comprised a single hereditament for business rates purposes and many of these were split into more than one hereditament. Aside from the administrative inconvenience of lots of new rates bills these changes meant, in some cases, a substantial change in rates liability for the occupier. This might be because having more than one hereditament meant the ratepayer lost small business rates relief, or because a series of individual office floors had a higher aggregate rateable value than they did as a single rating assessment. Some of these changes were made with retrospective effect back to 1 April 2010 and resulted in substantial retrospective rates bills. The main professional bodies (RICS, IRRV and RSA) wrote to the Secretary of State at the time asking for action to protect ratepayers against such retrospective increases. At the time the Secretary of State was not willing to take action but as more examples of large retrospective rates bills have arisen it appears he is now willing to do so.

What is proposed in the consultation is an amendment to the Local Government Finance Act 1988 in the form of a proposed Non-Domestic Rating (Property in Common Occupation) Bill. This take advantage of powers already granted to the Minister to determine things that might normally be more than one hereditament should be treated as one, and vice versa. The new Bill will provide that, where two hereditaments are occupied by the same person and are contiguous, they shall be treated as a single hereditament. The definition of “contiguity” relies upon the sharing a common wall or ceiling. To achieve this, all or some part of the wall or ceiling of one property will also need to form all or part of the wall or ceiling of the other property. The definition is quite a tortuous one and may result in some things that would not previously have been a single hereditament becoming such. Properties that are used for wholly different purposes will not be able to benefit from this treatment, nor will unoccupied properties.

The implementation of this change will involve secondary legislation as well at the Non-Domestic Rating (Property in Common Occupation) Bill. The proposed secondary legislation will allow ratepayers to seek backdated changes to the 2010 Rating List where they have been affected by changes resulting from the Mazars decision. The consultation paper proposes that this should be done by giving ratepayers a new right to make proposals to alter the 2010 Rating list – something that they have generally not been able to do since the list ended on 31 March 2017, but now may be able to do again. The VOA would then be required to make equivalent changes to the 2017 Rating List so as to ensure consistency going forward.

The principle of the proposed changes is a welcome one because many ratepayers have seen substantial retrospective increases in rates liability through no fault or action of their own, but simply as a result of a change in the interpretation of the law. Whether the detailed implementation will play out in the way the Government suggests is now the key question. The consultation is open until 23 February 2018 and will be followed by an Act of Parliament, setting out the definition of what properties may be treated as a single hereditament, and subsequent secondary legislation allowing ratepayers the right to make appeals to have this approach applied to their circumstances. The Act of Parliament will apply to England and Wales but the consultation paper refers to England only so, presumably, there will be equivalent secondary provisions in Wales. The law in Scotland was not altered by the Supreme Court’s decision. We have commented many times on the extraordinary complexity of the business rates system in the UK and that complexity is only increasing. We seem no nearer a proper and fundamental review of the tax and its application.