Rates Exemptions for Building Improvements in their first year

Following on in our series of Rating reform measures emanating from the October 2021 Budget, the government has announced a new relief to support investment in property improvements. This will enable businesses to adapt to meet rising demand, make improvements to their premises, and enhance productivity as employees return to the workplace. The measure will be introduced in 2023 and will be reviewed in 2028.
To receive the improvement relief, ratepayers will need to demonstrate that their property meets 2 conditions:

•  the VOA must be satisfied that the improvements meet the definition of qualifying works – the ‘qualifying works’ condition, and
•  the relevant local billing authority must be satisfied that in the period since the qualifying works commenced the property has remained occupied and that the ratepayer has not changed – the ‘occupation’ condition.

Once the VOA is satisfied that the qualifying works condition has been met then it will issue a certificate of the increase in rateable value which is attributable to any works falling within the meaning of qualifying works. The billing authority will then apply the relief using the certificate, but only if the occupation condition has been met.
Ratepayers should have clarity about the types of activity which would make them eligible for the new relief. The parameters for meeting the qualifying works condition reflects the government’s objective of supporting businesses to make practical improvements to their properties to support their business and growth. Qualifying works must result in a positive change in the rateable value to be eligible for relief. Any improvements which result in no overall change in rateable value or a reduction due to simultaneous value-supressing activity, such as demolition works, will not be eligible for the relief. Therefore, in order to fall within the meaning of qualifying works, the improvements will need to produce:

•  an increase to the size of a building or the internal useable space within a hereditament,
•  other improvements or upgrades to the property’s physical state which might include addition of heating, air conditioning, or raised flooring, or
•  addition of other rateable plant and machinery

Examples of the type of works which may meet the definition of qualifying works are (assuming all remain in a rating list and under the same occupation):

•  A business adds insulation or new lining to a previously uninsulated old industrial property resulting in an increase in value of the property.
•  A business makes a physical extension to their property, like an extension to the rear.
•  A shop removes a structural wall within its front part. This could increase the rateable value as the areas previously behind the wall are now able to be used for retail purposes rather than storage.
•  A business adds a structural mezzanine retail area at their retail warehouse.

A change of use alone (for example changing a shop to a bar) would not constitute qualifying works, although any of the above works associated with that change of use might still be eligible. The addition of land to an existing property, the construction of a new hereditament outside the existing property and repair works are also not eligible for relief. However, a new build on part of an existing property, like a new building on a large factory site, would be treated as an extension or improvement to that site, and hence be eligible for relief. Should a ratepayer undertake a scheme of works which results in the division of a property into multiple different rating assessments, then this may still qualify provided the other tests are met. For example, if the occupier of an industrial unit undertakes some qualifying works and also divides part of their property for use by a different tenant then the works may still qualify but only on the part they continue to occupy.
The object of the relief is to help occupiers making improvements in support of their existing business premises and is not intended to subsidise general commercial property development such as new construction or refurbishment. Given that such major works generally result in the property leaving the rating list, for ease and clarity the government will provide that the meaning of qualifying works will exclude works where the property was not entered in a rating list during all or part of the period of the works.
Examples of the types of works which may not meet the definition of qualifying works are:

• Construction of a new building resulting in a new rating assessment.
• A redevelopment scheme which takes a property out of the rating list, but after substantial redevelopment the property is brought back into rating.
• Replacing an old technology such as Asbestos lining with a different type of modern insultation with no resulting change in rateable value.

These determinations will be made by the VOA which, once it is satisfied the eligibility conditions have been met, will issue a certificate of the change in rateable value which is attributable to any works falling within the meaning of qualifying works.
The government wishes to target the relief to support ratepayers investing in their own active businesses and ensure no diversions to support property developers, landlords improving their asset or businesses which have merely inherited improvements from previous occupiers. To meet this objective, billing authorities will apply a further condition before awarding relief – the occupation condition. In order to meet the occupation condition billing authorities will have to be satisfied that in the period since the qualifying works commenced the property has remained occupied and that the ratepayer has not changed.
The occupation condition will ensure as much as possible maximisation of the impact of that support, that the relief is not in effect inherited by new ratepayers with no connection to the works and that support does not flow to landlords or developers making improvements to their asset. In the case that landlords make improvements to their asset, the existing occupier of the property will be eligible for the improvement relief, given that the occupier is likely to face higher overall rental/commercial costs due to the improvements. Billing authorities will need to be satisfied that the occupation condition is met before awarding relief.
Once the conditions are met, the billing authority will need to calculate the relief based on a certificate issued by the VOA. This will certify the change in the overall rateable value of the property which is attributable to any qualifying works. So, for example, where a shop removes a structural wall to increase the most valuable retail space then the certificate will reflect the net increase in rateable value resulting from the additional retail space. The government considers that such a process can be effective without significant changes to VOA or billing authority operating practices, and that certification is the best way to ensure that the evidential link between rateable values and the application of the relief is maintained.
To ensure that link is sustained in line with the VOA’s responsibility for list accuracy, the design of the certification will be flexible and amendable. The certificate will have daily effect for the year of its life, and the VOA will be able to revisit it should any part of the property affected by the qualifying works change during the year. The VOA will be able to withdraw or amend a certificate at its discretion, for example to reflect changes in facts or errors relating to the certified qualifying works. Any subsequent changes on a property which the VOA concludes are not a variation of the original qualifying works but a new set of qualifying works could result in a new certificate being issued for a year. Separate qualifying works on the same property in the same year may result in separate certification.
Ratepayers will continue to be able to challenge list alterations made by valuation officers, through the existing appeals process, to reflect qualifying and other works.
It is envisaged that certificates will be issued by the VOA proactively when a ratepayer fulfils their new obligation to notify changes and will be sent to the billing authority and copied to the ratepayer.
In summary, this relief will only run for periods of 12 months.