SMEs have long been fighting to understand the commercial ratings system. But it's a hard, ongoing struggle - not made any easier by the 'ratings cowboys'.
There was a big victory for small businesses in Manchester last month when two directors of the firm Hamilton Baines & Co were convicted of conspiracy to defraud. The firm, using a telesales team, had promised to reduce the business rate bills of some 5,000 businesses. For £176, the firms thought they would get expert advice and a valid appeal. They got neither. The directors were just good salesmen who knew little about non-domestic business rates - sadly neither did the firms buying their services. In fact, many small businesses are still baffled by the rating system.
The likes of Hamilton Baines are known as rating cowboys (see box, right) and are one good reason why it is important to understand the commercial rating system and how you can reduce your bill or appeal against your rates. It is particularly relevant now, as the Government's Valuation Office Agency (VOA) begins Revaluation 2000, the process by which rating levels will be set for the five years from 1 April 2000. The new rating levels will be based on property values as at 1 April 1998.
Commercial rates are a tax raised by the Government on occupiers of non-domestic premises. They are collected by the local authorities, which have no power to set the levels at which the rates are levied, however.
The money collected is pooled centrally in England, Scotland and Wales and then distributed back to councils on a per-capita basis to pay for local services such as police, education and roads.
Government figures show that small businesses are more heavily burdened by commercial rates than larger ones, however. For those with a turnover of less than £50,000, rates make up 7.7% of turnover or 13.7% of its overheads.
This compares to businesses turning over between £100,000 and £500,000 for which rates account for just 2.5% of turnover.
A firm's rates bill is derived from the property's rateable value, which is based on the rental value of a property on the VOA's chosen revaluation date. This rateable value is then multiplied by the rate poundage, which is annually set by the Government and known as the Uniform Business Rate (UBR), to establish the amount to be paid. The UBR for 1998/99 is 47.4p in England and Scotland and 42.9p in Wales. For properties with a rateable value of less than £15,000 in London, or £10,000 elsewhere, the rate poundage is 46.5p in England and Scotland and 42p in Wales.
The rates bills that firms are paying now are based on values from 1 April 1993. The new values, based on the 1998 figure, will apply from 1 April 2000 until 2005 and could be up to 15% higher on average than the 1993 values.
Multiplying its rateable value by the poundage should give you a simple calculation of a firm's bill but, unfortunately, the system is complicated by transitional relief, which is designed to help phase in increased payments for those who have suffered large increases in their rateable values after revaluation. It is funded by artificially increasing the bills of those whose rateable values have dropped significantly.
In the past, the VOA sent a form requesting rental information to all businesses. For Revaluation 2000 it is sending out forms selectively.
As the VOA is trying to base its list on market rents for 1 April 1998, it will be most interested in properties that have had rent reviews or new tenants in the six months before or after 1 April 1998.
Andrew Smith, managing director of surveyor LSM Partners, says giving the correct information is vital and involves more than just filling in your annual rent. 'The property deal might include rent-free periods or payment for a fit-out,' he explains. These incentives often mean that rent paid is artificially higher than the market rent. A rating expert would filter all these extras to provide an accurate yearly rental figure.
The new rateable values won't be ready until the beginning of 2000 but, until then, there are some ways for small businesses to get reductions in their rates. A vacant property is subject to 50% rates once it has been unoccupied for three months. Section 44a of the Local Government Finance Act 1988 (as amended) also gives rates reductions for short periods - usually under a year - if the property is only part-occupied. Simon Horsington, local taxation manager for West Berkshire Council, recommends that firms get in touch with their local authority to see what their policy is.
Temporary relief can also apply if you are undergoing building work, suggests Charles Partridge, director at surveying firm Lambert Smith Hampton.
The disruption and perhaps temporarily reduced business space mean that your premises will be regarded as less valuable.
This April saw the introduction of new relief for general stores in settlements of 3,000 people or less. A 50% reduction will be standard but the local council also has a discretion to pay some or all of the remainder.
Do not despair if you are having trouble paying your rates. Horsington says the local council will be understanding as long as you are pro-active.
'We encourage businesses to talk to us as soon as possible - it's simple debt management. If the council is able to reach a payment agreement, it won't charge interest.'
There are also other changes that small businesses should watch out for.
The Government released a consultation paper on rates in April, which aims to give back some rate-setting power to local councils. This reflects Labour's commitment to giving regions more control. However, If it goes through, local councils could add a levy on top of UBR, which could make it difficult for businesses to budget accurately for rates bills.
The other change being investigated is to give more relief to small businesses to alleviate some of the burden. Partridge says this would most likely work in the same way as income tax with all firms paying a lower level of charge for lower levels of rateable values and increasing in stages for the higher level of rateable values. But sadly this system would not just help small businesses, adds Partridge. 'If you use rating system relief for small businesses, it is large businesses in small premises that benefit.'
REVALUATION 2000: SOME HANDY HINTS
Don't throw away the form: it is a statutory obligation and needs to be returned within 21 days. As less forms are being sent out this year, the VOA will be more stringent and swifter when it comes to chasing you up.
Use the information to budget for your likely increases: although you cannot yet gain an accurate figure, a rough estimate can be built into your budgets for the new cycle which starts in 2000.
Keep a copy of your form: an obvious point but one that many forget. The information could be useful for appeals and the valuation officer can contact you for further details.
Take advice: giving inaccurate information could land you, and others, with higher rate bills than are necessary.
Adopt normal business practice when hiring an advisor: get quotes from three or four different firms.
Don't be panicked into paying out for advice: always check the expert's qualifications.
RATING COWBOYS AND HOW TO AVOID THEM
Rating cowboys work by offering small businesses an easy way to appeal their rates. They often charge an upfront fee of around £500 to lodge an appeal with the Valuation Office.
Unfortunately, lodging the appeal is only the first step in a very long process and, as Charles Partridge, director of rating at Lambert Smith Hampton explains, they are not working illegally but to a carefully worded contract. 'These people say that they don't ask for money upfront but only when an appeal is accepted. It is a legal requirement for the Valuation Office to accept the appeal.' So firms should question the motivation of anyone asking for money in this way.
Many of the cowboys purport to be chartered surveyors - who have proper indemnity insurance. To help combat this problem, the Royal Institution of Chartered Surveyors has a helpline on which you can confirm whether they really are (0171 222 7000). The helpline will also put you in touch with three qualified surveyors in your area. The Institute for Revenue, Rating and Valuation has a similar helpline (0171 831 3505).
If you are thinking of appealing your rates, payment will either be on the basis of a success fee as a percentage of the rebate or an agreed fixed fee. These vary widely depending on the size of the business.
If you suspect a company of being a cowboy or you think you may have been mistreated by such an operation, you should contact your local trading standards office.