The so-called ‘Air-Con Tax’ was back in the press last week. The issue seems to come to the fore each year during a bout of good weather and highlights the current tax disincentive to invest in and add value to property.
The Local Government Finance Act 1988, Schedule 6, paragraph 2(1) provides that the Rateable Value of a non-domestic property is “an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year” on certain specified assumptions.
Under the Valuation for Rating (Plant and Machinery) Regulations 2000, which came into force on 1st April 2000, where there is plant or machinery of a certain class on a property, it is assumed that such plant or machinery will be valued as part of the property. There are a total of 4 classes of plant and machinery assumed to be part of a property; with Class 2 covering that used in connection with heating, cooling and other services.
The Valuation Office Agency will, therefore, include certain business assets in their valuation when setting the Rateable Value. Where plant and machinery add value to a property, certain types will be shown separately in an assessment as an additional amount – often with no further detail.
It is imperative that, in my view, action is taken by Government to alleviate the negative impact business rates have on investment in plant and machinery.
Excluding new plant & machinery, certainly for capital-intensive factories, would encourage investment, rather than placing those businesses who seek to improve their plant efficiency, environmental sustainability and conditions for their staff at a financial disadvantage.
In essence, where air conditioning is installed as part of a tenant’s improvement, it will increase the rental value of the property in question, yet this is not reflected in the rent as the Landlord has not paid for the installation. Additionally, the Valuation Office Agency sometimes fail to distinguish between AC and CC (Air Conditioning and Comfort Cooling), the latter being of lesser value with regard to the function that it performs (recirculating existing air within the building).
The above highlights a major difference between commercial and domestic property taxes. In a domestic property any additional value derived through significant improvements are held back until the property is sold, unlike business rates for commercial properties.
Another downside for ratepayers is the CCA regulations, which govern business rates appeals, require the ratepayer to declare the details of the survey of the property at the outset. An assessment could be increased for the presence of air conditioning, or items such as security cameras, before it can be established if the base rate of valuation is correct. In my view, the whole assessment and valuation should be looked at holistically to avoid the risk of an immediate increase while any appeal is on-going.
Taking the above into account, no wonder it’s sometimes difficult to keep your cool when challenging business rates!
Robert Hayton is Head of Business Rates at real estate adviser Altus Group.
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