3 Should a transitional scheme be introduced?
3.1 The consultation document set out the pros and cons of introducing a possible transitional relief scheme for non-domestic ratepayers. The pros were described as:
- Ratepayers in areas where property values have increased over a certain level will see bill rises phased in over several years.
- There will be no impact on those who otherwise receive 100% relief.
3.2 The cons were described as:
- Ratepayers in areas where property values have decreased over a certain level, who would otherwise see bills fall, do not see the full savings for several years.
- Rates bills become significantly more complex and difficult for ratepayers to understand.
- Schemes are difficult to model and may require adjustments to ensure they are cost neutral.
- Where a ratepayer wins a valuation appeal, they may not see the full benefit for several years.
- Because of a recent legal judgment,  at the 2017 revaluation, there may be more properties split into different liabilities than would otherwise be expected and special rules need to apply when premises are split or merged.
3.3 Question 1 asked respondents for their views on whether the Scottish Government should introduce a transitional scheme for the 2017 revaluation.
Question 1: Should the Scottish Government introduce a transitional scheme for the 2017 revaluation? [Yes / No]
3.4 Out of the total 52 respondents to the consultation, 51 answered this question. The remaining respondent chose not to reply directly to the yes / no question, but instead provided more general comments, expanding on the pros and cons of introducing a transitional scheme.
3.5 Table 3.1 below shows that nearly two-thirds (63%) of those who replied to the yes / no question, were in favour of some form of transitional arrangements for the 2017 revaluation; 37% were not in favour.
Table 3.1: Should the Scottish Government introduce a transitional scheme for the 2017 revaluation?
|Private sector - energy and renewables||8||100%||-||0%||8||100%|
|Other private sector||8||50%||8||50%||16||100%|
|Other respondents (incl individual respondents)||4||67%||2||33%||6||100%|
3.6 Companies in the energy and renewables sector and NHS respondents were unanimously in favour of introducing a transitional relief scheme. There were more mixed views among local authorities and other private sector respondents, although a majority of local authorities were opposed, and companies responsible for managing large property portfolios were unanimously opposed to the introduction of a transitional scheme.
3.7 Most respondents provided comments at Question 4 which explained their reasons for either supporting or not supporting the introduction of a transitional scheme for the 2017 revaluation.
3.8 Among those respondents who indicated support for a transitional scheme, around a third favoured transitional relief for those whose rates bills would be increasing, but they also wanted those businesses whose rates bills would be decreasing to receive the full reductions due to them as soon as possible. These views are discussed below, together with other views in support of a transitional relief scheme.
Views in support of a transitional scheme
3.9 Respondents who supported a transitional relief scheme included businesses or other organisations anticipating a substantial increase in their rates liability following the 2017 revaluation. These respondents noted that revised valuations had not yet been published. It was argued that a transitional scheme was vital to allow adequate time for businesses to plan for, and manage, their increased rates bills, and that the current challenging economic conditions made it difficult for businesses to absorb unexpected large increases in their costs. Some respondents went further and stated that it was 'manifestly unfair' to impose significant increases in rates without allowing those businesses time to plan.
3.10 Respondents in this group also highlighted the length of time since the last revaluation (seven years, rather than the usual five), and the 'unprecedented economic fluctuations' seen during this period. Uncertainty arising from BREXIT (the result of the EU Referendum held in June 2016) was also highlighted as an important factor for respondents in advocating transitional relief. Some noted that transitional relief had previously been available in Scotland prior to the 2010 revaluation.
3.11 Private sector respondents argued that any sharp, substantial increase in rates could lead to reductions in future investment, increased costs being passed on to customers and / or job losses. In sectors such as telecoms and energy, increased non-domestic rates therefore would have the potential to impact negatively on the wider population in Scotland ( i.e. beyond the business community). Private sector respondents also suggested that without a transitional relief scheme, Scottish businesses could be put at a competitive disadvantage compared to businesses in England and Wales which would have the benefit of a transitional relief scheme.
3.12 One respondent pointed out that, for hotels and other businesses in the hospitality sector (including licensed on-trade businesses), rates are calculated on the basis of business turnover rather than property values. This respondent suggested that, because of this method in calculating rates, businesses in this sector may see a substantial increase in rates (between 30-50% was estimated).
3.13 NHS respondents stated that they were anticipating a substantial increase in their rates bills. (Different respondents thought these increases could range from 10-20%.) This group argued that such significant increases would add to the financial pressures already on front-line services. However, the introduction of a transitional relief scheme would allow these increases to be managed more easily.
3.14 Businesses in the energy and renewables sectors were unanimously in favour of a transitional relief scheme. This particular group of respondents were concerned about the potential for large increases in rates bills at a time when a range of other revenue support mechanisms were being reduced or withdrawn entirely. These changes also coincide with falling profits resulting from (for example) reductions in the cost of installing solar panels, etc. It was suggested that the renewable energy sector was unique among business sectors in Scotland in relation to the dramatic changes there have been in both costs and revenues since the last revaluation.
3.15 As seen in Table 3.1 above, most local authorities were not in favour of transitional relief. However, those who did indicate support for a transitional scheme were concerned that some businesses might be faced with substantial increases in their rates bills and, were these increases to 'exceed certain thresholds', it may be necessary to introduce transitional relief to protect a fragile economic recovery.
Views opposed to a transitional scheme
3.16 Respondents who expressed opposition to transitional relief generally based their arguments on the principle of fairness: transitional relief was seen to be unfair and 'contrary to natural justice'. Respondents argued that such schemes 'interfered with market forces', introduced a system which lacked transparency, and took no account of ability to pay. One private sector respondent thought that such a scheme would be seen as 'democratically unacceptable' in relation to any other form of taxation, including Council Tax, Income Tax or Corporation Tax, and suggested that it was unjustified to discriminate against business ratepayers by introducing transitional relief. This same respondent noted that transitional relief relied on one ratepayer subsidising another by means of an arbitrary adjustment to their rates bill and could, in effect, result in one commercial business subsidising a direct competitor.
3.17 Respondents in this group commented that the purpose of a revaluation exercise is to re-distribute the tax base fairly. They argued that transitional relief undermines the relationship between a property valuation and the amount payable as rates - since those businesses assessed as being on too high a rateable value are denied the benefit of a reduction in their rateable value in order to pay for a delayed increase in rateable value for businesses that have been assessed as more profitable. Respondents repeatedly emphasised that transitional relief 'distorts the tax system' and is detrimental to businesses. Several private sector respondents (particularly those engaged in managing large retail property portfolios) also commented that the Scottish Government recognised this, quoting a statement made by the Scottish Government at the time of 2010 revaluation: 'Transitional Relief works by taking money off business who should see savings to subsidise those who see a rise. This is unfair and we want to pass on full savings to businesses.'  One private sector respondent also commented that if the non-domestic properties seeing the greatest increase in valuations are public sector-owned properties (such as schools, hospitals, etc.), that transitional relief might be viewed as the private sector 'subsidising' the public sector.
3.18 Respondents emphasised that, given the challenging economic climate, and the length of time since the last revaluation, it was crucial that those businesses and properties which are due a reduction in their rates should have the full benefit of that reduction immediately. This was seen to be especially important for the retail sector and 'struggling town centres'. It was suggested that some retail businesses have been paying significantly higher rates for longer than they should have (based on values assessed in 2008) and this had caused major distress among these business owners; respondents argued that, depending on the phasing arrangements, these businesses would have to wait a further three years (minimum) to see the full reduction in their rates bills. This was thought to be unfair and 'wrong'. One local authority respondent also noted that many business sectors currently paid no rates at all; therefore, the burden of supporting a transitional scheme would fall on a relatively small number of non-domestic ratepayers. Again, the view was expressed that this was not fair.
3.19 Some respondents also argued that properties which have been revalued at a higher level have already benefited from the two-year delay in revaluation. Moreover, they suggested that, if these properties have seen a significant increase in their valuation, the owners of these properties are more likely to be in a position to sustain an increase in their rates.
3.20 Some respondents suggested that there was little evidence to indicate that transitional relief would benefit ratepayers across all sectors in Scotland; rather it would simply introduce a 'more complex property tax system that is extremely difficult to understand'. Some private sector respondents pointed to evidence from Northern Ireland where there is no transitional relief (unlike in England and Wales), which suggested that the absence of transitional relief would lead to higher levels of occupancy of retail premises. 
3.21 While the principle of fairness (as discussed above) was the main reason given by respondents for not supporting transitional relief, other reasons, given less frequently, echoed some of the disadvantages (or 'cons') of the scheme set out in the consultation document. These were that:
- The administration of transitional relief schemes was seen to be complex, onerous and potentially costly for local authorities (in changing / developing IT systems)
- There was the potential for confusion with ratepayers, particularly among those who must pay additional rates to fund the scheme. Confusion may also result from rates bills changing between revaluations, and in situations where subdivision of existing entries in valuation rolls will generate several bills in place of the one currently paid.
3.22 Local authority respondents highlighted a range of issues in their comments. One emphasised that, if a transitional relief scheme was introduced, 'it must be as simple to understand as possible for all concerned, and should be for as short a time as possible'. Another suggested that if a scheme is introduced, transitional arrangements should take into account other forms of rates relief, including the Small Business Bonus, Mandatory and Discretionary Relief, and Disabled and Empty Property Exemptions that some businesses and sectors are already receiving. As discussed above, there was concern that the burden of paying for the scheme should not fall on a relatively small number of businesses. A third local authority argued against transitional relief, but suggested that it may be possible for local Councils to allow ratepayers more time to pay their rates if they need it. In general, local authorities felt that more information was needed before decisions about transitional relief were finalised.
3.23 Among respondents expressing support for a transitional relief scheme, some commented that, in principle, they were not in favour of transitional relief for non-domestic rates. However, given the current economic climate and the two-year delay in revaluation, they felt a transitional scheme was necessary at this time. This group advocated more frequent revaluations, or a mechanism for monitoring and adjusting rateable values in sectors where costs and revenues change dramatically between revaluations to avoid the need for transitional relief in future. One private sector umbrella organisation highlighted a specific example in relation to Aberdeen: it was suggested that property values assessed in spring 2015 (the tone date for the 2017 revaluation) were likely to be no longer valid given the recent dramatic changes in the economy of Aberdeen. This respondent suggested that, even if transitional relief is introduced, it may not entirely mitigate the adverse impact on Aberdeen businesses of substantial rates increases.
3.24 Some respondents in both groups ( i.e. those in favour of transitional relief and those opposing it) expressed support for the idea of 'upward phasing' for those ratepayers facing particularly large increases to their rates bill ( i.e. increases 'beyond the norm') but, crucially, they did not think this should be subsidised by ratepayers whose properties had been revalued at a lower level. Alternative options for funding transitional relief were suggested:
- Large increases in rates should be dealt with on a case-by-case basis using existing relief schemes (including hardship and discretionary powers available under the Community Empowerment (Scotland) Act 2015)
- Rates relief should be funded by the Scottish Government (not other businesses) as a practical way to support economic growth, and because of the increased liability which has resulted from the postponement of the 2015 revaluation.
3.25 It was suggested that any reliefs or exemptions relating to non-domestic rates should be underpinned by a clear and co-ordinated government policy, and should be thoroughly costed and risk assessed before implementation. It was further suggested that any relief or exemption should adhere to European 'State Aid' rules.
3.26 NHS respondents were unanimously in favour of a transitional relief scheme, and said that, should it be introduced, the following issues should also be addressed:
- Transitional relief should be applied to the property, not the occupier. An example would be if a health centre is occupied by a primary care practice, which subsequently vacates the property. If the NHS Board takes over the running of the centre, any transitional relief received by the former occupier should continue to be received by the NHS Board.
- New NHS properties are currently being constructed. If transitional relief only applies to existing properties (those in place as of 1 April 2017), then properties under construction and completed after this date could be paying substantially more in rates compared to similar properties. There was concern that these new properties could be faced with the requirement to fund a transitional relief scheme while receiving no relief themselves, due to the timing of their completion. 
3.27 Respondents made a range of more general comments.
- As noted above, some respondents stated that they found it difficult to assess the impact of options set out in the consultation document without knowledge of the draft rateable values. It was also noted that announcements about the rates poundage, the large business supplement and other reliefs are unlikely to be made until the autumn budget in December. There were frequent calls for any decisions about transitional arrangements to be delayed until further information is available on all these issues.
- It was noted that rates reliefs and exemptions can have unintended consequences. For example, it was suggested that where rates are low, rents are often high as a result. Thus, it can be the landlord of the property rather than the occupier who receives the benefit of rating reliefs as they are able to take advantage of the situation by increasing rents.