G80. The review considered whether there was a case for continuing with a transitional relief (TR) scheme and, if so, the form that it should take, and how it should be financed. The main questions considered were:
- Should there be a TR scheme at all?
How should changes be phased in; should this be achieved within the life of the lists? Should schemes be self-financing; if so, how should they be financed? Should there be a TR scheme at all?
G81. If there were no TR then NNDR would be a clear, simple and fair system. Everyone would pay a bill based on their rateable value and the national multiplier. TR complicates this, leading to lack of clarity for ratepayers, more work for billing authorities and creating some inconsistencies in the treatment of similar properties that reduce the fairness of the system. The 1990 and 1995 TR schemes also entailed considerable costs to the exchequer. The 2000 scheme will be self-financing over five years, but requires exchequer support in the early years. So why have TR?
G82. Transitional relief was introduced in 1990, as a transitional measure, to ease the large changes which then occurred as a result of the move from locally set rates to the national non-domestic rate. It was also the first revaluation for 17 years and large changes in bills were expected. Successive Governments have also decided to reintroduce TR schemes for the 1995 and 2000 revaluations, in recognition of the concerns of ratepayers about large shifts in rate bills as a result of revaluations. TR schemes have been introduced to provide stability and certainty, to allow those facing large increases time to adjust to their new liability.
G83. During consultation on the current TR scheme in 1999, there was a strong view from ratepayers, large and small, that the benefits of stability and certainty were more important to them than clarity and simplicity. Most ratepayers are interested in the bottom line and would rather have a bill that was lower, even if it was less clear how that sum was calculated. There was general acceptance at the time that it was fair and reasonable to expect the gainers from revaluation to contribute by way of smaller reductions in their bills. The main objections to having TR came from the rating profession, rather than ratepayers.
G84. In response to the consultation paper on this review, 37 respondents out of 114 called for TR to be continued and 19 called for it to be abolished. 30 respondents favoured a system that ensured all ratepayers were out of transition before the next revaluation.
G85. Despite this support for TR, it does have its drawbacks. The 1990 and 1995 schemes have operated so that many have never fully adjusted by the time of the next revaluation - around a third of all properties in England were still in TR at the end of the 1995 lists. Most were paying less than their full bill, but some were still paying more. Many will carry this forward into the 2000 TR scheme. This in turn is expected to leave around 200,000 ratepayers still in transition by 2005. Some have not paid the full amount since 1990. This calls into question the fairness and transparency of the TR schemes.
G86. Some ratepayers are unhappy about facing annual increases in their bills of 10% or more, at a time of low inflation, as a result of TR phasing. They do not realise that they are still benefiting from TR and paying less than their full amount. That is not to say that there is no criticism of the TR scheme amongst those whose bills are in downward transition, who are delayed in getting the full benefit of a reduction in bills as a result of the revaluation.
G87. Others are unhappy that they are paying significantly more than their neighbours in similar properties. This can occur where there was a change of occupation in 1990/1 or 1991/2, which led to loss of TR under the 1990 scheme. (Since 1992 TR is given to the property rather than the occupier). Even where both get TR under the 1995 and 2000 schemes, there can still be significant differences in rate bills. Similar inconsistencies occur where new or substantially refurbished properties enter a rating list early in its life and so do not get TR, while others that entered the old lists weeks or months before do get TR and substantially lower bills. To some extent this is offset by adjustments in rents.
How should changes be phased in?
G88. One of the major drawbacks of the current and previous schemes is that it does not get everyone out of TR by the end of the scheme, adding to the complexity of NNDR and perpetuating some unfair discrepancies, as described above. This is because the transitional limits are expressed in terms of the previous year’s bill and bear no relation to the full liability that they would be paying if there were no TR scheme.
G89. The TR scheme adopted for England for the 2000 revaluation imposes fixed limits on both increases and decreases in bills. These are expressed in terms of the previous year’s bill and are applied in addition to the annual RPI increase. Larger increases are allowed in later years, as businesses will have more time to plan for them. As a result, larger decreases can also be allowed in later years. The limits are more generous to small properties (smaller increases, bigger decreases in bills) in recognition of the greater burden of rates on small firms. Small properties are defined as those with rateable values of less than £12,000, or £18,000 in Greater London. The limits on increases and decreases are as follows:-
Maximum increases in real terms
Year
Small Property
Large Property
2000/01
5%
12.5%
2001/02
7.5%
15%
2002/03
7.5%
17.5%
2003/04
7.5%
17.5%
2004/05
7.5%
17.5%
Maximum decreases in real terms
Year
Small Property
Large Property
2000/01
5%
2.5%
2001/02
5%
2.5%
2002/03
10%
5%
2003/04
12.5%
7.5%
2004/05
25%
15%
G90. An alternative approach has been adopted in Northern Ireland in 1997 and in Wales and Scotland in 2000. These ensure that all ratepayers are out of transition by the end of the scheme, basing the amount of relief on a proportion of the full liability, rather than on the previous year's bill. This provides some stability and certainty while ratepayers adjust over time to higher liabilities, and helps fairness by getting everyone out of TR by the time the next revaluation takes effect.
G91. The Welsh TR scheme for 2000 applies only to properties with rateable values of less than £25,000. Larger properties receive no transitional relief. For those below this threshold, it limits increases in 2000-01 to 10% of the previous year’s bill. The relief is then reduced by one third in each of the two following years. After that, all ratepayers will have to pay their full liability from 2003/4. Reductions in bills are limited in the first year of the scheme to 15% of the current rates bill. In the second and third years the limits increase to 30% and 45%. All properties with falling rates bills will see the full benefit by April 2003, and some will see it even sooner.
G92. The Scottish TR scheme for 2000 is similar in form, but the details are different. It applies to all properties. In the first year increases are limited to 5% of the previous year’s bill in real terms for properties with rateable values below £10,000 and 7.5% in real terms for larger properties. Decreases are limited to 5% in real terms for all properties. The relief, for both increases and decreases, is then reduced by one quarter in each of the three following years. After that, all ratepayers will have to pay their full liability from 2004/5.
G93. If we were in future to adopt in England a system based on the full liability, it would mean higher annual increases in rate bills for those ratepayers facing the biggest rises than the current system. With a five-year revaluation cycle, ratepayers could for example be expected to pay in each year 20% of the difference between their pre-revaluation bill and their new liability. This would ensure that all ratepayers were out of TR by the end of the lists. In principle it would be a clear and simple system, though the calculation of bills would be no less complex than at present, including the interaction with changes to RV on appeal.
G94. This approach would place unequal burdens on ratepayers. Those facing the largest changes in full liability would face much bigger annual increases. If a bill increased by 25% overall, it would be phased in at 5% of the bill (20% of the change) in each year. If a bill increased by 100% it would be phased in at 20% of the bill in each year (also 20% of the change). So some would face smaller annual increases than under the present scheme, while others would face larger steps. However, as all would eventually move to their full liability it would be fairer than at present.
G95. Those facing smaller increases than under the current scheme would see them phased in over a longer period – either way they reach their full liability eventually. On the other hand, those facing larger increases include those who would otherwise never reach their full liability. A move to a system based on full liability would keep all of those affected in transition to the end of the scheme when all leave it, whereas the current system allows some to leave the scheme each year, while others never leave transition.
G96. It should not be necessary to apply any phasing to relatively small increases. To include them in a TR scheme would add unnecessary complexity to many rate bills with little effect, though to exclude them would add to the complexity of the scheme overall. A threshold can be set in terms of a percentage increase in the bill, below which TR is not applied. Only increases above this level would be phased, as was done, at different levels, in the Wales, Scotland and Northern Ireland schemes.
Should the scheme be permanent?
G97. One of the main criticisms of Revaluation 2000 was the relatively late announcement of the TR scheme. Before the scheme was finally announced on 25 November 1999, there was much uncertainty for ratepayers. We have considered above the scope for advancing the whole revaluation process, so that such announcements can be made earlier.
G98. Certainty would be further enhanced if a permanent TR scheme were to be established. There are three ways to do this, firstly to announce well in advance, or set in statute, that there will be a scheme, but leave its details to be established in the light of the outcome of any revaluation. The second is to set out in full a permanent TR scheme in statute that will apply at any future revaluation. This has the advantage for ratepayers of providing certainty that there will be a scheme at each revaluation and what its terms will be. It would also limit the need for discussions before each revaluation about the need for and the terms of the scheme. The third is to set out a minimum scheme in statute, but allowing changes to it if the Government felt the need to do so in the circumstances of any given revaluation. This would give a minimum level of protection to ratepayers, but would provide no certainty about what the eventual level of bills would be.
G99. One of the concerns expressed by ratepayers during discussions on the current scheme was that the relatively short timescale meant that, at least in the first year, any increases in bills should be relatively low, as ratepayers had little time to adjust. This is recognised in the fact that the limits on increases are lower in the first year, increasing in the second and third years. So if a scheme was set out in detail perhaps several years in advance of a revaluation, it would give ratepayers longer to prepare for the higher increases required by a scheme which fully unwound within the life of the lists.
G100. On the other hand, a permanent scheme with no option to change it would remove the Government’s ability to be flexible if the circumstances at the time of a revaluation demanded it. And it would be unlikely to remove completely the possibility of a lobby from business if they felt that the scheme should be changed and the Government should be more generous for any revaluation exercise.
Should schemes be self-financing? If so, how should they be financed?
G101. The 1990 and 1995 schemes were supported by the Exchequer, as is the 2000 scheme in the early years (although it is self financing over five years). These schemes, including the Exchequer contribution, were all devised in the light of the outcome of each revaluation and tailored to the detailed circumstances each time.
G102. If, as considered above, there is to be some form of permanent TR scheme, announced before the outcome of the revaluation is known, a scheme of the current type would open up the Government to unknown and potentially substantial costs. The Government cannot risk such blank cheques. So if there is to be a permanent TR scheme, some other way of paying for it must be found, to give Government certainty over future costs.
G103. The most effective way of providing the Government with certainty over the cost, is to ensure that any future TR scheme is self-financing. One way to ensure that any TR scheme could be fully self-financing, in advance of any revaluation, is to apply a supplement on the multiplier. This is clear, simple and fair, spreading the costs of the TR scheme across all ratepayers who do not need protection from big increases. However, depending on the outcome of any revaluation, this supplement could add significantly to rate bills.
G104. Appendix 4 illustrates the level of multiplier supplement needed to fully fund a scheme based on the full liability which unwound in five years, compared with the level of supplement needed to fully fund the percentage caps on increases which have been implemented as part of the 2000 TR scheme. There would be no limits on decreases in bills, which unlike the current system would apply in full from the start, though this would be partially offset by the multiplier supplement.
G105. The tables in appendix 4 show, for each of the two example schemes, what the multiplier would be if there was no supplement, but assuming increases for inflation in each year. It then shows the total multiplier and the level of the supplement if it applied to all properties. It then shows the total multiplier and the level of the supplement if it were imposed only on large properties, in which case small properties’ bills would then be based on the multiplier with no supplement. The definition of small properties is that used in the 2000 TR scheme.
G106. Scheme A assumes that all increases up to the full liability are phased in over five years, with increases up to 20% of the old bill being taken in full in the first year. Any increases above this level would be taken in equal steps over the five years of the scheme, so that all were paying the full liability thereafter. This upward phasing would be paid for by a supplement on the multiplier applied to all properties, including those in transition. A variant would be to exclude small properties from the supplement, to preserve the preferential treatment they get under the existing scheme.
G107. The table in appendix 4 shows that, if the supplement applied to all properties, it would be 4.0p in the first year, adding 9.6% to all ratepayers’ bills. However, the supplement falls in subsequent years, to 2.8p in the second year, increasing bills by 6.5% and 1.1p in the third year, worth 2.5% on bills. The supplement is 0 in year 4 and is negative in the final year.
G108. Assumptions for inflation have been made for the purposes of illustration, but their effect, taken together with the supplement falling over time, is that the net multiplier is very stable in cash terms over the five years, ranging from 45.3p to 45.8p.
G109. The supplement is, of course, greater if applied only to large properties, with small properties paying the base multiplier with no supplement. But it is not that much greater. Large properties account for around 30% of the total number. In the first year large properties would pay a supplement of 4.9p, adding 11.8% to bills, falling to 3.4p in the second year, increasing bills by 7.9%, and 1.4p in the third year, worth 3.2% on bills. As with the first option, the supplement falls to 0 in year 4 and is negative in the final year. Again, the multiplier is relatively stable in cash terms, ranging from 45.5p to 46.5p – all still lower than the 48.9p which applied in 1999/2000.
G110. Scheme B in appendix 4 models the effect of retaining the limits on bill increases which have formed part of the 2000 TR scheme as implemented. Unlike the 2000 scheme, there would be no limits on bill decreases, which are intended to part-fund the scheme. Instead it would be fully funded by the multiplier supplement.
G111. Under this scheme, the supplement would have been very large in the first year, amounting to 11.6p (27.9%) if applied to all properties and 22.0p (52.3%) if applied to large properties only. However, it falls very rapidly in the second year, to 3.6p for all properties or 4.0p for large properties only, and is less than a penny in all subsequent years. This reflects the fact that under this scheme some properties come out of transition in each of the second and subsequent years as the fixed caps allow them to reach their full liability, whereas the other method ensures all reach their full liability after the full five years.
G112. An alternative approach would be to phase in decreases in bills following revaluation, as well as increases, to offset the costs of the scheme. This means that those gaining from the revaluation see some of their gains deferred, but still see their bills go down each year until they reach their new, lower liability. This is done in the current and previous TR schemes in England, by reference to the previous year’s bill. Such downward phasing could also be implemented as a proportion of full liability.
G113. However, the amount saved by such downward phasing cannot be know until the results of the revaluation itself are known, so cannot guarantee that a scheme would be self financing. A supplementary multiplier would therefore probably still be necessary in addition to any downward phasing, though it would be lower than if there were no downward phasing. Such a mixed system would inevitably be more complex. It would shift the costs of financing the limits on increases towards those facing the biggest decreases, while reducing the costs for those facing more modest increases or decreases. This may be seen as less fair to those who have to wait to see all their gains, but on the other hand those are the ratepayers most able to afford to contribute.
G114. The schemes illustrated in appendix 4 are fully self-financing and require no Exchequer contribution. The Government cannot make an open ended commitment to future costs the level of which cannot be predicted until the outcome of a revaluation is known. However, as also discussed above, the Government could retain the flexibility to go beyond the minimum level of a permanent statutory self-financing scheme. This would allow it the option of contributing to the costs of such a scheme to reduce the level of the multiplier supplement in the first year or two, when it is greatest. Such decisions may need to be taken in the wider context of competitiveness and the state of the economy at the time. The Government may wish to consider whether part-funding a more generous transitional relief scheme is a good use of Exchequer funds, in comparison with other forms of support for business.
G115. It should also be noted that these examples are based on the effect of Revaluation 2000. The amounts would be different in any future revaluation. One factor driving the costs of transition is the number of properties still in transition on the old lists and paying less than their full liability at the start of the new scheme. In 2000 over 500,000 properties are in that position, increasing the costs of any TR scheme, including those modelled here. We anticipate that by 2005 that number will in fact be reduced to around 200,000, so reducing the costs of any future TR scheme.
G116. Alternative schemes could unwind in a shorter period, as in Wales, Scotland and Northern Ireland. This would mean bigger annual increases in bills for those in TR, but a lower multiplier supplement for all. Depending on the length of the revaluation cycle, it could also mean a longer period when no one was in transitional relief.
Conclusions
G117. There will always be difficulties in business accepting large step increases in rates bills following a revaluation. TR provides time to adjust to new liabilities. The previous section showed that there are always likely to be large changes in bills for some, even if the length of the revaluation cycle is changed. It is therefore likely that TR will need to be retained.
G118. However, there is no clear view on the form that it should take. A scheme based on the full liability, as employed elsewhere in the UK, would mean higher annual increases for some ratepayers, but would be fairer overall, as all would be out of TR by the end of the scheme, which could be well before the next revaluation. A permanent scheme could be laid down in statute, perhaps ensuring that all ratepayers are paying their full liability before each subsequent revaluation. This has firm attractions in terms of certainty for business. On the other hand, it would remove the Government’s ability to be flexible if the circumstances at the time of a revaluation demanded it.
G119. Similar arguments apply on the question of funding. The overall cost of transition is of concern to the Government. The scheme could be made entirely self-financing by applying a supplement to the multiplier. Again,this requirement could be set in statute. However, this could add significantly to liability levels depending on the results of the revaluation and it would restrict the Government’s ability at least to partially fund the transitional scheme. If more flexibility is allowed on the scope or funding of a TR scheme, perhaps within a statutory framework for a minimum scheme, there will be less certainty.
[ Annex G Section3 ] [ Contents ] [ Annex G Section5 ]
Published on 19 September 2000
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