The charitable rates relief bombshell – reducing the impact

Martin Clarkson looks at the impact of Scotland’s decision to axe charitable rates relief on independent schools

Martin Clarkson, Partner at real estate consultancy, Gerald Eve - talking about charitable rates relief

The removal of charitable rates relief for independent schools in Scotland, from 1 April this year, will have come as a shock to the custodians of such schools, who are now experiencing rates demands for the first time.

Of course, governments of all persuasion like business rates. A revenue generator, largely unique to the UK in scale and heritage (rating legislation has been with us for almost 170 years), this system of charging occupiers or owners of non-domestic property to fund public services satisfies a number of key criteria. Firstly, it is an established system that is understood (if consistently railed against). It is also immune to most tax mitigation and almost impossible to avoid in full. Lastly, it is relatively easy to collect.

“Business rates have become one of the most tinkered-with and politicised components of public finances.”

Over the past 15 years, coinciding with the global financial crisis, business rates have also become one of the most tinkered-with and politicised components of public finances. For instance, in Scotland in 2017, the government published the Barclay Review – a report intended to offer root and branch recommendations for improving the rating system in Scotland. Whilst a number of its cornerstone proposals have become policy and continue to be implemented, others – somewhat conspicuously – remain overlooked, omitted, under consideration, or ignored.

One of the more contentious (or some may say, cynical) changes attributed to the Barclay Review is the removal of charitable rates relief for independent schools in Scotland from 1 April this year – and had it not been for the Covid-19 pandemic, it would have been imposed earlier.

Ignoring the divisive and ill-informed politicking witnessed in Holyrood’s debating chamber, where the wider, holistic benefits of independent schools – often working in tandem with local authority-owned schools nearby – were forgotten, the removal of charitable rates relief at this time is harsh on a number of fronts.

“The timing for the removal of charitable rates relief is also unfortunate.”

For starters, due to the legal and procedural framework governing the rates system, there is no competent route for independent schools to appeal rateable value (RV) – the hypothetical rental value on which rates are levied. Indeed, until now, there has been no imperative for schools to have the basis of RV checked or appealed because the relief has been in place for decades. Similarly, local Assessors may not have been minded to robustly update and review RVs across subsequent revaluations (typically, every five years).

The timing for the removal of charitable rates relief is also unfortunate. The next general revaluation of all non-domestic property in Scotland is effective from 1 April 2023. A further one year’s delay in removing relief for schools would have coincided with the new right of appeal; sadly, no such consideration was taken. Moreover, the ongoing cost-of-living crisis has put pupil numbers under pressure at many of Scotland’s independent schools, so applying this new and significant overhead jeopardises the key “ability to pay” principle, which should be a prerequisite of any tax lever.

“Business rates have become one of the most tinkered-with and politicised components of public finances.”

Comparatively, the basis of valuation for most university, further education, and school properties is consistent. As these are properties not typically put up for sale or lease in the open market for their existing use, there is an adjusted cost-based approach to valuation, known as the Contractor’s Principle.

However, there are a few measures that independent schools can take to mitigate the impact of business rates.

Fact checking

The 2023 Revaluation offers independent schools both risk and opportunity. It is the first opportunity to sense check the factual data applied in each rateable value and, where valid, lodge legal challenges or appeals. However, there is also renewed impetus for sssessors to update survey records, which may be out of date by decades, causing rateable value (RV) to increase.

Cost-based valuation

Ahead of each revaluation, collate and analyse cost data and update existing survey records for all properties, to inform appeals and negotiations with the sssessors and ensure your property tax liabilities are not overstated. The statutory reference date for all 2023 RVs is 1 April 2022 and, at Gerald Eve, we are seeing evidence of significant cost spikes in raw materials and labour since the start of the pandemic. When coupled with the harsh removal of reliefs, this may create a perfect storm for the education sector.

Act quickly

All independent schools, particularly those who have not reviewed RVs at either the 2010 or 2017 revaluations, need to act quickly. A raft of new legislation and procedural rules come into force for 2023. Hitherto appeals could be lodged, via relatively simple means, within six months of the revaluation coming into effect. Now, however, a new two-stage appeal process requires full stated cases including grounds, technical information and formal valuations to be submitted between 1 April and 31 July 2023 – albeit lobbying continues to have this deadline extended.

At the very least, appropriate budgeting is required, and better still would be to put in place the groundwork to appeal new RVs, in what could yet turn out to be an unworkable framework and timetable for ratepayers.