Rates: Stay of execution but no room for complacency

This week has been momentous for the hospitality industry in Scotland.

The sector has gone from staring down the barrel of a potentially crippling hike in business rates for many from April 1 to a 12-month stay of execution after Finance Secretary Derek Mackay announced a 12.5% cap on rates for 8,500 pubs, hotels, restaurants and cafes.

The move marks a high point in the concerted campaign by owners, licensees and a host of industry experts who highlighted the real threat of mass closures, job losses and record numbers of appeals if the controversial revaluation went ahead as it stood.

It also means that the recommendations of the Barclay Review of Business Rates, which is due to report in July, will be looked at timeously and possibly legislated on before the rates are due again.

The Scottish Tourism Alliance, the British Hospitality Association and the Scottish Licensed Trade Association met Mr Mackay and Business Secretary Keith Brown on Thursday to seek further clarification on certain aspects of the 12.5% cap and how it will be applied.

The group said afterwards that they welcomed the “pragmatic” cap on business rates but stressed that there are still concerns around the need for a more permanent solution and for a fundamental review of the way that hospitality businesses are rated and assessed.

A spokesman said, “[The] meeting marked an important step forward in establishing what will be a more continuous dialogue between the three trade associations and Scottish Government during the next 12 months on the business rates issue and to inform, influence and shape more enabling and competitive policies for Scotland’s tourism industry.”

The cap was also welcomed by the Scottish Beer and Pub Association (SBPA) who estimate that it will save pubs in Scotland around £6million, with each premises benefiting by, on average, £4,700.

But they also stressed the need for clarity about what happens in year two and beyond and on whether pubs whose rateable value increased, but who had previously paid no business rates at all, will be liable to pay business rates under the new cap.

Brigid Simmonds, Chief Executive of the SBPA, said, “Pubs pay a disproportionate share of business rates in Scotland, and some were facing huge increases with bills due to go out in just a few days time. Whilst we appreciate action from the Scottish Government, they must go further, and offer the sector clarity on what happens after the one year cap expires.”

The mood seems very much to be one of cautious optimism – and relief that the concerns of those in the licensed trade have been listened to.

Donald MacLeod, convenor of Glasgow Licensing Forum, played an instrumental role in campaigning to highlight the rates issue.

He said, “This had the potential to be something of a poll tax moment for the SNP. The huge rises were gobsmacking. It was erroneous, it was punishing the whole hospitality sector and it was based on hypothetical turnovers. This was a kick in the baws.

I’m delighted that they finally listened, although I would have been happier if there had been a total freeze until after the Barclay Review. Going forward the advice is to get your appeal lodged before the September deadline if you think your rates are over what they should be.

This is still a political hot potato and it needs put to bed. The licence trade should not be treated so uniquely – there should be one system for all and it should be transparent and easily understood.”

Harry Hood (pictured above), Director of the Lisini Pub Company, agrees.

He said, “The biggest issue is that the calculation is based on a hypothetical equation – in the dictionary that means something which is not supported by available evidence. It is unfair and it’s flawed.”

The dire situation, which would have been a hammer blow to the hospitality industry across Scotland, came about for a number of reasons.

The new rates are partly based on rental values (and for the hospitality sector, turnover) calculated on April 1 2015 (the “Tone Date”) – when the economy and the property market were more buoyant than they are now.

The previous year – 2014 – had been a bumper one for Scotland. We hosted a string of major events including the Commonwealth Games, the Ryder Cup at Gleneagles, BBC Sports Personality of the Year and the MTV Europe Music Awards. It was the Year of Homecoming, we were pre-Brexit and the North Sea oil and gas slump had yet to really bite.

In addition, the Scottish Government postponed the revaluation until 2017 to bring its process into line with England and Wales.

But the issue is not just about when or how often revaluations take place – it is also about the methodology, which many argue is fundamentally flawed, unfair and not fit for purpose in the 21st century.

Shops, offices and industrial units are valued largely on the basis of rental value for square footage, with turnover excluded, whereas in hospitality, the rates are based partly on turnover without taking profit margins or operating costs into account. This anomaly means that in some cases a small pub might face a rise in rates, while a supermarket’s rates will fall.

Currently, for every £1,000 of turnover, the hospitality sector pays over £30 in business rates. This is over three times more than every other sector, and 258% higher than the average.

Analysis conducted by commercial property consultants Ryden before the cap showed that those in the hospitality sector were among the hardest hit – with the rateable values of some premises more than doubling.

Among the worst cases were the Old Bank Bar in Dundee, whose RV was set to soar 183 per cent from £28,500 in 2010 to £80,700 and the Grand Central Hotel in Glasgow where the increase was 168% – taking their rates from £440,000 to £1.18million from April.

The picture throughout Scotland was similar. Scotts Bar &Restaurant in Largs, Ayrshire, was to go from paying rates of £100,000 to £265,000 (up 165%) while the Mosset Tavern in Moray faced a 154% hike from £33,500 to £85,000.

Moira Walker, Head of Rating at Ryden, explained, “The Scottish Assessors formula, based on a hypothetical achievable turnover, does not look at profit margins and operating costs and therefore penalises outlets in poorer, price sensitive areas where gross margins are low, as well as outlets which have higher operating costs.”

It can take up to two years for an appeal to be heard and the rates still have to be paid in the meantime. Without any transitional relief in place many feared that some of the worst-hit pubs, hotels and restaurants would simply fail in the intervening period.

Despite the cap, businesses are still being advised to appeal if they feel the rates they would have paid without it are too high.

Duncan Johnston, General Manager of Glasgow’s Hotel Indigo said the cap would take the pressure off businesses in the short term. He added, “It is good news for members of the Glasgow Hotels Association – we are quite happy that we are not going to be hit with the revaluation before we have time to appeal. It is positive that the Government are listening to us.”

Meanwhile Stewart Spence, who runs the five-star Marcliffe Hotel in Aberdeen, plans a self-imposed freeze on his rates. He says that he will refuse to pay any increase and will continue to pay his old rates instead.

He had been facing a 25% increase in rates before the cap was announced, despite his turnover being down 40% because of the oil and gas slump and had been hoping for a reduction.

Ryan James, Chairman of Glasgow Restaurant Association and owner of Two Fat Ladies, also believes that a freeze on rates, rather than the cap, might have been better and that businesses should still appeal – because of the uncertainty over what will happen in 12 months time.

He told DRAM, “My personal opinion is that, with a cap at 12.5% you are almost as well freezing it for a year and waiting to see what the Barclay Review says and turning that into law, rather than leaving this hanging shadow of what happens in year two, three, four and five.

The advice to everyone is still to appeal because nobody knows what’s going to happen and how long this revaluation is going to last for. It could still be that the rates that were quoted and that have caused the scandal will still be the rates in 2018/19. There is a lot of uncertainty still but we have to welcome what was actually a very generous offer.

When Barclay reports, the Government has got to make legislation as quickly as possible and then enforce it so that we don’t end up back in the same situation about the state of tax reform.

We want a fair, equitable and proportionate system of non-domestic rates for all industries and for us all to be judged on the same merits.”

Perhaps we can raise a cautious glass to that.