Commercial rates have become a serious health hazard for many small businesses and there seems to be little logic to valuations of licensed premises any more. Pat Nolan reports.
1 June 2011
For some time now, the country has echoed to widespread calls for a reform of the commercial rates system, the cause célèbre of the commercial classes, if you will.
The manner in which rates are now charged out to businesses – including pubs – has raised the temperature of the business community around the country. Now there’re calls for fundamental change, especially with the on-trade suffering a 14 per cent decline in trade in the year to the end of July 2010.
Rates make up only about a third of Local Authority income. The rest derives from a stipend from Government. It takes €4.7 billion to run the country’s Local Authorities. Businesses now want Government to take a closer look at the efficiencies that can be put in place here. Studies have indicated that it’s possible to save some €550 million of the €1.4 billion generated in rates. This could lead to a 30 per cent reduction in charges and that’s without extending the rates system to domestic…
There seems to be no logic to valuations on licensed premises any more, certainly not through judging a pub’s value on the business it’s doing at present.
In this, the licensed trade has proved itself different from other retail establishments. The standard method of evaluating a retail outlet relies upon square footage, deemed not appropriate in the case of a public house. Instead, turnover has been chosen as the base on which to work.
But in order to understand how we came to be where we’re at with commercial rates in Dublin pubs, for example, we need to go back 20 years to get a handle on why licensed premises are valued in the way that they are.
The Valuation Office (VO) last revalued Dublin pubs in 1990. This revaluation took about three years and nearly every Dublin pub was revalued, with few escapees.
The VO sought nothing less than audited backdated accounts from ’88 to ’90. Naturally this was objected to by those going in to bat for the publicans.
One of the most prominent was Eamonn O’Kennedy, proprietor of Kiely’s of Mount Merrion, who used work in the Valuation Office himself and so knew a thing or two about how it operated. Since 1978 Eamonn has acted as a consultant in this field to publicans and has represented over 500 Dublin vintners at Appeals Tribunals over the past 30 years or so.
“We battled it ‘big time’” recalls Eamonn, “Why did they need more than the banks needed? We could get them turnover and wages figures, insurance figures and other relevant figures. To be looking for a full set of accounts was a bit over the top.”
But the Valuation Office got its wicked way when the issue was appealed to the Valuation Tribunal.
Between the jigs and the reels of argument, it was eventually agreed that the valuation method to be adopted would be based on looking at the surrounding rental values for pubs, recalls Eamonn. But at that time, few rented out pubs, so what they settled on was a figure of nine per cent of turnover at that time, 1990.
Things settled down between the VO and the trade after that and peace of a sort reigned. A principle had been established based on accounts, bottom lines, turnover, net profit figures etc. The main emphasis was on turnover, not profit, thus eliminating poorly-managed operations.
Jump forward a few more years to 1996 or 1997 and turnovers in Dublin pubs had risen quite a bit. A number of them sought planning permission to extend or renovate. The VO therefore stuck with the rising turnovers as their touchstone.
Turnover in Dublin pubs rose for the next few years and publicans were accordingly hit for higher rates based on their current three-yearly turnover — until 2010, that is. The turnovers were backdated to November 1988 under the Drinks Price Index. But this did not necessarily mean that just because turnover had risen, profits had followed suit. Drinks prices had obviously risen in the meantime, as had other factors.
But what happened next in the economy became today’s headache for publicans. In the past year the Commissioner has refused to base his valuation on turnover so what’s he now basing it on?
In effect, for the past few years, all pubs’ ‘turnover values’ have been frozen in that very buoyant time. But pub turnovers have been dropping substantially since 2000.
When the national economic downturn came two years ago, the VO reverted back to its higher-value fallback 1988-1990 model (being no fan of the drop-off in trade leading to a reduced valuation as a result of the reduction in turnover).
But it gets worse.
Under the 2001/2002 Valuation Act, without structural alteration to a premises since the date of the last valuation, there’s no mechanism for getting revalued away from this period thanks to a clause known as the ‘No Material Change in Circumstances’ – the dreaded ‘MCC’. This remains the biggest problem for today’s pubs – getting revalued away from the high-turnover days of the Celtic Tiger.
“This allows the Commissioner to refuse to value a premises even though its turnover, letting value and sale price may have reduced by 50 per cent,” explains Eamonn, “In addition, publicans pay a €250 revision request fee only to be told that Commissioner is refusing to value premises.”
This dogged grip on the past has never been satisfactorily explained by the Valuation Commissioner who’s supposedly independent of both the publican and the local council. but is he?
“We’re independent, yes,” confirmed Patrick Conroy, a Managing Valuer at the Valuation Office, rather incongruously, “We jealously guard that too. We don’t try to raise revenues for anybody.”
He uses the ‘Tone of the List’ argument to hit the MCC clause to touch too.
“If one has two pubs with identical values, both with values falling through the floor, you can’t value one in isolation,” he argues.
So why not revalue them all?
“If all were revalued, the council’s multiplier would ensure that the same level of rates would be applied,” he answers.
Regular revaluations will take place once every 10 years, he assures me. They’re currently examining ways to get this done.
“The Commissioner has just signed a Revaluation Order for Dublin City Council,” he informs me, “It will be published in December 2013 and will be effective by rating year 2014.”
In this scenario a rates cap applies on any redistribution of rates income.
“If pubs have suffered more dramatically than office blocks, they’d be the winners in that scenario. It’s the strongest performers, the person who’s suffered the least decrease in value who’ll pay more rates. The hotel sector would also benefit judging by what happened in Dun Laoghaire/Rathdown and its’ base date of 2005. Dublin City Council’s revaluation date has been set at 7th April 2001.”
Unhappily for Eamonn and his clients, a recent test case to the Valuation Tribunal on this restriction to re-assessment, just adjudicated, has backed the VO’s decision to refuse to take current valuations into account, thus the Tribunal has backed the present iniquitous system.
Unhappily too for publicans In South Dublin, Fingal and Dun Laorhaire/Rathdown, this means that the valuation will be based on an economic world very far removed from the present economy.
For its part ABFI and the wider Irish drinks industry has called for a 20 per cent reduction in commercial rates and other local authority charges and a new system of determining ratable valuations.
A new Wexford-based organisation, Employers for Affordable Rates, has been established recently and its Strategic Committee hopes to approach the Minister about the rates issue.
It also wants to get the MCC change clause altered.
And VFI President Gerry Mellett has called for a radical overall of the way in which local authorities are funded, calling on members to support Employers for Affordable Rates.
“We all recognise the need for local authorities to be funded and our members, plus other small and medium businesses, have been doing more than our bit,” he stated recently, “But it has now reached a level where these rates have become punitive and are actually putting a huge financial strain on employers.
“Rates, as presently structured, are costing jobs.”
He continued, “Fine Gael’s jobs and economic development strategy ‘Working For Our Future’ outlines how local authorities will be expected to ‘reduce commercial rates every year until 2014’”.
That is but a start, believes Gerry Mellett, “We now need the fundamental structural review as outlined above.
“We must incentivise employment and break down barriers to doing business and the current system for funding Local Authorities is one such barrier.
“The current rates system is not sustainable and if continued, will see further businesses go to the wall and will see even longer queues at dole offices.”
Earlier, he’d stated, “The commercial rates system may be a major income stream for local authorities but it is not calculated in a fair and even-handed way or in a manner that encourages small businesses to operate.
“Local authorities seem to be oblivious to the fact that the relentless pursuit of small businesses is leading to significant job losses and will result in less rates being collectable as these businesses go out of existence. Authorities should be seeking to find a system that takes account of ability to pay and is based on reality.”
In callilng for a review of the system he concluded, “Businesses throughout Ireland are united against this current system of commercial rates which is now outdated and causing huge difficulty”.
Rates & pubs
The average rates bill for a Dublin public house is believed to have averaged €40,000 in 2009 while that for a pub outside Dublin about €11,000.
It’s also generally agreed that there has to be at least two changes to the present rating system to make businesses more viable:
1. There has to be an opportunity for publicans to have a revision of valuation at any time
2. The whole system of Local Authority funding needs to be abolished and a new, much broader-based system pub in place which can take into account the ability to pay.
How rates are struck
The rate struck for every pub comprises the rateable valuation (as supplied by the Valuation Office) multiplied by the rate in the €uro (as struck by the local council each year, otherwise known as the ‘multiplier’).
If a premises is given a Rateable Valuation of €200 and the rate in the €uro is struck by the local council at 60, then the licensee will be liable for €12,000 in rates that year.
If a licensee is unhappy with the rate struck, he can only challenge his own rateable valuation to the Valuation Commissioner. The rate struck by the council is inviolate.
Should the licensee still be unhappy with the decision of the Valuation Commissioner on appeal, he can take his case to the Valuation Tribunal that adjudicates between the Valuation Commissioner and the appellant.