Calling Last Orders On Pubs’ Business Rates Problems

By Chris Grose, Rating Director at Hartnell Taylor Cook (https://htc.uk.com)

If the government were hoping that the business rates changes in last year’s budget would fly under the radar, then those hopes have been sorely disappointed. There has been widespread outcry from pubs and the hospitality sector that the uplift in liabilities is unfair – with some even claiming that this heralds the doom of pubs entirely. As a result, the government have announced a new support package for pubs which gives them 15% of the new rates payable and a freeze for the 2 years (subject to inflation) after that. There will be other sectors looking at them with some jealousy and of course we wait to see how the relief will be implemented and how a ‘pub’ is defined. It remains the case that while undoubtedly rates should not shoulder all the blame for the difficulties faced by pubs, they are perhaps indicative of a wider, intrinsic flaw in the UK’s property tax regime.

Peeking behind the curtain
For starters, while changes to rate multipliers often steal the limelight, changes in rateable value (RV) also have a huge impact on rates bills. It is good to see that as part of the proposed relief the government is going to look at the way rateable values for pubs are calculated.

The calculation method is not commonly understood by publicans, particularly those who own the freehold of their pub and have no idea of its rental value. The RV for each pub is based on its theoretical rents, which are in turn based on its ‘fair and maintainable trade’, which is essentially an estimate of its annual turnover (excluding VAT).

Where possible, the Valuation Office Agency (VOA) uses a pub’s actual turnover as the starting point for calculating its fair and maintainable trade – but where that information is unavailable, it must be estimated by taking into account factors such as the pub’s services or location (among other things).

Once a pub’s fair and maintainable trade is decided, its rateable value is calculated as a percentage of this. Food, drink, and accommodation turnovers are calculated separately – for example, according to the 2023 valuation, a category 1 pub in central London with a turnover of £150,000 each on both food and drinks would have had a maximum RV of 8% (£12,000) on its drinks sales and of 5.25% (£7,875) on its food sales. The overall RV is then multiplied by the rate multiplier to calculate the overall bill.

A big jump
Over the last few revaluations up to and including 2023, the VOA has not had turnover information for many pubs, meaning that estimates were used to determine their fair and maintainable trade, and thus their RV. In the main, these estimates have tended to underestimate pubs’ turnovers and therefore undervalued their RV. The problem is that, this year, it seems that the VOA has had access to more complete information, or has used higher estimates, leading to higher estimates of fair and maintainable trade and vast increases in RVs.

Claiming relief
A further change from the 2023 valuation is to the relief that pubs are eligible to claim. Firstly, due to Covid, the valuation officer instituted an allowance on the fair and maintainable trade of up to 30%, impacting the total RV. This was in addition to the regular payment relief available, meaning that some pubs were effectively receiving double relief on both their RV and their payment liability.

However, in the 2026 revaluation, the VOA has removed Covid relief from within the valuation while the government have reduced the available relief on the payment. Pubs that were previously benefitting from relief on both counts, essentially compounding to reduce liabilities significantly, are now only able to claim a much-reduced relief on their payment. However, it should be remembered that those whose valuation has increased significantly may benefit from transitional relief or supporting small business relief capping the year-on-year increase in their business rates liability. This is not often mentioned in the media and it will be interesting to see how this interlinks with the new relief and freeze.

The backlash this has provoked demonstrates the core problem with a system anchored on the use of relief. Reliefs provide a temporary solution to permanent pinch points – and their removal has understandably resulted in uproar from those who previously benefitted due to the significant increase in their liabilities. As to whether other sectors should also qualify for relief, the same arguments apply. At the end of the day, someone has to pay the tax, the question is who’s covering your tab?

Of course, as well as losing out on double relief, pubs are now having to grapple with an increase in national insurance, alcohol tax, and minimum wage all at once, so it’s easy to see why publicans are feeling the squeeze.

Calling time
In the end, business rates are undoubtedly an important and efficient source of income for the government, so asking for a root and branch reform to bring them up-to-date is far from an outlandish suggestion.

Ultimately, fiddling with relief only exacerbates the problem when it comes to the next revaluation – sooner or later the government will have to call last orders and reorganise property taxes once and for all.