SCOTTISH EXECUTIVE

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NON-DOMESTIC RATES: 2000-01 SCOTTISH POUNDAGE CALCULATION

Purpose

This note explains how the Scottish Executive calculated the poundage for non-domestic rates (NDR) that will apply in Scotland for 2000-01

The Scottish Executive has set the key aims of the Revaluation as stability, certainty for business and continued harmonisation of valuation treatment and practice north and south of the border. The non-domestic rate income that will be raised from businesses in Scotland after the revaluation will be the same in real terms as before.

Background

Non-domestic rates are levied on the basis of a national rate poundage multiplied by the rateable value of each non-domestic subject on the valuation roll.

The principal purpose of revaluation is to ensure that the distribution of the rates burden between ratepayers remains equitable. The 2000 revaluation will raise the rateable value of some properties since the last revaluation (1995) while others will decrease. The overall result however will be an increase in the total rateable value for Scotland to reflect the changes in economic conditions. Because the total rateable value of subjects in Scotland will increase, and the bill is based on rateable value multiplied by the poundage figure, the poundage will need to decrease to achieve the aim of maintaining the total income in real terms.

A provisional Scottish 2000-01 poundage figure of 45.8 pence was announced by the Minister for Finance on 8 December 1999. As in England and Wales the figure was set to ensure that the total tax income from non-domestic rates will remain unchanged in real terms as a result of the 2000 revaluation of non-domestic rateable values.

This paper describes how the poundage figure was calculated for Scotland. The calculation follows the same approach as in England and Wales, taking account of inflation and of future appeals losses following the revaluation.

Revaluation Factors

The revaluation factor for Scotland is estimated to be 12 per cent. This is the average amount that rateable values in Scotland will increase by as a result of the 2000 revaluation.

For the purpose of calculating revaluation factors, the non-domestic subjects on the revaluation roll can be split into two: locally valued subjects and those within prescribed industries. Within both, there are elements of estimation which means that the poundage calculation will need to be reviewed once further information is available in early 2000.

Locally valued subjects. These non-domestic subjects account for over 90 per cent of the rateable value on the valuation roll. Assessors within each area have responsibility for valuing these subjects based on agreed methods for each class of subject.

Prescribed Industries: These are subjects in industries such as gas, electricity, water, rail and docks and harbours where the rateable values after revaluation are prescribed centrally. Proposed values for these industries have been derived following discussions with industry representatives nationally, and are subject to approval by the Scottish Parliament. The necessary Orders will be presented to Parliament in February.

Locally valued subjects

The assessment we have made of the revaluation factor is based on a sample survey of around 10 per cent of subjects in Scotland. Details of the survey, which was conducted for the Scottish Executive by the Scottish Property Network, are given in Annex A.

It is important to recognise that the figures supplied by Assessors to the survey are mainly estimated 2000 rateable values. The survey was conducted in late summer 1999, as close to the revaluation date as practical in time to inform decisions on the poundage. However, at this time the assessment process was not complete for the majority of subjects and Assessors were asked to provide their best estimates.

Within the locally valued subjects, telecom was treated as a special case. Most Assessors did not attempt to revalue telecommunication subjects due to the uncertainty over an outstanding House of Lords decision. The rateable value of telecommunication subjects was assumed to be unchanged after revaluation.

Prescribed industries

When the provisional poundage figure was calculated the 2000/01 rateable value for all prescribed industries had not been finally agreed. Provisional estimates were used for the electricity industry and for docks and harbours.

The table below shows the calculation of the revaluation factor of 12 per cent for Scotland. This is based on a revaluation factor of 13 per cent for locally valued subjects (excluding telecom); assumed no change for telecom and 7 per cent for prescribed industries.

* Best Estimates

Appeals Losses

The aim of the poundage calculation is that the tax income in real terms within Scotland should remain unchanged as a result of the revaluation. On past experience, following a revaluation significant numbers of subjects appeal their value. Consequently in the years following a revaluation there is some reduction in the rates base from successful appeals. To meet the stated aim the poundage must be set to raise the appropriate level of income after appeals have worked their way through. Following the 1995 revaluation when the increase in rateable values was over 30% the cumulative loss to the rates base from successful appeals has been a little over 6%. With a revaluation factor of 12% at the 2000 revaluation we can expect the loss through appeals to be lower. For the poundage calculation the assumption has been made that 3.6% of rateable value will be lost through appeals. This figures, which is a 'best guess' based on past experience, is probably towards the lower end of the range of likely outcomes from appeals following the revaluation and is similar to the levels of appeals losses assumed in the calculations for England and Wales.

Calculating the 2000/01 non-domestic poundage for Scotland

(1) Estimate

If the revaluation factor had been higher then the poundage would have been lower, and similarly if the revaluation factor had been lower then the poundage would have been set higher. This is because the poundage figure is calculated to ensure that the tax income within Scotland remains unchanged in real terms after the revaluation. Because of this the rates bill of a subject whose rateable value increases by the Scottish average uplift immediately following the revaluation and whose rateable value subsequently reduces by the average reduction following successful appeal will increase by only inflation (1.1%) between 1999-00 and 2000-01. Annex B shows that the poundage calculation would have produced the same effect for any subject whose rateable value increased by the average uplift regardless of the actual level of uplift.

The 2000-01 poundage of 45.8p was announced as provisional. On present plans, by early February rateable values will have been finalised for the prescribed industries and we may have further information on those 1995 revaluation appeals currently being considered by the Lands Tribunal. In early February the poundage calculation will be reviewed on the basis of this new information.

As part of their work for the Scottish Executive on the 2000 revaluation, in early Summer 2000 the Scottish Property Network will receive from each Assessor a copy of the valuation roll in electronic format. SPN will compile this into a single database on a common format, matched to a copy of the valuation roll for a year earlier, which they will provide to the Scottish Executive for analysis. This will provide full information on the actual outcome of the revaluation to inform decisions on the poundage from 2001-02 onwards.

Annex A

The survey of revaluation factors from the 2000 revaluation 

The aim

The aim of the survey was to provide a computerised database of information on pre and post 2000 revaluation rateable values of a sample of Scottish non-domestic subjects. From this the revaluation factor for non-domestic subjects on the valuation roll (excluding prescribed industries) could be estimated.

After tendering, the contract to conduct the survey was awarded to Scottish Property Network (SPN).

Methodology

Sampling

• Within each Assessor area, the top 1% of non-domestic subjects in terms of rateable value was selected.
• The remaining subjects on the valuation roll were then stratified into 9 groups based on type (commercial, industrial, other) and rateable value (small, medium, large), and the sample was selected. The definition of small, medium and large varied depending on the whether the subject was industrial, commercial or other.
• Optimum sampling fractions were calculated for each of the strata using Neyman allocation. The aim was to ensure good coverage by size and type of business, as well geographical area.
• Non-domestic subjects with a 1995 rateable value of zero were excluded as were subjects described as 'fishing rights'

Survey

• The Assessors gave the best estimates they could for the rateable value, post revaluation, of sampled subjects within their areas.
• Where the rateable value pre revaluation of the subject had been revised since the sample was drawn (for example as the result of an appeal) this was also noted and used.
• Where assessors gave an estimate for the 2000 rateable value, but expressed severe doubt about it’s accuracy, the subject was excluded from the sample.
• Most Assessors did not attempt to revalue telecommunication subjects due to the uncertainty over an outstanding House of Lords decision. The rateable value of telecommunication subjects was assumed to be unchanged after revaluation.

Annex B

Illustration of relationship between poundage, revaluation factor and final bill

The relationship between poundage, revaluation factor and the final bill (before any relief) can be quite confusing; this annex gives a couple of illustrative examples.

Calculating the poundage for different revaluation factors

If, instead of 12 per cent the revaluation factor had been 5 per cent or 25 per cent then the poundage figure would have been 48.8 pence or 41.0 pence respectively (this is for illustrative purposes only and keeps the assumption that appeals would be 3.6 per cent). The calculation is given below, based on the table given in the main paper.

Revaluation factor 25%

Calculating the bill, for a subject with an average revaluation factor

If the rateable value of a subject on the valuation roll increases by the average revaluation factor, then the bill will be the same regardless of what the average uplift is. This is illustrated in the following example.

(1) The slight difference is due to the poundage figure used in the calculation being rounded to the nearest 0.1 pence.

Annex C

IMPACT OF THE REVALUATION ON BUSINESSES WITH AVERAGE UPLIFT

The table calculates the change in non-domestic rates bill between 1999-00 and 2000-01 in England and Scotland for business whose rateable value was £20,000 in 1999-00 and has increased by the average for each country. In Scotland, the estimated average increase in rateable value for subjects on the local list is 13%. For England the equivalent figure is 24%.

The table shows that business whose rateable value increases at the average level in each country will have almost the same increase in bill.

Notes: The table shows the position before the effect of any transitional arrangements introduced in each country.

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