It should come as no surprise if the volume and complexity of Scottish appeals for rates reductions on the basis of hardship or Material Changes in Circumstance overwhelms the rating system in the coming months.

In spite of exceptional levels of high street discounting in December and January, retailers have, in the main, reported poor winter trading results. In addition, an inflation driven 5.6% increase in rate liability awaits all non-domestic ratepayers, and the continuing near recessionary economic malaise shows little sign of abating any time soon.

Businesses are struggling and losing faith in the rating system

With the government’s Valuation Office Agency seemingly unable to settle appeals quickly, and hardship relief from already hard pressed local authorities in very short supply, businesses are losing confidence in the ability of the rating system to address their complaints. Increasingly desperate occupiers are voicing concern as never before.

Past issues of Rating in Brief have discussed numerous examples of the law of unintended consequences buried deep within non-domestic rating legislation. The situation in Scotland with regard to the consequential effect of a drop in rental values on the interpretation of some aspects of rating law now merits a mention.

Two rating clauses drafted over 25 years ago are under the spotlight

The interaction of two particular rating clauses, placed on the Scottish statute books more than 25 years ago, and clearly drafted without regard for future recessionary economic conditions, are now under the spotlight.

Since 1984, the definition of a Material Change in Circumstances has not excluded “any change in the general level of rental values”. Thus, as the country’s current economic peril is clearly causing rental values to fall, it could be argued that this drop in value constitutes a valid ‘Material Change’ for occupiers in Scotland. In fact, one renowned case in 2010 achieved an estimated 43% reduction in rateable value as a result of exactly this argument.

Now consider the ‘Tone of the Roll’ provisions enacted back in 1966. These provisions set a ceiling on the level of increases in rateable value allowable during a revaluation. They require that any increases in valuation (perhaps being brought about by a return to favourable economic conditions) may reach, but must not exceed the valuation set at the ‘tone date’, when the original assumptions for revaluation were defined.

Scottish occupiers can appeal for a reduction in rate liability

These two provisions offer occupiers in Scotland the opportunity to appeal for a reduction in rates liability as the result of a recession led Material Change in Circumstance. Then, when the economy flourishes, as it surely will, successful appellants in Scotland may benefit further by having any future increases in liability limited by the Tone of the Roll provisions.

No such ceiling exists in England, and therein lies the rub. This unintended legal consequence brings to light yet another disparity in the treatment of businesses for tax purposes within the different jurisdictions of the United Kingdom. If a large enough number of businesses in Scotland successfully argue the case for a recession driven reduction in rate liability, the resulting gap in funding for the nationalist Scottish government in Edinburgh may indirectly have to be funded by businesses located south of the border.