taxing telecoms networks

15 January 2004

Peter Emanuel

In the October 2003 issue of the International Dispute Resolution Newsletter, Camilo Schutte from our office in The Hague reported on a finding by the Supreme Court of The Netherlands that a cable network qualified as real property. In particular, Camilo commented on the shock wave this finding had caused within the Dutch communications sector. The article highlighted that municipality real estate tax might become due on cable networks as a result of the decision.

Conversely, the law of England and Wales has always regarded a communications network as real estate. Local taxes, known as “rates” have been levied on them accordingly. The rates system is based on the premise that land can be valued according to how much rent it would raise on the market. It is highly artificial to apply this to telecommunications networks and this has been the subject of much debate and legal argument.

Liability for rates is based upon occupation of land. English law sees no logical reason why a cable duct should not be treated for tax purposes in the same way as an office block. It is valued in accordance with a formula laid down by statute as interpreted by the courts and custom and practice. Tax is levied as a percentage of the value, the amount of the percentage being set by legislation.

Ordinary commercial buildings, not associated with any communications network, are valued by the Local Valuer, an official employed by the local authority within whose jurisdiction the building is located. The value is recorded in a Local List. If the property (or “hereditament” as it is referred to in rating law) is spread over several different local authorities, or even the whole country then it can be assigned for valuation to a Valuation Officer attached to the Valuation Office Agency (“VOA”), a central government agency.

The values determined by the VOA are recorded in a Central List which is open for public examination. Both Local and Central Lists are reviewed on a 5 year cycle (the most recent took place in 2000 and updated the 1995 Central List).

It is easy to see how difficulties can arise when a telecoms network, as a whole, has to be valued. Modern networks will be made up of many components such as cable ducts containing varying numbers of fibres, switches and other equipment housed in buildings of varying sizes.

The rateable value of a non-domestic hereditament is based on the amount of rent that could be claimed if the property was let in the market on certain terms. Four valuation techniques have been developed but these can only be applied when they produce a sensible result in line with the valuation of other similar hereditaments.

1. The “Rentals” method considers the market rent for the hereditament in question. It is unlikely that a telecoms network would ever be let out in its entirety so there is no “market rent” as such.

2. The “Receipts and Expenditure” method considers what income the occupier derives from the hereditament and deducts from that the cost of occupation. The difference is the value of the hereditament to the occupier and this can be taken as the rateable value.

However, many telecoms networks are loss making so to apply the “Receipts and Expenditure” method of valuation to telecoms networks often results in a nil or negative rateable value which is clearly unacceptable to the VOA. Interestingly, the National Trust has applied this method of valuation to to two stately homes which were loss-making[1].

3. The “Contractor’s Basis” method arrives at a valuation by adding the cost of building the hereditament to the value of the land it is built on. This method is commonly used to value public amenities such as swimming pools and leisure centres. This basis is less helpful when applied to telecoms networks, some of which may consist mainly of cables strung on poles or pylons (cheap to install) while others may be underground (expensive to install).

4. The “Comparable Assessments” method considers what rateable values have been assigned to other similar hereditaments and makes some adjustments for differences between them and the hereditament being valued to arrive at a “fair” value. The difference between the various networks makes it very difficult to find any networks that are truly comparable. For example, a city based network such as COLT will be very different to a nation-wide network such as Energis.

In practice, a combination of different methods are used to assign values to different components of the network and a figure that is acceptable to both sides is arrived at through hard bargaining and negotiation. Consequently, it is difficult to discern any legal or sometimes logical basis for the values recorded on the Central List.

There may well be scope for a legal claim attacking the whole basis on which networks are taxed under the rating system to show that telecoms networks should not be treated in the same way as ordinary commercial property and that it is nonsense to apply an old land law system to modern communications assets. Indeed, ground breaking law, to the benefit of the communications sector, could be created given the right circumstances and a willing client. However, the current focus on alternative dispute resolution means that we are likely to have to wait to for some time to see such a radical change.

[1] National Trust v Hoare (1998) CA.

Important - The information in this article is provided subject to the disclaimer. The law may have changed since first publication and the reader is cautioned accordingly.