Rates are a big overhead for all UK businesses. The problem for telecom network operators is that current rates are based on valuations made in 1998. The value of a telecom network now may be much less than it was in 1998, but the rates go on being demanded as if the value had stayed the same.
A chance to do something positive about this problem is coming. The year 2005 will see a revaluation of business rates liability in line with the potential market rent on communications equipment in April 2003. This means that telecom network operators will soon have an opportunity to bring the rateable value of their networks more closely into line with their current market values.
The rating system
Liability for rates is based upon occupation of land. English law sees no reason why, for tax purposes, a cable duct should not be treated 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.
The rates system is based on the premise that land can be valued according to how much rent it could raise if let out. Applying this premise to telecom networks is highly artificial and has given rise to a lot of arguments between the lawyers and rating consultants employed by the telecoms companies, and the valuation officers employed by local and central government. The recent case of Orange v Bradford  EWCA Civ 155, which concerned the valuation of mobile phone masts sited within the limits of public highways, is a typical example. There the Court of Appeal found the sites did have a rental value for rating purposes, even though no rent was actually paid for them.
Who carries out the valuation?
Ordinary commercial buildings, not associated with any telecom network, are valued by the Local Valuer, an official employed by the local authority within whose jurisdiction the buildings are located. The value is recorded in a Local List. When 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 responsibility for its valuation can be given to a Valuation Officer attached to the Valuation Office Agency (“VOA”), a central government agency.
The VOA deal with rail, water and electricity as well as telecom networks. The values are recorded in a Central List, which is open for public examination. The Valuation Officer with special responsibility for valuing telecom networks in England and Wales is Alan Bradford.
Valuation is retrospective
Both Local and Central Lists are reviewed on a 5 year cycle. The most recent review took place in 2000, updating the 1995 List. But it is important to bear in mind that the business rates that are paid by the occupier of telecoms fibre in 2004 bear no relation to the current market rental value. Instead, under the relevant Regulations, the values must be determined by reference to the rental value on 1 April 1998. This date, two years before the valuation itself is determined is known as the Antecedent Valuation Date. In 2000, the Valuation Office calculated how much annual rent could be obtained for one kilometre of fibre optic cable with reference to the prevailing market conditions as at 1 April 1998. Thus a network operator may be paying business rates each year, i.e. a percentage of a hypothetical yearly rent, that vastly exceed the current market value of its network.
The five year cycle means that another valuation will be made in 2005 and now is a good time to prepare for it.
How is the valuation carried out?
The valuation of a building, which may house part of a telecom network, is relatively straightforward. Difficulties arise when a telecoms network as a whole has to be valued. Modern networks will be made up of many components: cable ducts containing varying numbers of fibres, Dark Fibre leases, Indefeasible Rights of Use, and microwave/radio links as well as switches and other equipment housed in buildings of varying sizes.
The statutory definition of rateable value is contained in the Local Government Finance Act 1988, Schedule 6, as follows:
“The rateable value of a non-domestic hereditament shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year if the tenant undertook to pay all usual tenant’s rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command that rent.”
A “hereditament” is the whole of the property to be valued and on which rates will be levied. In the case of a telecom network, this may mean buildings containing switches, joint boxes and other equipment as well as the cable and fibre itself.
Following the statutory test set out above, a valuer has to try to estimate what the rent of a hereditament would be, if it was let on the terms set out in the test. To achieve this, four valuation methods have been developed, but in all cases, valuers carry out a final check to make sure that, whatever method has been used, a sensible result has been reached. This is known as the “stand back and look” stage in the valuation.
The four valuation methods
1. Rentals: This looks at what the market rent is for such a hereditament. No one in practice lets out the whole of a telecom network, so there is no market rent.
2. Receipts and Expenditure: In this method, you look at what income the occupier derives from the hereditament and deduct from that the cost of occupation. The difference (the value of the hereditament to the occupier) can be used as the basis of arriving at a rateable value.
Many telecom networks, today, are loss-making. Applying this method of valuation to loss-making hereditaments gives a nil or negative rateable value. So, this valuation method is highly unlikely ever to be agreed by the VOA and no telecoms company has yet pursued this argument to a judicial decision, although the National Trust has done so in relation to two stately homes which were loss-making. This was the case of National Trust v Hoare decided by the Court of Appeal in 1998.
It is worth noting that while the VOA is highly unlikely to agree a nil valuation, it is aware from the National Trust case that the courts are quite prepared to rule that the right valuation is nil. The possibility of such a ruling in respect of a telecom network must provide the VOA with a strong incentive to agree a valuation and prevent the matter ever coming before a court.
3. Contractor’s Basis: This method arrives at a valuation by examining how much the hereditament cost to build and adding on the value of the land it is built on. The method is commonly used to value public amenities such as leisure centres.
It is less helpful when applied to telecom 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. Comparable Assessments: Applying this method, the valuer looks at what rateable values have been given to other similar hereditaments, makes some adjustments for differences between them and the hereditament being valued, and arrives at what he considers to be a “fair” value.
Again, the difference between the various networks makes it very difficult to find any that are truly comparable. A city based network with most of its plant underground is not truly comparable to a nationwide carrier, whose network is strung along poles or pylons stretching across the countryside.
Commercial values are irrelevant
It is important to bear in mind that the statutory test assumes a letting from year to year. Thus the commercial values which have been given to telecommunications networks in recent years, in sale and purchase agreements or for the purpose of drawing up company accounts, are of no assistance at all in carrying out the statutory test because they are always based upon the long-term potential revenue projections of the networks.
Negotiation can produce good results
In practice, the Valuation Officer will use a combination of the four different methods to give values to different components of the network to arrive, through some hard bargaining and negotiation, at a figure acceptable to both sides. The values recorded on the Central List have been negotiated and agreed between the individual companies and the VOA. It is sometimes difficult to discern any legal, or even sometimes any logical, basis for the different recorded values. However, the common theme is that network operators have been able to achieve significant savings and rebates.
Appeals against valuation
The VOA will not alter a valuation unless an appeal has been lodged against it. Not only does the appeal procedure lend urgency to the negotiations, it also provides the machinery for the agreed valuation to be officially recorded on the Central List.
There are a number of grounds, set out in Schedule 6 of the Local Government Finance Act 1988, on which a rates demand itself can be challenged.
1. The rateable value is wrong – this may be asserted in relation to the initial valuation or a five year revaluation.
2. There has been a “material change in circumstances” – this requires something which has a physical manifestation, such as a change in the mode of occupation or a physical change to the property or the surrounding locality. A change in economic circumstances, as witnessed in the last few years in the telecoms sector, is not sufficient to constitute a material change in circumstances.
3. A decision of a Valuation Tribunal, Lands Tribunal or a higher court affects the valuation.
So the first step in obtaining a reduction in rates is to launch an appeal against the valuation. Again, now is a good time to start considering how that might best be done.
The next valuation will take effect from 1 April 2005 and will be based on values as at 1 April 2003, the Antecedent Valuation Date. Thus this year, 2004, provides the ideal opportunity for the operators of telecom networks to prepare their challenges to the next valuation, marshalling their arguments and evidence and deciding upon the best strategy to adopt.
Experience has shown that operators who are prepared to invest time and effort into this and to retain lawyers to assist them in the appeal and negotiation process, can achieve very significant savings.
Peter is grateful to Daniel Lowen for his assistance in writing this article. If you would like to know more about anything mentioned in the above article, or the topic of business rates generally, please contact Peter Emanuel, tel 020 7415 6042.
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.