England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		18 May 2006

Mr Justice COLLINS :

1. This claim concerns non-domestic rating. It is a challenge to the lawfulness of a demand made on 18 March 2005, confirmed on 11 April 2005 for payment of £727,950 for the financial year 2005/2006 in respect of the canals and inland waterways in England which the claimants own and manage. The claim was lodged on 1 December 2005 and so was substantially out of time having regard to CPR 54.5. Since the defendant has relied on delay, on 2 February 2006 Burton J ordered that the application for permission "be adjourned to be dealt with at an inter partes hearing at which the application for judicial review (if permission granted) will also be listed to be dealt with at the same time". He indicated that the only reason why he was not granting permission was to "protect the defendant's argument in respect of alleged delay".
2. Part 3 of the Local Government Finance Act 1988 requires all non-domestic hereditaments which are not exempt from rating to be listed on either a local list for the area in which they are situated or the central rating list. The central list is for hereditaments which are national in character and cannot sensibly be allocated to the area of one billing authority. The canals and inland waterways clearly constitute a hereditament which is appropriately included in the central list.
3. Section 52(1) of the 1988 Act requires the central valuation officer to compile and maintain a central rating list on 1 April in every fifth year after 1990. The current list came into force on 1 April 2005 and will remain in force until 31 March 2010. The valuation for rating is determined in accordance with rules set out in Schedule 6 to the 1988 Act. It is not necessary to go into any detail for the purposes of this judgment. Suffice it to say that the rateable value is an amount equal to the rent which it is estimated might reasonably be expected to be received for the hereditament if let applying certain specified assumptions.
4. The claimants' hereditament was first included in the central list on 1 April 1995 with a rateable value of £490,500. The claimants appealed to a Valuation Tribunal against that value. On 21 March 2001 the appeal was allowed. The Tribunal accepted that the costs of taking on a tenancy of the hereditament would be considerably in excess of the income which could be derived from it and concluded:-

"… [O]n the evidence presented, no tenant would give a rent for the subject hereditament, leading to a conclusion that a Nil valuation was appropriate in the circumstances."

It accordingly directed that a rateable value of £Nil be entered in the list with effect from 1 April 1995. That nil valuation was maintained for the 2000 list. However, the valuation officer decided that a rateable value of £1,725,000 should be entered in the list for 2005. This has resulted in the liability to pay the sum of £727,950, which is calculated by use of the appropriate multiplier. The claimants intend to appeal against that assessment of rateable value. They have not yet done so because the time limit for appealing does not expire until 2010 and there is an obligation to include details which have, by virtue of the relevant regulations, to be provided in lodging an appeal, an obligation which is (in the claimants' view) onerous and what is required is the subject of discussions.

5. The purpose of revaluation is not to change the total yield from non-domestic rates but to ensure that the burden is spread equitably, reflecting movements in the property market. The multiplier is adjusted to maintain the total yield. But, as is obvious, a substantial increase in the amount payable by an individual ratepayer resulting from revaluation of his hereditament could have a dramatic effect. Accordingly, the Secretary of State was given a discretion to include in Regulations provisions designed to soften the impact of such changes in rateable values. Since the increase in value of one could, when considering the total, impact on the liability of others, the scheme adopted involved the capping of an annual increase or decrease (some revaluation could go either way) over the five year period. Broadly speaking, the purpose behind the transitional provisions was to produce a gradual increase or decrease rather than a sudden change of amount in the first year. While this, no doubt, was beneficial to those whose liability increased, it was not so for those whose liability decreased. However, that was how generally it applied and ratepayers had become accustomed to it.
6. The power to make these transitional arrangements was contained in s.58 of the 1988 Act. It was decided that the power should be transformed into a duty and as a result the Local Government Act 2003 inserted s.57A into the 1988 Act. This imposes on the Secretary of State a duty to make regulations for periods from 2005 onwards to deal with transitional arrangements. He is, as one would expect, given a wide discretion as to what rules he should lay down in order to deal with those arrangements, and it is unnecessary to do more than cite s.57A(10), which reads:-

"In making regulations under this section the Secretary of State shall have regard to the object of securing (as far as practicable) that the aggregate amount payable to him and all billing authorities by way of non-domestic rates as regards a particular relevant period is, after disregarding any adjustments made to take account of amounts being payable at times other than those at which they would have been payable apart from the regulations, the same as the aggregate amount which would be so payable apart from the regulations."

It is this principle which means that any restrictions in annual increases to soften the blow for individuals was to be balanced by corresponding restrictions in decreases. It also meant that, under the arrangements then applicable, the claimants were still liable to pay decreasing amounts despite the reduction to nil.

7. In August 2004 the defendant's office (ODPM) issued a consultation paper inviting comments on the proposed transitional arrangements to be introduced from 1 April 2005. It stated that such arrangements were designed to soften the impact of sudden and dramatic rises in business rate bills, described the proposed scheme and invited answers to various questions. Paragraph 7.1 recorded the Government's intention to 'introduce a transitional scheme from 1 April 2005 for those properties that face significant changes in their rates bill as a result of revaluation'. It proposed a four year scheme with upward and downward caps applying so that the full increase or decrease would not be effective until the financial year 2009/2010. The imposition of these caps had been the system applied in previous transitional arrangements so that the proposals did not break new ground. Paragraph 11, which deals with upward caps, I should set out. It read:-

"11.1 The upward cap in the first year of the proposed scheme is the same as the first year cap in the 2000 scheme (12.5%). It can be argued that this is the level of protection that ratepayers might reasonably have expected to receive.

11.2 Year one of the scheme is particularly sensitive to any alteration of the cap levels. A small reduction in the caps in year one can have a significant effect on the scheme in terms of revenue. The 12.5% cap in year one results in a revenue shortfall of £740m. Initial modelling on lowering the cap to 10% increases the revenue shortfall to about £870 and raising the cap to 15% reduces the revenue shortfall to about £700m.

11.3 The lower the cap in the first year the greater the rise in the cap in subsequent years to ensure that the scheme works through in time, and works through smoothly i.e. without a sudden and dramatic rise for many ratepayers in the year the scheme ends.

11.4 The caps chosen strike a balance between providing an element of predictability in the early years while allowing the scheme to work through in a reasonable time frame. On this basis, a relatively small number of properties remain in transition by year four. As special arrangements are in place for smaller properties the greatest protection is offered to them."

The document which explained why the 4 year scheme was adopted stated in Paragraph 6:-

"The transitional arrangements will benefit all properties facing an increase in their rate bills in 2005/06 of over 12.5% [the level of the proposed cap] for large properties and 5% for small properties. The value of the benefit will depend on the extent of the increase in rates liability.

The key benefit is that ratepayers will be able to plan for the effect of the 2005 revaluation knowing that they will not face dramatic changes in their bills in the first year and subsequent three years."

8. The claimants were not included in the fairly lengthy list of specific consultees. However, King Sturge & Co, who were acting as their advisers, were. The claimants were aware that they had been covered by the previous transitional arrangements and had no reason to believe that the proposals would change that. There was nothing in the consultation paper which suggested they might. That became particularly important when they were informed in October 2004 that the rateable value of the canal hereditament was to be £1,750,000. From their point of view (and in accordance with any reasonable understanding of the English language) that constituted a revaluation from £Nil to £1,750,000 and would, unless they were protected by the transitional arrangements, result in a 'sudden and dramatic rise' in their rates bill.
9. The defendant relies on a witness statement by Andrew Allberry, head of the Council Tax and Business Rates Division in the ODPM. He recognises that draft regulations were not included in the consultation exercise. He says that 'a limited group of principal stakeholders' were consulted about draft regulations in October 2004. These did not include the claimants or their advisers. They were limited to four, namely two representatives from the Royal Institute of Chartered Surveyors, one from the Rating Surveyors Association and the head of rating at the City of London. The proposed exclusion of those who had a nil rateable value from the transitional arrangements was not raised then; indeed, it seems that it was not decided upon until the regulations were put into their final form and there was certainly no consultation upon it. The claimants have established that they are probably the only ratepayer on the central list who had a nil value and so, they submit, they should have been consulted and it is unfair that they were not.
10. The relevant regulations are the Non-Domestic Rating (Chargeable Amounts)(England) Regulations 2004 (2004 No.3387). By virtue of s.143(4) of the 1988 Act, regulations under s.57A are subject to affirmative approval by each House of Parliament: see s.143(4) as amended by s.127(1) of and paragraphs 9(1) and 24(1) and (3) of Schedule 7 to the 2003 Act. Regulation 2 defines relevant days and years to be those falling within the period in relation to which the regulations applied, namely 1 April 2005 to 31 March 2009. Regulation 3 is the most important. It provides, so far as material:-

"(1) …. [As] regards a relevant day, a hereditament is a defined hereditament if –

(a) the conditions in paragraph 2 are fulfilled …

(2) For the purposes of paragraph (7)(a), the conditions are that the hereditament is shown in any list, with a rateable value greater than zero, for –

(a) 31 March 2005;

(b) the relevant day; and

(c) each day (if any) falling after 31^st March 2005 and before the relevant day."

There then follow detailed provisions for calculating the amount of any liability. Those are all complicated and it is unnecessary to set them out. They provide for the phasing in over a four year period of the variations in amount due because of a revaluation. The base liability is calculated by multiplying the rateable value shown in the previous list for 31 March 2005 by the multiplier shown for the financial year beginning in 2004. Regulations 10 and 11 then set out the method for calculating the amount payable applying the capping limits for each of the four years. The caps are applied to the base liability.

11. A hereditament which is in the list, whether local or central, may not have to pay any sum for two reasons. Either the rateable value is assessed at £Nil, which was the case with the claimants, or, despite a positive value, no payment is due because, for example, no use has been made of the hereditament. In the latter case, regulation 6 will produce a base liability from the value in the list. In the former, no such liability can be given since zero multiplied by anything produces zero.
12. The regulations for the 2000 to 2005 period contained, so far as the relevant provisions are concerned, a virtually identical scheme. The key difference lay in the omission of the words "with a rateable value greater than zero" in the equivalent regulation: see regulation 3(2) of the Non-Domestic Rating (Chargeable Amounts)(England) Regulations 1999 (1999 No.3379).
13. The explanatory memorandum provided by the ODPM stated, under the heading 'Policy background', in paragraph 7.8:-

"Under regulation 3, hereditaments can be subject to transition where they have a value in the list on 31^st March 2005, 1^st April 2005 and continuously thereafter, hereditaments with a value of zero are excluded from transition because any percentage limit applied to zero would produce a zero chargeable amount in subsequent years."

Mr Allberry has expanded on this in his statement. Because the scheme, following what had been done in the previous periods, depended on the base liability, there had to be a positive rateable value. In the previous schemes, those who had had a zero valuation maintained that throughout the period. Thus there was for such ratepayers a virtual exemption from rates. That was obviously unsatisfactory. Those whose hereditament had a positive value but were paying nothing could be included because that positive value could produce a base liability. Those such as the claimants whose hereditament was accorded a value of £Nil could not.

14. Before considering further the justification for what was done, I should complete the history behind the claim. Neither the claimants nor their advisers appreciated the effect of the change to the scheme, but expected that they would, as has been the case in the previous schemes, be covered by the transitional provisions. It was therefore a considerable shock to them to receive on 18 March a bill for £727, 950. On 1 April 2005 they wrote to the ODPM noting that the bill had 'not taken account of the transition arrangements' and asking for an explanation. On 11 April 2005 they received a reply which started:-

"For transition to apply, the rateable Value (RV) must be greater than zero at 31 March 2005. At this date British Waterways RV was zero. The relevant regulation is Regulations: 3(2) of SI 2004 No:3387.

Accordingly, no transitional arrangement would apply to the demand notice for 2005 –6."

15. The claimants sought advice from King Sturge. They made enquiries and ascertained by early July 2005 that it appeared that the claimants were the only ratepayer to be affected by this change. Legal advice was sought. It was not until 23 September 2005 that a pre-action protocol letter was served. The claimants paid the instalments between April and September but have paid nothing since. Ms Rose has not been able to submit that there was any good excuse for the failure to comply with CPR 54.5 and the defendant has submitted that that delay should prevent permission being granted. The period of delay relied on is that between 11 April 2005 (at the latest) and 23 September 2005 when the pre-action protocol letter was sent.
16. The defendant has threatened legal action to claim the amounts said to be due. The claimants would be entitled to assert the unlawfulness of the demand in resisting any such claim. So much is clear from the decision of the House of Lords in Wandsworth LBC v Winder [1985] AC 461. Mr Mould (who submitted that the relevant starting date was not 11 April 2005 but 22 December 2004 when the regulations were made) sought, unsuccessfully, to gainsay the application of Winder, but nonetheless submitted that the absence of an excuse for the delay meant that this court should not entertain the claim.
17. In the circumstances of this case, there can be no detriment to good administration or prejudice to anyone in permitting the claim to proceed, particularly if (and this has not been denied) the claimants are the only ratepayers affected. It would moreover be pointless for me not to decide the issue when I know that it will have to be decided, initially I suppose by the County Court, when a claim for payment is resisted. That would result in an unnecessary waste of money. Accordingly, I shall grant permission notwithstanding the delay and proceed to determine the substantive claim.
18. In paragraph 35 of his statement, Mr Allberry says:-

"The statutory purpose of the Regulations is to soften the impact of significant changes in non-domestic rates bills resulting from the revaluation of rateable hereditaments for the purposes of rating lists coming into force on 1 April 2005. A rateable hereditament which was entered in a rating list compiled in 2000 with a rateable value of nil is unaffected by that impact because there has been no such transition in respect of such a hereditament. Rates would not have been payable in respect of a such a hereditament prior to the coming into force of the rating lists on 1 April 2005."

Mr Mould has submitted that there was no revaluation but the situation was analogous to the listing of a new hereditament.

19. I am bound to say that I find Mr Allberry's explanation to defy logic. The canal hereditament was in the central list on 31 March 2005. It had a value, namely £Nil. That was as much a rateable value as any other. The value in the present list is £1,750,000. That is, as it seems to me, clearly revaluation. Certainly, the effect on the claimants has been a sudden and dramatic increase in their rate bill. It is not a new listing. If a new hereditament is created, the ratepayer could not expect to be covered by any transitional proceedings which might allow him not to pay the full annual amount due from the outset. The canal hereditament has been in the lists since 1995 and has not changed. All that has happened is that it was revalued by the Tribunal to nil and has since been again revalued by the valuation officer to £1,750,000.
20. The anomaly created by the maintenance of what has amounted to an exemption from paying rates is because of the nature of the scheme which was devised. It is not sensible nor consistent with good administration to substitute an unfair and flawed solution to remedy the situation. It has been suggested that a nominal value of £5 could be substituted to get over the difficulty. This artificial solution has in my view been correctly rejected. It produces its own anomaly, namely that the increase would be payable virtually in full in the fifth year, since the capping percentages multiplied by £5 would produce very small sums in each of the years when the cap applied. That would be entirely inconsistent with the purpose of the transitional arrangements to provide gradual increases to the final amount due in the fifth year.
21. The reality is that the basis of the arrangements should be reconsidered. Since the increase or decrease in the payable amount is to be staggered, it is difficult to follow why the rateable value should necessarily provide the only basis. If the increase is very large, it will produce an undesirable leap in the final year and insufficient increases in the earlier years. I cannot see why the cap should not be applied either to the rateable value or to the increase in liability whichever is the greater. Thus if the increase is more than double the value in the previous list, that increase will be capped. If it is less than double the previous value, that value will provide the figure to be capped. An increase from £10,000 to £30,000 will produce a figure to be capped of £20,000. An increase from £10,000 to £15,000 will provide a figure of £10,000. There may be other means of producing a fair result. The present arrangements do not.
22. I appreciate that I should consider very carefully whether it is appropriate to declare a regulation which has gone through an affirmative resolution procedure to be irrational. But I have no hesitation in deciding that the scheme as enacted in the way in which it affects the claimants is irrational and is unfair. I note that s.57A(9) of the 1988 Act provides:-

"Regulations under this section in their application to a particular financial year shall not be effective unless they come into force before 1 January immediately preceding the year; but this is without prejudice to the power to amend or revoke."

It should therefore be possible to amend the regulations to produce a rational and fair result.

23. The consultation process did not refer to the proposed change which, as the defendant must have known, would affect the claimants to a very substantial extent. There is no statutory obligation to consult, but, having chosen to do so, I think the defendant ought to have let the claimants know what was proposed and enabled them to comment on those proposals. I do not think that the submission by Mr Mould that no-one was consulted on the exclusion of those who had a nil valuation and so the claimants cannot complain is an answer since that part of the proposal must have been known to affect very few but particularly the claimants. It was not fair, if consultation was decided to be needed, to exclude them in relation to a proposal which would have such a dramatic effect upon them.
24. Ms Rose raised in her skeleton argument alleged breaches of the Human Rights Act. She did not pursue those arguments before me, recognising that there was no need to do so. For his part, Mr Mould suggested that the claimants could apply to the valuation officer to certify a different value pursuant to Regulation 16 of the 2004 Regulations. That would be on the ground that the nil valuation was inaccurate. Since the claimants do not believe it was inaccurate, that suggestion is fanciful.
25. It follows that the claim succeeds. I will hear counsel on the relief which is appropriate.