City law firms could witness ‘100% overnight increase’ in business rates

Some City law firms could see an overnight increase in their business rates bills of more than 100 per cent come April, thanks to a revaluation of the tax this week.

Businesses across the City will pay an extra £1.4bn – 33 per cent more than current rates – over the next five years in accordance with the new rates.

For the last three revaluations the rateable value remained capped at 12.5 per cent for the first year, which gave businesses breathing room to adjust to any large changes. However, the new “transitional relief” option chosen by the Government will result in law firms and other businesses facing an increase on the cap from 12.5 per cent to 42 per cent plus inflation in the first year alone.

Jones Lang Lasalle (JLL) London and South East director Tim Beattie said the “real issue” was the change in “transitional relief”, and not just the increase in rates alone.

“The real issue is that the Government has decided not to continue with the transitional relief program that they’ve had with the previous revaluation,” said Beattie.

“In most cases City law firms will be facing overnight 100 per cent increases on what they were expecting to have to pay, rather than seeing the increase spread over multiple years.”

He continued: “Liabilities will be going up dramatically overnight with very little time to plan for it all adding to a mix of uncertainty that may lead to changes in firms’ decision about location.”

Keith Cooney, department head at Knight Frank’s business rates team commented: “The Government response today was that they would fund a valuation office to ensure this new procedure worked smoothly but it was announced a month ago that the valuation office was to have their budget cut by 25 per cent.”

The disclosure of the bill for the City will likely increase the pressure on Government to make changes to the business rates system in the budget next month.

There is also concern surrounding other issues with the revaluation process, including confusion among businesses about the rates appeals system, which could lead to “chaos”, Cooney said.

He explained: “It wasn’t correctly funded and they’re introducing a totally new complex procedure so lawyers could find themselves paying these high rates for quite some time.”

JLL head of corporate research for EMEA Tom Carroll agreed that the rates increase signals a mounting pressure for law firms.

“We expect all occupiers to review the impact on their portfolio and explore how they can mitigate some of the risks in certain high costs locations. We’ve seen a process of aggressive portfolio optimisation and that trend will continue.”

Past increase in business rates has led to a small number of firms abandoning the City, including, most notably, Norton Rose Fulbright, which relocated to More London in 2004, and Clifford Chance, which moved to Canary Wharf in 2003.

Whether the increase will lead to a second wave of firms leaving the City for alternative office locations remains to be seen, and property agents are sceptical the City business property market will be injured as a result of the rates increase.

However CBRE ratings senior director Tim Johnson said more firms could be looking at Canary Wharf as a favourable location to move to in the coming years as a result of the difference in rates.

“Rising will business rates will undoubtedly be a contributing factor for firms when looking at their options. One of the options will be Canary Wharf and the other will be cheaper business rates but I doubt the rates alone will be the primary driving force behind a move,” Johnson said.

JLL’s most recent real estate investment report shows that office space leases in the City accounted for 44 per cent of all transactions in 2016, while alternative locations accounted for 23 per cent.

But firms that made an early decision to move will undoubtedly continue to reap the costs benefits of their non-City offices. Business rates in Canary Wharf are predicted to rise by as little as 2 per cent in 2017/18.

Standing in stark comparison, City business rates have increased by nearly 30 per cent from April 2008 to 2015 with rates payable increasing by another 23 per cent in the next couple of years.

Freshfields recently confirmed that it will be moving into the city, taking out a lease on 100 Bishopsgate. The firm expects to pay £16.5m per annum for its new City headquarters.

Read more about UK 200 law firms’ rent bills and office spaces in The Lawyer’s UK 200 Workspace Trends 2016 report here.

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