Redrose Ltd v Thomas [2014] UKUT 0311 (LC)

IN THE MATTER OF AN APPEAL AGAINST A DECISION
UT Neutral citation number: [2014] UKUT 311 (LC)Venue OF THE VALUATION TRIBUNAL FOR WALES, BETWEEN REDROSE LIMITED Appellant, and, ELIZABETH THOMAS Respondent, (Valuation Officer), Re: Rosemoor, Walwyn’s Castle, Haverfordwest, Dyfed, SA62 3ED, Before: N J Rose FRICS, Sitting at Haverfordwest County Court, Penffynnon, Hawthorn Rise,, Haverfordwest, Dyfed SA61 2AX, Mr JAP Meulendijk, director of Appellant, for Appellant., Respondent in person., The following cases were cited:, Dennett and Dennett v Crisp (VO) [2013] RA 205, Calver v Thomas (VO) RA/3/2013 UT, DECISION, Introduction
Between
Redrose LtdThomas
Date 3 July 2014
[1]This is an appeal by the ratepayer, Redrose Ltd, against the decision of the Valuation Tribunal for Wales (the VTW), reducing the assessment in the 2010 rating list of a complex of self-catering units known as Rosemoor, Walwyn’s Castle, Haverfordwest (the appeal property) from RV £13,000 to RV £11,750. The latter figure was put forward at the VTW hearing by Mr P Davies, who was the valuation officer dealing with the appeal at the time. Before me the respondent valuation officer was Ms Elizabeth Thomas MRICS, who appeared in person. Ms Thomas considered that the assessment determined by the VTW was not excessive. Mr J A P Meulendijk, a director and shareholder of the appellant, represented the appellant. Mr Meulendijk’s approach to the valuation varied over time. In a letter to the Valuation Office Agency (VOA) dated 25 July 2013 submitted with his statement of case he suggested that the appeal property was simply not lettable on a tenancy from year to year. In his reply to the Respondent’s statement of case, however, Mr Meulendijk asked the Tribunal to assess the appeal property at RV £6,000.[2]The appeal was conducted in accordance with the Lands Chamber’s simplified procedure. Mr Meulendijk gave evidence himself and called expert evidence from Mr Jonathan Jones CBE, FTS. Mr Jones was CEO of the Wales Tourist Board (WTB) from 1999 to 2006 and became Director of Tourism and Marketing at Visit Wales from 2006 until 2012, upon the merger of WTB into the Welsh Government in 2006. He retired in August 2013 from the post of Director, London Office, Welsh Government.[3]Ms Thomas gave expert evidence. For both the 2005 and 2010 revaluations she was responsible for determining the basis of value for self-catering properties (SCHUs) for the North Wales area. She was also on the Class Co-ordination Team nationally for this class of property and had involvement with bodies acting for their occupiers. In addition to her present role as non-domestic rating team leader for North Wales, Newport and Merthyr Tydfil areas, she has recently taken over the lead role for SCHUs across the whole of Wales. She has been an external tutor for the College of Estate Management for over 25 years.[4]On the morning following the hearing I inspected the exterior and much of the interior of the appeal property, accompanied by Mr Meulendijk and Ms Thomas.[5]The material day and the effective date are both 1 April 2010. The antecedent valuation date (AVD) is 1 April 2008. Facts[6]In the light of the evidence and my inspection I find the following facts. The appeal property is located in the tiny village of Walwyn’s Castle, which lies approximately 6 miles south of Haverfordwest. It is within the Pembrokeshire Coastal National Park. There are no pubs or shops in the village although it is within easy reach of the coast and beaches.[7]The appeal property is situated approximately one mile north-north-west of the Murco oil refinery, which can be seen from parts of its lawn. Some two miles to the south is the South Hook LNG terminal, the largest natural gas receiving terminal in Western Europe. The site of the terminal is not visible from the appeal property, but when in use it lights up the night sky. Approximately 300 yards to the west is Syke quarry, extraction from which is intermittent.[8]Little Haven and St Brides are on the coast to the west, 3 and 4 miles away respectively. Dale is 8 miles to the south-west.[9]In July 2008 a modern development containing a large number of self-catering units, known as Bluestone, opened about 15 miles from the appeal property. The Bluestone development was undertaken with the assistance of more than £15m of grant aid.[10]The appeal property is set in approximately 35 acres, including 2½ acres of lawn. It includes a nature reserve, of which about 5 acres is pasture let to a farmer. There are nine SCHUs of varying sizes, with private parking, and all have access to the partly walled gardens. The properties comprise a mixture of converted buildings, predominately of stone and slate. Six of the properties are linked and face a courtyard area. There is a play area on site for children. The properties are centrally heated by biomass boiler and solar panels provide some of the electricity.[11]In addition to the appeal property, the Rosemoor complex contains residential accommodation on the first floor of the main house which is owned by the appellant but occupied by Mr Meulendijk and his wife. Premises known as No.1 Cottage also front the courtyard, but are in separate ownership.[12]At the material day the accommodation in the appeal property was as follows: Unit Number of Bedrooms Sleeps/Single Bed Spaces Holly Tree 1 3 Gardeners’ Cottage 2 3 The Coach House 3 5 Orchard Cottage 3 5 Spring Cottage 1 2 Apple Cottage 3 6 Peace Cottage 2 4 First Cottage 2 4 Rose Cottage 1 2 Total 18 34 Case for the appellant Evidence of Mr Jones[13]Mr Jones said that, since there was no statutory registration of tourist accommodation in the UK, it was difficult to obtain accurate statistics relating to the amount of such accommodation available at any time. It was accepted, however, that there had been a continual growth in the available stock of SCHUs, as the demand for better value and better quality holiday accommodation had grown.[14]Nowhere had this increase in supply been more marked than in Pembrokeshire, as more second homes had been made available as holiday lets and more recently with the development at Bluestone with its huge capacity and yet more in the pipeline. The increasing activity of large letting agencies such as Hoseasons generated further supply and competition.[15]Mr Jones produced data taken from two reports commissioned by WTB/Visit Wales. He said they clearly showed that occupancy levels in South West Wales had dropped significantly between 2003 and 2008; by 11% at individual operator level. Pembrokeshire made up the bulk of South West Wales. Although it was difficult to be sure to what extent the drop in occupancy levels was caused by increased supply or lagging demand, the figures clearly showed that demand for SCHUs had not kept pace with supply. Any combination of increased supply and lagging demand would lead to downward pressure on occupancy and price.[16]Although there was a perception that self catering accommodation enjoyed almost 100% occupancy during the peak summer period, this was not borne out by the statistics. The following numbers applied to independently operated SCHUs in Wales (source: Wales Accommodation Occupancy Survey 2008): July 2006: 84% Aug 2006: 96% July 2007: 86% Aug 2007: 93% July 2008: 76% Aug 2008: 87% 16. These results were in line with the annual results shown for South West Wales/Pembrokeshire. As operators needed sufficient turnover in peak weeks to cover for the less popular weeks, these were worrying developments for operators.[17]With an economic recession superimposed on this trend a little later, the position deteriorated further. Pembrokeshire County Council Tourism Department’s research provided the following occupancy statistics: July 2010: 84.9% Aug 2010: 93.7% July 2011: 75.3% Aug 2011: 92.3% July 2012: 69.1% Aug 2012: 80.8%[18]At the same time the cost of taking the product to market had been increasing, as a result of the ever greater competition within the UK and from the developed and emerging overseas destinations, with their large tour operator and government supported marketing budgets. Not only did self catering operators have to spend an increasing amount on marketing, but the consumer continually demanded higher levels of product quality and service. The grading system operated by WTB and now Visit Wales had consistently demanded more and better facilities to achieve the same accommodation grading. Regular maintenance was no longer considered adequate. A programme of annual investment and improvement was necessary to keep pace with what both Visit Wales and the consumer demanded. Operator margins were constantly being squeezed as a result. Tourism accommodation was a perishable product unlike consumer goods which, if not sold on a Monday, were still available for sale on subsequent days. The competition to achieve the highest possible occupancy was intense and only those with the best marketing techniques and budgets would survive.[19]All these factors, together with the increasing trend of later booking and negotiation on prices by the consumer, made the operation of a small self catering complex increasingly difficult.[20]Owners who marketed their SCHUs through an agency would normally be charged upwards of 20% of turnover, plus VAT. Independent operators had more control over their marketing spend, but would have to keep to similar levels if they were not to be “lost in the crowd.” The advent and ever increasing importance of the internet was a case in point. It was a great leveller, in that it allowed everyone to show their wares. At the same time it favoured larger operators and agencies, disadvantaging small or medium sized stand alone businesses.[21]There were thousands of SCHUs in Pembrokeshire. They all competed in essentially the same market, going after essentially the same customers. Although they offered an endlessly varying range of products, they were to a considerable degree inter-exchangeable. As a result, existing operators might easily experience a negative impact from new entrants and added accommodation. One such major event had been the entry of Bluestone into the market in Pembrokeshire. Bluestone offered self catering accommodation that competed directly with the average operator. The only difference was that it was much bigger, and could therefore offer added attractions that helped it pull even more customers away from smaller providers.[22]In marketing there was a view that perception was often reality. This could work in two ways. If a self catering operation was situated close to what the consumer would consider to be an undesirable development such as a factory or power station, then the operator would be under a serious disadvantage and under pressure to reduce the price. Such checking of locations prior to booking was now commonplace, given the ease with which such searches could be facilitated by Google Maps and other services. On the positive side, operators could succeed if they offered quality or services that exceeded customers’ expectations based on price.[23]There was in Wales generally and in Pembrokeshire in particular an endless variety of self catering places, all with their own mix of positives and negatives, in location, accommodation, space, facilities, quality, finishes, added services, personal interaction and price. All of these items combined should be taken into account when assessing the economic viability of a given self catering business. No single item should ever be used on its own to classify a property as better or worse. This would not reflect the customer’s perception, and would therefore not reflect a property’s potential.[24]Many people underestimated the very considerable efforts self catering operators put into their businesses. They often worked very long hours for very modest financial reward. In so doing they added considerably to Wales’s overall tourism image, and to the significant portion of GDP that tourism brought to the Welsh economy.[25]Given the importance of the self catering product to the enhancement of Wales’s tourism, Mr Jones said that he felt strongly that the assessment of business rates should take all these outside influences into account. Evidence of Mr Meulendijk[26]Mr Meulendijk started life in Holland, where he qualified as a pharmacist and a lawyer. In the course of his business career he has acted as an adviser/assistant to the board of directors of the largest pharmaceutical company in Holland; lived in Rome for 2 years; and run his own pharmacy in the Netherlands with 10/15 staff. He acquired the appeal property in 1998 in search of a lifestyle change.[27]Mr Meulendijk said that he had received the draft 2010 list assessment in November 2009. The proposed RV, £13,000, was 2.4 times the previous figure of £5,400. If the proposed RV was not reduced the business would not have been able to continue.[28]Mr Meulendijk recounted his encounters with members of the VOA before and during the VTW hearing in October 2013. He suggested they demonstrated on the part of the VOA a lack of understanding of the self-catering industry and a disdainful approach to ratepayers. He likened the process by which RVs had been arrived at to a big black box into which certain unknown information had been put. Some mysterious activities took place inside the box, and eventually a figure of RV emerged. Mr Meulendijk said that whenever he put this analogy to a VO the only response was an enigmatic smile. He suggested that the VOA’s approach was contrary to the duty of Government which, according to Mr John Bercow MP in an interview in 2009, was to act with equity, transparency, accountability and auditability.[29]Mr Meulendijk produced a copy of a lengthy letter he had written to Mr P Davies of the VOA on 25 July 2013. It contained the following observations on the particular character of self-catering as a business:
“Letting self-catering holiday properties is a very particular type of business, the consequences of which we believe have never been thoroughly thought through by the VOA. VOA has tried to devise a system by which to force this particular business into the straightjacket of “rental value agreed between a willing landlord and an equally willing tenant.”
So far this approach has failed spectacularly. There are a number of reasons for this, and for why this approach is bound to keep failing. One should start with the question “Why are there essentially no premises let by landlords to tenants who then run those premises as a self-catering business?” As we remarked during your visit, if there would be even the tiniest scope for this business model to work, i.e. to prove fruitful for tenants, there would be plenty of business properties so let, providing VOA with the necessary data on which to base a valuation scheme. After all, there is no lack of entrepreneurial types in the UK. The simple fact that – as you agreed during your visit – no such premises exist, is testament to the fact that this business model is unviable. Even the very best, best run, best marketed and most highly spoken of self-catering businesses would be totally unviable for a tenant to run, let alone for a landlord to let: there is no room in the proceeds for any meaningful rent to be paid by tenant to landlord. Uncomfortable through this truth may be for both ratepayer and VOA, it is nonetheless the truth, and should therefore inform any and all work undertaken by VOA to arrive at rateable values for self-catering premises. If VOA bases its valuations of a certain type of business on actual rental data, it implicitly bases its valuations on a set of transactions, each one of which is part of a chain that is designed to result in a profitable undertaking, for both landlord and tenant involved. If no profit can be made, rental agreements will not be entered into, and so the source from which to arrive at the rateable value would disappear. (This, incidentally, is what one now sees in a great many town and city centres). If no rental data exist in a given sector of the economy, and VOA wishes nonetheless to come up with a rating scheme for that sector, it should come up with something that respects the profit-making capability of the business. In other words, there should still be sufficient scope for a profit once rates have been levied. Successive valuations of self-catering premises, and especially the latest one, for the 2010 list, are in serious breach of this requirement, as we shall show below. The 2010 valuation of self-catering premises shows vastly increased rateable values, does not take into account (changing) market conditions and rapidly rising costs, and is informed by a shockingly limited, even denigrating, view of self-catering by valuation officers. You, or your colleague, we don’t remember who it was exactly, were heard to say, to an uproar of shock and dismay of the people gathered at the meeting in Haverfordwest on 12 November 2009, that self-catering operators “are just property owners, in it for the capital gains” and that the work involved is little more than “pushing a hoover on a Saturday.” Suffice to say that, even if they were true, these claims have no place, anywhere, not even sideways or upside down, in the process to arrive at rateable values for self-catering. But perhaps they do to a certain extent explain why VOA comes up with so very badly aimed stabs at setting rateable values at the levels it does, irrespective of the special nature of the business and the very limited scope for profits.”[30]Mr Meulendijk also produced a letter dated 13 February 2014 from Mr Roger Burgess, chair of the Wales Association of Self Catering Operators (WASCO). It included the following observations:
“5. WASCO has had VOA officers address its general meeting, in order that its members have the opportunity to learn how business rates are arrived at. Unfortunately, the VOA officers concerned were unable to give a clear, satisfactory and transparent account of how rates are calculated. Attempts to develop a dialogue by both WASCO and Wales Tourism Alliance (WTA) similar to that which has taken place in England (2012) and prior to that in Scotland have proved unsuccessful… 12. WASCO cannot understand how, or why … individual members should be confronted with considerably increased rateable values, and hence be required to pay significantly higher non-domestic rates. 13. WASCO sees increased rateable values and non-domestic rates as a serious threat for the continued survival of those of its members who do not qualify for business rate relief. In order to continue trading these businesses have no option but to absorb these increased rates. This puts them at a great disadvantage, as the competitive nature of the self catering market precludes any significant price increases to cover these costs. 14. WASCO is aware that some of its members have appealed their non-domestic rateable values. Very few of these have obtained some reduction. The majority have seen their appeals fail in part due to the lack of clarity and transparency surrounding the calculation of rateable values.”
[31]Mr Meulendijk submitted that the cost of directors’ salaries should be included in the total expenditure for the purposes of the R and E valuation. The figures for this item in the appellant’s accounts were £16,013 (year to 31 October 2006) and £16,597 (year to 31 October 2007), Mr Meulendijk drew attention to a VOA Guidance Note on R and E valuations which suggested that, where the occupier was an individual, or where the hypothethical tenant might be expected to carry on the undertaking without advice from directors, it was normal to allow for remuneration solely in the tenant’s share. Mr Meulendijk considered that the guidance was incorrect. The effect of disallowing all or part of director’s salaries as expenses was to increase the divisible balance, resulting in increased liability to rates. However, the director would be liable to pay tax on the salary that he received. The result would be double taxation of the same sum, through different taxpayers, arising from the same economic activity. That was unacceptable because “tax laws are carefully crafted to prevent this from happening.” It was also unacceptable because it “would seem to leave VOA room to allow or disallow (part of) directors’ remuneration depending on factual or perceived differences between rate-paying companies, thereby introducing a measure of inequity, unpredictability and unfairness in the treatment of taxpayers and ratepayers.”[32]If, contrary to this submission, the Tribunal decided that directors’ salaries should not be included as expenses, Mr Meulendihk said that the R and E valuation should reflect the fact that the appellant’s directors performed many more tasks than would normally be the case in a business of this type. Such tasks included boiler maintenance; laundry; ground maintenance; external painting, roof repairs and sundry plumbing/electrical works; help with cleaning; and all book-keeping apart from drawing up annual accounts and submitting tax returns. If the actual expenses were adjusted to reflect these matters the total expenditure would be £63,450. Assuming total receipts of £75,000 and a tenant’s share of 50% of the divisible balance, this produced an RV of £5,775. If the appellant’s excessive work load was not reflected in the total expenditure figure, the landlord’s share of the divisible balance would have to be correspondingly reduced below 50%. The second valuation upon which Mr Meulendijk eventually relied assumed total expenditure of £62,225. This was arrived at by applying various percentages to the turnover of £75,000 to reflect the notional cost of each item of expenditure. Assuming an equal split of the divisible balance it resulted in an RV of £6,388.[33]In his reply to the respondent’s statement of case Mr Meulendijk pointed out that the average of his two valuations was £6,082, and he suggested the appropriate RV was £6,000.[34]Mr Meulendijk referred to the suggestion which had been made by the VO at the VTW hearing that rateable values for SCHUs were normally between 17% and 20% of gross receipts. That this was the case was the result of the VOA’s mistaken valuation of virtually all self catering properties in Pembrokeshire for the 2010 list. RVs for these units had increased by upwards of 100% compared to the 2005 list. Basic economic indicators, and especially the specific economic situation affecting the industry, did not justify these changes. Case for the respondent Evidence of Ms Thomas[35]Ms Thomas said that, as part of the preparations for the 2010 revaluation, most occupiers of SCHUs – including the appellant – had prepared a return form (VO6048W(03/08)). Those returns were analysed by the VOA. Very few SCHUs were let on an open market rental basis. Consequently it was not normally possible to establish a valuation scheme based solely on rental evidence.[36]The return forms requested details of trading receipts for the past three years and details of the high season weekly tariff and the period when it applied. Following consultations with WASCO, the VOA agreed that it did not have full information on the costs incurred by operators. It therefore produced a new return form (VO6048(10/11)), which asked for a breakdown of three years’ expenditure as well as letting income, income from service provision and income from other charges.[37]Ms Thomas outlined the matters which she needed to check before valuing the appeal property. Firstly, she looked at any rental evidence of SCHUs in Pembrokeshire. Secondly, she looked at assessments of SCHUs in the area of the Pembrokeshire billing authority. There was a total of 1,078 such assessments in the 2010 list, with an average RV of £2,860. Appeals had been submitted against 68 assessments: 6.3% of the total. Twelve appeals were outstanding. Of appeals which had been disposed of, fourteen had been dealt with by agents; of which eight had been withdrawn and the remainder resulted in a reduction. Of the 42 appeals by unrepresented ratepayers 12 were withdrawn, 15 were agreed, 8 were dismissed at VTW hearings, five were reduced by the VTW and the VOA agreed that two were well-founded.[38]Ms Thomas said that she had considered the R and E of the appeal property based on its accounts and the R and Es of comparables based on their accounts data. For this purpose she had to use her knowledge of accounts at a range of locations elsewhere in Wales. She had also considered the VOA Practice Manual – PN 2010 Holiday Homes – which recommended “that a SBS per beacon type [reflecting location and quality] should be adopted as the primary means of comparison for single properties and complexes for the 2010 Revaluation.”[39]Ms Thomas produced a table showing the rate per single bed space (SBS) which had been adopted in valuing SCHUs depending on location (prime, good, average and poor) and quality (good 1 to 7 or more spaces); average (1 to 7 or more spaces) and basic (1 to 7 or more spaces). The rates ranged from £215 per SBS for a basic unit with 7 or more bed spaces in a poor location to £840 per SBS for a good unit with 1 or 2 spaces in a prime location. In Ms Thomas’s opinion, for the purposes of applying this valuation tone, the appeal property should be considered as being of good quality in an average location.[40]Ms Thomas said that the SBS tone had been arrived at using such limited evidence of rents and accounts as had been available when the 2010 list was being prepared, together with the application of percentages to gross turnover. Such percentages had been based on an analysis of tariffs and gross takings as disclosed in rent returns.[41]Ms Thomas produced a document which was created by The Federation of National Self Catering Associations (FoNSCA) in consultation with the CEO of the VOA. It stated that FoNSCA’s membership comprised WASCO, the Association of Scotland’s Self Caterers (ASSC), the English Association of Self Catering Operators (EASCO) and the Northern Ireland Self Catering Holiday Association (NISCHA). The document was entitled “2010 Non-domestic (Business Rate) Revaluation and how it may affect your Rate Liabilities.” It included the following paragraphs:
“Analysis of rents and accounts has shown that rental levels for fully commercial self-catering accommodation fall in a range of 20-30% of total turnover (excluding VAT). This range can be used in a shortened analysis of the turnovers of freehold properties in order to provide an indicative price per bed space for these properties as well. For the 2010 Revaluation all individual holiday properties will be assessed on a price per bed space, none will be assessed on a percentage of receipts. The valuation approach for the 2010 Revaluation is fundamentally the same as that for the 2000 and 2005 Revaluations. The VOA have agreed with FoNSCA that the VO6048 form you should have already received, completed and returned, was not as clear as it could have been in terms of what income and expenditure figures you should (or could) provide. Consequently you should compare what information you may have already provided with a view to completing and submitting a copy of the attached REVISED VO6048 Form, Send your revised VO6048 Form to your local VOA office with a covering letter saying that the form replaces the version you previously submitted and is sent in agreement with the VOA’s CEO, Rating Leisure and Licensed Property.”
[42]The revised form which accompanied this document was in a different form from VO6048 (10/11) – see para 36 above. It did, however, request an additional breakdown of 3 years expenditure as well as letting income.[43]The FoNSCA document was not dated, but Ms Thomas said that it was prepared “just before the revaluation” in 2010.[44]Ms Thomas said that, when the SBS scale was prepared, the VOA had insufficient accounts on which to base its valuations. In North Wales, however, she “filtered the accounts of those properties which were fully commercially let” and she was able to identify the areas which produced evidence of the highest rents where such evidence was available. After looking at the SBS table, agreed settlements and levels of value adopted on other properties, the final stage in the valuation exercise was to “stand back and look” and consider whether there were any special factors which would justify an end adjustment.[45]Ms Thomas produced details of the available rental evidence of self-catering units in Pembrokeshire. It consisted of 10 rents. Nine of these related to single units. The only rental evidence of multiple units related to Skerryback Farm Cottage, Sandy Haven, Haverfordwest, St Ishmaels. This was a letting between connected parties. Ms Thomas concluded that little could be gleaned from the rental evidence, except as the basis for valuing single units.[46]In preparing her R & E valuation, Ms Thomas used the appellant’s actual accounts as the starting point. She bore in mind, however, that they had been prepared in accordance with accountancy rules. They therefore included items which should be excluded from an R & E valuation, such as works of improvement. Ms Thomas also noted that the appellant had not made a profit since 1998 and commented that one might ask why that was.[47]Although Ms Thomas had requested a breakdown of the expenditure on repairs for certain years the appellant had refused to provide it on the grounds that the information was private. In the course of Mr Meulendijk’s evidence I indicated that the requested information should be provided and Mr Meulendijk subsequently produced the relevant figures. However, said Ms Thomas, it appeared that some of the alleged repairs were works of improvement and others related to furnishing and chattels.[48]When preparing her valuation Ms Thomas had considered that the reduced takings at the appeal property in 2008 (£63,052) were not typical, because major building works were carried out during that year, resulting in a reduction in the number of winter lettings. Ms Thomas also noted that the accounts were unaudited.[49]Ms Thomas estimated expenditure on repairs at £8,500 per annum. Although this was significantly below the average expenditure incurred by the appellant, that expenditure was considered to be excessive. Ms Thomas’s repairs allowance was based on 11% of her estimated total income of £77,000; that percentage had been derived from the accounts of three other SCHUs: Talhenny Hall Cottages, Fenton Cottages and Cwm Connell Cottages, and also from her knowledge of other accounts of properties in North Wales. Ms Thomas added that the VOA adjusted rental evidence from retail and industrial properties by taking external and internal repairs at 5% each.[50]Ms Thomas said that she had had regard to the sets of accounts of the three other SCHUs in assessing the cost of heat and light, insurance, telephone, advertising and professional fees. No allowance was made for bank fees, despite the fact that this item was included in two of the three “comparable” accounts, on the grounds that the appellant’s business presumably operated without an overdraft.[51]Ms Thomas estimated total expenses at £35,625, to which she added £11,250 for depreciation of furnishings and chattels. This was based on 15% of gross turnover and reflected the need to maintain the property to a high standard and repair more frequently than usual. Although these figures were lower then those shown in the appellant’s accounts, she considered that the latter were very high in relation to turnover, having regard to the accounts of the three comparables. She observed that the appellant’s accounts had been prepared in accordance with accountancy rules to minimise tax in a legitimate way. A potential tenant would not necessarily assess the potential profitability of the appeal property in the same way.[52]The result of this exercise was to produce a divisible balance of £30,125, and a landlord’s share of £15,063 based on a 50/50 apportionment between landlord and tenant.[53]Ms Thomas produced a schedule containing the valuation and analysis of tariffs and takings of eight SCHUs located close to the appeal property which she considered were of a similar style/quality. She observed that, when considering figures for other properties, it was essential to bear in mind that there were enormous differences in the way such businesses operated.[54]Ms Thomas’s Appendix 19 contained details of 16 rating appeal settlements of SCHUs with multiple units in Pembrokeshire. In each case the RV was at least £5,000, in an attempt to exclude properties benefiting from small business relief. Having reviewed those settlements, and all the other available evidence, Ms Thomas concluded that the RV of £11,750 determined by the VTW was not unreasonable.[55]Ms Thomas considered that the appellant’s objection to that figure, on the grounds that it represented a large increase compared with the assessment in the 2005 list, was unjustified. She pointed out that the figure of £5,400 in the 2005 list was only £900 more than that in the 2000 list; and only £1,000 more than in both the 1995 and 1990 lists. Ratepayers of SCHUs in North Wales had argued that their properties were assessed in the 2005 list at higher levels than similar units in South Wales. The VOA had tried to be more consistent when preparing the 2010 list. The result was that assessments generally in the south had increased at a greater rate than in the north between 2005 and 2010.[56]Finally, Ms Thomas said that there was a discrepancy between the number of bed spaces at the appeal property which had been included in the assessment determined by the VTW and the actual number as shown on the appellant’s website. Discussion[57]I consider there is some justification for Mr Meulendijk’s concern as to the way in which the VOA has presented its method of valuing SCHUs. In the decision under appeal the VTW recorded Mr Davies (the VO who gave evidence before it) as saying:
“there was little or no rental evidence available in this sector of retail and it was universally accepted amongst rating practitioners and the courts that the most appropriate method of valuing properties such as the appeal property was with reference to Receipts and Expenditure (R & E) method.”
[58]Despite this unequivocal statement of the position, it appears from the VTW decision that Mr Davies did not produce an R and E valuation of the appeal property. Instead his valuation, which was accepted by the VTW, was prepared directly in accordance with the tone, applied to the number of bed spaces and with two end deductions of 5% each.[59]The lack of clarity surrounding Mr Davies’s evidence to the VTW was unfortunate. Nevertheless, the function of this Tribunal is to determine the value of the appeal property for rating purposes, not to judge the communication skills of the VOA. The starting point when valuing any hereditament is to seek evidence of rents paid for comparable properties in the vicinity. It is a striking feature of this appeal that rental evidence exists in respect of only ten of the 1,078 SCHU hereditaments in Pembrokeshire – less than one per cent of the total. Of those ten, only one relates to a hereditament containing more than one unit, and that rent was not agreed in an arms length transaction.[60]Although Mr Meulendijk did not pursue at the hearing his initial suggestion that the absence of lettings to self-catering operators demonstrated that there was no market for a SCHU business tenancy, I would state that I do not agree with the suggestion. The hypothetical landlord of the appeal property, for example, would have the option of letting it on a series of assured shorthold tenancies (ASTs) to residential occupiers. If the total net income obtainable from ASTs was significantly higher than that from a SCHU tenancy, the prudent landlord would adopt the AST approach. It does not follow that a lower, albeit positive rental figure would not have been obtainable if the property had been let under a business tenancy.[61]I turn to the R and E valuation, which before me the parties agreed is at least the starting point in valuing the appeal property. There are three principal elements to the R and E valuation: fair maintainable trade (FMT); expenses; and the percentage of the divisible balance (the difference between income and expenditure) which is apportionable to the tenant as a reward for his efforts (the tenant’s share) and to the landlord by way of rent (the landlord’s share).[62]Ms Thomas added to her estimated FMT of £75,000 the sum of £2,000, based on figures appearing in the appellant’s accounts and attributed to other operating income. Although his suggested RV of £6,000 had been based on total receipts of £75,000, in oral evidence Mr Meulendijk accepted the justification for an additional sum. He suggested, however, that only £800 of the £2,000 related to the appeal property, the remainder representing rents paid for property not included in the assessment. I accept Mr Meulendijk’s evidence on this issue.[63]I turn to the expenditure figures to be included in the valuation. Ms Thomas discounted many of the actual expenditure figures in the claimants’ accounts. She thought that the total expenses, expressed as a proportion of total income, was very high. She considered that the accounts had been prepared in accordance with accounting rules to minimise tax in a legitimate way, but they did not necessarily reflect the manner in which a potential tenant would have estimated the likely outgoings. In preparing her valuation she had had regard in particular to the accounts of three other SCHUs.[64]I do not consider that Ms Thomas’s approach to expenses is sound. She based her calculation largely on the relationship between items of expenditure and income as illustrated in the accounts of three other self-catering enterprises, one of which (Cwm Connell Cottages) did not start trading until some three years after the AVD. Moreover, if Ms Thomas is right that the accounts of the appellant do not reflect the approach of a hypothetical tenant, it is not clear why a similar criticism should not be directed at the three properties on which Ms Thomas placed most weight. Furthermore, as will be apparent from my conclusions on the R and E valuation below, I do not agree that the appellant’s accounts, properly interpreted, demonstrate a pattern of continuing losses, provided directors’ salaries are left out of account.[65]Mr Meulendijk increased the expenditure figures in his company’s accounts to reflect his contention that he and his wife worked exceptionally hard and that the hypothetical tenant would employ outside labour to carry out some of the tasks they were undertaking themselves. That approach seems to me to be justified in principle, although in practice it means that the valuer is required to make various adjustments to the actual accounts, each of which must to an extent be subjective. On the evidence at this one day hearing, conducted under the simplified procedure. I am not persuaded that Mr Meulendijk’s approach would give a more reliable valuation than one based on the actual expenditure. As I explain below, however, the amount of work done by the tenant is relevant when quantifying the tenant’s share.[66]When preparing an R and E valuation the accounts of the actual occupier must be studied with caution because they will not necessarily reflect the approach of the hypothetical tenant. In the light of the evidence in this appeal, however, I consider that, with two exceptions, the appellant’s accounts provide a more reliable guide to the hypothetical tenant’s approach than the information upon which Ms Thomas based her calculations. I therefore prepare the R and E valuation adopting for each expenditure item the average spent by the appellant in the three years ending 31 October 2007. I disregard the accounts for the following year, which straddled the AVD, as I have found that year to be exceptional (see para 48 above).[67]The first exception is the cost of repairs. Ms Thomas queried the figure of £17,017 in the 2006 accounts and the information provided by the appellant in support of it was not entirely clear. I shall disregard the 2006 expenditure when calculating the average expenditure in 2005/7.[68]Secondly, Ms Thomas considered that the allowance for rates should be the amount payable with effect from 1 April 2008, with an addition for water rates. Mr Meulendijk did not disagree with that approach in principle. I accept Ms Thomas’ figure of £2,775.[69]The effect of my conclusions on income and expenditure is to produce a divisible balance of £24,292 (see para 72 below). The third element in the valuation is to apportion this figure between landlord and tenant. Ms Thomas apportioned on a 50/50 basis. Mr Meulendijk considered that assuming, as I have found, that the actual expenditure figures should not be increased to reflect the cost of employing outside labour for many of the tasks currently performed by him and his wife (see para 32 above), the landlord’s share of the divisible balance should be reduced below 50%.[70]It is clear that Mr Meulendijk and his wife work extremely hard. However, as is apparent from Mr Jones’s evidence on the subject, which I accept, they are not alone. Mr Jones said that self-catering operators “often work very long hours, for very modest financial rewards: a labour of love, as some don’t mind calling it.” No doubt the life-style advantages of operating a SCHU business will be attractive to many. Of no less significance however, in my view, is a matter referred to by an officer of the VOA at a meeting with SCHU operators in November 2009 (para 29 above) namely that such people were motivated by the prospect of an eventual capital gain. Although that observation was apparently greeted negatively, there was in my view an element of truth in it and, in the case of Mr Meulendijk and his wife, their investment in the appeal property has resulted in a significant potential gain as shareholders in the appellant company. As Ms Thomas pointed out, the value of the appeal property was included in the accounts to 31 October 2008 at £531,518 and this figure was increased to £1,131,518 in the accounts to 31 October 2009 following a professional valuation. In my judgment, to many SCHU operators the prospect of being able to dispose of their property at a profit at a later date will be one of the factors taken into consideration when deciding whether to accept the limited financial rewards which are immediately available to many participants in the industry. The chance of such a capital gain, however, is not available to the hypothetical tenant for rating purposes, who will only be granted a tenancy from year to year, albeit with a reasonable prospect of continuance.[71]If Ms Thomas is right, two people would be willing to work extremely hard operating the SCHU business at the appeal property for a combined wage of £12,146 per annum (50% of £24,292), in the knowledge that they will be unable to sell their interest in the property when their tenancy ends. That seems to me to be an unrealistic approach. I agree with Mr Meulendijk that a tenant’s share of 50% is too low. In my judgment, the tenant’s share in the circumstances of this appeal should be 75% of the divisible balance, providing a joint annual income to the husband and wife (or other two person partnership) of £18,219.[72]My R and E valuation of the appeal property is RV £6,000, calculated as follows:- Income stream £ £ Fair maintainable trade (FMT) 75,000 Other operating income 800 Total income 75,800 Working expenses Wages and employees’ NI 5,536 Repairs 9,419 Light & heat 6,209 Rates 2,775 Insurance 3,072 Trade Association subscription 517 Equipment hire 41 Software 153 Print/Post/Stationery 724 Telephone/fax 1,240 Advertising 4,067 Prof. fees 1,169 Misc and sundries 150 Bank fees 713 Motor, travel & subsistence 1,678 Other direct costs 1,029 Total expenses 38,492 Deprecation 13,016 Total expenses 51,508 Divisible balance 24,292 Landlord’s share – 25% 6,073 Say RV £ 6,000[73]In preparing this valuation I have adopted Ms Thomas’s approach to directors’ salaries. I have excluded them from total expenses on the grounds that the tenant’s remuneration would be accounted for in the tenant’s share. Mr Meulendijk suggested that a different approach to tenant’s share should be adopted when the actual tenant was a limited company. I reject that approach. The rating valuation is to be prepared on the assumption of a letting to a hypothetical tenant, not the actual tenant. The fact that Mr Meulendijk has chosen to operate the business at the appeal property through a limited company is no reason to approach the tenant’s share in a manner different from what would have been appropriate had he operated as a sole trader or in partnership with his wife.[74]I turn to consider Ms Thomas’s valuation by reference to the tone. The VTW’s determination was based on 31 bed spaces. In fact, there are 34. Ms Thomas’s valuation, reflecting the correct number of bed spaces, was as follows: Unit Single bed £per SBS Value Rose Cottage 2 525 1,050 Apple Cottage 6 360 2,160 Coach House Cottage 5 380 1,900 First Cottage 4 400 1,600 Spring Cottage 2 525 1,050 Gardener’s Cottage 3 460 1,380 Peach Cottage 4 400 1,600 Orchard Cottage 5 380 1,900 Holly Flat 3 405* 1,215 13,855 Allowances 0.95 maintenance of nature reserve and -5% complex allowance (Compound factor) 0.9025 £12,504 Say £12,500 * Reflects 3SBS in one room.[75]Ms Thomas said that this valuation reflected her opinion that the appeal property was a good quality property in an average location. Mr Meulendijk did not accept that the tone provided a legitimate method of valuing the appeal property.[76]I do not attach any significant weight to the SBS tone. It was arrived at with the benefit of minimal rental evidence. Although it had regard to financial information which had been requested in the return forms, that information was seriously deficient because it did not include details of working expenses. Without such information any conclusion as to the amount which an operator could afford to pay by way of rent was mere speculation. Although details of expenses were requested in return forms which were sent out just before and some time after the list was compiled, it is not clear how many such forms were sent out; nor how many were completed; nor whether the expenses information which was provided in response led to any alteration in the tone matrix. Certainly Ms Thomas accepted that it was uncommon for the VOA to obtain full accounts from SCHUs consisting of single units or small complexes. Moreover, of the SCHU assessments in Pembrokeshire which have been the subject of settled appeals, well over half have been negotiated with unrepresented ratepayers and are therefore of limited evidential value. Result[77]The appeal is allowed. I direct that the assessment of the appeal property in the 2010 rating list be reduced to RV £6,000 with effect from 1 April 2010.[78]In appeals conducted in accordance with the Tribunal’s simplified procedure costs are only awarded in exceptional circumstances. Mr Meulendijk asked for costs on the basis that Ms Thomas had displayed a lack of care and attention in her response to the appeal. That submission was in my judgment without foundation. I make no order as to costs. Dated 10 September 2014 N J Rose FRICS

Cited in 5 later judgments