The scope of this Practice Note is solely to ensure a consistent valuation approach for this property Class / Subclass / Type for Non Domestic Revaluation 2023 and subsequent entry in the new Valuation List which becomes effective on 1 April 2023.
The basis of valuation for new entries in the Valuation List, and Rating Revision cases after 1 April 2023, is Schedule 12 (2)(1) of the Rates (NI) Order 1977.
This Practice Note refers to property classified as:
Class: Licensed Premises
Sub Class: Licensed House
Type: Not applicable
Schedule 12 Part 1 Paragraph 1 of the Rates (NI) Order 1977 applies.
“Subject to the provisions of this Schedule, for the purposes of this Order the Net Annual Value of a hereditament shall be the rent for which, one year with another, the hereditament might, in its actual state, be reasonably expected to let from year to year, the probable average annual costs of repairs, insurance and other expenses (if any) necessary to maintain the hereditament in its actual state, and all rates, taxes or public charges (if any), being paid by the tenant”.
The Licensing (Northern Ireland) Order 1996 – consolidated the law relating to the sale by retail of intoxicating liquor.
Valuation approach for 2023
The shorthand version of the R&E method of valuation is to be retained as the approach for this type of hereditament.
Research by the Practice Note author concluded that there was insufficient rental evidence available to develop a comparative approach.
In the absence of rental evidence, or a suitable unit of comparison to permit such rental evidence to be reliably analysed, the preferred method of valuation may be either the R&E method or the Contractor’s basis. Where the nature of the occupation of the property is primarily concerned with achieving anticipated profit, and the tenant’s rental bid is therefore likely to be based upon a consideration of receipts and expenditure, then in the absence of reliable rental evidence, the R&E method may be the most appropriate method of valuation to adopt.
Source: The Receipts and Expenditure Method of Valuation for Non-Domestic Rating Guidance Note produced in 1997 by the Joint Professional Institutions' Rating Valuation Forum which consists of the RICS, the IRRV, the RSA, the SAA, the VLA and the VOA.
Gross Receipts will be determined by taking into account all income reasonably to be derived from occupation of the property. A period of three years accounts, prior to the AVD should give sufficient information to establish a fair and reasonable indication of the trading position. In the case of new ventures where trading accounts do not exist, refer to the accounts of similar ventures, or to the business plan prepared for the new occupier. In general, receipts should include all income derived directly and indirectly from occupation of the property.
The proper Cost of Purchases made in order to produce those receipts should be deducted to determine the Gross Profit. Such costs relate only to those purchases which form part of the venture undertaken.
Deduct the Working Expenses from the Gross Profit to determine the Divisible Balance. Outgoings considered as allowable working expenses are those incurred as a result of the operation. For example, salaries, National Insurance payments, provision of services, insurance, phone bills, advertising, Head Office expenses. However, a mortgage payment, which is an expense of the business, is not an expense for a rating valuation.
The Divisible Balance (or net profit) is the remaining sum available to be shared between the landlord, and the tenant. It comprises two main elements:
a. The Tenant’s Share – to provide a return on any tenant’s capital employed and a reward to the tenant for his venture reflecting the extent of the risk and the need for profit. It must be a proper and sufficient inducement, not merely a fraction of the divisible balance. A 50/50 split of the divisible balance is adopted as a last resort. This is deducted from the Divisible Balance to leave.
b. The Landlord’s Share – i.e. the amount available for the payment of rent and rates.
The above sets out the methodology for assessing a rent using the Receipts and Expenditure. It may also be possible to determine a ‘shorthand’ approach whereby a percentage is applied to the Gross Receipts to determine a rental value.
Application of this Practice Note will require an estimate to be made of the Fair Maintainable Trade (FMT) which should represent the annual trade considered to be maintainable at the Antecedent Valuation Date (AVD), 1 October 2021, having regard to the physical nature of the property and its location as at 1 April 2023 when the new list comes into force.
A shorthand approach or matrix has been developed whereby an appropriate percentage rate is applied to the FMT in order to convert it to a Net Annual Value (NAV). The matrix table is shown below. In estimating the FMT, the hypothetical tenant is envisaged to be a reasonably experienced operator who responds to normal trading practices and competition in the locality.
The actual trade at AVD is used as a starting point, however in some instances it is not made available by the operator or may not represent the best evidence of what is a reliable and sustainable FMT.
If an area experiences a unique year/ event, which is not going to be repeated then the effect of such an event should be removed from the estimation of FMT as the hypothetical rent should be ‘one year with another’. An example of this could be the impact of the City of Culture status.
Similarly, if there is clear evidence the actual turnover or property has been enhanced by an individual’s personal goodwill the turnover should be adjusted to reflect the hypothetical turnover.
Conversely, where the actual turnover of premises is lower than that which would be anticipated due, for example, to poor management, the low turnover should be adjusted to reflect the hypothetical turnover.
Where a property is new, or has been reopened, the initial turnover may be enhanced, or the converse, for the duration of the period of adjustment, known as the honeymoon period, and may warrant adjustment in order to arrive at a FMT. The duration of the honeymoon period should be individually assessed according to the particular circumstances.
Recognising the nature of licensed premises and the varying profit margins within each income stream, it is necessary to determine the FMT for each of the following income steams:
On sales – turnover for all sales of intoxicating liquor, soft drinks and incidental bar sales such as nuts and crisps.
Food – receipts from the sales of all food (excluding wines and liquors which will be included with on sales)
Off sales – may be either over the counter or from a separate dedicated area. If the off sales is valued as a separate hereditament then any receipts for the off sales should be excluded from the estimate of FMT.
Other - relates to a wide range of sources such as admission charges, room hire, machine income etc.
Accommodation – on occasion there may be income from bedroom accommodation associated with the public house which must be included in the assessment.
The FMT for each of the above income streams is “weighted” to take account of the different profit margins.
On sales - Income from on sales will be taken at 100%
Food Sales - The first £40,000 of food sales will be disregarded due to the lack of profitability, on the basis that up to this amount will be used to meet overheads such as staff costs, the provision of kitchen facilities and equipment etc.
The Next £40,000 will be taken at 75%.
All Food income above £80,000 will be taken at 100%.
Off sales - Income from off sales is taken at 100%
Other sources - income from other sources should be taken at 100%
Accommodation - Where accommodation held with the bar is available for letting, the income from this will be treated as another income stream and taken at 100% for inclusion in the estimate of the FMT. It should not be valued on a price per bed space.
Percentages to be applied - The FMT for food income is multiplied by 5%. (Dry Sales).
The FMT for all other income streams is combined and then multiplied by the appropriate percentage based on thresholds in the table below. (Wet Sales).
The total Wet sale and Dry sale amounts combined equate to the 9th list NAV.
|FMT / Turnover
|Percentage rate to be applied
|Wet Sales (Drink)
|Dry Sales (Food)
|£250,001 - £500,000
|£500,001 - £750,000
|£750,001 and above
Having arrived at an initial valuation it will be necessary to stand back and take an overview of the assessment to ensure relativity with other comparable premises.
Rent and Lease Questionnaire
For this class of property RALQs were issued centrally by LPS and analysed by the Local District Office.
For advice on any aspect of this Practice Note contact LPS on 0300 200 7801
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