I am pleased to outline the findings of my review of the present law governing the rating valuation of plant and machinery for small-scale hydropower schemes in Scotland.
The terms of reference for the review are:
- to consider the present law governing rating valuation of plant and machinery for small hydropower schemes in Scotland; and
- to recommend any legislative changes required in respect of the extent of rateable property for such schemes, having regard to the financial, technical and other considerations involved.
The 2017 Revaluation saw rateable values for small hydro increase significantly. The hydro sector are concerned that the rateable values for small hydro - expressed as a percentage of gross turnover – are significantly higher than for comparable renewable energy producers such as small onshore wind and standalone solar energy.
From 1 April 2018, the Scottish Government, with the endorsement of the British Hydropower Association, introduced an interim 60 per cent relief for non-domestic rates bills of hydro generators. Whilst the hydro sector welcomed this, they see it as a short-term relief and are seeking a more long-term solution via amendments to the plant and machinery regulations and/or changes to the application of the rating valuation methodology to the small hydro sector.
Although the terms of reference of the review are to consider and recommend if any legislative changes are justified in respect of the extent of rateable property for small hydro schemes, it soon became apparent that hydro sector representatives were not only concerned about the application of the plant and machinery regulations but were also uneasy of the rating valuation methodology applied to small-scale hydro. Therefore, several meetings were dedicated to considering in detail the evidence available to assessors in determining valuations including discussion over which plant and machinery was considered rateable in the valuation process.
Given the failure of the group to unanimously agree on several issues, my report focuses on the views expressed by the hydro sector and the Scottish assessors and seeks to set out for consideration viable options available to Scottish Ministers in order to ensure and maintain the principles of fairness, transparency and credibility within the rating process as it is applied to the hydro sector and to the wider non-domestic rating environment.
Therefore, my report identifies concerns and options and does not seek to simply identify areas of agreement. Given that on numerous occasions the group was unable to agree a consensus opinion, this report attempts to avoid any editorial judgement by myself or any other members of the group on the merits of each argument and instead seeks to provide a summary of the discussion over the seven meetings. I hope that the views of all parties are objectively and transparently captured in the report.
A recurring issue in the discussions of the group was the impact of the State Aid regulations which apply to forms of public assistance given on a discretionary basis and which have the potential to distort competition and affect trade. Many of the avenues explored by the group were identified as likely to be subject to the same restrictions given the selective nature of any intervention. In coming to the conclusion in this report, State Aid considerations have been a recurring and material factor. By focussing on a single sector of the economy, all options available to the group are understood to have state aid implications.
1. The hydro sector suggests that the following changes to plant and machinery legislation and to the application of the rating valuation methodology should be considered:
a. "Tools of the trade" exemption to be built into the plant and machinery legislation for small hydro schemes or
b. Pipeline and all pipeline works for small hydro should be exempt in the plant and machinery legislation.
c. Scottish assessors to review the application of the Receipts and Expenditure (R&E) method of valuation – in particular the "divisible balance calculation" directly impacted by which components of plant and machinery are considered rateable.
d. Prescription of rateable values at a fixed 10% percentage of annual turnover.
Most of the group agreed that the above-mentioned changes to the plant and machinery regulations specifically for small scale hydro were not justified or required. The group acknowledges that the concerns of hydro sector were focussed primarily on the divisible balance calculation in the receipts and expenditure valuation model which directly impacts which components of plant and machinery are considered rateable. Such aspects are ultimately matters of the application of the valuation process which are subject to an independent appeals system and which may be resolved by discussion between the Scottish assessors and ratepayers or in the end by litigation. Prescription of rateable values for small hydro heritages was not considered by the Group.
2. A frequent issue for the group was the complexity of the non-domestic rates scheme including a lack of transparency regarding both the evidence provided by scheme occupiers as ratepayers and by assessors in calculating rateable values. The group supports the recommendations of the Barclay Review of Non-Domestic Rates that the rating system needs to be more transparent and information flows between stakeholders must improve. Those reforms are expected to have a positive impact on the information available to assessors and the hydro sector and help to ensure that more hydro subjects are valued accurately. It is encouraging to note that such information flows and engagement between assessors and the hydro sector has recently improved significantly.
3. The group noted that on occasions even the most basic of discussions and exchanges of information did not take place before expensive and currently inconclusive litigation was considered necessary. It is not certain that the final outcome of the Old Faskally appeals will have a bearing on the prosecution of other 2010 roll cases where appeals have been lodged nor be relied upon as a precedent in similar 2017 roll appeals. It may well be that if ratepayers and assessors cannot agree the outstanding 2010 and 2017 roll rating assessments - and I strongly hope that open, transparent and meaningful negotiations ensue between the parties - then further litigation may be the only resort to determine the valuation approach – in particular in respect of the outstanding 2017 appeals.
4. The group agrees that the assessors are correctly applying the plant and machinery regulations as they stand. Most of the group agreed that the plant and machinery, or indeed lands and heritages, for hydro are not materially different to equivalent plant and machinery operated in other business sectors. While the hydro sector representatives dissented from this position, the group did not agree that changes to the plant and machinery regulations specifically for small scale hydro were justified or required.
5. The group agrees that it is appropriate for small scale hydro to be assessed using the Receipts and Expenditure method – although the hydro sector is very concerned about the levels of value arrived at by the application of this rating methodology. There were questions about the extent to which the method was sufficiently flexible to accommodate subjects which are otherwise uneconomic in the absence of a Government subsidy.
6. Despite agreement that the R&E approach was correct, for context the group discussed the impact of adopting the Contractors Principle. The group noted that the methodology would deliver broadly comparable rateable values to that generated by the R&E approach. This correlation is not unexpected given that both methods ultimately reflect the capital build costs incurred.
7. By design, hydro electricity generation plant is heavily dependent on civil engineering works which are typically rateable as either plant and machinery or as lands and heritages in their own right. Comparator technologies such as wind and solar power do not require comparable levels of civil engineering infrastructure which typically results in relatively lower rateable values. The group agree that the outcome of correctly applying the regulations is resulting in adverse outcomes for some elements of the small-scale hydro sector and that concerns regarding the viability of parts of the existing hydro sector have merit. The group therefore concludes that elements of the existing sector will struggle – at least in the short term – without further public sector support. In addition, future investment may be undermined by the existing rates regime although, non-domestic rates is only one factor that may impact that situation and other concerns may have a more material impact.
8. The nature of any ongoing public support is a matter for Scottish Government to determine but reflecting on the options considered by the review group; the group does not believe that doing nothing is a sustainable or fair option for parts of the hydro sector.
9. The group noted that non-domestic rating valuation does not usually lend itself to short term policy solutions, but reliefs provide a flexible route to address anomalies and undesirable or unintended outcomes to specific businesses to ensure a fair burden of rates falls on all sectors of trade and commerce. The hydro representatives expressed concerns that reliefs were considered to be temporary and while the current relief was welcome, it was seen as a short-term fix as opposed to a sustainable long-term solution. In addition, the industry noted that funders of the small-scale hydro schemes currently exclude the impact of reliefs from their assessment of financial viability thus negating the impact of such measures on long term funding.
10. While a relief may be an imperfect solution, it would provide some support for investors in new plant, the majority view on the group was that a reasonably long-term relief could represent a viable solution to deliver a more affordable rates outcome for the sector whilst maintaining fairness with other ratepayers.
I could not have completed this review without the considerable time, expertise and insight provided by my colleagues in the review group. I wish to thank each of those individuals for the constructive way they engaged, shared ideas and strongly set out their viewpoints in a positive and respectful manner despite the obvious differences of opinions, perspectives and possible solutions put forward.
The group has been exceptionally well served by officials in the Scottish Government who have provided extensive secretariat support and helpful advice throughout the period of the review.
Professor David Tretton FRICS FIRRV
RICS Registered Valuer
Chair, Small-Scale Hydro Review of Plant and Machinery Group (Scotland)