Rateable Values: the Assessor’s spanner in the hydro works
The battle with the Assessor and Scottish Government over extreme and disproportionate Rateable Values has been going on for a very long time.
The History of
Old Faskally
It all began with the Assessor’s valuation of run-of-river hydro sites in 2010. At the time, there was no pressing need to interrogate these valuations, as renewable energy schemes enjoyed 100 per cent relief from business rates. But the founding directors of Alba Energy, a members organisation for independent hydro operators, noticed that there was something wrong with the way underlying Rateable Values for hydro were being calculated – and they reckoned that these “RVs” might come to haunt the sector if rates relief were removed.
Which is exactly what happened.
The first step in the case was taken in 2013, when the appeals of six hydro schemes – under the collective title “Old Faskally Farming Company & Others” – was heard before the Tayside Valuation Appeal Committee.
The arguments which developed out of this case have often been obscure, convoluted and difficult to understand. Yet underneath all the technocratic disputes of the last decade, there arguably lies a simple solution to a simple problem.
So, what is Small Hydro’s problem?
In 2016, the fears of Alba Energy were realised when the Scottish Government removed the reliefs. Then came the revaluation of 2017.
The increases to Small Hydro RVs in the 2017 valuation were not a matter of hydro being disadvantaged by a percentage-point or two. Calculated as a proportion of turnover, RVs for Small Hydro increased by an average 140 per cent over and above those of the nearest comparable sector: onshore wind.
Business rates are derived from comparative principles. There is no other sector in the UK that has suffered such an extreme and irrational disparity. The precise degree of this disparity was acknowledged in 2017 by the Scottish Government, when it agreed to reliefs of 60%, a figure derived directly from the difference between hydro and wind.
Hydro’s Rateable Values are a structural economic threat to the sector. Government reliefs provide temporary assistance not long-term security. Once these are removed, every site in Scotland will be exposed to crippling bills. We can already see this in the case of Ardtornish, Ormsary and others who have fallen foul of State Aid regulations which deny them reliefs. Exposed to the full consequences of the Assessor’s valuations, they face bills out of all scale to their operations, threatening jobs and the closure or sale of schemes.
Old Faskally: the hydro spanner in the Assessor’s works
The Assessor would have entirely dismissed the concerns of Small Hydro by now, were it not for the fact that the Old Faskally case remained obstinately stuck in his system. He is legally obliged to address the appeals that have mounted up against the 2017 valuation. But he could not do so until the outstanding appeal from the 2010 valuation had been concluded.
It is clearly absurd that the dispute over 2010 persisted while more than two hundred appeals against the 2017 valuation were waiting to be heard. Yet the stagnation of this process was a result not of Alba’s appeals, but of the Assessor’s.
When Alba Energy first brought the Old Faskally case to the Tayside committee in 2013, it was successful. Alba argued that the Assessor’s Rateable Valuations should be amended according to appropriate principles. The committee agreed. It might all have ended there, with the Assessor amending the hydro RVs.
But it did not end there.
Since 2013, the Assessor has been appealing to the Lands Valuation Appeal Court (LVAC) against his own committee’s decisions.
Over the last eight years, there have been two committee decisions and two court verdicts and still the Assessor has not prevailed.
Now we have the committee’s third and final decision, the 2017 case can be heard at the Lands Tribunal to receive a decision applicable to the whole industry.
In outline, this is how the case developed.
Old Faskally at the Tayside Appeal Committee: part I
In 2013, at the Tayside Appeal Committee, the argument was based on the “comparative method” of valuation. Hydro rents showed a consistent value across sites of around 10 per cent of turnover. The Assessor dismissed these rents as invalid measures and stated that, using the “Revenue & Expenditure” method, 50 per cent of a hydro fell to be rated.
Alba argued that, even if the Assessor rejected the rents, it could not be the case that half of a hydro fell to be rated, as the largest civil engineering cost is the installation of the penstock, or pipeline. And the “penstock” is explicitly exempted from valuation in the Plant & Machinery regulations. Furthermore, a penstock comes under the “tools of the trade” classification, by which the turbine and generator of a hydro are also exempted.
A hydro penstock does not deliver fluid from one place to another, like a gas pipeline; it is a mechanism for creating the pressure by which a hydro generates electricity. The penstock is a part of the machine.
Penstock, turbine and generator represent the major construction costs of a hydro. Once these are excluded from valuation, what remains to be valued – using the “comparative method” of valuation – are the rights to use land and water; plus the powerhouse building.
The committee upheld Alba’s case and ordered the Assessor to amend the RVs accordingly.
Affronted by this decision, the Assessor appealed, stating that he wanted to use the “R&E” method which, he argued, would produce higher Rateable Values.
So, he took the Old Faskally case to the Lands Valuation Appeal Court (or LVAC), the highest court of its kind in Scotland.
Old Faskally at the LVAC: part I
The Assessor was under the impression that he won this appeal. But what the LVAC actually did was to send the case back to the committee to decide, albeit with a caveat.
In February 2016, Lady Dorrian’s verdict upheld the Assessor’s appeal on one point: that the committee had “erred in law” by failing to address all four classes of the Plant & Machinery Order (PMO). While the penstock is explicitly exempted in the first class of the PMO, it was necessary, Lady Dorrian stated, to take the “sequential approach” to all four classes of the PMO and to ensure that nothing else fell to be rated under these definitions.
Lady Dorrian stated that it was up to the committee to consider the definition of a penstock; and it was also up to them to choose the method of valuation.
Tayside Committee decision: part II
In response to Lady Dorrian’s verdict, the committee produced a second determination, in which they opted to use the Assessor’s own R&E method of valuation. Since the Assessor himself had excluded turbine, generator and pipeline materials from his valuation, the committee could see that these – the majority of costs – did not fall to be rated and decided on a split of costs: 25% rateable, 75% non-rateable.
Using the Assessor’s own valuation model, this 25:75 split produced Rateable Values that come out at an average 10% of revenues. This is the same proportion as the RVs for the wind sector and, coincidentally, the same as average rents on hydro sites.
This rateable split produces RVs that are fair – and proportionate to other sectors.
Outraged again, however, the Assessor decided to appeal to the LVAC for a second time, on the basis that the 2010 valuation should be a 50:50 split, while also knowing that he wanted an increased 55:45 split for the 2017 valuation.
LVAC verdict: part II
The Assessor’s second appeal was heard in January 2019, by three high court judges: Lords Malcolm and Doherty, with Lady Dorrian presiding.
Lord Malcom concurred with the committee’s decision. However, Lord Doherty had a caveat. He proposed that the case be reverted, once again, to the Tayside Committee, so that the committee could re-examine the PMO and justify its 25:75 split.
In her verdict, Lady Dorrian sided with Lord Doherty and upheld the Assessor’s appeal – but to a specific extent only: that the committee should check the fourth class of the PMO to ensure that there was nothing else in the civil works of a hydro, besides the pipeline, which would fall to be rated as a result of it being “in the nature of a building or a structure”.
(It should be noted that the Assessor’s counsel confirmed that, in his 2010 valuation, the Assessor himself had exempted the pipeline, turbine and generator.)
The committee’s final decision
At the beginning of 2020, the committee instructed Alba and the Assessor to “agree the facts” of the Old Faskally costs so that they could assess the rateable proportion precisely.
Due to Covid delays and the convoluted processes of the Assessor, it took a year to agree exactly what these costs were, but both parties finally agreed on the basic numbers.
What remained in dispute was the rateable split of the costs of building a hydro scheme.
Taking into account the instructions of the LVAC, between 23%-29% of a scheme appeared, in the hydro sector’s view, to be a reasonable rateable share.
The Assessor, however, changed his position. He no longer argued for a 50 per cent split but began to argue that 80%-83% of hydro construction costs should fall to be rated. If this were accepted, the Small Hydro sector would be grievously damaged.
To argue the case, Alba Energy appointed James Findlay KC, qualified at both English and Scottish bars, a brilliant and forensic cross-examiner.
At the last committee hearing in 2022, he exposed the Assessor’s case to be a muddle of contradictory positions.
The 2017 case
We have had the support of a statutory adjudicating committee on three occasions over ten years under the instruction of two high court verdicts.
The exemption of penstock, turbine and generator have been confirmed for the 2010 valuation.
The same may now be done for 2017 and all future valuations.
We have a good case, excellent counsel, and the opportunity to apply proper valuation principles to Small Hydro in law.
The “Old Faskally” VerdictContact Us
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