There has been a lot of comment in recent weeks about the so-called “staircase tax” and its impact on small businesses, especially focussing on its retroactive effect and the fact that business occupiers are having to pay tax for previous years that wasn’t demanded from them. At first blush, this all sounds very unlike the way in which a modern Western democracy operates its tax system, so what’s going on?
Many of you may remember that back in July 2015 the Supreme Court handed down its judgment in Woolway v Mazars, a case concerning the liability of Mazars for business rates and held (to the shock of business tenants across the country) that a tenant who occupies separate floors in a building is only entitled to treat the floors as part of the same rateable occupation (known as a hereditament) if it is possible for him to move between those floors without leaving space that is exclusively his. If there are two hereditaments the tenant is less likely to be able to claim an allowance for size (“quantum relief”) to reduce his liability for business rates. So, a tenant who has to use the common parts of the building, such as common lifts or staircases, to pass between floors will have to treat them as separate hereditaments, whereas the tenant who has a private lift or staircase connecting its floors will be able to treat them as one and so could claim quantum relief.
The Supreme Court did not change the law with this decision; they simply explained what it already was. The Valuation Office Agency (the government agency responsible for overseeing business rates) has therefore instructed its officers to apply the decision retrospectively, so that the rates collected for previous years where quantum relief was incorrectly applied are “topped up” by the rates payers to what they should have been without the incorrect quantum relief. It is this loss of quantum relief that has been dubbed “the staircase tax”.
Two years on from Mazars, the Supreme Court’s decision is still good law, but it is perhaps inevitable that the VOA’s decision to apply it to rates bills that were settled before the judgment came out will cause difficulties for businesses of all sizes, especially SMEs who operate on tight yearly budgets and might not be able to fund unbudgeted payments for previous years’ tax without finding savings elsewhere. They will also have to budget for rates that are higher in future years not just because of the increase in the rating multiplier but also because of the loss of quantum relief.
Is there anything that business occupiers can do to avoid the staircase tax? In some situations, it may be possible to find ways of designating parts of the building as exclusive to one tenant in order to create a direct connection between floors. However, this sort of strategy will need careful analysis and advice from both lawyers and specialist business rates consultants or surveyors as this sort of arrangement has yet to be tested. Alternatively, whilst it may not help with the rates liability for previous years, occupiers could also consider installing new communication routes between floors, for instance connecting staircases between contiguous floors although this may be an uneconomic solution.
On new lettings, if tenants need to take multiple floors in a building, they should certainly seek to take contiguous floors and consider ensuring that they have a way of moving between them without entering common parts of the building.
For landlords, if the values are substantial enough, which they can be in London especially, tenants may want to negotiate deals to ensure they can pass between floors without leaving their exclusive space. This may present bargaining opportunities for the landlord.
As the government is unlikely for the foreseeable future to change the law, both landlords and tenants should start thinking creatively about strategies that could achieve value for each other.
 Woolway (VO) v Mazars LLP  UKSC 53  PLSCS 240