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Business Rates for small-scale hydro – An update on the legal challenge

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For the last five years, Alba Energy has been in a protracted dispute with the Tayside Assessor, in order to challenge the Rateable Values (RVs) ascribed to small hydro sites in Scotland. Alba and the BHA consider these valuations – from which business rates are calculated – to have been inappropriately high in the 2010 valuation roll and grossly excessive in 2017.

 For the hydro sector more broadly, the level of business rates has become a threat to the viability of the sector.

In order to bring formal appeals against the 2017 RVs it has been necessary, first, to settle the dispute relating to the 2010 roll. The original challenge was brought by “Old Faskally Farming Co & Others” (represented by Alba Energy). The revised valuations for “Old Faskally & Others” have twice been agreed by the Tayside Valuation Appeals Committee and, twice, the Assessor has appealed the committee’s decisions in the courts.

On the 15th January, the Lands Valuation Appeal Court (LVAC) heard the second appeal of the Tayside Assessor against the committee. From the arguments heard on Tuesday, we believe the Assessor’s appeal has failed.

However, we cannot be certain until the written verdict of the judges – Lady Dorrian, Lord Malcolm and Lord Docherty – is delivered next month.

The judges will also decide whether to accept the Rateable Values put on the small hydro subjects, or whether they will instruct the committee to explain further – or possibly alter the small hydro valuations.

From the point of view of the Alba, the BHA and the wider hydro sector in general, the most encouraging aspect of the hearing was the broad acceptance on all sides that the Penstock or pipeline of a run-of-river hydro was not rateable for the purposes of valuation.

Should this position continue to be accepted in both the previous and current valuation roll, we believe it provides a fundamental argument against the Assessor’s valuations of small hydro sites.

During the hearing, their Lordships narrowed the argument down to what they considered to be the only two salient questions outstanding in the case.

These two questions were:

1. Although Penstock and pipeline, broadly defined, may not be rateable, some component parts of civil works should still be rateable under class 4 of the Plant & Machinery order. Their Lordships wanted to know if the committee had, as instructed at the last hearing, considered items in class 4 and conducted a “sequential analysis” of rateable elements (i.e. checked all classes of the PMO).

In its stated case, the committee does indeed claim to have done so, and to have considered new items, but its proposed 25:75 split of assets nevertheless produced the same result as the comparative method which it had previously used. How come? Shouldn’t the new items have altered the percentage?

 2. Shifting from the “Comparative Method” (using rental values for water rights plus the value of the “shell” of the powerhouse) to the “Revenue & Expenditure” method (based on calculation of rateable assets between tenant and landlord) how did the committee actually calculate its 25:75 split between tenant (i.e. operator) and landlord?

Inconveniently, in its stated case, the Tayside Committee did not actually explain how it calculated 25%. In reality, we believe they came to that figure because it was a reasonable proportion, which comfortably covers all the rateable elements of a small hydro scheme, and which squared with the results previously produced by the comparative method.

Meanwhile, it seemed clear that the 50:50 split favoured by the assessors lacked both explanation and reasonableness.

We will find out for certain in their written Opinion, but their Lordships did not appear to consider the committee to have been acting contrary to the law, but rather as missing an element of explanation, which leaves the hydro sector waiting for a definitive conclusion.

But in the meantime, the following may be considered the important developments of the case -

The hydro schemes of Old Faskally & Others appear to have established clearly that Penstock/pipeline do not fall to be rated.  In which case, the rateable elements that remain out with the definitions of Penstock and pipeline are, in terms of cost, proportionately minor.

In the hearing, the judges indicated that the foundations of the building might fall to be rated, as well as the “shell”. But we in the hydro sector don’t have a problem including the value of the foundations, as that would still only represent a minor percentage of overall costs.

The same would go for the other item raised as potentially falling into class 4: the intake structure.

Since the expensive parts of a hydro scheme (penstock and turbine) do not fall to be rated, it should be possible to demonstrate clearly that rateable elements comprise no more than 25% of a hydro scheme – as the committee has suggested.

However, in brief subsequent discussion, it is clear that, even if the Judges endorse the 25:75 split, Scottish assessors will not accept that for the 2017 small hydro appeals.

They repeated their position that they want to take the 2017 cases to the Lands Tribunal – because that’s the court into which they put their faith.

This doesn’t discount a political solution. Discussions continue by industry through the BHA, with Scottish Government that may yet be able to work something out through the “Tretton review” of the Plant & Machinery order – which will be meeting again next month – and the Opinion of today’s Judges may assist in that.

But if we are formally to get fair and reasonable valuations from the assessors for the grossly disproportionate Rateable Values of 2017 – and defend the small hydro sector against the threat of unsupportable business rates – it is likely that the only means of doing so will be to confront them at the Lands Tribunal.

British Hydropower Association