Judgments - Regina v. Central Valuation Officer and another (Respondent) ex parte Edison First Power Limited (Appellants)

(back to preceding text)

    65. On 19 July 1999 Edison completed its acquisition of the two power stations and went into rateable occupation. PowerGen remained liable to central rates in respect of the hereditaments which it occupied for the purpose of generating electricity. These no longer included the two power stations which it had sold to Edison, but owing to the way the rateable value of its properties was calculated by reference to its total declared net capacity for generating electricity ("DNC") at the beginning of each rating year a change in the hereditaments which it occupied during the year did not affect its liability to rates until the following year and did not do so even then if it did not affect its total DNC. Accordingly for the remainder of the 1999-2000 rating year PowerGen continued to be liable to central rates in an amount which reflected the DNC of the two power stations even though it had disposed of them and Edison was in rateable occupation and liable to local rates in respect of them.

    66. The agreement for sale provided for PowerGen's liability to central rates in respect of the two power stations to be apportioned. PowerGen estimated that they would contribute some £13.5 million to its total liability for central rates for the rest of the current rating year. Edison duly paid this sum to PowerGen, though it subsequently contested its liability to do so in arbitration proceedings.

    67. Following its acquisition Edison was assessed to local rates in respect of the two power stations. The assessments were made by the rating authorities for the areas in which the power stations were situated. They were in an identical sum and were made in accordance with a special scheme for the industry established by Part II of the ESI Order made by the Secretary of State pursuant to powers conferred by para. 3(1) of the Sixth Schedule to the 1988 Act. Edison paid under protest but accepts that it had no ground for withholding payment. Being unable to recover its payment of local rates, Edison has turned its attention to the recovery of the central rates paid by PowerGen for the period when Edison was in occupation. If PowerGen was unlawfully assessed to them, they could not properly be apportioned to Edison.

    68. The central valuation officer has refused to make any amendment to the central rating list with effect from the change of occupation in July 1999. He says that he can do so only with effect from the beginning of the following rating year on 1 April 2000. Edison accepts this as correct, and identifies this limitation on his powers as the aspect of the scheme of central rating which is unlawful.

The Rival Contentions.

    69. Edison's case is as follows:

    (i)  It was properly assessed to local rates in respect of its occupation of the two power stations for the period from 19 July 1999 to 31 March 2000. The assessment was based on the DNC of the power stations. This is common ground.

    (ii) The DNC of the two power stations also continued to be taken into account in determining the amount of central rates payable by PowerGen for the same period even though Edison was in rateable occupation of the power stations and PowerGen was not. This too is common ground.

    (iii) The assessment on PowerGen was inconsistent with two basic principles of rating law (a) that rates are payable in respect of the occupation of a hereditament (save in the case of vacant property when they may be payable by the owner) and (b) that (save in the case of joint occupiers) only one person can be in rateable occupation of a hereditament at any one time: see Smith v Lambeth Assessment Committee (1882) 9 QBD 585 at p 595; Westminster City Council Southern Railway Co [1936] AC 511 at p 565; Brook v National Coal Board [1975] RA 367 at p 371.

    (iv) The assessment on PowerGen was ultra vires (a) because on the true construction of the enabling provisions of the 1988 Act they did not authorise such a radical departure from the basic principles of rating; or alternatively (b) because the assessment infringed the presumption against double taxation or double recovery and was not required by the Act whether as a matter of express language or as a matter of necessary implication.

    (v) In particular the ESI Order was ultra vires the 1988 Act insofar as it provided for the recalculation of the rateable value of the hereditaments shown on a central list only at yearly intervals and did not provide for recalculation during the course of a rating year when a hereditament ceased to be occupied by a designated person and became subject to local rates.

    70. The Secretary of State acknowledges that the general principles of rating law are as Edison describes them. But he says that the 1988 Act authorised him to establish a scheme for central rating which departed from those principles and that the scheme which he adopted was neither irrational nor unfair. He accepts that the 1988 Act did not require him to make a scheme which provided for annual recalculation only but says that it authorised him to do so and that annual recalculation was a long accepted practice in the industry and represented a pragmatic solution to a practical problem. He denies that strictly speaking the scheme which he established involved any element of double taxation, and to the extent that it involved an element of double recovery he says that, taken as a whole, it was not oppressive or objectionable and did not need to be authorised by express words or necessary implication in the enabling Act.

    The Rating of Public Utilities.

    71. My noble and learned friend Lord Hoffmann has described the various methods which have been adopted from time to time to determine the rateable value of hereditaments occupied by public utilities and situated in numerous rating districts. As he has shown, it has been found necessary for practical reasons for Parliament to authorise departures, and often radical departures, from conventional rating principles. The Local Government Act 1948 introduced a system known as "formula rating" based on the method formerly employed for the railways under the Railways Act 1921. This system, however, was not extended to the electricity industry until the Local Government Act 1958. In the meantime the industry was exempted from rates and required instead to pay to central government a fixed sum in lieu of rates which was then distributed by central government to local authorities.

    72. By the time of the 1988 Act the large majority of statutory undertakers, as well as some private enterprises, were rated by statutory formula. It is not necessary to describe the system in any detail, but two of its features may be briefly remarked upon. First, the liability of an undertaking for rates had only a tenuous connection with the hereditaments which it actually occupied. Notional hereditaments were created in each rating district and the liability of the undertaking was based on the initial aggregate (or "cumulo") rateable value of the hereditaments which it was deemed to occupy when the valuation list came into force. This was adjusted annually to reflect changes during the life of the list. The formula differed from industry to industry. In the case of the CEGB the initial cumulo figure represented a pre-determined proportion of the payment which it had made to central government in lieu of rates in the last year of the old system, and this figure was adjusted periodically to reflect changes in its output of electricity. Accordingly while changes in the hereditaments which the CEGB occupied from time to time affected the distribution of its payments among local rating authorities they did not affect the amount of its overall liability unless they affected its total output. Secondly, in common with other undertakings subject to this form of rating, the CEGB's output was revised at the beginning of each year, so that changes during the year did not affect the amount of its liability until the following year.

    73. These two features were retained in the scheme of central non-domestic rating which the Secretary of State established for the industry under Part III of the ESI Order.

    The 1988 Act.

Non-domestic rating.

    74. The long title to the 1988 Act describes it as an Act (inter alia) "to create new rating systems". Part III of the 1988 Act introduced a new system of rating for non-domestic property. This differs from the familiar system of domestic rating in two ways. First, the rate or poundage is not set by individual local rating authorities. Instead a single national rate is set for the whole of England by the Secretary of State. Secondly, the proceeds are not retained by the rating authorities in the areas where the relevant hereditaments are situated. Instead they are paid into a central pool which is administered by the Secretary of State and distributed among local authorities on a basis which is independent of the location of the hereditaments in question.

    75. The 1988 Act established two forms of non-domestic rating, one by means of local lists (sections 41-51) and one by means of central lists (sections 52-54). Some classes of property are exempt from rates altogether, but all rateable non-domestic property must be rated by inclusion in one list or the other. The two lists are mutually exclusive; it is not possible for the same property to appear in both lists at the same time.

    76. A unit of rateable property is known as a hereditament: section 64(1). For the purposes of non-domestic rating the financial year runs from 1 April: section 145(3). Both local and central lists were to be compiled on 1 April 1990 and on 1 April in every fifth year thereafter: section 41(1)(2) (local lists) and section 52(1)(2) (central lists). Lists remain in force for a period of five years: section 41(3) (local lists) and section 52(3) (central lists). The present case is concerned with the local and central rating lists compiled for the period of five years beginning on 1 April 1995.

Local list rating.

    77. Local non-domestic rating lists are maintained by local rating authorities. They continue to be responsible for the valuation of hereditaments in their areas and for the assessment and collection of the rates. Hereditaments are individually assessed by local Valuation Officers, and the rateable value of a hereditament is ordinarily determined on a conventional basis. This is not, however, so in all cases. In the case of the electricity generating industry and some (but by no means all) other utilities the conventional basis of valuation has been disapplied and special schemes of valuation by statutory formula have been substituted.

    78. Sections 42-44 are the key provisions. Section 42 governs the contents of local lists. A local rating list must show every relevant non-domestic hereditament which is situated in the authority's area and which is not a hereditament which must be shown for the day in a central non-domestic rating list. It is this last requirement which prevents a hereditament from being shown for the same day in both a local and a central list. The local list must also show the rateable value of the hereditament for each day on which it is shown in the list.

    79. Sections 43-44 are concerned with liability to local list rates. This is based on rateable occupation for a chargeable day. A ratepayer is subject to local non-domestic rates in respect of a chargeable financial year if on any day in the year (a) he is in occupation of all or part of the hereditament and (b) the hereditament is shown for the day in a local list: section 43(1). The chargeable amount for a chargeable day is ascertained by multiplying the rateable value shown for the day by the non-domestic multiplier for the financial year and dividing the product by the number of days in the financial year: section 43(2)-(4) and section 44.

Central list rating.

    80. Central list rating was designed to accommodate those public utilities which were to continue to be dealt with on a global basis and rated undertaking by undertaking rather than locally and hereditament by hereditament, though not necessarily by use of a formula. As one might expect, therefore, the statutory provisions relating to central lists are closely modelled on those for local lists with only such variations as are necessary to reflect the aggregate and undifferentiated nature of the hereditaments shown in the list.

    81. Central non-domestic rating lists are maintained by the central valuation officer. Sections 53-55 are the key provisions. Section 53(1) is the enabling section. It explains the statutory purpose and gives the Secretary of State power to designate the undertakings and hereditaments to be shown in a central list. It provides:

    "(1) With a view to securing the central rating en bloc of certain hereditaments, the Secretary of State may by regulations designate a person and prescribe in relation to him one or more descriptions of relevant non-domestic hereditament."

    82. Section 53 governs the contents of central lists. It provides that, where the regulations so require (as they do), a central non-domestic rating list must show, for each day in each chargeable year for which it is in force, the name of the designated person and, against it, each hereditament (wherever situated) which on the day concerned (a) is occupied or (if unoccupied) owned by him and (b) falls within any description prescribed in relation to him. It must also show for each such day against the name of the designated person the rateable value (as a whole) of the hereditaments so shown, ie the hereditaments occupied or if not occupied owned by the designated person on that day.

    83. This is amplified by Section 67(9) which provides that a hereditament is to be treated as shown in a central list for a day if on that day it falls within a class of hereditament shown for that day in the list; and by section 67(9A) a class may be expressed by reference to whether hereditaments are occupied or owned by a designated person and fall within any description prescribed in relation to him.

    84. These provisions make it unnecessary for every hereditament occupied or owned by a designated person to be identified individually and entered separately in the central list. In PowerGen's case the central list contained against its name the description

    "The electricity supply hereditaments as described in Part 2 of the Schedule to the Central Rating Lists Regulations 1994."

The description referred to is

    "Hereditaments (other than excepted hereditaments) wholly or mainly used for the purposes of the generation of electrical power, or for ancillary purposes."

    85. This is a generic description of a fluctuating body of hereditaments. To come within the description on any particular day a hereditament must on that day (i) be occupied or (if unoccupied) owned by the designated person and (ii) be wholly or mainly used for the generation of electrical power or for ancillary purposes. On the disposal of the two power stations to Edison they failed to meet the first condition and automatically ceased to come within the description. It followed that they ceased to be treated as shown in the central list and qualified for inclusion in local lists instead.

    86. Section 54 deals with liability to central list rates. A ratepayer is subject to central non-domestic rates in respect of a chargeable financial year if for any day in the year his name is shown in a central non-domestic rating list in force for the year. There is naturally no requirement that he should be in occupation of the hereditaments shown in the list, because the hereditaments are already defined by reference to his occupation or ownership. The chargeable amount for a chargeable day is ascertained in a similar manner to that required by sections 44-45 in relation to hereditaments in the local lists: section 54(4).

Formula rating: the Consultation Paper.

    87. As I have already mentioned, most statutory undertakers were subject to formula rating in 1988. The 1987 Consultation Paper which preceded the 1988 Act stated that the existing formulae would require extensive recasting, and that the Government would be reviewing them, in consultation with the industries concerned, with the intention of bringing them up to date at the same time as the general non-domestic revaluation in 1990. The review could not be completed in time to be included in the main legislation, and accordingly the Government had it in mind to replace the existing statutory provisions relating to formula rating with a simple enabling power. The Consultation Paper stated that there was no intention of substantially extending the scope of formula rating, and that indeed in some cases it might be possible to revert to conventional methods of valuation. In the meantime it was proposed that the rateable value of hereditaments subject to formula rating should be determined as a specified sum or be calculated in a specified manner and for the value to be adjusted for changes in occupation.

    88. Eventually, it seems, it was hoped that formula rating could be phased out altogether; though in the event this was not achieved for the electricity generating industry until the next quinquennial revaluation in 2000. This objective could be the more easily achieved the more closely assessments produced by formula rating approximated to those which would be produced by conventional methods of valuation. Accordingly the Consultation Paper stated that the object would be

    "to replicate, in very broad terms, the rate burden a hereditament or industry might have borne had it been capable of being conventionally rated" (my emphasis).

(The reference to "hereditament" was a reference to local rating and the reference to "industry" to central rating). It was envisaged that different provision would be made for determining rateable values for different industries, and that the Secretary of State would consult representatives of each industry before varying the existing formula or applying formula rating for the first time or ceasing to apply it.

Valuation under the 1988 Act.

    89. As foreshadowed by the Consultation Paper, the 1988 Act takes the form of an enabling Act with power for the Secretary of State to make provision by statutory instrument for particular classes of hereditaments to be rated by formula. Whether because it was recognised that formula rating was a departure from the norm and was not appropriate for all public utilities, or because it was intended to phase it out eventually, the 1988 Act makes general provision for hereditaments, whether in local or central lists, to be valued by conventional methods, while giving the Secretary of State power to disapply those methods in particular cases and substitute formula rating in such form as he may prescribe.

    90. Section 56(1) of the 1988 Act gives effect to the Sixth Schedule, which contains detailed rules for determining the rateable value of non-domestic hereditaments, whether shown in local or in central lists. Para. 2(1) sets out the conventional method of valuation. So far as material it provides

    "2—(1) The rateable value of a non-domestic hereditament………shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year if the tenant undertook to pay all usual tenant's rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command that rent."

    91. Paragraph 3 of the Sixth Schedule, however, gives the Secretary of State power to disapply this paragraph and substitute valuation by such method as he may prescribe. Subparagraph (1) of paragraph 3 applies to local lists and subparagraph (2) to central lists. The paragraph provides

    "(1) The Secretary of State may by order provide that in the case of a non-domestic hereditament of such class as may be prescribed -

      "(a) paragraphs 2 to 2B above shall not apply, and

      (b) its rateable value shall be such as is determined in accordance with prescribed rules.

    (2) The Secretary of State may by order provide that in the case of non-domestic hereditaments to be shown in a central non-domestic rating list by virtue of regulations under section 53(2) above—

      (a) paragraphs 2 to 2B above shall not apply, and

      (b) their rateable value shall be such as is specified in the order or determined in accordance with prescribed rules."

In each case the order required an affirmative resolution of each House of Parliament: Section 143(8).

    92. By the ESI Order the Secretary of State exercised these powers in relation to hereditaments used or available for use for the purpose of generating electricity. The order was made on 20 December 1994 following extensive consultations with the industry and came into force on the following day. Part II of the ESI Order applies to hereditaments shown on local lists and Part III to hereditaments treated as shown on central lists. In relation to a hereditament shown on a local list Article 6(1) disapplies paragraphs 2 to 2B of the Sixth Schedule and stipulates that its rateable value in any year beginning on or after 1 April 1995 shall be £11,620 per megawatt of its DNC (or, where the primary source of energy is wind or tidal power, half that figure). This formed the basis on which the rateable value of each of the two power stations acquired by Edison was determined when it was entered in the relevant local list with effect from 19 July 1999.

    93. In relation to each class of hereditaments shown on a central list Article 8(1) similarly disapplies paragraphs 2 to 2B of the Sixth Schedule. For each designated person the rateable value of its centrally listed hereditaments as a whole is specified as a single figure. In the case of PowerGen the figure for its hereditaments in England as at 1 April 1995 is stated to be £178.8823 million.

    94. The basis of this figure is not explained in the ESI Order but is agreed by the parties to have been as follows. It represented the net book value of PowerGen's rateable assets as shown in its current cost accounts. Allowance was made for particular disabilities of the hereditaments to leave the effective capital value of the assets, and this was then converted into an annual rateable value by the application of a 6% decapitalisation rate. This corresponds to the conventional "contractor's basis" of valuation. The resulting figure embraced all non-excepted property in England within the specified description. Items such as offices and other property not on operational land were excepted from the specified description. But the figure included both productive and non-productive property, the latter being property which did not contribute directly to PowerGen's total DNC. An example of non-productive property canvassed in argument would be a car park for the use of staff employed at a power station; but many other examples could be given.

    95. The figure was calculated in December 1994 and was adjusted to take account of changes between then and 1 April 1995 when it took effect, but nothing turns on this in the present appeal.

    96. For subsequent years the figure was adjusted annually by means of a specified "recalculation factor" to reflect changes in the total DNC of generating plant within PowerGen's prescribed class of hereditaments, taken at 31 March in the immediately preceding year, compared with 31 March 1995. In PowerGen's case Article 9(1) of the ESI Order specifies the figure of £11,620 as the recalculation factor.

    97. The basis of this figure is also not explained in the ESI Order, but the evidence shows that it was calculated by adding together the rateable values of the hereditaments occupied by PowerGen and National Power (the other former publicly owned non-nuclear electricity generator in the central list) and dividing the total by their combined DNC in megawatts at the same date. The resulting figure was taken to represent the average value to a designated person of the occupation of its power stations in terms of pounds per megawatt of generating capacity. It was applied to the DNC of each of the independent generators to arrive at the rateable value of their hereditaments.

    98. The basic scheme of Part III of the ESI Order is common to all centrally listed hereditaments in relation to which the Secretary of State exercised his powers under paragraph 3(2) of the Sixth Schedule to the 1988 Act. These included gas and water undertakings and the railways. In each case the ordinary basis of determining rateable values is expressly disapplied and instead a single global or cumulo figure is prescribed as the rateable value of the relevant class of hereditaments for the year beginning on 1 April 1995. For each subsequent year the figure is subject to annual adjustment by means of a specified recalculation factor to reflect changes in the proxy selected for the utility in question. As envisaged in the Consultation Paper, some utilities were centrally rated but were conventionally valued under paragraphs 2 to 2B of the Sixth Schedule. These included telecommunications, canals and long-distance pipelines.

The Consequences of the Sale to Edison.

    99. On the acquisition of the two power stations by Edison they ceased to come within the generic description of the hereditaments treated as shown against PowerGen's name in the central list and qualified instead for inclusion in the relevant local lists. PowerGen ceased to be subject to central rates in respect of them and Edison became liable to local rates in its place. But since PowerGen's liability was determined by its total DNC at the beginning of each rating year, the reduction in its DNC was not reflected in the amount of its liability to central rates until the beginning of the following year.

    100. Although the power stations transferred from central to local listing, they did not cease to be subject to formula rating. Their rateable value was now determined under Part II of the ESI Order instead of Part III, but in all essential respects it was determined by the same formula as before. It continued to be based on DNC, so that the acquisition or disposal by Edison of non-productive property would not affect its rateable value while the current lists remained in force. Moreover the conversion (or "recalculation") factor of £11,620 per megawatt was unaffected. Given the way this figure was calculated the rateable value of the two power stations continued to reflect an element of value derived from the rateable value of non-productive property formerly occupied by PowerGen (or National Power for that matter) and not included in the sale to Edison. Each of these features represents a marked departure from conventional rating principles, but neither is challenged by Edison.

 
continue previous