Business Rate rise to increase BB cost!

It appears from a BBC news item that both BT and Virgin are being hit by a massive increase in Business rates ( 450%) to £743m.

My simple maths says that if this is all loaded on OR BB customers (20m) it equates to a £3.10 a month increase in wholesale cost.

A large amount of the revaluation is anecdotally due to the increase in fibre and street electronics but I cannot find evidence of the VOA methodology in the public domain.

I see no way BT could absorb such a huge increase in cost and Virgin will have the same issue.

If loaded purely onto fibre lines it would be £10.30 ( 6m lines) but this would slow the take up and thereby ROI on fibre so more likely to spread it over all lines.

So ditch it and you pay it in your community charge and income tax .

Note also that small (local?) businesses look set to benefit, reducing what you pay elsewhere.

In reply to a post by RobertoS:

So ditch it and you pay it in your community charge and income tax .

Note also that small (local?) businesses look set to benefit, reducing what you pay elsewhere.

Or the state just doesn't increase the tax specifically on telecomms. We're supposed to be getting some stimulus anyway.

You're basing your sums on rateable value rather than the business rates.

That's the rateable value. There's a multiplier of about 40%. Also, it will be attributed to all OR services. That includes all phone lines (not just BB ones, which is perhaps 25m or so). Also, leased circuits.

Then there is the fact that these are mostly prices regulated by Ofcom and whether they would permit OR to pass on the increased costs in full is a bit of an open question.

I wonder if BT have any properties that aren't Openreach ....

Plenty ...

Every metre of fibre, every street cabinet (PCP or DSLAM), every phone box, every pole ... business rates are charged on them all.

It's a flea-bite anyway.

In the three months to the end of June, the FTSE 100-listed company saw earnings before interest, taxes, depreciation, and amortisation (EBIDTA) jump 25% year-on-year to £1.8bn. Meanwhile revenue, excluding currency volatility and the impact of acquisitions and disposals, surged 35% to £5.78bn.

That's for the group, Apr-Jun 2016.

They certainly do (like the headquarters opposite St. Pauls cathedral). Also, a lot of exchange buildings also double up as offices for other BT departments.

However, it appears that the main hit of the rates review is going to be on the network infrastructure. All those roadside cabinets, poles and ducts all have a rateable value and it appears that this is the bit which is causing BT (and VM and other network operators) to complain loudly. Those are, of course, all attributable to OR. Presumably where exchanges are used as offices with other parts of BT then some form of allocation of business rate costs has to be done.

What we don't know yet is what the multiplier will be as this is a comprehensive review of rateable values and it's likely the multiplier will from the present level.

A net increase of £200-250m is not a flea bite. It may not be crippling, but it's still a very significant sum.

Note the lack of a question mark, the "....", and the wink.

It was the misattribution to Openreach of all the valuation increases I was pointing out.

Funny that my wife spent most of her working life acquiring exchange and office property for the GPO/British Telecom/BT, and the final part getting rid of it as it became surplus to requirements.

But the bit that is causing all the complaints by all the telecom network infrastructure operators is the huge increase in the rateable value of network infrastructure. The row is not about the office buildings (there is a separate row about the massive increases in London relative to many other parts of the country, but for a company operating across the UK it will balance out).

VM are also complaining the rateable value of their infrastructure is being quadrupled.

So I really don't know what point you are trying to make.

nb. the mobile operators aren't obviously complaining, so I assume that they (and BT's EE subsidiary) are not being hit to anything like the same level for their infrastructure.

*** edit ***

A quote to back up that this is largely about network infrastructure

"Tom Mockridge, chief executive of Virgin Media, whose rates quadrupled in today's announcement, said: "The Chancellor Philip Hammond is choosing to side-step responsibility for a huge increase in infrastructure taxes at the very moment after the Brexit vote the UK needs to maximise investment into its digital fibre network.""

http://www.telegraph.co.uk/business/2016/09/30/busin...

Edited by deleted (Sat 01-Oct-16 12:48:37)

MHC / Roberto

As at last year it was actually very few buildings that were not OR 'owned'.

All the ones that were offices only ( bar the one that is OR only) so 20-30 out of 5700, plus the Data centres (maybe 5 or 6).

All the rest of the infrastructure is OR and the vast amount of the increase is due to FTTC and Access fibre. VOA is basing valuations on value elsewhere so the 70000 FTTC cabs plus the additional fibre kM to them is a major value in here.

TheEulerID
I recognise it is the Rateable value but without knowing what the new multiplier is, and I suspect it will be higher than the old to keep the end result the same, it is not possible to work out the difference to actual rates however if the multiplier is the same it will still be 450% higher.

As most of the increase in infrastructure value is due to fibre and FTTC cabs it would seem sensible to opportion the increase to those products that use them ie FTTC/P and Ethernet products, not copper.

The rates bill is included in the regulated costs and I suspect BT will be going back to OFCOM for an immediate review of all OR regulated costs on the basis that the increase was not covered in the last adjustment and that therefore the services are no longer 'cost oriented'

That's interesting as the implication this increase is going to be primarily charged against NGA (FTTC/FTTP) rather than the copper loop. So line rental is not much impacted, but the GEA products will. That will surely have big impacts on the current Ofcom review of GEA pricing. It will also surely

I must admit I find the imposition of business rates on plant (which is surely what fibre and the contents of FTTC cabinets) rather odd. Historically rates have been charged on the rentable value of buildings and property, not on plant or the economic activity within the buildings..

I can see the case for rates being charged for the passive components (ducts, poles, cabinets and so on) and their putative rental value, but the VOA seem to be using the economic value of the plant which goes up with added value. It seems the VOA taken into account the profitability of the asset, which is surely not the historical basis of business rates.

The government would be better served getting their revenue for increased economic activity by VAT and not on bending the business rates model to discourage investment.

In reply to a post by TheEulerID:

I must admit I find the imposition of business rates on plant (which is surely what fibre and the contents of FTTC cabinets) rather odd. Historically rates have been charged on the rentable value of buildings and property, not on plant or the economic activity within the buildings..

I can see the case for rates being charged for the passive components (ducts, poles, cabinets and so on) and their putative rental value, but the VOA seem to be using the economic value of the plant which goes up with added value. It seems the VOA taken into account the profitability of the asset, which is surely not the historical basis of business rates.

Where there is no market rental value available, eg large one off freehold buildings like power stations, major departments stores etc the VOA has always taken into account the profitability of the asset.

As a drastic over-simplification BT has two types of assets. All of its offices, exchanges, etc are valued on estimates of the rental value of similar properties in the same area. Its network assets are valued using the Receipts & Expenditure (R&E) method. This starts from revenues and then deducts (a) operating costs incl depreciation, and (b) the value of equipment & machinery (DSLAMs, switches, etc) multiplied by an assumed rate of return. The cost of equipment is falling and the rate of return will have been drastically cut (because of the way it is derived), so this deduction will have fallen substantially while revenues are growing.

The outcome was inevitable and should have been no surprise to BT, no matter what they say publicly. A part of this is due to the fact that revenues from FTTC investments are not tightly regulated and so these assets earn a much higher return than is permitted for the copper network. Technically this is not a valuation based on profitability but on the residual rent that an occupier would be willing to pay for the rateable assets.

All of this is the result of having a property tax based on rental values rather than asset values. Since rental values cannot be observed for phone networks - or power line or gas pipelines - it is necessary to use some proxy. It is impossible to assign revenues or expenditures to particular bits of the network, so the network has to be valued as a whole rather than in parts. I don't know the details for VM but I think that its network is valued in the same way and similar factors apply.

People like City Fibre feel aggrieved because their assets are valued in a different way. They operate in a competitive market and rents for dark fibre can be compared, so their assessment is based on market values. This could be done for BT but the only impact would be to shift the split of the overall valuation between monopoly and competitive assets. This would show that the rental value of the copper network is relatively low and the rental value of the fibre network is relatively high but it would not change the amount of tax that BT pay. We already know that the rental value of the copper network is low, since BT has no interest in renewing or extending it.

If you don't like this then lobby for a property tax based on the capital value of assets. I wish you the best of luck since people have been trying to change the system for the last 200 years without success.

In reply to a post by gah789:

The cost of equipment is falling and the rate of return will have been drastically cut (because of the way it is derived), so this deduction will have fallen substantially while revenues are growing.

Yet revenues aren't really growing. Ofcom's annual reports show that UK telecoms revenue has fallen from £42.5bn to £37.5bn over 2008-2015. There are plenty of reports about BT being the smallest incumbent, by % share, in Europe - presumably caused by the increase in LLU over the same timeframe.

Is there a growth in revenue that really manages to justify a multi-hundred % increase in RV?

Likewise for cost of equipment. Comparing like-for-like, the cost does indeed decrease over time. However, the costs jump again at each new iteration of technology. In 2008, BT's "norm" will have been to install ADSL2+ equipment into a few thousand exchanges, and build ever-bigger routers into core capacity. In 2015, the "norm" is to put VDSL2 equipment into many tens-of-thousands of locations, and to keep upgrading the core capacity and transmission capabilities.

I have no idea how the R&E system works, but I don't see that the UK's telecoms infrastructure now draws any significant increase in revenue, or has become massively more profitable.

BT's overall tax expenditure will still be lower tho thanks to very generous cuts in corporation tax.