Bay Farm Power Ltd v Bob Prescott (Valuation Officer)

Anaerobic digestion is a method of producing energy from organic matter, including crops grown specifically for the purpose, as well as municipal or agricultural waste, or a combination of these materials. The material, referred to as “feedstock”, is broken down by microorganisms at temperatures of 35-50 ^oC in anaerobic (oxygen free) conditions to produce biogas comprising methane and carbon dioxide. The biogas is then either burnt on site to produce electricity in combined heat and power (CHP) plants, or processed to remove the carbon dioxide, leaving biomethane which can be fed into the UK gas grid.

These appeals concern the valuation for non-domestic rating of two separate anaerobic digester (AD) plants in East Anglia using the receipts and expenditure method of valuation. The appeals were presented as test cases for the valuation of AD plants in the 2017 rating list.

Bay Farm at Worlington, near Bury St Edmunds, is the site of an AD plant which supplies gas directly to the grid (referred to as a “gas to grid plant”) and which appears in the 2017 rating list with a rateable value of £285,000. The hereditament first entered the list with an assessment of £168,000 with effect from 15 February 2018, but this was increased to its current level by a valuation officer’s notice of alteration with effect from 9 April 2021.

Oak Grove at Scottow, near Norwich, is the site of an AD plant at which biogas is burned in CHP gas engines to create electricity (referred to in the evidence as an “electrical AD plant”). It appears in the 2017 rating list with a rateable value of £145,000. It was originally entered in the 2017 list with a rateable value of £164,000 with effect from 1 April 2017 but was first increased then reduced by successive notices of alteration.

The Bay Farm appeal was initiated by a proposal served on behalf of the ratepayer, Bay Farm Power Ltd, on 23 September 2022 seeking a reduction in the list entry to a rateable value of £170,000. The Oak Grove appeal commenced with a proposal served on behalf of Oak Grove Renewable Energy Ltd on 20 December 2022 seeking a reduction to £113,000. The valuation officer, Mr Bob Prescott, did not consider either proposal to be well founded and rejected both by decision notices issued on 18 December 2023. The ratepayers appealed to the Valuation Tribunal for England (VTE) on 3 April 2024.

In a decision published on 28 May 2025 the President of the VTE, Mr Gary Garland, dismissed the Bay Farm appeal and confirmed the list entry of £285,000. He allowed the Oak Grove appeal and reduced its rateable value to £140,000 with effect from 1 April 2017.

Both ratepayers now appeal to this Tribunal. At the hearing of the appeals they were represented by Mr Daniel Kolinsky KC. Evidence was given on their behalf by Mr Edward Bastow, who is a director of both appellants, by Mr David Kinnersley MBA FIAgrM FRASE of Fisher German LLP, who gave evidence on the AD and renewable energy sectors, and by Mr Blake Penfold FRICS MCIArb, who gave evidence on valuation. The valuation officer, Mr Prescott, gave evidence in support of his own valuation and was represented by Mr Cain Ormondroyd. We are grateful for the assistance of all who participated in the appeal.

The rateable value of non-domestic hereditaments is determined by reference to a measure of value prescribed by statute. A variety of techniques or approaches to valuation is available depending on the nature of the hereditament, but the object in every case is the same, namely, to value the hereditament according to the measure prescribed by Parliament.

Materially, paragraph 2(1) of Schedule 6 to the Local Government Finance Act 1988 defines the rateable value of a non-domestic hereditament as an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year on an antecedent valuation date (AVD) which, in the case of the 2017 list, is 1 April 2015. In estimating that amount it is to be assumed that the hereditament is in a state of reasonable repair and that the tenant will bear the cost of maintaining it in that state and will pay all usual tenant’s rates and taxes.

Not all of the plant and machinery which forms part of, or is used in connection with, a hereditament is required to be valued to ascertain the rateable value of the hereditament.The Valuation for Rating (Plant and Machinery) (England) Regulations 2000 (SI 2000/540) (the “2000 Regulations”) were made under paragraph 2(8) of Schedule 6 to the 1988 Act, which permits the Secretary of State to make regulations providing for the making of “prescribed assumptions” in applying the statutory valuation hypothesis. Paragraph 2 of the 2000 Regulations is headed “Prescribed assumptions as to plant and machinery”. It provides:

“2.

For the purpose of determining the rateable value of a hereditament for any day on or after 1 April 2000, in applying the provisions of sub-paragraphs (1) to (7) of paragraph 2 of Schedule 6 to the Local Government Finance Act 1988 -

(a)

in relation to a hereditament in or on which there is plant or machinery which belongs to any of the classes set out in the Schedule to these Regulations, the prescribed assumptions are that:

(i)

any such plant or machinery is part of the hereditament; and

(ii)

the value of any other plant and machinery has no effect on the rent to be estimated as required by paragraph 2(1); and

(b)

in relation to any other hereditament, the prescribed assumption is that the value of any plant or machinery has no effect on the rent to be so estimated.”

By paragraph 2(a)(i), plant and machinery which appears in any of the classes in the Schedule to the 2000 Regulations is treated as part of the hereditament to be valued. It is sometimes referred to as “rateable”. Other plant and machinery is said to be “non-rateable” and by paragraph 2(a)(ii) and 2(b) in applying the rating hypothesis its value is to have no effect on the rent at which it is estimated the hereditament might reasonably be expected to let. As will be seen, the distinction between rateable and non-rateable plant assumes an additional significance in the Valuation Officer’s approach to the valuation of renewable energy plants of all types (including AD plants, wind or solar farms, hydro and nuclear power installations). In order to understand that significance it is necessary to consider the approach to valuation which has generally been adopted in valuing renewable energy plants for rating including by the experts in these appeals.

The Valuation Officer and Mr Penfold agree that the most appropriate means of valuing AD plants is using the receipts and expenditure basis of valuation. This method is typically employed when valuing hereditaments including the property of statutory undertakers or leisure premises such as pubs, clubs and hotels which are capable of generating profit, but which cannot readily be valued by reference to rental evidence using the comparative method. It takes as its starting point the anticipated profits of the business carried on at the hereditament, valued as a going concern.

An illuminating explanation of the receipts and expenditure basis can be found in the speech of Lord Millett NPJ, sitting in the Court of Final Appeal of Hong Kong in Hong Kong Electric Co Ltd v Commissioner of Rating and Valuation [2011] RA 399 at [149]-[159]. That case concerned the rateable value of a single hereditament comprising land, buildings and structures occupied and used by a utility company for the generation, transmission and supply of electricity on Hong Kong Island. It was common ground at the appeal stage that the hereditament should be valued on the receipts and expenditure basis which was explained by Lord Millett as follows:

“152.

Although profits as such are not rateable, the receipts and expenditure method of assessing the rent which the hypothetical tenant would offer to pay is based on the idea that where a tenement can be used to yield profits as part of a going concern then the hypothetical tenant would be prepared to pay rent for the use of the tenement in order to make the expected profits, and the level of rent would reflect the level of those profits […].

153.

The receipts and expenditure method is therefore not based on the value of the individual assets comprised in the tenement, but on the receipts and expenditure of the undertaking carried on as a going concern upon the tenement.  It involves two steps.  First, the gross receipts and expenditures that the hypothetical tenant would expect to derive from his occupation of the tenement in the forthcoming year are quantified.  These are not necessarily the same as the gross receipts and expenditures in the previous year, which may need adjustment to reflect increasing or declining business.  The difference between the expected gross receipts and gross expenditure, known as the “divisible balance”, represents the anticipated profits in the year of the tenancy.  […].

154.

The second step is to divide the divisible balance between the hypothetical landlord and the hypothetical tenant.  This forms the central issue in the present case.  The division must be accomplished by determining the amount of the hypothetical tenant’s share and deducting it from the divisible balance.  The hypothetical tenant’s share represents the sum that provides him with a reasonable return on his capital and a reward for his efforts and risks sufficient to induce him to rent the tenement and embark on the enterprise.  What is left over is prima facie (see para 159 below) the rent.

155.

This process is based on the economic view of rent as a residual payment and the hypothetical tenant’s share as a “first charge” on the returns of the undertaking.  The latter expression implies that it is a minimum and not a maximum.  Although it is regarded as a first charge on the divisible balance, the valuation must properly reflect the relative strengths and weaknesses of thehypothetical landlord and the hypothetical tenant as they negotiate the rent.  The amount which the hypothetical landlord would demand and thehypothetical tenant would be willing to pay will reflect their relative bargaining power.

156.

In the Southern Railway case Lord Hailsham observed that the expression “division of the net receipts” (like similar expressions such as “the divisible balance”) is not a very happy phrase to describe the process which is involved, viz. the deduction from the net receipts of the amount necessary to induce the hypothetical tenant to embark upon the undertaking.  But, as he observed, this was no justification for treating the hypothetical parties as joint adventurers.  Their relationship remained that of landlord and tenant, but if the amount which the hypothetical tenant would require in order to induce him to embark upon the undertaking is properly ascertained and deducted from the total net receipts, the result is to divide the net receipts fairly and justly between the hypothetical landlord and the hypothetical tenant, even though, in an extreme case, the landlord’s share, i.e. the rent, might be nothing at all.”

At paragraph [159] Lord Millett added the following important qualification:

“159.

The receipts and expenditure method is only an aid to the ascertainment of the rent which the hypothetical tenant would be willing to pay; it is not an inflexible code or set of rigid rules.  The valuation must take account of “every intrinsic quality and every intrinsic circumstance which tends to push the rental value either up or down” […]. The methodology must be sufficiently flexible to accommodate any feature which affects the amount of rent, whether it is common or rare.  It has also been recognised that the receipts and expenditure method, when applied to very profitable undertakings, may result in figure which is too high to be properly regarded as rent […]. In such cases the figure may require a downwards adjustment.”

In summary, the tenant’s share, the determination of which is also the central issue in this appeal, comprises three elements, namely, a reasonable return on the tenant’s capital, a reward for his efforts i.e. a profit, and an allowance for the risks of the business, which must be sufficient in aggregate to induce the tenant to rent the hereditament and embark on the enterprise.

Guidance on the receipts and expenditure basis is provided in a Guidance Note published by the Joint Professional Institutions’ Rating Valuation Forum in July 1997. This identifies four possible methods of calculating the tenant’s share, once the divisible balance has been determined: by taking (a) a percentage of the hypothetical tenant’s capital; (b) a percentage of the gross receipts; (c) a percentage of the divisible balance; or (d) a “spot” figure. The choice is a matter of valuation judgment and the outcome in each case is a factual determination.

The hypothetical tenant’s capital invested in the business is not to be equated with the ratepayer’s capital. The hypothetical tenant’s capital, on which a return on investment is expected, includes the non-rateable plant and machinery comprised in the hereditament; it does not include the rateable plant and machinery, which the 2000 Regulations treat as part of the hereditament for which the hypothetical tenant will be required to pay rent (whether or not the ratepayer provided the rateable plant and machinery).

As the Rating Forum’s Guidance Note points out, in order to produce receipts from the undertaking, the tenant will also need to provide working capital for the running of the business, including cash in hand for day-to-day requirements, and cash held on deposit for the purchase of stock or for running expenses. This forms part of the tenant’s capital on which a return would be expected. In this appeal, the hypothetical tenant’s requirement for working capital was quantified in the evidence by reference to the gross receipts for a certain number of weeks of operation.

In the Hong Kong Electric case the Lands Tribunal chose to determine the tenant’s share by reference to a given percentage of the divisible balance (option (c) in the Rating Forum’s Guidance Note). The percentage it selected was equal to the percentage of the total fixed assets of the business which were non-rateable (and so, notionally, contributed by the hypothetical tenant rather than the hypothetical landlord). The ratio of non-rateable to rateable assets was 48 to 52 in the Hong Kong Electric case, and the Lands Tribunal calculated the tenant’s share as 48% of the divisible balance, leaving 52% available as rent (see paragraphs [162]-[163]). As Lord Millett explained, this was on the footing that the divisible balance was earned at the same rate on all the company’s fixed assets, whether they belong to the hypothetical tenant or the hypothetical landlord.

In this appeal, the valuation officer has also adopted method (c) in his valuations of Bay Farm and Oak Grove; the appellants have adopted method (a), which equates the tenant’s share to an assessed percentage of the hypothetical tenant’s capital. The VTE preferred the valuations officer’s approach but adjusted it to produce a higher tenant’s share and thus a lower hypothetical rent, (although in the case of Bay Farm this did not yield a lower rateable value for reasons which we will explain in due course).

It is important to appreciate that no legal principle is involved in the approach taken to ascertaining the tenant’s share. Decisions of this Tribunal on appeals involving the receipts and expenditure basis of valuation are decisions on their own facts which lay down no rules. It was suggested in evidence that recent cases in the Tribunal involving the application of the receipts and expenditure basis to smaller undertakings favoured the use of a simple percentage of the divisible balance, method (c), and that this apparent preference was relevant to the selection of an appropriate method in these appeals. That is a misunderstanding of the significance of Tribunal decisions on issues of fact. The determination of the tenant’s share in an individual case is a determination of an issue of fact which depends on the evidence in that case and on the circumstances of the hereditament being valued; it cannot provide a precedent for the valuation of a different type of hereditament on different evidence.

It goes without saying that consistency is important in rating. As Lord Pearce explained in Dawkins (VO) v Ash Brothers and Heaton Ltd [1969] 2 AC 336:

“rating seeks a standard by which every hereditament in this country can be measured in relation to every other hereditament. It is not seeking to establish the true value of any particular hereditament but rather its value in comparison with the respective value of the rest.”

The achievement of consistency in the valuation of similar hereditaments is promoted by the publication by the Valuation Office Agency (VOA) of its own Rating Manual, which instructs valuation officers in how to undertake valuations, and by the establishment of schemes of valuation applicable to particular categories of hereditament. In some cases these schemes are negotiated with the representatives of ratepayers who occupy premises in the relevant category. In such instances they provide an agreed template which can then be applied to hereditaments of that type to arrive at a rateable value. They are an important tool in enabling valuation officers to carry out their Herculean task of maintaining an accurate valuation list containing (in the 2017 list) more than 2.1 million properties. But it is important to emphasise that, while it may be a useful tool, a valuation scheme cannot supplant the statutory basis of valuation.

Mr Prescott, who is both the respondent to the appeal and witness, explained in his evidence that, up to and including the 2000 rating list, hereditaments used for generating electricity were valued according to a statutory formula. The use of a formula was discontinued for the 2005 and subsequent lists and the standard approach of valuing by reference to the rent at which the hereditament might be expected to let on certain assumptions became applicable. The receipts and expenditure basis is the preferred method of valuation and, for the 2017 list, the same basic template has been applied by valuation officers across the whole of the renewable energy sector from the smallest photo-voltaic cells to the largest biomass plants. For the 2017 list, this template was designed and populated by Mr Prescott and his colleagues when the list was first compiled, and in that iteration it was referred to as “the 2017 model”.

One significant feature of the 2017 model was that the product of the detailed receipts and expenditure valuation was not adopted as the appropriate rateable value in every case. Once the valuation figure had been ascertained, it was made subject to a “cap” and a “collar”, which confined the final rateable value within upper and lower limits represented by 8% and 4% respectively of the notional gross receipts of the business. We were told by Mr Prescott that, of 166 sites valued using the 2017 model, 124 yielded results which fell either above the cap level or below the collar level. These were adjusted either to raise the rateable value to the level of the collar, or to reduce it to the level of the cap. In practice, the level of the cap or the collar was determinative of the rateable value of 75% of the sites in question.

The 2017 model was not accepted by ratepayers but in 2021, after prolonged negotiation, a consensus was reached between the VOA and ratepayers in the AD sector (including the appellants) on the adoption of the receipts and expenditure basis of valuation for the 2017 list and on the identification and quantification of all of the inputs required to arrive at the divisible balance. This consensus emerged from a process referred to as a Group Pre-Challenge Review and is recorded in two Memoranda of Agreement (MoA) dated 28 July 2021 signed on behalf of the VOA by Mr Prescott and on behalf of the participating ratepayers by Mr Handel, who acts for the appellants and who made the proposals which gave rise to these appeals. The first MoA records the extent of agreement in relation to AD gas to grid plants while the second covers electrical AD plants.

The details of the agreed inputs need not be referred to, because in each of the appeals the parties have arrived at an agreement on the divisible balance using those inputs as they would have been expected to be during the first three years of operation of the relevant plant after the AVD. But the MoA are relied on by Mr Prescott for a larger purpose, namely as reflecting an acceptance by the participating ratepayers, including the appellants, that the ascertainment of the tenant’s share should begin by apportioning the divisible balance in the same proportions as the rateable and non-rateable capital assets. This is disputed by the appellants and it is therefore relevant to refer to the contents of the MoA.

The two MoA are in similar form and we will refer to the version applicable to gas to grid AD plants. The document begins with some definitions and a section headed “general intention and purpose”. This records that the memorandum will “set out the majority of inputs” to be used in the receipts and expenditure valuations of gas to grid AD plants in the 2017 Rating List (paragraph 2.1) and that it is agreed to be the most appropriate method to determine their rateable values (2.2). The document continues:

“The purpose of this framework is to provide some certainty around the application of this methodology by setting out some details, necessary for the application of this valuation approach, that have been agreed between the parties.”

The MoA dealt in considerable detail with valuation inputs and indicated clearly where changes had been agreed to the VOA’s original 2017 model. The last input in the calculation of the divisible balance was a deduction for the depreciation of tenant’s assets, after which the MoA dealt with tenant’s share and risk adjustment. On these topics the MoA said this:

“3.13

Deductions for depreciation of tenant’s assets

The parties agreed to raise the default capex up from £4,000,000/MW to £4,500,000/MW.

The parties agreed no changes were required to the depreciation deductions, and the existing split of 55/45 rateable non rateable ratio should be retained.

3.14

Tenants share and risk adjustment

The 2017 model’s starting point for arriving at the “tenants share” is the capital allocation of non-rateable / rateable items at 45/55. This was agreed by the parties as above.

The existing model acknowledges our operator would demand more of the operating profit, adding a 10% risk premium giving a Tenant’s share of 49.5 %.

The parties were not able to agree on this aspect.

The VOA will therefore maintain their existing approach, with [Mr Handel, the ratepayers’ representative] reserving his position as to pursuing this further.”

The parties disagree over the extent of the agreement recorded in the MoA, and in particular over the meaning of “This was agreed by the parties as above” in the first paragraph of 3.14. Mr Prescott told us that he understood this to be an acceptance that the tenant’s share was to be based on the agreed split of capital assets, to which he then proposed an adjustment by the addition of a 10% risk premium, which was not agreed. Mr Kolinsky KC submitted that Mr Prescott’s subjective understanding of the document was irrelevant and that his evidence on it was inadmissible. He called no evidence from Mr Handel to explain his understanding of the MoA and treated the document as if it were a contract to be interpreted according to well established principles of contractual interpretation which exclude reliance on the subjective intention or understanding of the parties. Mr Kolinsky’s interpretation of clause 3.14 was that the first sentence recorded what was in the VOA’s 2017 model while the second sentence confirmed that the 45/55 allocation of non-rateable and rateable items was agreed, as recorded in the preceding paragraph, it went no further than that. It was not to be understood as an endorsement of the approach taken in the 2017 model which used the same ratio to determine the tenant’s share of the divisible balance.

It is possible that Mr Prescott and Mr Handel were at cross-purposes when they signed the MoA, although it is clear that they did not agree on the final proportion to be applied to the divisible balance. It seems to us that Mr Prescott’s understanding of the document accords with its more natural meaning, especially when it is remembered that the parties took the 2017 model as the starting point of their negotiation and indicated clearly what changes they intended to make to it. But ultimately, and despite the detailed argument we received on this issue, we do not think the meaning of the MoA matters. It was not suggested by either party that the Tribunal is bound by the MoA, or that the appellants were prevented by whatever Mr Handel had agreed from advancing a different case relying on the opinion of Mr Penfold. The Tribunal will obviously respect the parties’ agreement on the quantum of the divisible balance, and we have been presented with no evidence which would enable us to form a different view. But the Tribunal is not obliged to adopt a particular method of valuation, or to apply an agreed methodology in a particular way, if it is satisfied that doing so would not produce an outcome which accords with the statutory hypothesis. It would be an extreme case for the Tribunal to reject a consensus between expert witnesses (although as an expert tribunal we would be entitled to do so), but in a case like this, where the experts giving evidence do not agree on a matter of valuation judgment, the fact that a different expert may have shared the view of the valuation officer at an earlier stage is not a matter to which any significant weight can be given.

The MoA finally recorded that there had been no detailed discussion of the valuation cap but that the VOA intended to continue applying an upper cap of 8% and a lower collar of 4% for gas to grid AD plants (the cap for electrical AD plants was increased to 10%).

The only potential significance of the MoA, and the approach it appears to take to the ascertainment of the tenant’s share, is that it is said by Mr Prescott (and we have no reason to doubt him) that the same approach has been taken in valuing hereditaments of all types in the alternative energy sector. Mr Prescott relies on the MoA for its consistency with the treatment of those hereditaments and in support of his argument that there is a “tone” which extends to the adoption of his preferred methodology. We will consider that proposition after recording the facts which are agreed between the parties or which we find to be proven by the evidence we have heard.

The Bay Farm plant, which has 2.176 megawatts (MW) of generating capacity, was commissioned in February 2018 with a 20 year expected life. The site has an area of 4.05 hectares (10 acres) and is situated approximately six miles north-east of Newmarket. The ratepayer occupies the site under a 20 year lease, granted in 2019 at a commencing rent of £72,000 per annum. Buildings, structures, plant and machinery were constructed by the original operator of the site, S&P Biogas Ltd, and were acquired by the ratepayer, together with the lease, when it acquired the company.

The feedstock for the AD plant comprises approximately 50% waste material and 50% crop material - mainly rye and maize. It is stored in clamps and fed into digester tanks by three feed systems: a “walking floor”, a cattle-mix hopper and a liquid waste feed. Micro-organisms in the temperature controlled digester tanks break down the feed material, in the absence of oxygen, to produce biogas which is rich in methane, and a waste produce known as digestate.

The biogas is supplied to a membrane building where the methane is split from the CO2 gas multiple times to ensure “clean” gases. The CO2 is liquefied and then sold. The methane is cleaned and compressed and propane is added to it to increase the calorific value of the gas. The treated methane gas is then available for supply to the gas grid. The digestate is stored in covered lagoons, which are surrounded by a double bund to prevent leakage. The removal of liquid digestate incurs a cost, so some of the digestate is dried using a Mississippi Dryer, which blows hot air through it, and is then removed by farmers free of charge for spreading onto farmland.

The Bay Farm site also has a boiler, which supplies heat to the digester tanks, a chiller to chill the output gases, an engine which drives the plant and equipment, a weighbridge to weigh feedstock material and a gas flare used to burn unwanted gas. The entire site is controlled from a control building.

Income is derived from clean gas sales, CO2 sales, Renewable Heat Incentive (“RHI”) income, Renewable Obligations Certificate (“ROC”) income and Climate Change Levy (“CCL”) certificate income.

It was agreed in the MoA that the “default capex” for a gas to grid plant would be £4,500,000 per megawatt of production capacity. Applying this assumption to the Bay Farm plant produces a notional capital expenditure requirement of £9,792,000 for the whole plant. The gas to grid MoA apportions capital expenditure between rateable and non-rateable plant and machinery in the ratio 55:45.

Oak Grove is a 2.444 MW generating plant, commissioned in late 2013. It has an area of 4 hectares (10 acres) and is situated 10 miles northeast of Norwich, near North Walsham. The ratepayer occupies the site under a 25 year lease dated 25 October 2012 at a basic rent of £40,000, subject to a turnover rent addition. The lease is for the site only and the buildings, structure, plant and machinery were constructed by the ratepayer.

The site does not hold a waste management licence so biogas is produced by the anaerobic digestion of maize and rye only. 30,000 tonnes of maize and 10,000 tonnes of rye are bought each year, to be ensiled in clamps and fed over the course of the following year into the digester tanks by a single feed hopper. The resulting biogas is burned in two CHP gas engines to produce electricity which is supplied to the grid. The residual digestate is stored in two storage tanks. Some of it is dried, using two Mississippi Dryers which take heat from the CHP engines, and removed free of charge by farmers.

Some of the remaining waste heat produces additional electrical power. The site has a boiler, which supplies heat to the digester tanks, a weighbridge and a gas flare, and activities are controlled from a portakabin office.

Income is derived from electricity sales, Feed in Tariff (“FiT”) income, RHI income, ROC income and CCL certificate income.

The electrical AD plant MoA assumes a ratio of rateable to non-rateable plant and machinery of 60:40. Applying the assumptions in the MoA, the “default capex” for an electrical AD plant would be £3,500,000 per MW, thus £8,554,000 for the whole Oak Grove plant, allocated 60% rateable (£5,132,400) and 40% non-rateable tenant’s plant and machinery (£3,421,600).

Mr Bastow and Mr Kinnersley provided evidence about the operation of the two AD plants and more generally about the renewable energy sector.

Mr Bastow has been involved with the development, construction and management of AD plants since the emergence of the sector following the introduction of subsidies in 2010. He confirmed that whilst gas to grid AD plants were new in this country at the 2015 AVD, some electrical AD plants had been in operation for several years by that time.

Mr Bastow emphasised two particular commercial risks that the operators of AD plants faced in the operation of their businesses. Timeliness of commissioning at the start of an AD plant’s life was critical to optimising subsidy income, while careful management of gas exported to the grid was essential once a gas to grid AD plant was commissioned. The main source of income was the RHI tariff, which is related to the volume of gas supplied to the grid. There is no guarantee of export to the grid and when consumer demand is low, such as on summer nights, the amount of gas that can be exported is limited. The calorific value (“CV”) of exported gas must also be matched to the CV of gas in the grid, which varies day by day. Because the sector was new at the AVD there was little established knowledge of the risk to business which the restrictions on export to the grid impose.

Numerous operational risks also arise in managing the biological process within the digester tanks and the hazardous gas and digestate produced from them. CHPs are managed by specialist suppliers to minimise downtime, but the biological process must continue uninterrupted so any downtime can lead to gas production exceeding storage capacity with the need to flare off (and waste) the excess gas. Much of the plant and machinery used in both types of plant is sourced from the continent, with replacement parts not immediately available, which can lead to operating delays when breakdowns happen. Although the plants are specified to have an effective life of 20 years, most components will require replacement within a 10 year period.

Mr Bastow also explained the requirement of an AD plant for working capital. Substantial sums are needed to purchase sufficient feedstock at harvest time to maintain a supply for the following 12 months, and to allow provision for a small carry over in case the next harvest is delayed. At Oak Grove, which is wholly dependent on agricultural products, the average working capital invested in feedstock at the AVD was £1,000,050. At Bay Farm the figure would have been £612,500. Working capital is also required for a stock of spare parts, a cash buffer and to cover late receipt of FiT, RHI and ROC payments, which are paid quarterly in arrears and are sometimes delayed.

Mr Kinnersley is Head of the Agribusiness Department at Fisher German LLP. He has worked for clients on more than 85 AD plants over the past 17 years, including financial analysis of plant performance and modelling of new projects. He was instructed to comment on the financial and commercial risks that would have affected the decisions of investors and operators at the AVD. In view of the Valuation Officer’s position that all forms of renewable energy plant should be valued on the same basis, Mr Kinnersley was also asked to draw comparisons between AD plants and solar and wind generation projects of a similar scale.

Mr Kinnersley summarised some of the particular risks for AD plants compared to other forms of renewable energy: the need to source feedstock from a local supply, subject to weather and price risk; the storage and disposal of bulky digestate, subject to regulatory restrictions; the level of operational risk and cost relating to the complexity of the biological, mechanical and electrical systems, including the need for skilled staff on site around the clock; dependence on FiT, RHI and ROC support which was dictated by Government budgets and reviewed on a quarterly basis; the strategic government aim of incentivising the renewable sector as a whole to grow and become self-supporting through economies of scale, which were less easily achievable in the AD segment.

Published sources also indicated that in 2015 investors and lenders considered AD plants to have greater risks than solar and wind generation businesses because performance was less predictable and the risks to be managed required specialist knowledge. The Green Investment Bank report of 2015 “Anaerobic Digestion Market” noted that the majority of agricultural AD plants had been financed by investors with Enterprise Investment Scheme, Venture Capital Trust or Seed Enterprise Investment Scheme accreditation and that AD plants would cease to be eligible for these schemes on 31 March 2015. Banks were lending cautiously for farm scale AD, but only on the basis that loans were secured against other farmland assets. At the AVD one bank financer of UK AD projects was lending at rates around 13%. Mr Kinnersley concluded that investors in an operational plant at that date would have required a rate of return of at least 12%.

The divisible balances agreed for each plant for the three years after the AVD were the following:

Mr Prescott and Mr Penfold adopted different approaches to deriving the tenant’s share of the agreed divisible balance. Mr Prescott used option (c) in the Joint Forum’s 1997 Guidance Note, taking a percentage of the divisible balance based on the hypothetical parties’ notional capital contributions, while Mr Penfold used option (a), basing his split of the divisible balance on a percentage of the hypothetical tenant’s capital.

Mr Prescott provided a primary and a secondary valuation.

Mr Prescott’s primary valuation of £285,000 for Bay Farm was arrived at after applying the cap of 8% on the first year receipts of £3,582,018 (£286,561) rounded down. The table below shows in summary how rateable value was derived from a calculation of divisible balance for the three years following the AVD. The tenant’s share, assessed at 49.5%, was 45% (derived from tenant’s share of capital employed but with no allowance for working capital) increased (relatively) by 10% for risks faced by the tenant. Mr Prescott provided no evidential justification for his 10% uplift, except that in his extensive experience it had become established practice across the range of renewable energy sector hereditaments. The balance was the amount available for rent and rates and the parties had agreed to use the Goal Seek spreadsheet function to derive a rateable value at the AVD from these figures.

Mr Prescott’s primary valuation for the Oak Grove electrical AD plant, using the same standard approach as at Bay Farm, is shown in summary in the table below. The tenant’s share, assessed at 44%, is based on 40% (derived from the hypothetical tenant’s share of the capital employed but with no allowance for working capital) increased (relatively) by 10% for risks faced by the tenant.

Mr Prescott’s alternative valuation used the return on tenant’s capital method to determine the tenant’s share. That was also the method favoured by Mr Penfold, but before adopting it Mr Prescott considered that it was first necessary to reassess the agreed divisible balance which had been arrived at using the inputs taken from the MoA. In Mr Prescott’s opinion many of these inputs were what he described as “tenant friendly”, by which he meant that they already took risk into account. These tenant friendly inputs were acceptable to Mr Prescott only on the assumption that the tenant’s share of the divisible balance would be in proportion to the notional parties’ assumed contributions to capital expenditure. That was the method he used in his primary valuation and which he considered was the basis of the MoA. If a different method of arriving at the tenant’s share was to be adopted Mr Prescott suggested that the previously agreed inputs should be reconsidered. For his alternative valuation Mr Prescott therefore made adjustments to some of the inputs, to produce a higher divisible balance. He also acknowledged that the 2017 model (and the MoA) did not take account of the requirement for working capital and in his alternative valuation he allowed for this by adding 15 weeks of first year gross receipts to the tenant’s capital, before applying a return of 9% to the total capital employed.

Mr Prescott’s decision to depart from the inputs derived from the MoA in his alternative valuation meant that a lot of time was spent in the hearing revisiting the detail of those inputs. We found this distinctly unhelpful. Mr Prescott provided no evidence to support his assertion that the agreed MoA inputs were “tenant friendly” and we have no material which would enable us to find that they were. Having heard cross examination about some of the inputs it is sufficient to say that we are unpersuaded that they are favourable to one side or the other; they represent a compromise, with which both sides were originally content and which seems to us to provide a firm foundation for the required valuation. Mr Prescott was happy to use them in his primary valuation and we can see no reason why the divisible balance should vary depending on how it might eventually be divided. We therefore do not intend to revisit those figures in this decision.

Mr Penfold adopted method (a) as his primary valuation. using a return on capital of 9% and including working capital equal to 10 weeks of first year gross receipts. His figure of 9% as the rate of return likely to have been sought by the hypothetical tenant at the AVD was based on evidence of “hurdle rates” set or approved by regulators, and on Mr Penfold’s discussions with operators and their advisors (as potential hypothetical tenants at the AVD). He considered it prudent to adopt 9%, taken from the lowest end of the range of rates provided to him. Although we heard much evidence on risk and the appropriate rate of return, since Mr Prescott also adopted a rate of 9% in his alternative valuation we need not discuss it, and we will use the same rate.

Apportioning 45% of the default capital expenditure to the hypothetical tenant’s assets produced a figure of £4,406,400 at Bay Farm. Year 1 gross receipts were agreed at £3,582,018 so an allowance for 10 weeks working capital would amount to an additional £688,850. Adding fixed and working capital gave a total requirement for tenant’s capital of £5,094,741, from which a 9% return would yield £458,572 which Mr Penfold treated as the tenants’ share of the divisible balance. Using the goal seek function produced a rateable value of £165,000 (after rounding).

The equivalent figures at Oak Grove gave a total requirement for tenant’s capital of £3,966,021, 9% of which produces a tenant’s share of £356,942. This exceeded the divisible balance in each of the first three years of operation and, unadjusted, would have produced a negative rateable value of -£92,621. In view of this outcome Mr Penfold applied the VoA’s collar which prevented the rateable value falling below 4% of the first year’s gross receipts. The resulting rateable value for Oak Grove was £113,000.

Mr Penfold also produced an alternative valuation, using a percentage of the divisible balance. For Bay Farm he first adjusted the tenant’s capital share, by increasing the total capital expenditure to include £688,850 for working capital, equal to 10 weeks of first year gross receipts. The revised total capital employed was £10,480,850 of which the tenant’s share at £5,094,741 was 48.61%. Whereas Mr Prescott had applied a relative increase of 10% to account for risk, Mr Penfold considered that further percentage shares of the divisible balance should be apportioned to the tenant to account for profit and risk, and that the amount added for risk should not be a standard figure but one taking account of the particular risks to AD plants. Using his own judgment, informed in particular by the evidence of Mr Bastow and Mr Kinnersley, Mr Penfold considered that a further 15% share of the divisible balance should be added for risk, and 5% for profit. He therefore proposed a total tenant’s share of the divisible balance at 68.61%. This resulted in an assessment of rateable value of £194,000.

In his alternative valuation for Oak Grove, Mr Penfold first adjusted the capital share of the tenant by increasing the total capital expenditure to include £544,421 for working capital at 10 weeks of first year gross receipts. The revised total capital expenditure was £9,098,421 of which the tenant’s share at £3,966,002 was 43.59%. As at Bay Farm, Mr Penfold again considered that a further 15% share of the divisible balance should be added for risk, and 5% for profit to give a total tenant’s share of the divisible balance of 63.59%. This resulted in an assessment of rateable value of £94,796.

Mr Penfold acknowledged that the figure of £94,796 yielded by his alternative approach was again below the collar for Oak Grove of £113,000, which he therefore adopted as the appropriate rateable value. He characterised this as a comparative valuation, as described by the Rating Forum, “…utilising either market transactions or comparable assessments (which may themselves have been derived from a ‘full’ R&E method valuation), interpreted or analysed to represent a proportion of gross receipts.”

We do not think Mr Prescott’s case is strengthened by his argument based on tone. The “tone” he relied on was not a tone of the list in the conventional sense. Rather, he placed considerable weight on the acceptance of the 2017 model across the renewable energy sector and, built into it, the convention that the divisible balance should be allocated by reference to the notional parties’ relative contributions to the capital employed in the business (mirroring the 2000 Regulations’ treatment of rateable and non-rateable assets). We do not accept that the concept of a tone or pattern of values, and the weight which attaches to it, can be applied to a valuation technique. The 2017 model may command acceptance in some parts of the renewable energy sector because it produces an outcome which is beneficial to particular ratepayers who enjoy a favourable allocation of non-rateable plant and machinery under the 2000 Regulations (75:25 in the case of more than 2000 hereditaments covered by a memorandum of agreement reached between the VoA and the Solar Trade Association). Whether the same technique should be applied to the AD sector, where the apportionment is 40:60 in the case of electrical AD plants, is one of the issues in the appeal, but it cannot be resolved by simply asserting the existence of a tone for all renewable energy hereditaments.

In his primary valuations, as in the 2017 model and the MoA, Mr Prescott made no allowance for tenant’s working capital. It was only in his alternative valuation that he allowed for this factor by adding 15 weeks of first year gross receipts to the capital employed in the enterprise by the tenant. We can see no reason why working capital should be omitted whichever approach is taken to ascertaining the tenant’s share, so we start from the premise that Mr Prescott’s original valuations must be reworked to allow for its inclusion. This lifts the starting point for a split of divisible balance based on tenant’s capital from 45% to 48.61% at Bay Farm and from 40% to 43.59% at Oak Grove. Adding Mr Prescott’s standard 10% allowance for risk to these figures the tenant’s shares would be 53.47% at Bay Farm and 47.95% at Oak Grove.

The table below summarises for each plant the relevant figures to be considered, once working capital is included, using the percentage of divisible balance and the return on capital.

It is notable that whichever method Mr Penfold used, the outcome for Oak Grove defaulted to the amount determined by the collar. This demonstrates the value of having an agreed collar in place, but the fact that the return on capital method produced such a large negative rateable value for Oak Grove calls its utility into question for this hereditament. The same might, of course, be said about the VoA’s 2017 model in view of Mr Prescott’s evidence that in 75% of the assessments in which it has been employed the unadjusted result fell above the cap or below the collar. As Lord Millett pointed out in the Hong Kong Electric case at [159], the receipts and expenditure method is only an aid, it is not an inflexible code or set of rigid rules and when applied to very profitable undertakings, it may result in a figure which is too high and which may require a downwards adjustment. Nevertheless, a scheme of valuation on the receipts and expenditure basis which consistently produces results recognised as being either too high or too low to represent a credible rateable value does not inspire much confidence.

Mr Kolinsky KC submitted that Mr Penfold’s approach using a return on capital was thoughtful, took account of matters set out in the Rating Forum guidance, and reflected the way operators would determine a rental bid for the properties. It treated a return on the tenant’s capital as an essential first charge on the divisible balance and Mr Penfold had been conservative in adopting a rate of return of only 9%. He had rejected the percentage of divisible balance method in part because it required an arbitrary adjustment for risk.

Whilst we can accept the basic rationale for Mr Penfold’s preference for his primary method, the fact that it only produces a credible result for one of the two appeal properties suggests that it is not well adapted to hereditaments of this sort. It may be that if a return on capital lower than 9% was utilised, the method might produce a more convincing value for hereditaments where the divisible balance is small in comparison with the tenant’s capital. But a 9% return is at the lowest end of the range likely to be acceptable to someone looking to invest in such a business, and Mr Kinnersley’s evidence suggested that at least 12% would be required to tempt them. We would be required to make an arbitrary and unevidenced adjustment to Mr Penfold’s figure if we were to adopt his preferred return on capital method. That is not an attractive course.

Despite the apparent fallibility of Mr Prescott’s 2017 model it has attracted relatively wide support and has been used consistently in this sector. There is an obvious benefit for valuation officers in retaining accepted practice in the valuation of alternative energy hereditaments, and we would not wish to disrupt its use in the AD sector provided such adjustments can be made as appear to us to be necessary. Accepted practice supports the allocation of the divisible balance by reference to the notional parties’ respective contributions to capital (option (c) in the Rating Forum’s list). An apportionment of returns by reference to relative contributions to the enterprise is justifiable on the basis that the divisible balance is earned at the same rate on all the fixed assets deployed in the business, whether they belonged to the hypothetical tenant or the hypothetical landlord, as Lord Millett pointed out.

The evidence in this appeal has drawn attention to the particular risks of doing business in the AD sector and there is a consensus that these support an upward adjustment to the tenant’s share. At the AVD profitability in the AD sector was subject to a great many commercial and operational risks, compounded by its relative infancy and a lack of experience of how those risks would play out over time. Mr Prescott considered that these factors justified a 10% enhancement in the tenant’s share, but he made the same adjustment when applying the 2017 model to all forms of renewable energy hereditaments. The only exception was in the case of nuclear power plants, where the enhancement of the tenant’s share is 25%. In Mr Penfold’s alternative approach, he added a further 20% of the divisible balance to the tenant’s share. The resulting rateable value of £95,000 for Oak Grove was more credible than his negative figure based on a 9% return on capital, although still below the collar. The resulting rateable value of £194,000 for Bay Farm represented a large reduction on the current rateable value in the list.

Missing from Mr Prescott’s primary approach, and from the 2017 model, is an adjustment to include working capital. Once working capital is credited to the tenant’s share of the capital employed in the enterprise in addition to Mr Prescott’s 10% uplift for risks, the total proportion of the divisible balance allocated to the hypothetical tenant rises to 53.47%. This would result in a rateable value for Bay Farm of £285,000, exactly equivalent to the cap at 8% of gross receipts. At Oak Grove the effect of adjusting for working capital as well as risk is to increase the tenant’s share of the divisible balance to 47.95%, reducing the rateable value from £145,000 to £135,000.

We are nevertheless concerned that even after this adjustment the resulting division would not adequately reflect the higher risks in the AD sector by comparison with, for example, wind and solar technologies. Those sectors are much better established than AD and the 2017 model is universally applied to them. Mr Prescott described his application of the 2017 model as being based on “broad averages” and the 10% adjustment for risk as a “top up” which was not based on an analysis of the risks of a particular enterprise. Moreover, if in Mr Prescott’s mind the MoA inputs were already “tenant friendly” to account for risk then it is likely that any further adjustment he made for risk would at best be conservative. We are therefore satisfied that an enhanced allowance for commercial and operational risks is justified. The evidence does not shed much useful light on the quantum of the necessary adjustment although for the reasons we have just given we are confident that Mr Prescott’s 10% is too low. On the other hand, Mr Penfold’s figure of a 20% further share of divisible balance lacks a reasoned justification. The only other landmark is the allowance of 25% in the nuclear sector which is not analogous. We are not persuaded by the evidence that an adjustment greater than 15% is appropriate. Coincidentally that was the adjustment the President of the VTE made for a different reason (to account for tenant’s working capital). It produces the following results:

Standing back to consider if the answer for each appeal property looks reasonable, when compared with the amount of tenant’s capital, the turnover and the divisible balance, we consider that it does.

For the reasons we have given both appeals are allowed. With effect from 9 April 2021 the rateable value of the Bay Farm gas to grid AD plant in the 2017 list is reduced to £270,000 from the figure of £285,000 confirmed by the VTE. The rateable value of the Oak Grove electric AD plant in the 2017 list is reduced to £129,000 from £140,000 with effect from 1 April 2017.