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Business Rates Avoidance and Evasion

On September 28th the consultation period on Business Rates Avoidance and Evasion closed. We now await Government analysis and what, if any, changes are to be implemented.

Part of the consultation focuses on Temporary Occupation (or intermittent occupation) and whether Government should legislate, making intermittent occupations unattractive to landlords. Presently where a property falls vacant the ratepayer is entitled to a holiday from empty rates, during which no rates are payable. The period of void is typically 3 months, with industrial property being exempt for six months. Once the void period is exhausted full rates are payable and once any lease has expired the liability reverts to the owner. However, the exemption period (three or six months) can be reset if a property is re-occupied for a new continuous period of at least six weeks.

Many investors and developers with vacant commercial property will look at ways to reduce the tax burden by either reoccupying the property themselves or letting the property short term on favourable terms to a third party to reset their void entitlement. Full rates are payable for the period of occupation with a new void entitlement after the six weeks occupation period.

A number of proposed options for amending the legislation have been tabled as follows:

  • extending the required occupation period from 6 weeks to 6 months
  • placing a limit on the number of times a property can benefit from empty relief in a given period (for instance one period of empty relief each rates year)
  • adding additional conditions to the meaning of occupation purely for the purposes of determining whether a property should benefit from a further rate free period (such as requiring that over 50% of the floor area is occupied)

In Scotland and Wales the legislation has already been amended so that a 6 month period of occupation is required before ratepayers are able to claim a new void. The Local Government Association argues that ‘contrived occupation’ is the most frequent cause of business rates avoidance and costs Local Government around £250 million per year, which amounts to circa 1% of annual business rates revenue.

These proposed reforms will be of significant concern to many property owners who at one time or another will likely experience some property vacancy. The consultation seems to miss the key point that property owners generally don’t want vacant property. Part of the Government justification for charging full empty rates has been that it is “increasing incentives for property that is empty to be either re-let or for the property and site to be re-developed”. However, the concern is that these proposed changes risk the opposite and could actually restrict investment and redevelopment and reduce the supply of affordable space for startup businesses or short-term seasonal lettings.

ForeView responded to the consultation highlighting some of our concerns over any proposed reforms.

Our 5 key concerns are summarised below:

1. Will this reduce affordable short term commercial space?

Facing full business rates liability, we expect landlords and developers will consider all alternatives to avoid this hefty tax, where they are sitting on longer term voids. Stripping out the space by removing services is the most likely option and will often result in the deletion of the rating list assessment altogether with no rates payable.

Presently landlords who are liable for rates on longer term voids will run cycles of temporary occupation/mitigation, whilst marketing space for longer term tenants. With mitigation/temporary occupation no longer viable those landlords will potentially start a strip out early to avoid the rates. It’s worth mentioning that Local Authorities still typically collect around 35% of the rates they would collect on vacant space in a 12-month period during the 6 week cycles of occupation. Stripping out and de-listing would remove the entire rates liability will therefore also lead to a reduction in total Rateable Value and rates collected.

2. Does the planning process need reform?
One of the most common reasons our investor and developers clients give for prolonged periods of vacancy is delays in planning approval. These proposed reforms would penalise ratepayers who are expected to pay full business rates to the Local Authority, whilst Local Authorities regularly miss their deadlines for dealing with planning applications. The Government needs to recognise that one of the major reasons for prolonged vacancy sits with the Local Authority planning system. Decisions need to be expediated to allow developers to commence with their redevelopment plans, if the Government is genuine in wanting to encourage owners to make better use of vacant commercial space.
3. Questionable Timing?
Whilst we don’t know what or when any changes will be implemented the timing of the consultation will be of significant concern to owners. Different sectors of the commercial property market have seen significant shifts in occupier demand. Changing working habits following covid, a shift in consumer spending to online, further EPC restrictions on letting and the recent increase in the cost of borrowing have had a huge impact on demand for commercial property. Expecting landlords to now pay full rates on vacant property with little ways to reduce this tax burden could be the final nail in the coffin for some, particularly for retail landlords.
4. Postcode Lottery?
Part of the reforms suggest giving more powers to Local Authority to decide how to consider whether an occupation is contrived or not. There is a real risk that without central Government legislation directing Local Authority, developers will have uncertainty over the viability of development schemes from authority to authority. Historically where Local Authorities are given discretionary powers they default to not granting any reliefs.
5. No historical business rates support for landlords
Business rates in the UK are some of the highest property taxes anywhere in the developed world. Historically rates have been a tax associated with occupation and the use of Local services. Many Owners argue that vacant property places little or no demand on local services and charging full empty rates penalises landlords for failing to find a tenant, often when this is down to market trends, planning issues or other letting restrictions like EPC regulations. Throughout Covid the Government have, understandably, provided significant support for occupiers through rate relief, particularly in the retail sectors. However there has been no support or reliefs for landlords with vacant property, despite the rise in vacancy, particularly in the retail sector. So, whilst an occupier trading from a retail unit would benefit from 100% relief from rates during the height of the pandemic, if that property fell vacant the owner receives no relief from rates. Add to this that during the pandemic a moratorium on lease forfeiture for rent arrears placed further burdens on landlords. With no realistic chance of letting the space, temporary occupation has been the only way ensure a schemes viability.
On the face of it, many will look at these reforms as a way of channelling much needed revenue to Local Authorities, but we need to understand better what the wider impact will be.

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