Business Rates Avoidance – one simple answer
In my last post I promised you a tantalising glimpse into the world of Business Rates avoidance on the back of the Government consultation to address the loopholes being exploited by ratepayers and their agents.
The deadline for submissions to the consultation was last week and I duly sent in my 2,500 word/ten penneth as it's a subject I think that can be addressed quite simply and doesn't need extraordinary lengths or legislation to reverse this trend.
With any tax avoidance there will always be companies or individuals who look for ways to pay less tax – at the end of the day we all think we can spend our money much more wisely than the Government and it's human nature to try and keep as much of our hard-earned wage or profits as is legally possible.
However, the practice of business rate avoidance is particularly prevalent in England at the moment due to a number of factors that combined to create a "perfect storm" of hardship and as a consequence innovative tax avoidance schemes.
The 2008 financial meltdown and the recession hit every sector particularly hard but none more so than the property and retail sectors. The situation was exacerbated by the erosion of the empty rates relief in 2008 but business rates avoidance became truly established as a method in its own right when the Government announced the delay of the Rating Revaluation, due in 2015, to 2017. Whilst this benefited some businesses and retailers in the wealthier south east and certainly London, thousands more in other parts of the country were left paying artificially high business rates based on market and rental values set as of April 1, 2008, just before the economic crisis hit.
Many property owners had no other choice than to look at ways to mitigate the cost of business rates. Exploitation of exemptions and loop holes became a full time enterprise with more elaborate schemes coming to the market to test the letter of the law, as well as Local Authorities renewed vigour in relation to the collection of business rates.
A number of business rates avoidance schemes are based around the loopholes afforded by charitable status and the exemptions they attract, as well as the avoidance of empty property rates through the use of insolvency exemptions. The majority, however, revolve around temporary periods of occupation.
But I believe there is one way to reduce the financial attractiveness of business rates avoidance without the need for additional red tape and that is to make it financially unviable.
The business rates system and its current exemptions actively encourage avoidance. In respect of commercial property we have landlords being hit with 100% of business rates liability as soon as the 12 week period of grace ends. They will look to get in any tenant for a minimum of six weeks so that after that period they can once again claim another 12 weeks of 100% relief.
This becomes an inevitable cycle of artificial letting which benefits no-one. The landlord struggles to find a long term and viable tenant to take on the property; they employ a mitigation expert who recommends the best scheme to minimise the cost of business rates in respect of their empty property and the Local Authority miss out on vital business rate payments as a result.
If the Government was to introduce a scheme that made this cycle financially unattractive it could create a win/win situation for the ratepayer and local authority.
Currently the Government has in place a good scheme that allows a tenant to claim 50% rates relief for 18 months if they take on a retail property that has been empty for more than 12 months – the Business Rates Relief for Occupying Vacant Retail Premises scheme.
Unfortunately landlords in such dire circumstances prefer to minimise costs via business rates avoidance. This can be changed.
Here's an example under the current regime using retail premises attracting a notional £1,000 per week business rates liability that is vacated on 1 January:
· First 3 months the property is vacant and receipts for the Local Authority are £0.
· Following period of relief a temporary occupation is achieved for six weeks where 100% liability is payable. The Local Authority receives £6,000.
· The property is vacated and another 3 months 100% relief applies. Receipts for the Local Authority are £0.
· This cycle continues for the rest of the financial year.
· Over the course of the year the LA would collect £13,000 in Business Rates. The landlord saves £26,000 but has to pay a fee to the mitigation expert which can be anything up to 25% so the actual saving is nearer £19,500.
By introducing Business Rate Relief at 50% for landlords after 12 weeks of unoccupied premises you effectively cut out the need or desire to employ a mitigation scheme.
If the empty charge is reduced to 50% post the initial 3 months period of 100% relief. The scheme would be unworkable for the mitigation expert with fees of just £3,250 for 3 cycles of occupation. This would leave the landlord paying £20,000 if the property remained empty. In effect he is no worse off and the Local Authority's receipts are increased.
The regime is more clearly understood, red tape is reduced, the Government can make an announcement that the business rates burden has been substantially reduced and the landlord has a better chance of introducing a long term tenant.
If we went back to the pre April 2008 position, many business rates mitigation schemes would not be worth doing and the tax take would go up as a result. Landlords would be encouraged to focus on the retail incentive scheme rather than mitigate. This would get proper tenants back in place, that would over time improve asset values and it would be a political win as the Government would be seen to give a 50% reduction in liability for struggling ratepayers.
In essence, this is a simple proposal to reinstate the pre 1 April 2008 position but in many situations complex problems often have straight forward answers…
London Mayor Sadiq Khan is the latest big name to call on the government to extend the business rates holiday beyond April 2021.
The retail and hospitality sectors are mobilising the troops with dire warnings that thousands of business are at risk if the rates holiday isn’t extended beyond April 2021.
The pandemic has led to more than 50,000 extra appeals being lodged against business rates by Scottish firms alone.