Government clamping down on empty business rates misuse

The Non-Domestic Rating Bill I reported on recently will bring far reaching changes to modernize the system and ensure that property alterations, additions and other changes are quickly included within the rating list assessment. The government haven’t stopped there and has launched further consultation on empty rates mitigation.

The background

Prior to 1 April 2008, industrial properties were exempt from empty rates and offices/retail were subject to a 50% charge after an initial three month void period at 100% relief. After April 2008, this changed to 100% liability after six months on industrials and three months on offices/retail.

What’s the rationale for the three or six months I hear you ask? It was originally because industrial properties were harder to let – to say this is an outdated assumption is an understatement. These changes spawned a new industry – rates mitigation.

The bulk of rates mitigation schemes rely on a clause in legislation which allows a new statutory void period with 100% exemption after reoccupation for six weeks. There has been a multitude of schemes and providers over the years but the government is now looking to clamp down on what it sees as the misuse of the six week rule.

The proposed changes

Headlining the proposed reforms is the extension of the six week period to three or six months. Wales have already changed to six months and this has cut empty rates mitigation at a stroke. The suggestion is that having to occupy for an extended period would limit the financial benefit and extend the ‘pay back’ period, making it much less attractive.

The next question is whether there should be a limit on the number of times a property can benefit from empty property relief in any given period, so that even if a property repeatedly became vacant within a short time frame it would cease to benefit from EPR until sufficient time had passed.

This approach would mean that the existing ‘reset period’ would cease to apply and, instead, a property would only benefit from a single rate free period of up to three or six months in a set period of time. Full rates would be payable for the rest of the time, regardless of whether the property was empty or not.

The question of what constitutes occupation is also being addressed as there is currently no statutory definition. This is a tricky one that’s come up in several mitigation-related cases and the consultation raises the question about whether more than 50% of the space would need to be in use for it to be considered occupied. I’m sure some readers will have seen a small pile of boxes in a building which is for rates mitigation purposes and some schemes use minimal occupancy.

An interesting proposition is that the administration on empty property relief could, after an initial statutory void period, be placed in the hands of the local authority and awarded at their discretion. This has the potential for wide variations in application and I can make a list already of which councils would be hostile or supportive which would lead to massive inconsistencies across the country.

The method of letting vacant units to charities to mitigate rates doesn’t escape scrutiny. The key here is that a building can be vacant and exempt from empty rates as long as the next use is for charitable purposes. The exemption allows charities to hold empty properties to use as say, warehousing for urgent aid distribution centres, but there is a suggestion of widescale abuse and no way to police the next in use assumption.

I don’t agree with the suggestion that some charities have been hoodwinked into taking space but it’s clear that there are some artificial constructs that have been set up primarily with mitigation in mind.

Evasion, particularly in relation to fraudulently claiming Small Business Rates Relief and exceeding cash caps on Retail Discount, is included within the consultation although the changes in the Rating Bill and Digitising Business Rates will deal with this.

Tagged on at the end of the consultation is a section on rogue agents. I wrote a piece on this for Place recently and its good to see that the government is taking this seriously.

What it means in real terms

Rates mitigation is in widescale use but it’s a solution that’s been created to combat a tax regime which doesn’t account for the complexities of the property market and the difficulties in letting certain types of property in certain locations.

Removing the ability to mitigate rates won’t miraculously lead to vacant space being let but it will place an additional burden on a market that’s already suffering from high interest rates and increased energy costs.

The rating system is governed by legislation and caselaw that’s too rigid to deal with buildings that are obsolete, beyond their economic life or where there is oversupply. I suspect it will lead to more buildings being stripped out to delete them from the rating list.