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Empty rates: Are the screws about to be tightened again?


All about business rates - what are they?

Business rates are a form of tax charged by the Government on non-domestic premises including shops, offices, warehouses and factories. Empty rates relief is where business rates are reduced when premises are vacant.

The pre-2008 position

Before 2008, if a property was vacant, the owner of that property benefitted from a 100% reduction in business rates for three months, and then a 50% reduction thereafter. The intention of the legislation was clear: where no income is being derived from a property, the owner should benefit from a reduced financial liability when it came to rates.

The position now

It was perceived that the significant reduction in rates for empty properties disincentivised owners from bringing them back to the market for occupation.

As a result, the Rating (Empty Properties) Act 2007 came into force in April 2008. This changed the position so that after the expiry of the initial three-month rate-free period, owners of vacant property would be liable for full business rates.

What did that mean for owners of vacant property?

Unfortunately, the introduction of the new rules coincided with the onset of the financial crash - exactly when financial reliefs were most needed by landlords.

For the last 10 years, landlords have had to accept that they will be liable for full business rates on their empty premises. However, some landlords have developed a “creative” approach to benefitting from the initial three-month rate-free period.

Under the current legislation, in order to qualify for a three-month rate-free period, the property must have had “rateable occupation” for six weeks prior to it becoming empty. As such, some landlords have been artificially occupying their properties (for instance by simply putting boxes in them), in order to claim that they qualify for the rate-free period. Once the rate-free period is over, they will artificially occupy the properties for another six weeks, and the cycle continues until a genuine tenant is found.  

Although there was a 2012 High Court finding, in the case of Makro Properties Limited v Nuneaton & Bedworth Borough Council [2012] EWHC 2250 (Admin), that such mitigation schemes can be lawful, it looks as though the Government is going to tackle what it considers to be unacceptable practices.

The Government has already undertaken a consultation and, perhaps unsurprisingly, it was local authorities who formed the highest proportion of respondents. They stated that the most common method of avoidance of rates was through repeated periods of artificial/contrived occupation, and that this method of avoidance had increased since the High Court ruling in 2012.

Suggestions for tackling the issue included defining the occupation of a property as a percentage of the utilised floor space, extending the length of time an occupier is required to occupy a property in order to qualify for a relief, and placing a cap on the number of times that an exemption for an empty property can be claimed.

Since the Local Government Association’s initial estimates suggest that around £230m per annum is lost to avoidance, it is no wonder that the local authorities are keen to crack down on these measures. This is in spite of statistics released this year estimating that non-domestic rating income for 2019-20 will be £25 billion, an increase of £206 million, or 0.8%, on the figure for 2018-19, and 4.3% higher than 2017-18.

What next?

The Department for Communities and Local Government and HM Treasury are due to collate responses to inform the Government’s future action on business rates avoidance. What future action that might be is awaited. Now that Scotland has committed to putting anti-avoidance measures in place this year, we may see Westminster following suit in the not-so-distant future.

If you have any questions about this blog, please contact our Real Estate Team for more information.

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