Why the government’s new empty rates relief policy will backfire and certainly won’t help the high street
Written by John Webber, head of business rates at Colliers
In March the government published a summary of responses to its Business Rates Avoidance and Evasion Consultation launched in July 2023.
One key response was to announce a stricter regime for property owners claiming Empty Property Relief for when there are voids in their properties.
The government announced an extension to The Empty Property Relief (EPR) “reset period” from six weeks to thirteen weeks from 1 April 2024.
A property now must be occupied for a minimum of 13 weeks before it can receive either the three months (offices/retail) or six months (industrial) empty rates relief.
Properties that have already benefited from EPR are also required to be occupied for a minimum of thirteen weeks before they can benefit from a further period of relief.
The Government believes this new legislation will disincentivise tax avoidance and in particular, the widespread practice of “box shifting,” a method of artificial occupation which involved landlords moving items into a building, solely to satisfy the six-week occupation condition.
Items were then removed once the reset period was completed, rendering the building unoccupied and eligible for another period of EPR. The government said 58 per cent of respondents to its consultation said that extending the reset period would be the most effective means of reducing losses from rates avoidance and highlighted the precedent set by similar “reforms” in Scotland and Wales.
So, what do we think?
At Colliers we are dismayed at this new legislation, which is a “kick in the teeth” for landlords already struggling to let their properties.
It seems based on the premise that landlords need to be encouraged or even coerced into letting vacant properties, claiming EPR as some kind of scam, rather than a necessity.
This is a total misreading of what is going on in the market, where lack of market demand and long-term socio-economic factors are the main reasons behind empty commercial property, not because a landlord wants to keep their property empty.
It’s a particular blow for high street landlords, as well as retailers most who have 5 per cent of their estate empty at any time because of relocations or approaching lease events.
Given it can take up to 12 months to find an appropriate tenant for a property, why are landlords penalised for trying to mitigate business rates bills at a time when they are receiving no rent on their properties?
Will the scheme work and lead to a reduction in voids?
Evidence seems to suggest not. Extending the reset period for EPR has been trialled in in Scotland and Wales and has not resulted in more properties being let. Instead, it has simply resulted in landlords who, unable to find a tenant for their vacant properties, pay more in their business rates liability, putting further pressure on the sector.
Stats from the Local Data Company bear this out. The extension of the reset period for EPR was introduced in Scotland in 2020 and in Wales in 2022.
Since then, vacancy rates in Scotland reached 15.9 per cent in Q2 2023 (an 18-month high) according to the Scottish Retail Consortium.
And in Wales during the same period, retail vacancies reached 16.7 per cent (the highest in the UK) according to the Welsh Retail Consortium.
Looking at individual towns bears these findings out. According to LDC town centre vacancy rates in Scottish cities such as Aberdeen, Edinburgh and Glasgow were 15.1 per cent, 8.0 per cent and 13.7 per cent in 2019. By mid-2023 they were 21.6 per cent, 16.6 per cent and 17.6 per cent for these cities respectively.
Wales shows a similar pattern. Vacancy rates in Cardiff, Swansea and Aberystwyth were 15.8 per cent, 17.5 per cent and 10.1 per cent in 2019. By mid-2023 they were 24.9 per cent, 21.3 per cent and 30.6 per cent. Far from reducing vacancy rates, the new policy has coincided with a period in which voids have increased. So much for saving the high street!
Abuses
Whilst the legislation will deter “box shifting”, there are other more prevalent questionable schemes out there, that might even be encouraged by this proposed change.
We are a strong supporter of the charity sector and advise the Charity Tax Group on its business rates strategy. Charities quite rightly get significant help with business rates and that is commendable and essential.
But these changes in EPR opens the way for less scrupulous advisers to take advantage of some charities’ status.
Some advisers contact landlords offering them a way out of these longer business rates liabilities by letting or licensing the property to a “charity,” and takes a hefty fee for the introduction.
The charity does not even have to occupy the property- just hold it on license and will receive a donation for their trouble. The landlord has his business rates liability reduced as no rates are payable, but the high street becomes even further the haven of empty properties.
Surely that’s not what the government had in mind?
Conclusion
These new rules yet again illustrate the government’s total failure to understand the business rates issue- that fundamentally business rates are just too high and are approaching a 60 per cent tax.
Nowhere else in Europe are property taxes so high. The reason landlords try and mitigate their tax is simply because the level is increasingly unaffordable.
Charging empty rates at 100 per cent to a landlord or tenant of retail premises in 2024, is akin to levying 50 per cent income tax on a person made redundant in a recession!
We believe if the multiplier was rebased to a fairer, say 34p business rates tax, much of this need to mitigate or avoid business rates would disappear. Far from cracking down on EPR, the Chancellor should have instead extended the three- and six-month empty rates holidays to twelve months for all property types including the offices and retail sectors.
It’s disappointing the government failed to support business, instead making things more difficult and disincentivising investment along the way!