Running on Empty

Despite widespread opposition from within the property industry, tax increases on vacant commercial premises take effect from April 2008 – owners and tenants need to prepare

by Simon Lees 

7 February 2008

This year will see sweeping changes to the business rates applied to vacant commercial properties. In the 2007 Budget, Gordon Brown announced the government's intention to modernise empty rate relief. The Rating (Empty Properties) Act 2007 soon followed, with significant reforms coming into effect from 1 April 2008.

Owners of vacant property, as well as tenants with leases on vacant accommodation, will soon see the sharp end of the new legislation as local authorities across the country gear up to issue rate demands from March onwards to collect the increased revenue.

The new provisions

Under the existing empty rate arrangements, most properties when vacated receive full relief from rates for three months. Thereafter, a discount of 50 per cent applies. For vacant industrial and listed buildings, full relief applies at all times. There will be widescale changes from 1 April 2008. For non industrial property, the three-month exemption period will continue to be given but thereafter the full charge will apply. For industrial buildings, the exemption period will be six months, with the full charge coming into effect thereafter. Vacant listed buildings, for the time being, will continue to benefit from full relief.

Significant debate followed the announcement of these proposals. Few agree with the government's view that the changes will increase the supply of commercial property and stimulate redevelopment. The majority in the property industry believe that the reforms have been enacted hastily with one aim in mind, raising revenue. The figures in question certainly appeal to the government, they state the tax relief in 2007/08 on vacant industrial properties alone was worth £1.38 billion.

It is widely believed that the changes will discourage speculative development which can assist in the regeneration of areas. Developers will be wary of facing an exposure to empty rates on unlet properties and may in some cases choose to halt construction before completion, in order to avoid a charge.

On existing properties, we may see increased examples of property owners undertaking 'constructive vandalism' leading them to argue that the property should not be in the Rating List.

Tenants will also feel the effects of the changes, it is perhaps inevitable that landlords will generally pass on the new charges by way of increased rent and service charge levels. The changes may also disadvantage tenants through a reduction in the availability of short term leases and break options.

Companies still responsible for vacated properties will now see the cost of rates double on office and retail properties while facing, for the first time, rate demands on warehouses and factories.

What can be done?

Owners and tenants with vacant commercial property need to prepare for this new tax. Now that we know the tax is coming, the question that FMs need to address is how to mitigate and minimise the rates liability.

Solutions may be found that lead to significant savings in empty rate charges through avoidance, deferral and minimisation tactics. On new developments and substantial refurbishment schemes, Completion Notices need to be served by local authorities, stipulating when a property is deemed to be complete for rating purposes. It is a subject often misunderstood and savings can be made by arguing that notices have been issued prematurely or incorrectly.

On existing buildings that are to be redeveloped, it may be appropriate to bring forward certain aspects of the stripping-out programme, so it can be argued that the property is incapable of occupation leading to a deletion of the assessment. Additional rules and measures covering avoidance may well be introduced but it is doubtful they will cover all situations.

Even if the new tax cannot be avoided or deferred, consideration should be given to minimising the liability by appealing against the level of rating assessment or by exploiting the provisions relating to intermittent occupation, this being an area unchanged by the new legislation.

Landlords, developers and occupiers will all be affected by the changes to empty property relief. FMs should plan ahead and know what rate charges to expect in April on their vacant properties and have a battle plan in place for minimising the cost to their organisation.

Simon Lees is a partner of Altus Edwin Hill Chartered Surveyors