We are losing £250m a year – are the claims by Local Government Association fair?

2006 HM Govt. identify that new empty rates scheme would bring in £910m p.a. more than existing scheme
2008 New regs concerning empty rates come in
2019 Charging Authorities claim they are losing £250m p.a.
Doesn’t that leave them £660m (£910m-£250m) better off?

Prior to 1 April 2008

Non-domestic properties which are unoccupied may be liable to empty property rates.
Rates were charged at 50% of the full rate bill or of the transitional bill where the transitional arrangements apply.
Liability begins after the property has been empty for 3 months.
Certain types of property, including factories, warehouses, storage premises and listed buildings are exempt from empty property rates.
Empty property held by charities and CASCs is liable for 10% of the full business rate.

Post 1 April 2008

The Rating (Empty Properties) Act 2007, which received Royal Assent in July 2007, gives effect to key elements of the Government’s reforms, primarily by raising the rates liability for empty commercial properties from 50% to 100%.  Also introducing zero empty property rate for charities, and community and amateur sports clubs.

THE NON-DOMESTIC RATING (UNOCCUPIED PROPERTY) (ENGLAND) REGULATIONS 2008 [SI 2008/386] – these replaced the 1989 Regulations.

The primary legislation is found under section 45(1) of the Local Government Finance Act 1988

Primary changes are: –

  • All “relevant” properties are liable to the tax at 100% after a “void period”.
  • The “void period” for non-industrial properties is 3 months
  • Industrial properties receive an initial “void period” of 6 months. [regulation 4(b)]
  • All occupiers that are in administration are exempted from paying empty rates for an indefinite period. [Regulation 4(l)]

Why was it changed?

The Government study, Impact Assessment of: Unoccupied Property Regulations 2008 by Richard Enderby, identified that the 2006/07 empty rates relief structure of 50% liability and nil liability was one of the most generous in the world and was costing the Exchequer £910m per year.

What are Charging Authorities doing about it?

Since the Localism Act 2011, Charging Authorities have been accepting a reduction in their regional funding by substituting up to 75% in business rates receipts. This goes completely against the whole point of National Non-Domestic Rates and undoes the central tenet of the 1988 Local Government Finance Act.

Yet again, Local Authorities are accepting risk in their funding structure based on representations made to them on the solidity of business rates revenue.
The Local Government Association appear to be the main critic of empty rates mitigation, their Feb 2015 paper “Business Rates avoidance – discussion paper”,
“The business rates anti-avoidance working group identified six specific methods of avoidance. In the questionnaire that we issued last year respondents were asked about how frequently they came across the methods and what proportion of estimated losses were accounted for by each method:
a) Repeated short-term periods of occupation (minimum reoccupation period is 6 weeks) of six weeks or slightly more, resulting in a further period of exemption from empty property rates.
This was by far the most common method of avoidance. 91% of authorities which gave estimates for amounts lost due to different methods mentioned this and it accounted for 47% of estimated avoidance losses. However many mentioned that recent case law, notably the Makro case in Nuneaton, has not been helpful.
b) The occupation of vacant properties, for example retail warehouses or shops, by charities. Occupation of a property is often minimal (such as posters in a window, or Bluetooth broadcasting). In addition, the actual evidence of occupation may be limited. Goods may also be spread out to give the appearance of being wholly or mainly used for charitable purposes.
This was the second most common form of avoidance. 57% mentioned it and it accounted for 19% of total losses. Recent case law, particularly that involving Milton Keynes, South Cambridgeshire and Chester and Cheshire West councils and the Public Safety Charitable Trust, now in liquidation, has involved this.
c) The vacant property being leased to a charity and it is proposed that when next in use the property will be wholly or mainly used for charitable purposes. However, when questioned the charities do not have clear plans for occupation or intended use and authorities may never be informed that the premises are occupied, which leaves authorities uncertain as to whether the relief is appropriate or not.
This was mentioned by 47% of respondents and accounted for 11% of estimated total losses.
d) Insolvency to avoid paying empty property rates, the power to disclaim onerous leasehold interests is available to both liquidators and trustees in bankruptcy but is not perceived to have been exercised by them in a timely or expeditious manner.
This was mentioned by 40% of respondents and accounted for 13% of losses. Councils report that this frequently involves the same ratepayers. Although the Insolvency Service has tightened up recently it is still perceived to be a problem.
e) Avoidance as a result of properties not being on the rating list.
15% of respondents mentioned this; it accounted for 8% of losses.
f) Creation of new hereditaments through splits and mergers to gain additional empty property rate relief.
Although this was perceived to be comparatively rare (11% of respondent authorities; 1% of losses) authorities mentioned that it has been driven by recent extensions in small business relief.
g) Other methods mentioned by respondents include:
• Where a property is let to a limited company, which then sub-lets
it to another company on a short-term agreement. These sub-agreements are to companies that are registered with Companies House but the registered addresses are mostly derelict buildings or large blocks of flats and therefore it is not possible to trace these companies and recover rates payable.
The companies usually are struck off the Companies House list within 12 months of having left the rated property. The same applies to many public houses which are run by relief managers who are made liable for business rates by the pub owners. The owners claim not to have any contact details for their relief managers once they have left. The shops and pubs involved are usually in town centres, with high rateable values and high rates payable. One authority which reported this type of avoidance lost in excess of £650,000 in 2013/14.
• Bogus occupiers and avoidance through incomplete details of ratepayers with noted increase in ‘phoenix’ type companies.
• Companies registered abroad that own empty properties. If they don’t pay the empty rate charges there is a limited chance of recovery.
• ‘Sham’ tenancies; cases where a tenancy is created with a company that has no intention of occupying the property. This company may have been recently formed, have a sole director, has no assets and does not trade. As a result, any enforcement action that a council takes is unsuccessful.
• Avoidance due to the misuse of agricultural exemptions. One specific example given by respondents to the survey is snail farms claiming the agricultural exemption. The LGA has also heard of cases where farms lease buildings to industrial and commercial ratepayers without informing the VOA or the relevant local authority.
• Properties which have been given a zero rateable value by the Valuation Office Agency due to redevelopment, however once the VOA has reduced the RV, the work on the property ceases.
One authority reports a considerable number of properties which have had a zero RV for greater than 12 months.
• An organised pattern of occupation of vacant High Street shops by pop up companies selling low value goods such as mobile phone accessories or clothing and often a combination of these.
The registered office of the company and home addresses of the directors are fictitious.

Our response

Roderick Bisset of Villiers Chartered Surveyors has commented on the findings of the Local Government Association:
“ The complaints list that has been published is nothing short of breath-taking. It starts on the presumption that money is being lost by Local Authorities whereas it is a matter of fact that the 2008 Regulations came about as Central Government saw the possibility of increasing the empty rates “take” by £910m and brought in legislation to do so. Local Authorities have been forgetful of the Law prior to the 2007 Act and have inexplicably volunteered through pilot projects to start taking on the risk of business rates income, forgetting the tough lessons of the 1973 Rating List and the General Rate Act 1967.
Local businesses fundamentally believe that the money is better in their own hands as they provide the jobs and local landlords take on the property redevelopment risks in a volatile market. The assumption that extra money taken from local businesses and given to Councils is not a universal opinion.
Looking at the examples cited, the observations are based on clear misunderstanding of the Law as currently enacted. Cases have been propelled to the High Court, funded by Council Tax payers, where they stood no realistic chances of success. Local businesses can be extinguished, and the unreasonable enforcement threats have not assisted anyone and at the last stage, were not tolerated by the Courts.
It is clear that in instances of redevelopment, the fact a property has a zero rating is not a “tax dodge” but is a fundamental and logical point of the business rates system, upheld by the Courts in the Woolway(VO) and Canary Wharf cases. It is hard to understand how properties being redeveloped can be identified as tax dodgers as there are a raft of taxes that the developer ultimately pays for, Community Infrastructure Levy (CIL) being one of them!

The Local Authorities Response

Local Authorities through the Local Government Association published their last paper identifying the changes they wish to see in empty rates, “Business Rates Avoidance Survey Report 2019”. Data sharing and privacy concerns immediately come to mind in their sections referring to data sharing and use of the IRRV ‘rates avoidance’ tool.
Their recommendations do include practical suggestions such as: –

1. The return of 50% empty rates.
2. extending the minimum period of re-occupation beyond six weeks to six months
3. Greater powers of inspection
4. Compel ratepayers to provide LAs with evidence of commerciality of tenancies
5. Greater prosecution powers, up to date better legislation
6. Allowing billing authorities more discretionary power when awarding mandatory reliefs
7. Stricter definition of “when next in use, use for charitable occupation” in conjunction with the Charities Commission.

References:

1. http://www.legislation.gov.uk/uksi/2008/386/pdfs/uksiem_20080386_en.pdf
2. https://www.local.gov.uk/sites/default/files/documents/business-rates-avoidance–7b4.pdf
3. http://www.legislation.gov.uk/uksi/2008/386/pdfs/uksiem_20080386_en.pdf
4. Sunderland City Council v Stirling Investment Properties LLP [2013] EWHC 1413
5. Makro Properties Ltd v Nuneaton and Bedworth Borough Council [2012] EWHC 2250
6. https://www.local.gov.uk/sites/default/files/documents/Local%20Government%20Finance%20Settlement%201920%20LGA%20response.pdf
7. https://www.local.gov.uk/lga-survey-ps250-million-year-lost-through-business-tax-avoidance
8. https://www.local.gov.uk/sites/default/files/documents/Business%20Rates%20Avoidance%20Survey%20Report%202019.pdf