Business rates avoidance and evasion consultation

Key legislation to know

Since 1966, empty commercial properties in the UK have been potentially liable for the business rate tax.  Rate relief then gave those struggling to generate income from vacant commercial spaces a (minimum 50%) relief or complete exemption from rates. The Rating (Empty Properties) Act of 2007 then sought to leverage the decade of strong economic growth and rising property value to revitalize empty units. Lastly, the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 raised business rates for empty commercial property to 100% of the basic occupied rate, with an initial 3-month relief period, extended to 6 months for industrial properties. 

State of the industry

Taxation on empty, non-income-generating properties creates an additional burden to existing letting/security concerns, even with relief periods built in. We are no longer in the period of economic boom that sparked the legislative change in 2008. Instead, we see low growth, high inflation, and rising interest rates.

Using Q2 2023 figures, UK retail vacancies sit at 13.9%, compared to just 4% when the act passed. Over the last three years, vacant office space has risen by  65% (102 million square feet now lying empty), the most since 2014. In addition, there have been 6,342 registered company insolvencies — the highest number since Q2 2009’s recession.

Roughly a third of vacant office space is in London, with Birmingham, Glasgow, and Manchester also seeing significant impacts. Glasgow has the highest office vacancy rate in the UK (10.6%). It is estimated in London alone there are about 25,000 unoccupied commercial properties, half having had no tenants for 2 years or more.

Changing retail climate

The proliferation of e-commerce as retail competition was already impacting demand before the pandemic but consumer preferences have shifted further, and work-from-home is common even in traditionally premises-centered industries post-pandemic. Companies are now thinking long and hard about their commercial spaces.

Legitimate criticism has been raised about the government’s lack of support for landlords during the pandemic itself. Consider that the introduced ‘business rates holiday’ for retail premises during the lockdowns failed to include vacant properties. This generated a £924 million empty rates liability for landlords at a difficult time when they were often foregoing rent. 

Proposed changes to the ‘empty rates’ relief

Currently, there is a 6-week minimum occupation required before the empty rates relief can again be claimed. As with any tax relief initiative, it has not been free from abuse, with some opting to cycle through periods of superficial occupancy to trigger the next relief period.

The government is proposing reforms to counter this misuse by raising the reset period (to either 3 or 6 months) and limiting the relief cycles. As is regrettably common in such measures, however, there is a hyperfocus on a few ‘bad apples’ over the reality of modern commercial uses.

High street impacts neglected

The new proposals would directly countermand 2013/14 measures to support the high street environment through short-term leases. Flash retailing has proven an agile and sustainable way to utilise empty retail space. In May 2022 the ‘High Street Task Force’ acknowledged a significant positive impact from these pop-up shops on the viability and vitality of the high street. Ranging from seasonal shops (Halloween/Christmas) to temporary vaccine centres during the pandemic and low-cost start-up trials, they have added vibrancy and novelty, and driven foot traffic to an ailing area of the commercial sector. They have therefore delivered legitimate short-term uses of vacant properties that meet specific needs among the public.

The 2008 regulations sought more flexible leasing for positive economic impacts and revitalisation of empty commercial space. Where these flexible ultra-short rentals have been deployed, we see a fostering of local business, community and entrepreneurship, and economic vibrancy for struggling high streets. In turn, these rotating vacancies help prevent squatters and vandals, and discourage the demolition of buildings as ‘non-productive’. 

An un-nuanced approach

Extending the reset period will ultimately discourage legitimate short-term leasing at the expense of its positives and oppose the goals of the initial legislation. Additionally, commercial property will be more expensive to hold (also negatively impacting pensions, a forgotten angle). As proposed, the changes could:

• Eliminate incentives to support temporary low-cost occupation despite its many economic/social benefits

• Risk creating a ‘postcode lottery’ through discretionary schemes administered locally

• Cause confusion and uncertainty

• Unintentionally counteract existing legislation to encourage the use of vacant commercial spaces

Instead, it would be more effective to modernise the empty rates regime to ensure that rate-free periods are extended to reflect the time that it actually takes to re-let vacant properties. Failure to do so will stifle investment in our communities. Through the modernisation of empty rates, the financial imperative to mitigate empty rates liabilities would all but disappear.

What businesses should know about potential empty rates relief changes

For now, the proposed changes to the reset period are in the consultation stage.

The commercial real estate (CRE) market in the UK is in a state of flux, and making empty property even more expensive to hold could adversely impact the balance sheets and have dire unintended consequences. 

Should you need further assistance in navigating these potential legislative changes or reducing the cost of vacant CRE holdings, or if you simply want to stay in the loop, our UK team is here to deploy decades of expertise on your behalf. We continue to lobby at the highest levels of government to ensure these unintended consequences of extended reset periods don't go unnoticed. Additionally, we will be bringing you further updates on the consultation process and any potential business impacts as they become available.