The government’s new charge on empty business premises, intended to stimulate redevelopment and bring empty property back into use, is in disarray
The government’s well intentioned but half-baked abolition of empty rates relief earlier this year has single-handedly failed in its objective to stimulate redevelopment or bring back into use empty commercial buildings.
In fact the introduction of the new charge has had the opposite effect with many developers and property owners bringing forward planned demolition of empty buildings in order to avoid paying the new charge altogether.
And in another twist many empty buildings that could have found a new lease of life have undergone ‘constructive vandalism’ by their owners to put the premises beyond economic repair.
The government had hoped that the introduction of the additional charge would net the Treasury in excess of £1bn over two years, as well as stimulating redevelopment of empty buildings and removing the administrative burden of appeals to the Valuation Office Agency (VOA), however none of these aims are likely to be achieved.
Rates on empty business premises came into force on April 1, 2008; owners having previously been granted relief on unoccupied properties by the 1988 Local Government and Finance Act.
Under that act empty industrial property was granted 100% relief while all other commercial property received 50% relief following an initial three months exemption.
Although the new charge still allows relief for the first six months on industrial premises and three months for all other commercial property (it will not be available in relation to existing vacant buildings), the removal of relief thereafter has introduced a significant additional financial burden on property owners including property funds, who have empty accommodation and inevitably this will have a knock on effect in relation to the returns enjoyed by investors such as pension funds.
Furthermore companies wishing to downsize will have to cover the additional cost of the loss of relief until their original premises have either been let or handed back to their landlords.
However, the hardest hit will be Industrial owners who from April 1, will have to pay a 100% rate charge having previously paid nothing at all on their empty premises. And with manufacturing activity having fallen in July to its lowest level since December 1998, the introduction of the new rates charge is not good news for UK manufacturing.
Many buildings, such as old factories or warehouses are beyond beneficial use, and therefore have little or no market for alternative usage whether in the current economic climate or not.
However, properties that can be shown to be beyond economic use or would cost the owner more than three times the rateable value to bring the property into beneficial use, can escape the charge.
But the VOA in most instances has been unsympathetic with property owners so for them rendering their empty premises incapable of beneficial use or demolishing the building altogether to avoid paying rates could be the only option available to owners of such properties who face paying a charge that has done nothing to aid local economies.
While the government is to review anti-avoidance measures in 2009, the feeling is this maybe a non-starter as there is no real mechanism in place to monitor anti-avoidance by property owners due to lack of resources and ability, and if they were, no doubt they would have been introduced when the Empty Rates charge came into force in April 2008.
In the current downturn only the most optimistic developer would consider a speculative commercial development without a guaranteed pre-letting and few large house builders, if any, have the appetite to build large-scale housing on existing commercial sites while the present housing slump continues.
Even if circumstances were different the government has only allowed six months before the charge is applied; hardly enough time for a planning application to go through.
For the government, rather than finding that the administrative burden of appeals to the VOA would be removed, the result of the new charge is that the VOA has received large numbers of appeals from property owners desperate to avoid the new charge.
The net result of such appeals has been to not only increase the administrative burden and costs of the VOA rather than reducing them but such appeals, if successful, will reduce the amount of tax that the Treasury hoped to raise.
The new charge has failed on all counts; reducing bureaucracy, revenue raising and so as far as stimulating redevelopment or bringing back into use empty premises, areas of the country could well be blighted with levelled wasteland reminiscent of former World War II London bomb sites.
Not quite the picture the government envisaged on April fool’s day 2008. Still there’s no fool like an old fool.
Peter Chapman is head of rating at consultant Cluttons LLP.