Business rates on empty properties is a double jeopardy for landlords: not only are they deprived of rent, but the rates burden passes to them. Changes to the treatment of empty premises announced in the 2024 budget are about to make empty premises become even more costly for landlords.
There are of course steps that can be taken to mitigate business rates liability. One is to take advantage of the empty property relief that is available. That relief exempts an owner from paying business rates for 3 months (for retail and office premises, and 6 months for industrial properties). But after this period, the landlord will again be liable for rates at the full amount. Up to now relief was available so long as the premises had been occupied for at least 6 weeks prior to the relief being claimed. This is known as the “reset period” because, so long as the premises were reoccupied for the necessary 6 weeks, the landlord's entitlement to empty rates relief was reset.
To maximise the relief, landlords have been using various schemes, designed to ensure that premises were occupied for the requisite period to enable the landlord to claim relief for the subsequent 3 months. Until 2021, one such mitigation scheme was the use of live-in guardians to occupy the premises. But the Court of appeal held in Ludgate House v Southwark Council that, where ‘property guardians’ were living in an office block, they were not in rateable occupation of their individual rooms. The implication of this decision is that guardians can no longer be deployed to secure the necessary reset period, so that empty rates relief can be claimed afterwards.
Another common scheme involves storage. This is sometimes referred to as “box shifting” and typically involves the property being let to a company that uses it for temporary storage. Unlike guardians this practice has been upheld by the Courts as effective rateable occupation. Local authorities have reported an increase in these practices, which they view as artificial devices intended to deprive them of several millions of pounds in tax revenue every year.
It is therefore unsurprising that these practices have been labelled as tax avoidance, and that the Government has been looking at ways to limit their impact. It is against this backdrop that the Government launched its Business Rates Avoidance and Evasion Consultation in July 2023, with the aim to (1) test concrete reforms to Empty Property Relief to help close down known avoidance practices, and (2) gather information on wider avoidance or evasion risks. When it published the outcome of the consultation (which can be found here) earlier this month, the Government announced its decision to take “immediate action” on empty rates relief.
The principal action to inhibit box shifting and other mitigation practices, which was set out in the Spring Budget, is to extend from 6 to 13 weeks the period during which business premises must be re-occupied, in order to qualify for a further period of empty rates relief (i.e. the reset period). That takes effect on 1 April (in England).
This is disappointing news for landlords, particularly in the current market, in which commercial properties often remain unoccupied for longer than before. The extra financial burden that this will cause will be compounded by the business rates increase also scheduled for April 2024, leaving landlords to face a tougher liability for longer periods.
