Seeking to ease the burden over rates on empty properties

DESTRUCTIVE. Unhelpful.

Stifling. Immoral. Just some of the words that have been used to describe Empty Property Rates (EPR).

Given the economic climate, when the challenges facing businesses have never been greater, it is hardly surprising feelings should run so high.

At a time when many companies are struggling to survive, how unfair it seems that instead of concentrating on merely staying in business, efforts are instead being diverted into paying rates on empty buildings.

EPR in itself is not the problem many find hard to bear – it was the decision taken in the 2007 Budget, by then- Chancellor Gordon Brown, where full relief was removed, that really tipped the balance. Under the new rules introduced in April last year – according to Mr Brown to stimulate swifter lettings – buildings no longer qualify for half rates after the first three months of being unoccupied, or six months for factories and warehouses. Now, full rates are payable, and are proving too much for some businesses to bear. This year alone, EPR is estimated to cost the region upwards of £40m.

Demolition of buildings has been seen – about 15 million sq ft of space is thought to have been scrapped nationally in the past 12 months. Redundancies are becoming more common as companies look for the funds to finance the tax.

Speculative developments are becoming increasingly uncommon as developers fear the prospect of being burdened by EPR if they cannot find a tenant, stifling the opportunity for inward investment to the North-East and crushing the prospect of job creation.

Among the many critics of EPR are businesses, commercial property agents, developers, builders, the Conservative Party, which condemned the change as “immoral” – even Nick Brown, the Government’s Chief Whip and Minister for the North-East, has waded into the row, speaking of the “destructive” effect he has seen in the region as a result of the rates.

Although Chancellor Alistair Darling attempted to broker a way forward, offering 12-month relief on properties with a rateable value of up to £15,000 in November’s Pre-Budget Report (PBR), his efforts were dismissed as being “woefully inadequate”.

Regional MPs including Alan Milburn, John Cummings, Chris Mullin and Phil Wilson have urged Mr Darling to look again at the issue.

While the Government responded by saying the exemption would benefit 75 per cent of properties in the North-East, research from the British Property Federation revealed that statistic included cash points, public toilets and car parking spaces. Statistics revealed that to qualify for the exemption, offices must be of between 1,000sq ft and 1,500sq ft of space, and industrial units of between 5,000sq ft and 7,000sq ft, figures which account for significantly less than 75 per cent of the region’s business community.

The reality remains that thousands of businesses are being lumbered with costs they can barely afford to pay, but are left with little choice but to do so.

Four months ago, The Northern Echo, in conjunction with the North-East Chamber of Commerce (NEEC), launched the Building on Success campaign, which calls for the reinstatement of full relief from EPR.

Since that time, the supporters of the campaign have grown almost by the week. James Ramsbotham, chief executive of NECC, has written directly to the Government, MPs and local councils to highlight the issue, to target those who have the power to make a change. Yet still the situation remains the same.

Calls are now being renewed for full relief to be reinstated in the Budget, being held next Wednesday, with the necessity for removal of the current rates system being deemed as more important now than ever.

Ross Smith, head of policy and research at NECC, said: “This is a tax which was badly thought through in good economic times and is now heaping unnecessary pressure on many companies in a recession. Alistair Darling has to recognise this and reinstate EPR relief in full in his upcoming Budget.”

Interestingly though, in an attempt to outwit the EPR legislation, businesses and commercial property agents are turning to increasingly innovative ways to escape the liability.

Richard Farr, director of rating services at Sanderson Weatherall in Newcastle, said in some cases, the situation may not be as cut and dried as it may appear.

“In looking at a building with several levels, for example an office block, I look at whether the block can legitimately be split into each level, so each floor is treated as a separate building, in effect.

Not only would that decrease the liability of EPR, whereas the whole building would not qualify for the exemption given in the PBR, individual floors would,” he said.

“In industrial premises, where facilities aren’t being used for a short period of time, maybe due to production issues, we can look at exemption under section 44A of the Local Government Finance Act 1988, which looks at part-occupied premises.

“It could well be the case that if the owner could hire some crowd barriers to partition off part of the space, then that could become another part of the warehouse – one that is entitled to a sixmonth exemption.”

Furthermore, with retail premises, Mr Farr said owners are turning to charities to occupy their premises, which have exemption from EPR.

“We are seeing many examples of small charities occupying big shops, and I am also aware of owners of multiple retail properties moving a charity from one shop to another of his empty shops down the road, meaning the three-month exemption will kick in again on the one they have just left. There are major landlords currently circulating charities around their portfolio.

“Also in the case of warehouses, I know of one which was given to a charity over Christmas so they could perform their pantomime. Once they had finished and left, the six-month relief began again.

“I am also aware of someone who is responsible for a building, which is currently empty, who is willing to pay the rent on that building if a tenant moves in and pays the rates and services charges.

There are noises in the market which suggest that may be something that may become more widely used – by getting in a short-term tenant and covering the rent, that may be preferable to paying the rates for the building standing empty.”

While such tactics are undoubtedly helpful to businesses, Mr Smith said it demonstrates what a desperate situation has been created by EPR.

“It’s no surprise that businesses are looking for ways to avoid paying this tax.

The sad thing is that in too many cases they are forced into measures which damage the region’s economy, including demolishing buildings, letting them for purposes they were not designed for, or not proceeding with developments which could otherwise go ahead,” he said.

But although demolition is a means of escaping EPR which has become more common as businesses find it increasingly difficult merely to survive during the times of recession, Mr Farr said it may not be the immediate solution it may seem. The property, he explained, has to be registered as being demolished by the Valuations Office, but a backlog may mean that tax is technically payable until the building has been registered as being demolished.

“The Valuations Office has not processed any changes for the past four to six months because they are preparing the new valuations list, which comes into operation on April 1, 2010. Work on that list has slowed down the whole process.

Technically, if the list has not been updated, rates are still payable,” said Mr Farr.

Another commercial property agent, Atisreal, is also keen to point out the flaws in the removal of EPR relief, and has been a supporter of Building on Success since its outset.

Steven Turton, rating director for Atisreal’s Newcastle office, said: “Although the change to £15,000 in rateable value is a welcome change in some quarters and will benefit many, the vast majority of the actual liability will remain and a great deal of empty space will not benefit from the change.

“At a time of challenging economic conditions, clearly all opportunities to avoid or reduce the cost of EPR must be taken.”

While the current economic situation shows little signs of letting up, with many analysts predicting businesses will be forced to face such tough times for the next six months at least, the chance for Mr Darling to provide some respite by restoring relief has never been more timely.

Mr Smith concluded: “Mr Darling has on opportunity next Wednesday – we would urge him to take it.”

Voices of discontent over the removal of full EPR tax relief

■ NICK BROWN, Minister for the North-East and Government Chief Whip: “We are in a position where people are pulling buildings down, which is an unintentional but destructive consequence of this, and the way to avert that is to grant relief.”

■ ALAN DUNCAN, Shadow Minister for Tyneside and Secretary of State for Business, Enterprise and Regulatory Reform: “Removing the tax relief for empty property rates was always immoral. Instead of offering real help, it is contributing to making the future rise in unemployment higher than it would otherwise be, and is adding to the difficulties that our economy is facing from this recession.”

■ JAMES RAMSBOTHAM, chief executive of the North-East Chamber of Commerce: “Empty property rates are exacerbating the downturn and stifling development projects, which will help the fastest possible recovery.”

■ BRIAN WATSON, commercial director of CA Group, in Evenwood, County Durham: “Every single one of our clients has stopped work on building speculatively. They are not going to spend one more penny on that.

They know what will happen if they can’t let them.”

■ TOM STOKES, managing director of small business workspace provider Evans Easyspace: “Effectively, this is stopping us developing new premises. It’s really not giving us any encouragement to keep up development work, to provide small businesses with one of the key factors in the economy, with workspace.”

■ JOE DOCHERTY, chief executive of Tees Valley Regeneration: “EPR is making development harder across the country, especially in areas where the viability of a development is marginal, where often the prospect of paying rates without a tenant or buyer is enough for a developer to choose not to go ahead in the first place. This means less development and investment in areas like the Tees Valley.”

■ KEVAN CARRICK, regional policy spokesman for the Royal Institution of Chartered Surveyors and partner in Newcastle-based JK Property Consultants: “What’s most worrying is the long-term effect it will have on the commercial property market.

Action must be taken now to avoid a situation where the commercial sector reaches the standstill currently being encountered by the residential market.”

■ LIZ PEACE, chief executive of the British Property Federation: “Any tax which increases as income goes down is fundamentally wrong. Making firms face the double hit of recession and then a tax on that recession will simply make things much worse, and that’s what we’re seeing.”

■ PAUL NICHOLSON, director of Atisreal in Newcastle: “I do not know of many developers who intentionally keep their buildings empty. This is really not helping in terms of regeneration.”