At a time when the property sector is suffering from market uncertainty, Mike Price, industrial partner at Knight Frank takes a look at whether the forthcoming Budget is likely to offer any further empty rates relief and how this taxation has affected the industry a year after its introduction.
As members of the property industry will be only too aware, empty rates relief was significantly reduced with effect from April 1, 2008. As such, industrial and warehouse premises only benefit from 100 per cent business rates relief for the first six months of vacancy, while most other commercial properties have only three months of 100 per cent rates relief.
In November 2008 the Chancellor then announced that empty property rates would be scrapped for properties with a rateable value of less than £15,000 for the 2009-10 financial year. This was the result of months of lobbying from the industry and the British Property Federation and it is no understatement to say that the relief was in no way as comprehensive as hoped for by the industry.
Despite the Government estimating that this change would exempt 70 per cent of empty properties from business rates, only small properties such as very small industrial units and occupiers of lock up garages are benefiting, and with very few small units available in the UK anyway, the change has had very little or no impact on most empty rates bills.
When first introduced, the Government claimed that the imposition of empty rates would encourage landlords to reduce rent levels on their empty commercial properties and bring them back into use. They also maintained that, in the long term, beyond an initial rate-free period, it was right to charge rates on empty properties, as this would increase incentives to re-let empty property.
The opposite has in fact happened, rather than achieving its objectives of lowering rents and bringing empty properties back into use, the loss of rental income combined with empty property rates now threatens to push businesses over the edge.
It is evident that the Government either doesn’t understand, or chose to disregard, the fundamentals of the commercial property business when launching this legislation, and in many cases is now actually suffering from empty rates bills itself where buildings within its own property portfolio lay vacant.
In addition to the adverse effect the tax has had on demand in the market and the pressure it has put on businesses and landlords, empty property rates have also resulted in a slowdown in regeneration schemes and the premature demolition of
existing older buildings, from which partial rents can no longer cover the increased rates bills on the empty units.
Then came a drop in the standard rate of VAT to 15 per cent, it is difficult to see how, even with a projected cost to the Government of £13 billion, this is stimulating the economy or having any material effect on the property sector.
Newly constructed residential property which is zero rated is also unaffected by the drop, although it is having a small effect of the costs of refurbishments and extensions where VAT is standard rated. Many businesses have in fact incurred an unwanted administration cost from the change in the rate of VAT and professionals in the property sector have found their cash flow adversely affected by the fall in the VAT rate.
The last six months have proven that measures taken by the Government following the Pre-Budget report have not done enough to assist in a revamp in the commercial and industrial property market. Looking forward we have to see the bigger economic recovery picture to understand that bigger businesses also need relief. This hurdle needs to be removed to recover, if we start to turn the corner and there is an absence of buildings because so many have been demolished we’ll have a huge problem.
Demolition of this nature is not bringing forward new development. Sites have become piles of rubble and developers will not build speculatively only to end up with a rates bill if an occupier is not found.
There is little doubt the Chancellor won’t be announcing any relief to the current empty rates tax, but there is some light at the end of the tunnel. This month the London Stock Exchange demanded that the Government remove stamp duty as part of its April Budget. Although this is something that has become an annual tradition, if this request were taken on board, the abolition would remove a major barrier to growth of the UK capital market.
Another measure that could go some way to reigniting market confidence and activity would be the removal of the rates for new buildings or stock that has not yet been occupied. The Government’s current taxation is punishing developers for investing in cities, and as a result we may experience a lack of high quality stock when the market picks up. If this type of property were exempt we may see more development and investment taking place.