Ever since the catastrophic upheaval to the rating system precipitated by the Local Government Finance Act 1988, our property tax base has suffered a plethora of amendments, amendments of amendments, regulations, re-regulations, surcharges, transitional adjustments, exemptions, penalties … well, how long have you got? However, by far the most heinous, unfair, misconceived, mismanaged, counterproductive and fiscally repugnant of all these was the introduction in 2008 of a 100% (or more) penal levy on virtually all empty property.
For those who cannot recall the halcyon days of the 1967 General Rate Act (a slim coherent volume largely uncluttered by any qualifying regulations or statutory orders) the system was straightforward and broadly unchanged in principal from its introduction in 1601. A property was assessed and an annual rate set, and the ratepayer paid the product of the two multiplied together – “simples”, as those mongooses would say. The tax was calculated, as it is today, on the value to the tenant of his or her occupation of the property, i.e. rent. Almost without exception, no liability arose if the property was empty, because logically no business was being conducted to generate the necessary income; and so things remained until 1966, when a newly elected and perhaps headstrong Labour government was persuaded by Camden Council (whose then policy was to compulsorily acquire every property in the borough on behalf of “the people”!) to levy a charge on all vacant property.
After a few demolitions of perfectly sound buildings and a couple of suicides, this was rationalised down to a 50% charge, mainly on the retail and office sectors, with total exemption on the industrial and warehouse classes (and all listed buildings). Whilst still objectionable in principle, the net effect of the “empty rate” in a rising market and buoyant economy in the last quarter of the twentieth century was fairly minimal, so there was no great pressure to challenge it. The magnitude of this failure to oppose such a perverse measure was duly exposed in 2008, when Gordon Brown, the then Chancellor of the Exchequer, faced with a £1 billion pound shortfall in his budget, gleefully accepted the suggestion from one of his ambitious young advisors that an “increase” in the empty rate charge to 100% on (virtually) all classes of property would just nicely fill his fiscal gap. After all, the principle of taxing empty properties had already been established, hadn’t it? Tellingly, there was to be no consultation whatsoever on this massive tax raid.
One of the many virtues of the rating system is that it is exceedingly difficult to avoid, being based on an immovable asset. However, faced with the nightmare of paying out substantial sums of money on assets that were yielding no income, and in many cases were losing capital value as well, the victims of this patently unfair levy sought to fight back! So predictably, avoidance schemes appeared like mushrooms in the autumn mist; and like mushrooms some turned out to be good and healthy, and some turned out to be very poisonous indeed, promoted by those scammers who seem to blossom whenever government with its convoluted laws and regulations gives them the slightest opportunity. For the avoidance of doubt, tax avoidance is any scheme within the law which a taxpayer may adopt to minimise his or her exposure to any government levy. Tax evasion is any scheme which seeks to achieve a similar goal but by using deceit and is unlawful. Since 2008, millions of pounds of public money have been frittered away in legal fees and costs in challenges by a relatively small band of billing authorities who have sought, and continue to seek, to define the various empty rate avoidance schemes as evasion, in order to increase their rate income.
Whilst I have every sympathy for the plight of all local authorities facing year-onyear budget cuts from central government, I find this a particularly unsavoury and ultimately pointless attempt to solve their fiscal woes, particularly as some of those authorities in my experience have been less than frank in their dealings with ratepayers, and in seeking deliberately to frustrate avoidance schemes which the courts have repeatedly upheld as lawful. Indeed, one London borough’s “rate recovery” team were caught on CCTV breaking into a ratepayer’s premises in a failed attempt to gather evidence against him. In fact, the only beneficiaries in any of these tawdry contests have been the lawyers who have earned thousands of pounds in fees in the hundreds of almost entirely fruitless cases which this group of billing authorities have pursued. It is perhaps a cheerful reflection on human ingenuity that so many and varied successful schemes have manifested themselves, and they deserve a brief review.
First out of the starting gate were the charities, which of course benefit from a mandatory 80% relief on their business rate liabilities. Thus, a landlord of an empty property facing a 100% liability could let the premises to a charity who only had to pay 20%, so a deal could be struck over the 80% saving. Of course, the charity actually had to occupy the property, and that occupation had to be “wholly or mainly” for the charitable purpose, although how much of the building had to be actually physically occupied was open to argument – cue the lawyers! This dilemma evoked several examples of human ingenuity. One scheme was for charitable organisations to install Wi- Fi transmitters broadcasting beneficial messages to the locality. This was duly challenged by the usual group of billing authorities and the scheme failed on the “wholly or mainly” test, but a similar occupation by a non-charitable company was held to succeed, but only for brief periods of occupation to trigger a three- or six-month relief period. The Valuation Office Agency was then invoked to separately assess the sites in order to frustrate this solution. Another was to store furniture for donation to East Africa, again challenged on grounds of the proportion of space actually occupied. A rule of thumb view now accepted by most billing authorities is that actual physical occupation of 60% or more of the property by a charity will trigger the relief.
A similar approach has been adopted to “pop-up” art exhibitions, another innovative solution to the empty rate nightmare. For non-charitable occupations, the rules are very different. Here the schemes seek to take advantage of the unoccupied property regulations which will trigger a three- or six-month moratorium (depending on the category of hereditament) after a period of occupation of at least six weeks, with no limit on the number of times this period can be repeated. Unlike for charities, only a minimal extent of physical occupation is required because here the rule is “occupation of part is occupation of the whole” and where only 0.2% of a warehouse was used for document storage, the scheme succeeded. This includes third party storage, which has given rise to a separate “avoidance industry”. One such firm, Principled Logistics, faced with refusals by the usual suspects to issue appropriate rates demands, successfully sought judicial review against Trafford Council in the High Court to obtain a binding decision on the issue. Another billing authority then refused to issue the appropriate reliefs because “the intention was that the buildings were going to be re-occupied”, harking back to a cotton warehouse kept empty during the American civil war! The district judge was having none of that either, and somewhat unusually castigated the authority for its behaviour. Confusion still reigns on another scheme, relying on the provision that insolvent companies are not liable to rates. It is relatively straightforward to create such an occupation, but this was initially successfully challenged by the Insolvency Agency in the High Court as a sham transaction. However, subsequent decisions have distinguished the facts in that case, and other insolvency schemes have succeeded. And last but by no means least, we have the Civil Guardians! Again, confusion reigns on the precise interpretation of the law. The scheme relies on granting residential tenancies to civil guardians to occupy commercial buildings, commonly large office blocks, on the understanding that under the General Development Order within planning legislation, change of use to residential purposes from any other use class does not require specific consent.
Thus, the occupations become liable to minor amounts of Council Tax, rather than the full rates bill. Although this scheme has been largely successful, a recent Upper Tribunal decision has clouded this understanding. “Rooms” in an empty central London office block were let on residential tenancies, with the remainder of the building space used as a common part. The Valuation Officer initially complied with the plan and deleted the commercial hereditament, but subsequently went through several changes of heart (and assessment) at the behest of the billing authority, seeking to re-instate the office rating assessment. The Tribunal was having none of it and refused the re-instatement, but then determined that the residential occupations were nondomestic! So far as I’m aware, this decision hasn’t been appealed, but there may still be time.
I have advised a number of ratepayers on avoidance schemes, which I believe are warranted by the manifest unfairness of the unoccupied property rates regulations, and I further believe that billing authorities do themselves no credit by dubious use of their powers to try to frustrate them. The courts at all levels have repeatedly stated that avoidance schemes are legal and have found against billing authorities who seek to penalise ratepayers. Instead those authorities should have the moral fibre to seek to persuade central government of their cause and to amend the law, not bully taxpayers who are already hard pressed facing failing businesses, empty properties and falling values. That having been said, central government’s role throughout has been lamentable. As far back as 2010, the newly-elected coalition government acknowledged the mendacity of the previous administration’s actions, and the then chancellor of the exchequer, George Osborne, promised action to repeal the empty rate provisions “as soon as financially feasible”. He even appointed Julian Sturdy MP to chair a committee to investigate introducing immediate short-term measures to ameliorate the situation. Mr. Sturdy did a first-class investigation and produced a list of immediate intermediate remedies. They were all studiously ignored, and the issue, together with a long overdue reshaping of the whole business rates system, was repeatedly kicked into the long grass with a succession of fruitless reviews. No wonder the whole tax is in such a complete mess.
Tom Dixon RD BSc (Est Man) FRICS IRRV (Hons) is a past President of the Institute and a consultant with Daniel Watney, Chartered Surveyors. The views expressed are his own.