The cost of business rates in industrial buildings

With properties being charged at 2008 values up to 2017 and restrictions on how quickly the rates can fall when those values are reduced, arising from transitional reliefs, it is fair to say that business rates remain contentious.

While the media has focused on the high street, the issue is also live for the industrial and warehouse sector. When buildings are as big as now needed, and in prime logistical sites, their value can lead to hefty bills.

In the news

The most recent Queen’s speech promised to bring forwards changes to business rates, following election pledges made by Boris Johnson. The Budget, due on 11 March this year should provide some clarity as to what is proposed, or possibly just a further consultation.

The role of business rates

Business rates are superficially a local tax to provide local services. They are partly retained by the collecting authority and partly passed on to central government who then tops up or charges local authorities according to political and economic criteria. While there is an argument for a local tax to provide local government with greater accountability, it is far from clear that this is what business rates achieve.

In practice, rates are now a key part of business taxation. This is partly due to the high collection rate and the limited scope for avoidance. 

Business rates in 2018-2019 brought in £31 billion making them a substantial chunk of the UK government’s income from businesses. Since 1990 business rates receipts have risen from £8.8 billion, with a total rise of 210%; growth in line with inflation (calculated by the House of Commons Treasury Committee) would have been 75%. Despite allowing for a 19% increase in taxable property, this appears to be disproportionate. 

In the same period corporation tax has fallen from 34% to 19%; it appears shifting the tax burden to rates is deliberate. 

The problem

Business rates are charged on crude property values (basically the rental value at a set date multiplied by a figure dictated by central government), not on income, turnover, or any measure of financial success. In an economic downturn, rates do not fall in line with the economy. Until 2017, rates were calculated based on 2008 figures; it would be fair to say that the property market has changed during that time. 

The next re-valuation is due to take effect on 1 April 2021, reflecting rental values at 1 April 2019. As before, it is likely that the market will have shown some fluctuation between each date. There is of course no guarantee this re-valuation will take effect.

In addition, transitional relief provisions delay any substantial changes reaching the payer. This is great for the tax payer when rates rise, but not so helpful when they are falling.

Effect on the market

Since business rates generally bite the occupier rather than the owner of the property, the issue for owners is what to do with vacant properties? 

Unless the property is unfit for beneficial occupation the business rates will fall due. Moreover, occupation to undertake works in order to allow full occupation for a different function does not relieve the position. Rates are due irrespective of trading.

Many landowners fall back on the empty rates relief provisions. This is where landowners are exempt from paying business rates on empty buildings for 3 months, after which time, the majority must then pay full business rates. Relief for industrial buildings is available for six months but after that, the full charge is payable. The relief is on the building, not the rate payer so if an occupier has already claimed this, then it cannot be claimed a second time. 

To obtain additional relief, a period of occupation is needed which can be as short as 6 weeks and fairly artificial. In 2018 the High Court in R (Principled Offsite Logistics Ltd) v Trafford Council and others ruled that a lease to an occupier whose business was occupying property to allow land owners to avoid rates and used the properties for short term storage, was sufficient to start the relief clock again. The fee paid to the tenant was 20% of the rates saved.

For those occupying and using the building, reliefs provisions are far more complex with a large number of reliefs available that are operated in different ways by various charging authorities.

And on the paperwork

Any leasing documentation must always make it clear who is to pay rates.  The basic position is that the occupier must pay. and of course any ambiguity is undesirable. From an owner’s perspective, the lease should also include provision for tenants to repay any empty rates relief received.

In addition to the drafting considerations in normal lettings, there is a side industry in companies who locate short term tenants for buildings, or simply occupy buildings, to enable landlords to restart the empty rates relief period. 

How does this look in light of Brexit?

Rates of some sort have existed in this country from the sixteenth century, considerably before our entry into the EU. The tax seems unlikely to be materially affected by the terms of any Brexit. The only element of the tax currently imposed by the EU comes from EU state aid rules restricting discretionary payments and thereby limiting, to an extent, the reliefs available. It seems unlikely, given the other drivers on business rates, that even if these are removed at once (which seems unlikely if we are to have a trade deal with the EU) that this would make any meaningful change to business rates.

Overall, while change is promised on business rates this has been promised consistently for a number of years. Given that the rates system has no basis on income or profitability, or even in many cases the value of the property subject to the rates, businesses can hardly be blamed for seeking to evade them. As long as the courts remain as sympathetic to this as they presently appear to be, it would seem that empty rates relief will continue to be a valuable tool for all property owners.