Business rates avoidance: beware this blunt instrument

On 10 December the government quietly published a discussion paper: Business Rates Avoidance. Yet, surprisingly, given what is a very damaging proposition, little notice has been taken of it. Most businesses would, when confronted with legal options, choose to pay less in tax than they could. Some will pursue aggressive avoidance strategies, but most simply make day-to-day choices based on what, overall, is best for their business, shareholders and customers. No UK taxpayer wants to see profitable corporations paying little or no tax to the country that facilitates their success. It is the government’s duty to assess whether there are ways the tax system can be strengthened and made more fair. What is proposed? The discussion paper states that the government “is not proposing reforms; it is seeking information” and that it wants to “identify and evaluate means of closing any loopholes”. For an initial document seeking to research concerns raised by “interested parties” there is surprising certainty and clarity about what rates avoidance is taking place and how it might be combated. It flags eight specific types; the most common four being: repeated periods of artificial/contrived occupation; artificial/contrived occupation of properties by charities; artificial/contrived arrangements where charities own a property and it appears that when next in use it will be mostly for charitable purposes; the use of insolvency exemptions. The discussion paper uses emotive phrases such as “abuse of rate reliefs” and “exploit the system” and gives the sense that the aim is to tighten the rules. There appears to be no room to conclude that the system may in fact be fit for purpose. Rather than a first step towards making the system fairer, this seems to be a platform to lead respondents into giving certain answers. Is it, perhaps, merely a process seeking to justify changes already provisionally determined? If it is, owners and their advisers must speak up now, and do so clearly. Not least because one of the suggested solutions is to give local authorities anti-avoidance powers, allowing them to withhold reliefs and exemptions where they “can reasonably conclude that the main purpose of the ratepayer’s occupation or arrangements is to receive the relief or exemption and/or that the arrangements or occupation is contrived or artificial”. It is no secret that some owners of empty properties adopt rates avoidance strategies. However, what is described in the discussion paper as “artificial or contrived” is the market behaving freely and naturally. It might seem strange to an outsider that an owner would let a building to someone for free; and complete madness to pay someone to rent it. However, the burden of empty rates skews the financial considerations, meaning that some owners can offer their property to the market on what would, in the absence of empty rates, be unusually favourable terms. The property market in much of the country is still struggling. There are more properties than occupiers and some properties are currently unlettable at any rent. This government has, of course, exacerbated that problem with its decision to postpone the 2015 revaluation and keep rateable values artificially high. Some will inevitably adopt an aggressive rates avoidance strategy. To feed this market there are businesses, and charities, set up solely to provide rateable occupation or to be a sacrificial mule for premeditated liquidation. No one should be surprised if the outcome of the rates avoidance discussion is that blatantly contrived arrangements are outlawed. Consider such schemes as Bluetooth marketing businesses installing a single transmitter in a big building where there is no evidence that there is an audience; charities, unable to demonstrate a real need for the properties, taking dozens of different units in a single location; miniscule occupations in huge warehouses; tenants who take dozens of leases and liquidate their business later that same day. Beware of the dangers The danger is that in tackling the aggressive avoidance of the few the government interferes too much with the normal commercial dealings of the many. It was the government’s stated aim in its 2007 consultation paper Modernising Empty Property Relief that the Rating (Empty Properties) Act 2007, should increase competitiveness: “Strengthening the incentive for owners to re-let or redevelop property that is empty will help to improve access to premises and so reduce UK business rents.” On the subject of intermittent occupation, it was said that the minimum period should be “not so long as to unduly restrict the ability of owners to bring premises back into use through flexible short-term lets”. An owner letting a property to a pure empty rates avoidance tenant is entirely different to an owner letting a property to a normal business requiring short-term, flexible accommodation and a low rent – exactly what the government wanted to facilitate. If the government’s intention is to ensure a fair system, then it is to be welcomed. But there is much to be concerned about from the implicit messaging in the discussion paper. Outlawing short-term occupations or penalising all owners who take charities as tenants is too blunt an approach. And where is the fairness in a system where the cash-strapped local authorities are made the arbiter of decisions in which they have a financial interest?  Responses to this discussion paper are invited by 28 February 2015. We can be sure that all local authorities will be arguing for greater assumptive powers and tougher legislation. Unless owners’ views are heard we may find that this already punitive tax is about to get very much worse. The paper is available at: www.gov.uk/government/consultations/business-rates-avoidance-discussion-paper Robert Hayton is national head of the specialist empty rates team at Altus Edwin Hill