The Empty Property Rate Dilemma: Exploring Ethical Mitigation Strategies

Empty property business rates in the UK is a tax imposed on commercial properties that are vacant or unoccupied for an extended period. These rates are a significant financial burden for property owners, developers and businesses, as they must continue to pay these levies even when their premises are unoccupied. This levy was introduced to incentivise to keep properties in use and prevent them from leaving valuable spaces vacant, thereby stimulating economic activity. However, this can be problematic, especially during economic downturns or when businesses are facing unforeseen challenges, as it adds to their financial strain. Those liable for this cost explore various options to mitigate these costs such as temporary use of the space, exemptions for certain types of properties, or even demolishing or redeveloping the property, as this may offer relief from the financial burden of empty property business rates.

One of the most popular rate mitigation techniques used by UK landlords to obtain rate relief involves a practice called Box Shifting.

What is Box Shifting?

This process entails the strategic placement of a small number of easy to move, low-value boxes of stuff (such as coat hangers or paper records) within an otherwise unoccupied commercial establishment, to change its status to occupied, for a duration of six weeks. Once vacated, this minimum occupation triggers the entitlement to a legislated three-month or six-month exemption from business rates.

Many landlords and chain retailers with closed branches have been known to exploit the above regulatory gap. Subsequent to the conclusion of the rates exemption, the process is repeated by reintroducing boxes into the space for an additional six-week period, effectively perpetuating this pattern, colloquially referred to as “box shifting.”

Unavoidable Effects of Box Shifting

It is estimated that £250m in empty rates are avoided each year through box shifting and similar techniques.

Local Councils lose two-thirds of their empty rates revenue each time this box-shifting cycle is employed. This not only puts pressure of crucial local services, but it also reduces the proportion of rates collected that is passed back to national government.

The Department for Levelling Up, Housing and Communities has recently closed a consultation period to explore the causes of, and potential measures to combat, avoidance, evasion, and poor rating agent behaviour within the business rates system, to protect essential funding for local services.

With Scotland and Wales already clamping down on rates avoidance and growing calls for a business rates overhaul from all parties within England, the case for charity-led ethical rates mitigation has been highlighted.

A Case for Charity-Led Rates Mitigation

This approach to empty rates mitigation focuses on offering empty premises to a recognised and reputable good cause on a rent-free basis, using a legally binding rolling tenancy/licence to protect the landlords’ interests. The resulting business rate reduction is shared between the Landlord, the facilitating agency, and the good cause.

It is argued that the benefits of lower dilapidations/repairs, positive CSR, and a positive image of a going concern helps landlords relet their property faster than if it had remained vacant.

By occupying otherwise empty commercial premises, a charity can reduce a landlord’s business rates burden by qualifying for, and paying, 20% of the normal empty business rates charge, taking advantage of a special rate only available to genuine charities and social causes using the space.

This method of mitigation enables a net saving for landlords of at least 50% of their business rates which makes it comparable and often lower cost than the less palatable box shifting alternative. There are also other benefits from working with the charity sector in this way – namely the additional tax break for making a donation in kind (in the form of rent-free space) and for developers, the chance to save substantial sums on CIL levies when spaces (pre-demolition) are put to good use for 6 months or more.

Landlords take on the matter

Commercial property managers emphasise that the issue of vacant buildings extends beyond mere surface-level concerns. It stems from more profound and systemic challenges. The commercial real estate landscape has experienced significant transformation in recent years, primarily due to shifts in consumer behaviour and the growing prevalence of online shopping. This transformation has resulted in a decline in the retail sector, with many brick-and-mortar stores struggling to compete. Additionally, the ongoing shift towards remote work, accelerated by the events of recent years, has cast a shadow of uncertainty over the office sector. These circumstances have created a complex environment for property owners and pension fund institutions, who are facing considerable pressure to sustain their investments and ensure the continued functionality of the property markets. In such a dynamic and evolving context, any form of support, including rate mitigation, is crucial to assist property owners in navigating the challenges posed by these changes and maintaining the stability and vitality of the property markets.

Conclusion

The landscape of business rates and the challenges surrounding empty property rate mitigation in the UK are both intricate and evolving. The practice of box shifting and similar techniques has, for some, become a means of navigating the financial burden of empty property business rates, leading to substantial revenue losses for local councils. However, as scrutiny and calls for reform grow, a fresh approach is gaining traction. Charity-led rates mitigation presents an ethical and mutually beneficial solution. By facilitating partnerships between landlords and charitable organisations, this approach not only provides financial relief but also fosters a positive image for both parties, contributing to a vibrant and compassionate community.

The broader context of these challenges reveals a transformation in the commercial property landscape, driven by shifts in consumer behaviour and the rise of online commerce. This transformation has placed immense pressure on property owners and pension fund institutions to adapt and ensure the continued vitality of property markets.

In this dynamic and evolving environment, it is evident that change is on the horizon, and it is indeed needed. The recent government consultation and the actions taken in Scotland and Wales highlight the urgency for a comprehensive overhaul of the business rates system. As stakeholders navigate these shifts and challenges, the need for innovative and ethical approaches to rate mitigation, like charity-led initiatives, has been underscored. This shift towards more socially responsible and sustainable practices can be a cornerstone in revitalising the property market while supporting essential community services. As the landscape continues to evolve, it is imperative that stakeholders work together to find sustainable, ethical, and mutually beneficial solutions for the benefit of all involved.