From Phil Kelly, Director, Petty Chartered Surveyors

From April 2011, the empty property Business Rates threshold reverted to rateable value of £2,600 from the previous level of £18,000.

This is of great concern for SMEs and commercial property owners who have empty premises in their portfolio.

This will result in businesses with empty properties facing the prospect of having to pay thousands of pounds extra in business rates from April 2011. The Federation of Small Businesses has warned that this will place a very significant burden on companies struggling in the current economic climate.

After a short holiday of six months, when no rates are paid on empty industrial buildings (and three months for offices), owners or former occupiers are liable for full rates payment irrespective of their efforts to lease the buildings. Business Rates are basically a tax, similar to Council Tax on residential property.

In opposition, both the Conservative and Liberal Democrat parties were opposed to this tax but since coming into power they have yet to do anything about it, except for a marginal increase in the threshold of those small properties which are exempt from paying Business Rates. This may in some part be due to the higher than anticipated revenue raised by the initiative and the Government's requirement for income to finance public expenditure.

Empty rates on commercial buildings are effectively a tax on the landlords' or owners' failure to attract an occupier. In the current climate the continuing lack of finance and a shortage of business tenants have stalled speculative development, with many developers being further discouraged by the potential burden of empty rates payments whilst the property is being marketed to let.

There are many foreseen adverse results of empty rates:

Firstly, taxation should generally be levied on profit or income, but in the case of empty rates it is being levied on failure, making a bad situation even worse. Building owners never intentionally leave a building empty, regardless of whether the owner is a large institutional landlord or a small business. If a property does not generate rent, then there is no income from which the owner can pay his tax.

It is also important to appreciate that many buildings remain empty due to comanies restructuring to reduce costs in order to survive this downturn and empty rates penalise this strategy.

If a tenant is paying Business Rates as well as rent on a surplus vacant building, it represents a substantial drain on their business.

Secondly, in the current economic climate buildings remain empty due to the fact that there is a surplus of commercial properties and limited demand, regardless of price.

The argument that increasing the financial penalties of holding empty buildings will encourage greater competitiveness in the market is therefore mistaken. Companies which hold leases on vacant surplus buildings are tied into a rental commitment by their lease, which generally cannot be avoided.

Thirdly, institutional investors often include pension funds, which now face additional costs of holding empty buildings when no income is generated and this, in turn, will reduce the amount of money paid to pension pots when many funds are already depleted due to the downturn.

Fourthly, empty rates are acting as a deterrent to investment in building projects at a time when there is a general shortage of good quality new commercial stock. This will certainly adversely impact on the future competitiveness of the North West as a region.

Whilst the Government is under pressure to raise tax revenues from all sources, empty business rates penalise investment and development and substantially reduce the ability of SMEs to not only survive these difficult times but also to plan further expansion. The Government has the opportunity to put measures in place to aid the recovery by the abolition of this penal tax.

Phil Kelly
Director at Petty Chartered Surveyors
Email: p.kelly@petty.co.uk:
Twitter: @PettyCommercial