Empty property rate tax creating a ‘bombsite Britain’ has owners demolish rather than pay new levy

Owners demolish rather than pay tax

Even James Bond, well the studio rather than the man, is affected by the credit crunch with Columbia Pictures Corporation appealing against a £130,000 bill incurred during the refurbishment of its UK headquarters.

It claims that paying tax on an empty building is an unjust penalty and it is not the only large corporation who thinks so. Tesco, British Airways, Nokia, McDonald's, Next and Legal & General are just some of the big firms who want the UK government to scrap the tax which was introduced in April with the aim of raising £1.3 billion.

They have sent an open letter to Gordon Brown to restore rate relief on empty commercial property as it is an extra financial burden on the struggling property sector and is also affecting companies outside the sector that own real estate such as pension funds and local councils.

They are backing a campaign by the British Property Federation that has dubbed the situation 'bombsite Britain' as it is becoming more cost effective for a business to demolish an empty property rather than pay the tax on it while it lies empty.

Before April offices and shops were exempt from taxes on empty properties for three months, and then only had to pay 50%, while industrial properties had complete exemption.

But it was abolished by the government in April. Now offices and shops have to pay 50% of the taxes on empty buildings for the first three months, and then the full amount. Industrial properties have to pay 50% for the first six months and then in full. Commercial property owners pay full rates even if they have no tenants or are unable to occupy the building while work is being carried out.

The Bond situation is a good example. Columbia bought offices in Golden Square in London's Soho in 2007 and spent more than £2.8 million on refurbishment between the summer of 2007 and the summer of 2008.

It was unable to occupy the building when the work was taking place. The work included rewiring, installing some new ceilings and floors, installing new soundproof recording studios and knocking through into Number 25 Golden Square which it already occupies.

However the Valuation Tribunal Service decided that the work amounted to 'alterations with some repairs' and that it did not make the property materially different. So the property tax bill would stand.

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Asda, the supermarket giant, is another major player affected. It has demolished a call centre rather than paying empty rates tax on the vacant building. The site, which was to be developed, is now lying empty.

Some large companies face empty rate bills of millions of pounds. Segro, a leading property investment and letting group, estimates it could end up paying £8 million this year. 'This outrageous piece of taxation is hitting the whole of the British economy at a time of severe downturn,' said Ian Coull, chief executive of Segro.

For small property owners it can be crippling. Mac McCullagh decided to demolish The Lightening pub in Ealing, west London, rather than pay £8,000 for having an empty building. It closed because of the economic downturn and is now a pile of rubble.

'This policy is a disaster and will just lead to thousands more buildings being demolished. This tax means that people won't hold out for a buyer. They'll just demolish because it is cheaper,' he said.

The British Property Federation is leading the campaign. 'This tax penalises many businesses. Even those who upgrade properties to reduce their environmental impact, something we should be encouraging, are affected. The government must repeal this legislation. It amounts to a property poll tax and is hitting businesses and damaging the very regeneration projects that will help us out of recession,' said Liz Pearce, BPF chief executive.

'Empty rates are a terrible example of how disjointed the government is. Taxing empty buildings is totally at odds with government policy over helping businesses. The long term cost of raising £1.3 billion in empty rates will be immeasurable,' she added.

'Firms will be forced into bankruptcy through paying tax on properties earning them nothing while the forced demolition of perfectly useable buildings will mean less affordable space for new businesses when we come out of recession.'

Indeed driving into central London on the A40 from the West there is a highly visible image of the impact this tax is having. An owner of a storage company has demolished one of their old buildings and next to the pile of rubble is a huge sign with the words; 'Sorry Mr Brown, no empty rates on this one!' and a large arrow pointing to the rubble.

More than 70 MPs, headed by Labour's Linda Riordan, have backed a Commons motion calling for the empty property tax to be scrapped. 'For the sake of regeneration and development, the Government needs to think twice about this ill-conceived tax,' said Bob Laxton, Labour MP for Derby North.

It has prompted one Conservative parliamentary candidate to launch a petition calling for the scraping of the empty commercial property tax. Laura Sandys, candidate for South Thanet in Kent says she has seen its effect on a local level and it is not just large businesses that are affected.

'I have seen the devastating effect of empty rates first hand. Businesses are being penalised for a tax on properties they simply cannot use as the recession begins to bite. Businesses should simply not be in a position where it is more cost effective to demolish a building,' she said.

The decision to abolish the tax relief was probably made in haste and without enough consultation according to Philippa Pickavance of commercial property consultancy Drivers Jonas. 'It is a ludicrous situation. The property industry tried to lobby against this legislation. The general view is that there was not enough consultation prior to its implementation. This would have been damaging enough in boom times but in the current uncertain and world economic crisis it is crippling many occupiers/tenants and contributing to the stagnation of any speculative development,' she said.

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'Business Secretary Lord Mandelson caused uproar recently when he claimed that this tax on empty commercial property was somehow good news for tenants. The concept that doing away with empty rates would mean landlords would try harder to let their buildings and bring rents down is simply not a reality,' she added.

Her firm has many examples of how it is having a detrimental effect. One, a modern distribution warehouse and production unit in the south of England built in 2000 has recently been demolished. It was facing an empty rate bill of £448,140. In the north of England the owner of a stand alone retail unit undertook a comprehensive strip out to have the property deleted from the Rating List rather than pay a £203,280 empty rate bill.

'These scenarios clearly demonstrate that the government's view that the legislation will encourage landlords to bring empty property back into use is not happening,' said Pickavance.

She points out that it also means a loss of revenue. 'If the legislation had remained unchanged the buildings would still be standing and available to let meaning that there would at least be an opportunity to get tenants in and secure ongoing occupied rates,' she said.

There is little sign of movement. 'There are no plans to reverse the changes to empty property rate relief introduced on April 1,' said a spokesman for the Communities and Local Government Department. However, it laid open the prospect for change. 'As with all taxes the position is kept under review and the government has engaged with industry and local authorities to understand how the reforms are working overall,' the statement added.