Raising the roof over the Government’s tax blunder

Nov 12 2008 by Graeme King, The Journal

Momentum is building in the campaign against the abolition of empty property rate relief. While there has always been opposition to the move in the property sector, the troubled state of the economy has gathered more adherents to the cause. Graeme King spoke to some of those in North East who have been most affected.

THERE is nothing terrifically surprising in reporting that business leaders are objecting to paying taxes – it was ever thus, but the current campaign against the extension of Empty Property Rates is probably the most universally popular move in many a year.

Nobody The Journal has spoken to has stood up for the lifting of EPR relief, with most of the business world agreed that not only was the decision flawed in the first place – addressing a problem which property professionals say does not exist – but it is all the more idiotic at a time when the economy is struggling.

EPR has been accused of being purely a means for the Government to raise tax revenues – around £1bn per year by some estimates – and the notion that it was introduced to bring more property into use, has been derided as an idea put forward by those who simply don’t understand how the property industry functions.

Informed commentators say property is either in demand or it is not, and the notion that landlords are deliberately leaving their premises void is erroneous since why would anyone choose to reduce their potential income?

As it is, EPR can mean a 6% cost increase on a new development.

Those engaged in campaigning against the extension of EPR include the British Property Federation, industry magazine Property Week and the North East Chamber of Commerce.

The RICS (Royal Institution of Chartered Surveyors) is also engaged in dialogue with the Government, attempting to influence the Department for Communities and Local Government in its thinking on the issue.

With the economy getting into a more depressed state month by month, the prospect of the Government drawing an income from property becoming vacant through business failure is rather unpalatable.

It is known that some landlords are trying to artificially reduce the impact of EPR by putting charities into their buildings, and some people are setting up companies to store things for a period, as another way around the tax. Some developers are choosing not to finish construction of buildings, or are removing walls or a roof to make them uneconomic, and thus exempt from the tax.

Elliott Ward is one of the partnership behind the success of North East developer City Northern. The company has many high profile developments to its name, and currently has the striking looking Baltic Place offices close to completion on the Gateshead quayside.

He said: “There was lobbying before this move came in – all trying to persuade the Government not to go ahead with it. We knew what the impact would be on speculative development – that it would stagnate provision, though the Government claimed it would stimulate it!

“It is another layer of cost – another factor to dissuade us from going ahead with speculative schemes. Arguably, at the moment, whether empty rates apply or not, it would not make any difference – but when banks get themselves sorted out, it’s going to have a real impact.

“It may dissuade people from developing at all – it’s hard enough as it is, even without this extra cost.

Mr Ward said he would have taken a different approach to the finances for schemes like Baltic Place had he known what the impact of EPR would be. He said: “We would have tried to pay less for the land. In a development appraisal, you have a whole host of variables. We would have tried to pay less for the land and the landowner would not have had the same justification for the amount we paid.

“Everybody feels it’s grossly unfair – especially in our region, where it’s hard enough to develop anyway. The whole rationale is completely illogical – if property is empty, you are losing money. I don’t understand why you would leave a building empty just to save on rates.”

Adam Serfontein is the managing director of Hanro, one of the best known names in the North East property development world.

He said: “From my perspective, this is a mental aberration by the Government. In terms of Government errors, it’s up there with the abolition of the 10p tax rate – both in timing and implementation.

“It kicks in at around 35% of the market rental value. You get a short period of grace – then the cost. Its stated aim was to bring buildings which were obsolete into use, but it’s doing quite the opposite.

“It’s a nonsense – there is no reason on earth why it should not be reversed. If they want an excuse to repeal it, look at the money they are going to have to pay themselves on Northern Rock offices.”

Another senior property executive, who did not want to be named, used an analogy with another industry to make the point about what he sees as an unfair tax.

He said: “To me, this is like charging Greggs a tax on its unsold pasties. In that industry, that would either mean Greggs would not produce enough pasties to satisfy demand, or they would stop making pasties at all.”

He said there were three main grounds of objection.

“Firstly, EPR stifles regeneration because it makes speculative building uneconomic and reduces the availability of premises to business.

“Secondly, it penalises businesses which want to downscale or have flexibility to respond to cyclical demand. Thirdly, it makes the Government more money at the expense of business – and the worse the economy gets, and the more empty buildings there are, the more money Government gets.”

Mark Stephenson, policy adviser with the North East Chamber of Commerce, said: “One businessman I’ve spoken to said it was the only tax on failure. We are campaigning to have it repealed, or at least amended. We have written to all MPs, and are working closely with local businesses. We are hopeful the Government will heed our message.”

Kevan Carrick, North East regional policy spokesman for RICS (the Royal Institution of Chartered Surveyors), is one of the few to say the introduction of EPR did originally have some merit, with owners speculating that prices and rents would go up, to holding property without renting it.

But he added: “The Government’s carrot and stick approach has invoked the Laws of Unintended Consequences and has seriously backfired.

“It has brought speculative development to a dead stop, it is leading to the premature demolition of buildings that could be used at a low cost by new businesses and it is estimated that it will bleed over £30m a year out of the North East economy.

“The RICS is engaging in a sensible conversation with Government and making sure they know how this is affecting everybody. I hope they respond very quickly and take steps to mitigate the damage being caused.”

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