What does it say about our country when our second biggest city, and one set to have one of the fastest growing economies across the nation in 2023, declares bankruptcy? How have we let such a city fall into financial distress, with over £760m in unpaid equal pay claims, no less? Birmingham was one of three councils to file for bankruptcy last year, and one in five councils are at risk of bankruptcy this year. The Local Government Association (LGA) has highlighted that the funding gap of almost £3bn that councils face is in part due to outdated funding models and depleted reserves.
Yet the impact of business rates avoidance in draining council resources is not often given the airtime it merits. Over 6,000 high street shops have permanently closed following the COVID-19 pandemic, leaving a host of vacant premises across our towns and cities. That these properties are not reoccupied is often intentional. Occupation of commercial property that ends after six weeks triggers eligibility for a three- or six-month rates free period. In a practice known as box shifting, landlords are placing boxes in empty commercial spaces to claim said space is occupied. After six weeks, they remove the boxes and claim empty rates relief, and the cycle starts again. This results in councils losing over two-thirds of their rates income every time this zero social/employment value cycle is repeated, and as such, is no surprise that Birmingham City Council partly attributed their financial woes to business rates avoidance. Similarly, Camden Council reported that its rates income available for funding its services and activities is £7m lower than pre-Covid levels.
Taxed out
Box shifting is not the only practice landlords are adopting to exploit this legal loophole. The Oxford Street American candy shops are the highest-profile occurrence: with the pandemic causing footfall on Europe's busiest shopping street to drop by 71% and household names leaving the high street, landlords had to find ways to get rid of these empty flagship buildings. By giving these spaces over to the candy stores, run by illegitimate companies, unpaid business rates on the street now total a staggering £9.2m.
Much like box shifting, boxes of snails housed inside empty commercial properties, as seen in Bradford, also qualify for rates mitigation under agricultural use as snail farms, allowing landlords to ‘occupy' spaces and avoid business rates. Indeed, this means that landlords have no real incentive to find new tenants, in turn draining money from councils into their own pockets and contributing towards the death of the high street.
Government intervention
The Government has acknowledged the issue with last year's Business Rates Avoidance and Evasion Consultation. The consultation toys with several proposed reforms. One proposal is the introduction of a limit on the number of times a property can benefit from empty rates relief, preventing successive reoccupations. Other proposals include requiring more than 50% of a property's space to be occupied to claim relief, or the devolution of the system to local authorities.
Arguably, the most important proposed reform is the extension of the ‘reset period' for claiming empty rates relief from six weeks to three or six months, as has been successfully implemented in Wales and Scotland. It is also easier to implement and measure than dealing with aggressive empty rates mitigators hellbent on going through slow and costly court cases. This would encourage landlords to act quickly to have their space utilised, and in the event that they are unable to find a tenant, opt for ethical rates mitigation options.
Why ethical rates mitigation is the solution
The way forward is the adoption of ethical rates mitigation schemes that landlords, businesses, and councils may all benefit from, that support local communities while allowing landlords to save money. This option, on average, costs landlords less than box shifting, involves less red tape and is far more palatable to the local councillors and key local authority departments.
Spaces used for retail, hospitality and leisure purposes can be entitled to rates relief of 75%, and if a space is used for charitable purposes, relief is up to 80%. With charities reporting the second biggest problem they face, behind funding, being affordable space, it makes sense for landlords and charities to partner up, saving money for both parties while also improving local community services. With the country facing a severe cost of living crisis, the value brought by helping vulnerable communities through charities is multiplied. Several visionary and leading landlords have gone on to benefit further by signing longer-term, traditional rent-paying leases with these charities in these same spaces. Similarly, developers have saved tens of thousands of pounds in Community Infrastructure Levies by giving space away to charities whilst they await the start of their projects.
We started Ban Box Shifting to protect communities and high streets from falling into disrepair. Unused space can be found everywhere you look, and with a simple wording change in the legislation, these ‘dead spaces' could be put to use to improve communities across the country. With the range of services that charities provide across our cities, this could even make a difference in saving lives. We've gained the support of over 100 councillors and MPs, with a motion passed by the London Assembly to ban box shifting.
Change is desperately needed to preserve councils and communities, and to prevent our cities and towns from having to declare bankruptcy. A collective voice is needed to call on the Government for change, and create a more ethical, sustainable ecosystem for landlords, businesses, charities, and communities to thrive. Only through immediate action can we avoid a repeat of Birmingham. We sincerely hope that landlords and their agents embrace the anticipated forthcoming empty rates rule changes and seize the chance to join the move to the similar cost, but more socially conscious future.
