Business rates liability
In England, the taxes payable on commercial property are non-domestic rates (NDR), otherwise known as business rates (different rates and reliefs apply in Scotland). NDR is payable on commercial property, whether occupied or empty.
Under the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, relief from business rates is available for three months (or six months for industrial and warehouse premises) where the property becomes vacant.
NDR on empty property is a tax on a non-incoming producing asset and it has been termed, a "tax on failure". It is not surprising that a significant industry has developed around business rates mitigation or avoidance schemes designed to reduce that liability. Rates mitigation remains a fertile area for disputes between local authorities and landlords, with the courts being asked to adjudicate on the lawfulness of various business rates mitigation schemes. The latest chapter in this story is the Court of Appeal's decision in 48th Street Holdings, a case which, subject to any successful appeal, closes the loophole for so called “box shifting” schemes. Or does it?
“Box Shifting”
The most well-known form of "intermittent occupation" has become known as "box shifting". Under these arrangements, a specialist provider takes a short lease of the property from the owner at the end of the relief period and “occupies” the premises for the minimum statutory period by storing boxes or other low-value items in the property.
The boxes are removed as the lease terminates. This short period of occupation utilises the reset period and enables another claim for empty property rates relief to be made. If the property remains vacant for a prolonged period of time the process is then repeated so that business rates liability only arises during the temporary occupation period. By repeatedly cycling through occupation and vacancy periods, overall rates liability can be reduced significantly.
Local authorities have long argued that such schemes frustrate the purpose of the legislation. Landlords and scheme operators maintain that they simply take advantage of a statutory framework enacted by Parliament and that genuine occupation, however limited, satisfies the legal requirements.
The Court of Appeal decision
The Court of Appeal had to consider what amounted to rateable occupation. The Court held that occupation solely for the purposes of establishing occupation, which had no use, value or benefit other than the saving of business rates through establishing occupation did not qualify as occupation under business rates legislation for repeated claims to empty property rates relief.
Case facts
The dispute concerned premises in America Square, London. 48th Street Holdings Ltd was the owner of unoccupied leasehold premises with a liability, after the initial empty property relief period, for business rates on the premises. Following expiry of the initial empty rates exemption, 48th Street Holdings granted a short lease to Principled Offsite Logistics Ltd (POLL). POLL placed boxes with redundant contents in the building for six weeks (since April 2024, the reset period in England is now 13 weeks (The Non-Domestic Rating (Unoccupied Property) (England) (Amendment) Regulations 2024 (SI 2024/323). In Wales, the reset period is 26 weeks). The lease then terminated, the boxes were removed and a fresh exemption period was claimed.
Commentary
The Court of Appeal's judgment represents an important shift in the legal landscape.
In a previous case (see our previous article) the Court determined that POLL’s business model did amount to rateable occupation.
However, the Court of Appeal stated that decision “should be regarded as wrongly decided”. The Court of Appeal went on to say that Parliament could not have intended that “the temporary placement of items in an otherwise unoccupied hereditament amounts to occupation where the sole aim of doing so is to generate occupation” noting in this case that there was “no commercial or business purpose save for rate mitigation”. Interestingly the Court of Appeal did not (it was not asked to) overrule other types of temporary occupation such as self-storage (as determined valid in Makro Properties Ltd -v- Nuneaton and Bedworth BC [2012] EWHC 2250 (Admin) and PHE -v- Harlow DC [2021] EWHC 909 (Admin) or Bluetooth occupation (as determined valid in Sunderland CC -v- Stirling Investment Properties LLP [2013] EWHC 1413 (Admin).
Further, the Court did not categorise what was meant by “commercial or business purpose save for rate mitigation” and this will undoubtedly lead to further challenges -for example if a company is paid £1 for storage is that sufficient so that rates mitigation is not the “sole aim”?
Whilst any appeal is fought and before the above challenges are ironed out property owners should reassess existing mitigation strategies and place greater emphasis on the benefit that the occupier obtains from the occupation over and above any rates saving. Local authorities may also seek to revisit previous reliefs granted which have adopted a box-shifting scheme.
