Non-domestic rates reform: analysis of responses to consultation on Barclay implementation

12. Barclay Review Recommendation 21 – Close empty property relief loophole

12.1 Question 18 and 19 relate to Recommendation 21, "To counter a known avoidance tactic, the current 42-days reset period for empty property should be increased to 6 months in any financial year." Currently, a ratepayer can reapply for empty property relief after the 42-day reset period, the proposed change will increase the time period to six months. It is expected that this will help restrict any abuse through patterns of occupation which seek to exploit empty property relief. The Barclay Review advised the six month period should be discontinuous, to ensure that properties could provide space for "pop-up" use. The Barclay Review recommended this proposed change be implemented in 2020.

Question 18 – How do we raise awareness of this change among ratepayers?

12.2 There were 51 responses to Question 18. No Assessors or respondents from the Independent Education Sector answered Question 18. A breakdown of respondent categories can be found in the table below.

Table 18: Respondents Categorised

12.3 Most responses suggested that it ought to be the Scottish Government's responsibility to raise awareness of the proposed change to the empty property reset period.

12.4 Respondents generally advocated for mixed methods of communication which included websites / social media, via bills / formal notices and business / trade organisations. A small number of responses indicated there should be involvement of the press, for example advertising campaigns in the national media.

Question 19 – Do you have any further comments around the 6 month reset period for empty property relief?

12.5 There were 54 responses to Question 19. No Assessors, respondents from the Independent Education Sector or the Other Sector answered this question. A breakdown of responses by respondent categories can be found in the table below.

Table 19: Respondents Categorised

12.6 Overall, there were divided views between different types of respondents. Local Authorities and Representative Bodies were largely in favour of the 6-month reset period. Many suggested that a 6-month reset period would be more effective in preventing avoidance than a 42-day reset period. Chartered Surveyors and Businesses were against this proposal.

12.7 Along with preventing avoidance, Dumfries and Galloway Council stated that the 6-month reset period "will have direct and indirect benefits on the local economy". The Institute of Revenues, Ratings and Valuation (Scotland) specified that this change "would provide more time to undertake property inspection and, in our view, would generally be more effective in preventing avoidance than the current measures. It would be relatively simple to administer and relatively straightforward for a landlord to understand".

12.8 Chartered Surveyors were not in favour of the 6-month reset period along with a small number of Representative Bodies. The Scottish Property Federation stated "there is not an incentive to seek empty property rate relief rather than rent. Where this is done it is because of market failure not a desire to avoid taxes". They believed the reset period should stay at 42 days and the change to six months would not increase the incentive for landlords to find tenants.

12.9 Businesses indicated that the change to a 6-month period would make Scotland uncompetitive in the UK mainland market as England and Wales^[5] have a 42-day reset period. Therefore, these respondents advocated for the reset period on empty property relief to remain at 42 days. Along with this view, GVA noted that creating a discontinuous 6-month period would help maintain pop-up businesses. Another respondent held the view that there was no need for the change in policy as there were already financial incentives to sub-let and dispose of leases.

12.10 The Scottish Council for Development and Industry (SCDI) identified "current [letting] market trends […] towards short leases with a break clause". These trends, noted by SCDI and others, were not appropriately acknowledged by the new 6-month reset period. Argyll and Bute Council highlighted that "Short periods of occupation of less than 6 weeks are currently ignored. If a new business takes on a lease of a property and occupies it for less than 6 months under this proposal, and then the tenant fails and vacates the premises, the owner would then be penalised by not receiving any further empty relief whilst looking for a new tenant." Argyll and Bute Council felt the change in policy would deter owners from letting to start-up businesses, as they are more likely to fail in the first 6 months. SCDI suggested that a "3 month reset period for empty property relief would more closely reflect current market trends".

12.11 Concerns were raised by some respondents over the discontinuous nature of the 6-month reset period and there was support for the reset period to not be restricted to a single financial or calendar year. Suggestions from a small number of responses stated the 6-month reset period should be rolling. Inverclyde Council noted this would help avoid "artificial break points".

12.12 It was suggested that the Scottish Government should take into account how the change in the empty property relief may affect other reliefs and exemptions. In particular, "When a relief is changed (say to support a particular policy aim), it is necessary to be aware of issues such as, how it interacts with other reliefs and exemptions (whether business rates or other taxes), whether information needed to determine eligibility for a relief or exemption is readily available, how easy it would be to check compliance in respect of a relief or exemption, and whether IT and administration systems can cope with the requirements of the relief" (Chartered Institute of Taxation).

12.13 In addition, the necessity for clarity was highlighted over certain definitions such as 'meaningful occupation' and 'empty'. Stirling Council exemplified this point stating that the "regulation should define 'occupied' for example, 75% or more of the property should be occupied. This would prevent cases such as the Makro [Properties Limited vs Nuneaton & Bedworth Borough Council] case" ^[6].