Commercial Property

Mark Pawsey Excerpts

Wednesday 17th November 2010 Westminster Hall

[Mark Pawsey (Rugby) (Con)]

Before making my remarks, I first declare an interest as set out in the Register of Members’ Financial Interests.

I want to draw attention to the position faced by a constituent of mine, Mr Peter Summers, who visited my surgery a few weeks ago. For many years, Mr Summers operated a business supplying tyres from an industrial unit he had purchased. At 67, he sold his business but retained the premises, and invested in a personal pension fund. He spent some money refurbishing the building, and let it in 2005 at an annual rental of £35,000. In 2008, the tenant occupying the building went into liquidation and vacated the premises, leaving Mr Summers with some arrears and reinstatement costs of some £3,500, but since then he has been unable to find a new tenant.

In respect of the liability to business rates, Mr Summers enjoyed a period of transition for the first six months, from April 2008 to September 2008, but since then he has incurred a significant sum in business rates. In the six-month period from 30 September 2008 to 1 April 2009, he paid £8,628. For 2009-10, he paid full-year rates of £18,066, and for the current year he has paid £16,071. Over that period of two and a half years, during which he has received no services, his total expenditure has been £42,776. At a time when Mr Summers might have expected to contribute £35,000 a year to his pension fund, he has paid net outgoings of £18,000 a year, a difference of £53,000 per annum.

People such as Mr Summers recognise, in holding commercial property as an investment, that by virtue of the economic cycle, which can go up and down, there will be times when such a property may be vacant and there will be no income. Most investors in property must live with that fact. Mr Summers is prepared to live with it, but it strikes me as unfair that in addition to the loss of rental income, he must now bear a further loss in paying business rates when he cannot meet the sum from his income. He is effectively paying for services he is not receiving. He now faces the prospect of selling his industrial unit in a distressed market where prices have been forced down. The downward pressure has been caused partly by other investors’ concern that if they buy the property, they will be liable for the vacant business rate. Mr Summers came to see me to ask for my support in lobbying the Minister to rectify the position, which I believe is inherently unfair. I advised him that I was happy to do so.

The situation arose in consequence of a change to empty property rate relief that took effect in April 2008. For decades until then, the Government had helped struggling businesses through empty property rate relief. Shops and offices received an allowance of 100% relief initially and 50% thereafter, and owners of empty factories and warehouses received a 100% permanent exemption. The Government’s intention in reducing empty property rate relief was to provide incentives to bring vacant premises into use by encouraging rents downward. The change was intended to encourage property owners to re-let, redevelop or sell empty non-domestic buildings and improve competitiveness for all businesses, including small and medium-sized enterprises, in terms of property costs.

[Gavin Williamson (South Staffordshire) (Con)]

I declare an interest as outlined in the Register of Members’ Financial Interests. Has my hon. Friend found, as I have, that the changes, combined with the difficult market conditions, mean that speculative development of office or manufacturing property has stopped? Many small manufacturing businesses are concerned about expanding or taking on extra premises, because if the market weakens, they might end up paying rates on empty properties.

[Mark Pawsey]

I thank my hon. Friend for that contribution. I will make that point later in my remarks.

On the Government’s original intentions, they recognised some difficulty with the proposals, and the position was changed slightly in the November 2008 Budget report to exempt from business rates commercial and industrial properties with a rateable value of less than £15,000. Regrettably, that is below the value of Mr Summers’s property.

[Lorely Burt (Solihull) (LD)]

I discussed the repercussions of the change with the previous Government on many occasions. I think that the level is £18,000 now, but in Solihull one cannot rent a broom cupboard for rates of £18,000 a year, as I know to my cost. I criticise the previous Government tremendously for the repercussions. I have constituents in Birmingham who are trying to rent out property for £1 a square foot just to absolve themselves of their problems with the rates. Will my hon. Friend exhort the Minister to consider whether, in this current economic climate, some form of marginal relief might be possible, just for the time being?

[Philip Davies (in the Chair)]

Order. I remind Members that interventions, particularly in a half-hour debate, should be as short as possible.

[Mark Pawsey]

I am grateful to my hon. Friend for her contribution. I know that even in areas where rents have been reduced to the level that she mentioned, there are still no takers. If no businesses are willing to take the premises, the price is irrelevant. We know that the situation must change.

The regulations have been in force for more than two years and have had a number of effects, some of which the property industry expected and warned the Government about at the time of the change. On the failure to provide services, it can be argued in the interest of fairness that business rates are a tax on occupation with the intention of raising funds, in the same way as the council tax. However, clearly, if a property is not occupied, no services are being consumed, and it follows quite reasonably that no tax should be payable.

In many cases, the tax has become a tax on ownership rather than a tax on an income stream. Taxes are usually based on income streams, which means that they can be paid from profits earned. Again, where a commercial property is vacant, there is no income stream on which that tax can be levied.

[Mr Marcus Jones (Nuneaton) (Con)]

I congratulate my hon. Friend on making an important and compelling case. Does he agree that the imposition of non-domestic rates on vacant commercial premises has led to an increase in the demolition of serviceable commercial premises and in the number of derelict sites blighting our towns?

[Mark Pawsey]

My hon. Friend, whose constituency neighbours mine, is entirely right. There have been unforeseen consequences, one of which is that it is more sensible for property owners to develop a property rather than retain it for future use.

The rates are almost a form of wealth tax, levied on ownership of an asset rather than the income derived from it, as was originally intended. In times of recession, many small businesses find themselves occupying properties too large for their immediate needs and look for a tenant to take their surplus space. Where they do so, the rents add to their income and the occupier of the business becomes liable for the business rate, but if they cannot find a tenant, they face the burden of further business rates. For most businesses, business rates make up their third biggest item of expenditure, after wages and rents. Also, business rates are a fixed cost. They do not decrease as turnover declines during recessionary times. I am concerned that in many cases, excessive bills are contributing to business failures and leading to higher unemployment.

A further unfairness is that it often takes a long time to find a tenant for vacant commercial property, a fact reflected in the time limit allowed for the non-application of rates. Even in boom times, an industrial property is likely to remain vacant for between 12 and 18 months. In the current economic climate, the loss of a tenant will almost certainly mean additional liability for business rates that might not have been budgeted for.

The effect on rental values has not been what the Government intended. They hoped that rental values would fall, but an April 2009 report by the Royal Institution of Chartered Surveyors suggested that that objective had not been achieved and that property owners were offering other incentives instead, such as rent-free periods. There has also been a detrimental effect on capital values. The same report found that because empty property rates make fewer investors willing to enter the market, investment levels in the sector have fallen.

[Guto Bebb (Aberconwy) (Con)]

I congratulate my hon. Friend on securing this debate. The point about property values is important. In my constituency, responsible landlords have found themselves unable to proceed with property refurbishments and renewal work because they are paying rates on empty properties in other parts of the same area. The rates have a knock-on effect on the quality of the offer in towns such as Llandudno in my constituency.

[Mark Pawsey]

I thank my hon. Friend for his contribution; he makes a very good point. The hope that the application of empty business rates would encourage the property owner to accept lower rents in order to keep their buildings occupied, and that it would support businesses in the economy generally, has not been realised. There is a parallel here with the position taken by Opposition parties in respect of welfare reforms. The Opposition say that there is no point in trying to force people to take jobs because there are no jobs available. Similarly, there is no point in trying to force landlords to let commercial property cheaply if there are simply no occupiers to take up the space. There are absolutely no incentives for property owners to keep their buildings empty and not be active in seeking occupiers. In the case of Mr Summers, his failure over the past two and a half years to find a tenant has not been for the want of trying.

As mentioned by my hon. Friend the Member for Nuneaton (Mr Jones), one way in which property owners can avoid their liability for empty property rates is simply to demolish the property—if there is no building, there is no business rate. The RICS survey shows that the application of vacant property taxes is currently the strongest single factor in determining which buildings are demolished. It is often the older, less attractive properties for which, in times of recession such as now, it is more difficult to find a tenant. However, in most cases such properties are perfectly sound, usable buildings. An unintended consequence of the 2008 changes is that much of such low-cost industrial accommodation will no longer be available. Just as the country starts to emerge from recession, the start-up businesses that will be so important to our future prosperity will not be able to find any premises to operate from.

As my hon. Friend the Member for South Staffordshire (Gavin Williamson) mentioned, given the anxiety of completing a building, not being able to find a tenant and thus becoming liable for empty property rates, it is absolutely no surprise to find that property development companies are no longer developing commercial property on a speculative basis.

[Esther McVey (Wirral West) (Con)]

I congratulate my hon. Friend on securing the debate. During the past couple of years in Liverpool and Merseyside, there has been considerable regeneration both as a result of speculative build and because people really wanted to put their heart into the city to develop and grow it. The tax on empty properties has stopped that process in its tracks because people wanted to look for secondary investors while developing inner-city areas.

[Mark Pawsey]

I thank my hon. Friend for that contribution. Clearly the redevelopment and stimulation of our town centres has been brought to a halt by this legislation, which has made that process much more difficult. Commercial property development companies are no longer building property speculatively—by which I mean property being built in the expectation of finding someone to occupy it, rather than having an occupier already in place. No new building has taken place and nothing has been left in the pipeline for later. Again, as the country emerges from recession, the consequence of that is that the accommodation needed by our businesses will still be in the form of paper plans, rather than completed buildings.

[Andrew Bridgen (North West Leicestershire) (Con)]

I declare an interest in line with the declaration of Members’ interests. Business rates are undoubtedly a tax. When a building is empty, there is no rent. The crux of the matter is that this is a tax on an asset that has no income. As my hon. Friend has pointed out, that is distorting the property market and leading people to make strange decisions. The cheaper properties at the bottom end of the market being used by start-up companies will be the first to be demolished.

[Mark Pawsey]

I thank my hon. Friend for his contribution. That point has been well made. Many years ago, I recall setting up my own business and occupying exactly the kind of property that would, by now, have been demolished. In my business’s early days, secondary, inexpensive space permitted it to get started with relatively low overheads.

In addition to demolishing existing building, we will end up with no new building. My concern is that, as we emerge from recession, there will be no new industrial units for our businesses to occupy as they grow. That will have a significant effect in delaying our country’s ability to emerge from the current recession. I am particularly concerned about the plight of small businesses and small private investors.

[John Stevenson (Carlisle) (Con)]

For the record, I would also like to declare an interest in accordance with the register. Is the localism agenda not part of the solution, in that it should be up to local authorities individually to decide what should be charged and what percentage of relief should be given? That would reflect market conditions in different parts of the country.

[Mark Pawsey]

My hon. Friend makes an excellent point, which I am sure will be taken up by the Minister in his response. We are moving into an era of localism and it should be appropriate for individual authorities to make their own decisions on the matter, rather than having legislation imposed on them from on high.

Returning to the case of Mr Summers, the position of small private investors and small businesses contrasts significantly with that of larger, more established property companies that can absorb this cost in the round and are better able to respond. Of course, the business community fully accepts that the coalition Government need to take decisive action to deal with the country’s deficit, and that any proposals such as those articulated by my hon. Friends this morning need to stand up against many other calls on the public finances at this difficult time. However, I contend that the consequences of the abolition of empty property rate relief on a significant proportion of the country’s commercial property estate means that the matter should be given urgent and special attention.