Search This Blog


Wednesday, 28 November 2012

Energy Performance Certificates – A Blunt Instrument for Government Policy?

Energy Performance Certificates (EPCs) provide information on the energy efficiency of buildings, which are rated from A (most efficient) to G (least efficient), and make recommendations on how to improve a building’s energy use and carbon dioxide emissions.

But what are EPcs actually measuring and is it justifiable to use EPC ratings as the benchmark for the lawful letting of commercial premises?

A joint report published by Jones Lang Lasalle and the Better Buildings Partnership"A Tale of Two Buildings" – analyses the actual energy use of more than 200 properties.

Their findings show there's little or no correlation between EPC ratings and actual energy performance.

This is because EPCs focus on “design intent” or theoretical energy efficiency rather than measuring the actual energy consumption in buildings.

As an example, the report compares the energy efficiency of two London buildings – Ropemaker Place, London EC2Y 9LY and 10 Exchange Square, London EC2A 2BR.

The EPC rating for Ropemaker Place is a respectable B (score 46); the rating for 10 Exchange Square is a less favourable E (score 109).

So which is the more energy efficient building?

Surprisingly it’s not Ropemaker place, but 10 Exchange Square – which the report says is in fact 66% more efficient in terms of actual energy consumption.

So here we have an E rated building that is using less energy per m2 than a B rated building.

The report says this is far from unique, with similar findings occurring in a number of buildings across London.

The report’s authors say this highlights the shortcomings of relying on EPCs alone, showing that actual energy performance, as opposed to theoretical, should be the real focus for commercial property owners and occupiers – an area currently neglected by government policy.

To get a truer picture of energy consumption they say you have to consider the integral part played by occupiers, whose energy demands can vary significantly depending on the energy loadings of fitted-out space, the intensity of energy use and an occupier’s operating hours – all factors that affect the energy consumption in a building.

Yet EPCs do not take these complexities or variations of use into account.

Nevertheless, EPCs are likely to underpin a key provision of the Energy Act 2011.

The Act paves the way for secondary legislation (which hasn’t been created yet) making it unlawful to let buildings with poor energy efficiency.

The measurement of a building’s energy efficiency to be applied under the Act will be the energy rating given on its EPC.

DECC says that the intention is that the required threshold will be set at EPC rating E – making it potentially unlawful to let out F and G rated buildings after April 2018.

The government has suggested as many as 18% of all buildings with EPCs are F and G rated.

It may be hard to assess what the real impact of the letting restrictions in the Energy Act 2011 will be until the secondary legislation is brought into being (assuming it will be).

The fact that primary legislation paves the way for these restrictions poses a threat that property investors must take seriously, by reviewing the energy efficiency of their portfolios and identifying properties that, without improvements, may be at risk of being unlettable come 2018 – and deciding what to do about them.

The authors of A Tale of Two Buildings however conclude that it's questionable how effective the minimum letting standards envisioned by the Energy Act 2011 will be in reducing actual energy consumption and associated CO2 emissions for the UK.

Instead, they say it's imperative for the industry, backed by government direction, to focus on actual energy performance rather than just “design intent” – that there's little or no correlation between a building’s design (as measured by its EPC) and its actual consumption.

They advocate the use of mandatory Display Energy Certificates – which are based on actual (metered) energy consumption.

They also regard collaboration between owners and occupiers, and better metering, as vital in achieving real CO2 emissions reductions in the built environment.

Photo by anneH632 via Flickr

Monday, 26 November 2012

Flooding – Time for a New Deal?

The return of widespread flooding over the last few days has once again focussed attention on the uncertain future of flood insurance.

The BBC reports insurance companies warning that a lack of progress in talks with the government could leave 200,000 homes without cover against flood damage.

The pact between Defra and the insurance industry, known as the Statement of Principles, guaranteeing cover to businesses and households at risk of flooding, is due to end in June 2013.

In July – when we last saw large-scale flooding – I mentioned in my post, Flood Warnings, that there was no sign then of a suitable alternative, and there remains a deadlock.

With these episodes of extreme weather appearing to become more frequent, the Association of British Insurers (ABI) is discussing with the government how to provide affordable premiums in high-risk areas.

The ABI has issued a statement today calling for the government to commit to a joint solution to ensure long term affordable flood insurance for high-risk households, describing the current state of talks aimed at reaching an agreement as being at an impasse.

The ABI says this follows the government’s refusal to consider providing a temporary overdraft facility to a proposed not-for-profit special insurance fund for 200,000 high-risk households which will otherwise struggle to get affordable household insurance when the current arrangements come to an end next year. 

Insurers want householders pay an extra £8 to £10 on top of their premiums which would go into a £100m pool used by insurers to cover flood affecting their homes.

The temporary overdraft facility would be used to pay claims if there were large-scale floods in the early years of the scheme before it had built up its reserves.

The British Property Federation has today urged the government to commit to the scheme, as property without insurance is essentially worthless.

Environment minister Richard Benyon however has criticised the ABI's timing by raising the argument when people were suffering from the effects of flooding.

Meanwhile, as the industry and the government argue over the future, anyone affected by the latest flooding should check their insurance policies and make sure all premiums are up to date.

Landlords - check your leases too. Some leases make landlords liable to make good damage caused by flooding even where flood risk is not actually covered by insurance.

Tenants - also check your lease because, if it doesn’t make the landlord responsible for making good the damage, the burden might fall on you.

In both cases, the devil is in the drafting detail.

The Environment Agency has details of all flood warnings by region, updated every 15 minutes.

Friday, 23 November 2012

Bombsite Britain Tax on Olympic Park

The government is trying to sidestep a colossal £18m annual empty rates bill on the Olympic Park, Nick Whitten of the Estates Gazette reported this week.

It would be the largest charge in the history of the tax since it was introduced in 1966, which for followers of the England football team now seems like the dawn of time.

The Olympic Park was given a rateable value of £37.5m before the Games, which is odd given the fact that by definition the original use was only going to be temporary.

The London Legacy Development Corporation (LLDC) is however in talks with the Valuation Office Agency in an attempt to reduce the tax bill.

Empty rates become payable after the 3 month exemption period has elapsed.

The LLDC wants to pay rates only on "areas of beneficial occupation", such as construction cabins, while the park undergoes a £292m redevelopment programme to transform the site into the Queen Elizabeth Olympic Park (or “no ordinary park” as its website is called).

That’s not an option open to developers and landlords generally.

Empty property rates have been called the Bombsite Britain tax as they have forced owners to flatten thousands of empty buildings to avoid paying it.

The BPF and the BCSC have urged the government to adopt a four-point plan to reform business rates, mentioned in my post Calls for a Revaluation Rethink, which includes a call to reintroduce targeted relief on empty property in order to increase investment in high streets and boost economic growth.

Is this something that will be addressed in the upcoming Autumn Statement, being delivered, on 5 December?

Wednesday, 21 November 2012

HMRC Alters its Position on TOGCs – Stamp Duty Rebates to Follow?

HM Revenue & Customs has said that some property investors may be entitled to a stamp duty land tax (SDLT) rebate because VAT may have been charged on property transactions when it shouldn’t have been.

Specifically, this relates to the transfers of let properties which, provided certain conditions are met, can constitute the sale of a property rental business and qualify for treatment as a transfer of a going concern (TOGC).

A sale of assets constitutes a TOGC where there has been a sale of assets which together are capable of being run as a business to someone who intends to use those assets for carrying on the same type of business.

Crucially, a TOGC is outside the scope of VAT – so no VAT is payable on the purchase price.

Following a recent decision in a case before the Tax Tribunal, HMRC has issued revised guidance.

The gist of the new guidance is that a transferor of land could retain a small interest in the land without the new owners having to pay VAT on the deal.

Until this decision, HMRC’s view was that in order to qualify as a TOGC, the sale of a property rental business required the transfer of the whole of the seller’s interest in the transferred property.

The old guidance said for example that the grant of a 999 year lease to a buyer subject to tenancies out of a freehold would not be a TOGC, even though the seller had transferred virtually all its economic interest in the business.

The new briefing note says a transferor of a property rental business who retains a small reversionary interest in the property transferred does not prevent the transaction from being treated as a TOGC for VAT purposes – “provided the interest retained is small enough not to disturb the substance of the transaction, the transaction will be a TOGC if the usual conditions are satisfied."

This means the creation of a new asset (a lease or sub-lease) and the retention of the original asset (the freehold or a superior lease) is not automatically incompatible with TOGC treatment.

However, HMRC says TOGC treatment may not apply where the value of the interest retained by the seller is more than 1% of the value of the property immediately before the transfer (disregarding any mortgage or charge).

If more than 1% by value is retained, HMRC will “regard that as strongly indicative that the transaction is too complex to be a TOGC”.

HMRC is reviewing whether surrenders of an interest in land can qualify as a TOGC.

So how does this affect SDLT?

SDLT is calculated on the consideration paid plus any VAT charged on that consideration.

This means that if VAT was paid on past transactions which now wouldn’t be payable because of HMRC’s policy change, more SDLT may have been paid than should have been.

HMRC is reviewing "whether an adjustment can be made to the SDLT already paid" and will "soon" provide guidance on the issue.

Herbert Smith Freehills have published more detailed commentary.

These are complex areas of law and this post is just a general update by a non-tax expert!

You should always take specialist tax advice on transactions of this nature – past or present - to determine how they will be treated (or should have been treated in the light of new guidance) for the purposes of VAT and SDLT.

Monday, 19 November 2012

War on Judicial Review

The Prime Minister has announced plans to restrict objectors’ rights to mount legal challenges to projects they oppose in an effort to speed up development and boost economic growth.

David Cameron in a speech to the CBI today promised to crack down on what he sees as the "time-wasting" caused by the "massive growth industry" in legal challenges to government policy – including the judicial review of planning permissions.

There's now more detail on the Ministry of Justice website.

The BBC reports that Downing Street figures show more than 11,000 applications for judicial review in general were made in 2011, compared with just 160 in 1975.

Planning cases make up only a very small number the total judicial review cases - nevertheless, the British Property Federation says it welcomes the Prime Minister’s intention to “get a grip” of the judicial review process that has bogged down planning proposals vital to the British economy.

The Prime Minister is to consider:

·         Reducing the current 3-month time limit in which people can apply to challenge a decision.

·         Increasing fees for judicial review applications so people think twice about time-wasting.

·         Halving the number of opportunities currently available to challenge the refusal of permission for a judicial review, from four to two.

The BPF believes the current system leads to delays in commencing development until the claim is heard, thereby delaying or frustrating altogether the potential social and economic benefits arising from the development.

The BPF also urges the government to consider the insufficient number of judges with planning knowledge or experience, saying even a few dedicated planning judges would go a long way to speeding up the process for planning cases.

Green groups however have hit back saying planning laws protect the environment and should not be blamed for economic failings.

There’s also a paradox inherent in the latest proposal pointed out by the BBC’s Robert Peston.

The reform of the judicial review system will only happen after a "public engagement exercise on the plans", followed by "consideration of the responses" – so there will be a review of the decision to curb the growth of judicial reviews.

The property industry will be hoping this will end with the system eating itself by following the correct procedure.

Peston however wonders whether this war on "i-dotting" will be stymied by "t-crossing” – in other words, will the proposed judicial review changes survive the scrutiny of Whitehall?

And for thoughtful insight on the wider implications of these proposals outside of just the planning sphere, see the UK Human Rights blog.