Business rates avoidance schemes valid says Court of Appeal

Schemes put in place with the intention of avoiding non-domestic rates liabilities on empty properties have been upheld in an important test case in the Court of Appeal (Rossendale Borough Council v Hurstwood Properties (A) Ltd (2019)).

How did the avoidance schemes work?

The schemes involved property owners granting leases of empty properties to special purpose vehicle companies (SPVs) set up by the owners with no assets or liabilities. The SPVs were then either wound up voluntarily or allowed to be struck off the register of companies and dissolved.

Liability for business rates falls on the entity "entitled to possession" of the property. Following the grant of the leases, those entities were the SPVs, as tenants. Exemptions in business rates legislation mean that companies subject to winding up or dissolution are not liable for rates.

The owners implementing the schemes refused to pay rates on the basis that they were no longer entitled to possession of the properties. The SPVs claimed the benefit of the exemptions referred to above and neither party paid any rates.

What did the ratings authorities do about this?

The authorities sought to recover the unpaid business rates. They claimed the rates were due because either:

1. The "corporate veil" of the SPVs should be "pierced", meaning that the Court should look beyond the separate legal personality of the SPVs and attribute liability to their shareholders (the ultimate property owners who had set up the scheme).
2. The Ramsay principle applied. Where there is a pre-ordained series of transactions, this principle can allow any steps undertaken merely to avoid tax to be disregarded.

The property owners applied to strike out the claims of the ratings authorities. As there were a large number cases where similar schemes had been used, a test case was heard whilst the other cases were left pending.

What did the Court decide?

The Court of Appeal rejected both arguments of the ratings authorities.

1. Piercing the corporate veil

   It is a fundamental principle of company law that each company has its own separate legal personality. Piercing the corporate veil is a very limited exception to this principle. It applies where a person is under an existing liability which they deliberately evade by interposing a separate company they control.

   Here, as liability for business rates accrued day by day, there was no existing liability which the property owners were evading by granting the leases. A new liability for rates arose each day. Until the grant of the leases, the owners were liable for (and had paid) the rates. From the grant of the leases, each daily liability accrued to the SPVs, which were exempt.

2. The Ramsay principle

The Ramsay principle was not a blanket ban on schemes which include steps designed purely to avoid tax. The relevant legislation had to be interpreted to see whether it was intended to apply to the transaction in question.

In this case, as the concept of entitlement to possession of the property was clear-cut, there was no scope for any alternative interpretation. From the grant of the leases, the SPVs were clearly entitled to possession. The motive behind the grant of the leases was not relevant.

What are the likely implications of the decision?

The decision will be welcomed by landlords and owners of empty properties. We may see a rise in the numbers of property owners seeking to take advantage of such arrangements.

Ratings authorities, on the other hand, will be concerned about the implications of the decision. Estimates suggest these schemes are responsible for millions of pounds of unpaid rates, which authorities will now not be able to collect. It will be interesting to see whether they appeal the decision.

This was a test case and there are many similar cases pending before the courts, so its implications cannot be underestimated. The government may consider passing anti-avoidance laws to close the perceived loophole created by this decision.

TLT has a wealth of experience in all aspect of business rates liability. To find out how we can help you, please get in touch.

Contributor: Matt Battensby

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.