Supreme Court brands rates avoidance schemes an 'abuse of legal process'

Schemes put in place with the intention of avoiding non-domestic rates liabilities on empty properties are liable to challenge, says the Supreme Court in an important test case (Hurstwood Properties (A) Ltd v Rossendale Borough Council and another).

In a reversal of the Court of Appeal’s 2019 decision, the Supreme Court refused to strike out the ratings authorities’ claims for unpaid rates and held that the issue should proceed to a full hearing.

The avoidance schemes

Our previous update on the Court of Appeal’s decision explains how the schemes operated and the background to the case. In brief, empty properties were leased to special purpose vehicle companies (SPVs), which were then either wound up voluntarily or allowed to be struck off the register of companies and dissolved.

The ultimate owners successfully argued before the Court of Appeal that liability fell on each SPV as the ‘owner’ (defined in legislation to mean the entity ‘entitled to possession’ of the relevant property) under the leases. As companies subject to winding up or dissolution, the SPVs benefitted from exemptions from business rates.

It was common ground that the schemes had no business or other ‘real world’ purpose and that their sole purpose was to avoid liability to pay business rates.

The issues for the Supreme Court

The Supreme Court had to decide whether the ultimate owners should still be liable to pay non-domestic rates for periods the leases to the SPVs were in effect, on the basis either that:

• the leases were prearranged tax avoidance schemes and the relevant statute should be interpreted accordingly, in line with what is known as the ‘Ramsay principle’; or
• the SPVs can be disregarded by a ‘piercing of the corporate veil’ meaning that the Court should look beyond the separate legal personality of the SPVs and attribute liability to their shareholders (the ultimate registered owners of the properties who had set up the schemes).

The Ramsay principle

The principle is based on a purposive approach to interpretation of legislation, and that is the approach the Court took in this case. The Court held that its task, within the permissible bounds of interpretation, is to give effect to Parliament’s purpose in enacting the relevant legislation. This required an examination of the context of the legislation as a whole and its historical context, rather than simply giving the words of a provision their natural and literal meaning.

Taking this purposive approach to an examination of the ratings legislation, the Court noted that the purpose of charging rates on empty properties was to discourage owners from leaving their properties unoccupied to suit their own convenience or financial advantage. The legislation was there to encourage owners to bring properties back into occupation and use for the benefit of the community.

The rates liability was intended to be focussed on the person with the ability to bring the property back into use, which in this case was the ultimate owner of each property and not the SPV.

As a matter of real property law, by virtue of the leases, the SPVs were clearly entitled to the possession of the property. But, the Court held, adopting this narrow interpretation would defeat the purpose of the rates legislation to encourage empty properties back into use. In the Court’s view the entity entitled to possession for the purpose of the rates legislation must therefore be the one who has the power to bring the property back into use, in this case the ultimate owners. 

As a result, the leases were not effective in transferring entitlement to possession to the SPVs and the rates liability remained with the ultimate owners.

Piercing the corporate veil

Having found in favour of the ratings authorities on an interpretation of the legislation, it was not strictly necessary for the Court to consider this second argument of piercing the corporate veil.

Nevertheless, the Court rejected it on similar grounds to those adopted in the Court of Appeal’s judgment: as liability for business rates accrued day by day, there was no existing liability which the property owners were evading by granting the leases.

Implications

This was a test case. There are dozens of other claims where similar schemes have been used, the outcome of which will likely depend on the outcome of this case. The values of the claims for unpaid rates made in these cases vary from a few thousand pounds to millions of pounds. As such, the implications will be far reaching for property owners and ratings authorities alike.

Some will welcome the purposive approach to interpretation taken by the Supreme Court. Others will point to a lack of legal certainty created by this decision: it is now much more difficult to identify with certainty the owner of a property for the purposes of rates liability.

The Supreme Court acknowledged such concerns, but found that the “value of legal certainty does not extend to construing legislation in a way which will guarantee the effectiveness of transactions undertaken solely to avoid the liability which the legislation seeks to impose”.

More widely, this decision firmly establishes purposive interpretation as a favoured method in the courts. This is likely to embolden lower courts to stray from narrower interpretations of legislation, and to render tax avoidance schemes even more open to challenge in all contexts, not just business rates.

The observation by the Supreme Court that the schemes in this case may have involved the commission of a criminal offence will do nothing to enhance their popularity.

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 May 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.