Court of Appeal decisions in Rossendale BC v Hurstwood Properties (A) Ltd (2019) and Wigan Council v Property Alliance Group Ltd (2019) upheld rating schemes put in place by owners of empty properties with the aim of avoiding paying business rates on those properties.
The schemes involved the owners granting leases of empty properties to separate special purpose vehicle companies (SPVs) with no assets or liabilities which had been set up by the owners. The SPVs were then either voluntarily wound up or allowed to be struck off the register of companies and dissolved.
As liability for business rates falls on the entity "entitled to possession" of the property, the obligation to pay business rates passed to the SPVs as tenants under the leases. However, as companies subject to winding up or dissolution are not liable for business rates under an exemption in insolvency legislation, the SPVs benefited from this exemption.
The owners also refused to pay business rates on the basis they were no longer entitled to possession of the properties following the grant of the leases.
As a result, neither party paid any business rates claimed by the rating authorities.
What did the rating authorities argue?
The rating authorities sought to recover the rates because either:
- The Ramsay principle should be applied, meaning that the court should look at the overall legal nature of the transaction and disregard individual steps that had no impact on the outcome. The authorities argued that the SPVs entering into insolvency arrangements should be disregarded and the liability to pay business rates should be restored to the property owners; or
- The "corporate veil" of the SPVs should be "pierced", meaning that the separate corporate existence of the SPVs should be disregarded on the basis that the property owners deliberately evaded their pre-existing liability to pay business rates by interposing the separate companies.
What was decided?
The Court of Appeal permitted the schemes and rejected both arguments of the ratings authorities:
- The Ramsay principle did NOT apply. It was not to be used as a way to block schemes designed purely to avoid tax, rather under these cases it was a question of entitlement to possession i.e. the property owners divested themselves of the immediate legal entitlement to possession by granting the leases to the SPVs. The fact that subsequent steps were taken which had the effect of entering the SPVs into insolvency arrangements was not material. The motive for the grant of the leases was not relevant.
- The corporate veil was NOT pierced. Consequently, the owners were liable for the rates until the grant of the leases, after which each daily liability accrued to the SPVs, which were exempt from payment.
Take away points
The decision will be welcomed by owners of empty properties who may seek to minimise their liabilities to pay business rates by taking advantage of rates mitigation schemes.
This was a test case and there are more cases to be heard by the courts involving other mitigation schemes, including schemes permitting intermittent occupation of properties for not less than 6 weeks after which a fresh claim for empty property rates relief can be maintained.
The Treasury is launching an inquiry into business rates which could lead to the government considering passing anti-avoidance laws to clamp down on these arrangements.
It will be interesting to see whether the present cases are appealed, especially given the rating authorities are claiming millions of pounds of unpaid rates as a result of such schemes.