11 March 2019

Business rates savings schemes are proper and lawful

In a Judgment dated 7 March 2019, the Court of Appeal has held that 2 similar schemes designed specifically to avoid the owners of unoccupied properties being liable for business rates are perfectly valid and lawful. Such schemes do not stand to be treated any differently from tax avoidance schemes commonly used to avoid or mitigate any other form of taxation, such as income or corporate or inheritance tax.

The 2 schemes were challenged by Rossendale Borough Council and Wigan Council but the cases are essentially a test case for these authorities as these are just 2 out of 55 similar proceedings where a total sum of about £10million is at stake.

The schemes involve the owner of an empty property granting a lease of it at a nominal rent to a Company that is a Special Purpose Vehicle i.e. has no assets or history. This Company never does anything but take the lease. It then either goes into voluntary liquidation or is dissolved as a dormant company. As it is only the party entitled to possession of the property that is liable for business rates, and it is the tenant who is then that party, the schemes transfer all future liability to the tenants even though they have no means to meet such liabilities.

The Local Authorities claimed that the schemes were shams but it was held at first instance that this was not the case and this was not pursued on Appeal. The issues on Appeal were as to i) whether the SPV Companies are just a front for the owners and their corporate veils should be pierced so the owners were liable and/or ii) whether the leases fell to be disregarded under the Ramsay Principle whereby statutory provisions are to be construed purposively to determine the nature of the transaction to which they are intended to apply?

The Court of Appeal was forthright and unanimous in finding in favour of the schemes. It is truly exceptional for the Court to pierce the corporate veil and it is not an abuse of the separate legal personality of the company for it to incur a liability it cannot meet. And the purpose of the statute is to hold liable only the party entitled to possession of the property and the tenant is that party even if such right is illusory or artificial.

The Court made clear that the use of companies to avoid tax is commonplace in all sorts of different tax avoidance schemes and that it has been recognised for a considerable time that owners of properties can organise their affairs so as to avoid liability for rates. It is neither fraudulent nor unconscionable for parties to use companies in this way and to take advantage of the fact they have a quite separate legal personality.

It is, therefore, a matter for Parliament, not the Courts, if this practice is to become unlawful. In the interim, and assuming no successful Appeal to The Supreme Court, the practice and industry will no doubt continue to grow.

Jonathan is a partner in our Property Litigation team.

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