A recent judgment from the Supreme Court has found potential for local authorities to challenge property arrangements which are structured for the purpose of avoiding liability for business rates.
In the case of Hurstwood Properties Ltd & Others v Rossendale Borough Council and Another,  UKSC 16, two local authorities sought to establish that companies, who were tenants of the councils, were liable to pay business rates, despite schemes put in place to avoid this. The companies had established a number of special purpose vehicle companies, to which they then granted short-term leases of unoccupied properties, so that the SPVs became liable for business rates as the owner of the properties. The SPVs were then dissolved, so that the councils could not recover payment of business rates.
The local authorities argued that the proper interpretation of sections 45 and 65 of the Local Government Finance Act 1988 meant that the leases were ineffective to make the SPVs the owner of the properties, and therefore the original companies remained liable for business rates. Section 65(1) of the Local Government Finance Act defines the owner of a hereditament or land as the person entitled to possession of it. In this case, the respondent companies had set up schemes which were designed to ensure that the SPVs had no real control over whether the properties were occupied or not. The local authorities argued that Parliament could not sensibly have intended the legislation to provide for the person entitled to possession to include a company which had no real or practical ability to exercise its right to possession.
The local authorities argued that the Ramsay principle, established by the case of WT Ramsay Ltd v Inland Revenue Commissioners  1 All ER 865, should be applied. That principle requires that statutes should be interpreted with reference to the fact that there is a tax avoidance scheme in place. The local authorities suggested that, applying the Ramsay principle, the leases could be disregarded.
The local authorities also suggested that the separate legal personality of the SPVs should be ignored. They argued that the original companies had set up SPVs and had them wound up solely to avoid liability for business rates. They said that this was an abuse of the separate legal personalities of the SPVs which justified the court in piercing the corporate veil to deprive the original companies of the advantage that they would otherwise gain from the separate legal personality of the SPVs.
Last year the Court of Appeal struck out the local authorities’ claims but this was overturned in May 2021 by the Supreme Court, which found that there was a triable issue as to whether the respondent companies remained liable for business rates throughout the duration of the leases. The Supreme Court did however reject the local authorities’ request that it “pierce the corporate veil.”
This case follows on from the case of Isle Investments Ltd v Leeds City Council earlier this year, in which the high court upheld a finding from the Magistrates Court that short-term leases which a company had granted to newly created companies were sham arrangements, which had been entered into for the purpose of avoiding liability for business rates. Since the court found that the leases were not valid, the landlord company was liable for the payment of business rates.
These cases indicate that the attitude of the courts towards business rates avoidance schemes may be shifting and becoming more helpful to local authorities, with judges showing themselves willing to question whether leases which result in a party avoiding liability for business rates are genuine leases. This could provide local authorities with significant opportunities to secure income from properties going back a number of years.
We now need to await the decision of the Administrative Court when the case returns to it, in order to know the position that will be taken on this issue. Nevertheless, the finding of the Supreme Court has raised the prospect that local authorities could be in a position to challenge the validity of business rates avoidance schemes.
Advice to Councils
Local authorities will no doubt follow the progress of the Hurstwood case with interest to see how far the courts take this approach. In the meantime, local authorities should consider whether their current arrangements are maximising the potential to secure income from business rates. Actions they could take include:
- Deterring such arrangements by publicising the risk of them being challenged.
- Reviewing their lists of persons liable for business rates and exploring whether any details would merit further investigation to identify any sham arrangements.
- Reviewing their processes for obtaining details of liability for business rates and considering whether these are robust enough to enable them to identify sham arrangements for the purpose of avoiding business rates.
- Identifying whether there is any potential for them to apply to court to challenge arrangements which have enabled owners of properties to avoid liability for business rates.
For further information, please contact:
Paul Hilsdon, Partner: Telephone: 01332 378351 E-mail: firstname.lastname@example.org or Mark Hacking, Partner: Telephone: 0115 983 3732 E-mail: email@example.com
RELATED: CENTRAL, DEVOLVED & LOCAL GOVERNMENT