In a recent decision in the Court of Appeal, two local authorities (the Claimants) lost ‘test cases’ after attempting to recover business rates arising from empty properties. The impact the decision will have will mean that Local Authorities are set to potentially lose millions in business rates as landlords and businesses are able to employ schemes which benefit from empty rate discounts.
The Case: Rossendale Borough Council and Wigan Council v Hurstwood Properties Ltd and Property Alliance Group Ltd (2019) EWCA Civ 364
The case arose as a challenge to those schemes utilised by businesses to avoid the payment of National Non-Domestic Rates (NNDR) on typically unoccupied properties. The schemes generally involve granting a lease on a property to ‘Special Purpose Vehicle’s’ (SPV’s) which did not have assets or liabilities. The SPV would then be placed in voluntary liquidation or struck off of the register at Companies House [for failing to file accounts] as dormant companies, which were subsequently dissolved without business rates liability returning to the landlord/owner of the property.
The Claimants’ argued that SPV’s ‘can as a matter of law, be disregarded’ representing a sham. They sought declaratory relief to the effect that the schemes were ineffective and that the SPV’s should be disregarded as a nullity, sham or agent of the landlord. If successful in this argument, the Claimants’ argued that the schemes could then not succeed and the Defendant companies would be liable for paying NNDR on the properties and that these rates could then be recouped.
The Defendant’s argued that the SPV’s were not a sham, the transaction would have to say one thing and do another i.e. it would not give the legal rights and obligations it proclaimed to give. The Defendant’s argued that the granting of leases to the SPV’s in this capacity did not appear to create different legal obligations. HHJ Hodge QC sided with the Defendant’s and confirmed that ‘the fact that a transaction may be described as uncommercial or artificial does not render it a sham’.
During this court case it was questioned if it was arguable that the doctrine of ‘piercing the corporate veil’ (Prest v Petrodel Resources Ltd  UKSC 34) was applicable to the SPV’s and whether the leases fell to be disregarded by the application of the ‘Ramsay’ principle (WT Ramsay Ltd v Inland Revenue Commissioners  AC 300).
If the doctrine of ‘piercing the corporate veil’ was applied in this instance it would enable the Court to look at the SPV’s as a separate entity to the landlords or businesses who had deployed the scheme in order to determine if there was a dishonest use of the SPV. The Claimants’ argued here that the SPV’s were being used to conceal the true position and therefore the liability for payment of NNDR should revert back to the landlord/owner.
In Defence to the Claimant’s argument in favour of enforcing the doctrine of ‘piercing the corporate veil’ Counsel for the Defendant’s argued the veil should only be pierced to prevent the abuse of corporate legal personality and that the SPV’s in these instances were legal schemes with valid leases. HHJ Hodge Q.C (sitting in the High Court) clarified that the Supreme Court in Prest confirmed very limited and novel scenarios where one could look behind a corporate personality but the facts of this case did not justify the extension of this principle. Notably however, HHJ Hodge Q.C did comment that the doctrine of piercing the corporate veil is a developing piece of jurisprudence and the Claimant did have an arguable case on this point.
The ‘Ramsay’ principle would allow the Claimants’ to ignore the granting of the leases to the SPV’s and seek the recovery of the NNDR from the property owners. The Claimant’s argued that the SPV’s existed and were used as ‘an act of impropriety with a view to avoiding a potential or immediate legal obligation or liability; evading the law or frustrating the enforcement of the relevant legal obligation’. The Claimants’ did not view the SPV leases as valid and on that basis argued they should be disregarded.
Counsel for the Defendant’s argued that a genuine transaction was what it professed to be and HHJ Hodge Q.C confirmed in his judgment that granting the leases to the SPV’s was genuine ‘the Court could not go behind it to some supposed underlying substance’.
These were the two main points of consideration for HHJ Hodge Q.C alongside consideration of the leases as ‘sham transactions’ which is disappointing and undermines the efforts of Local Authorities to collect NNDR. The Court of Appeal unanimously rejected the Claimants’ arguments. HHJ Hodge Q.C in his Judgment confirmed that it could not be said that the SPV’s were used as ‘engines of fraud’ and that the SPV’s held valid leases meaning business were entitled to make use of the empty rates exemption granted to insolvent companies pursuant to the Non-Domestic Rating (Unoccupied Property (England) Regulations 2008. This approach meant that on the proper application of the ‘Ramsay’ principle, it could not apply as the transfer of ownership had taken legal effect. Further, the SPV’s could not be said to be nullities as they served a bona fide commercial purpose and were properly incorporated companies, they were not judged to be a sham.
Whilst each case has to be considered on its merits, Landlords will be pleased with the Court of Appeal decision that it is not fraudulent for companies to take advantage of the SPV’s, inevitably Local Authorities will be hit hard by the decision. It remains to be seen if the Claimants’ will seek permission to appeal to the Supreme Court in particular building on their argument to apply the doctrine of ‘piercing the corporate veil’. We would also hope that Parliamentary proposals for further anti-avoidance legislation will also likely be on forthcoming Government agendas to potentially change the regulations.