In the recent decision of Isle Investments Ltd v Leeds City Council  EWHC Admin 345 the High Court has upheld a Magistrates’ Court decision that a business rates avoidance scheme was a sham and as such the business rates were payable by the landlord, Isle Investments Limited (“Isle”).
The decision is an important development in an area that has seen a flurry of cases in recent years, many of which have been decided against the local authority by upholding the validity of various rates avoidance schemes. This judgment though should encourage those implementing rates avoidance schemes to proceed with caution and carefully consider the details of the particular scheme they seek to implement.
What was the appeal about?
In 2018 Isle acquired three units in an office complex and entered into an arrangement with a company called Crusader whereby Isle agreed to pay Crusader 20% of the business rates payable in respect of the units in exchange for Crusader implementing a rates avoidance scheme.
The rates avoidance scheme in this instance involved Isle granting a number of short-term (21 week) leases to a number of newly created shelf-companies as the tenants. The terms of the various leases provided for the tenants to pay all business rates liability in respect of the units. Additionally some of the leases contained an unusual restriction on the permitted use of the premises, restricting the use to “the purpose of heliciculture by the tenant or persons authorised by the Tenant.” Heliciculture is otherwise known as snail farming, an unusual provision in a lease of premises ordinarily used as offices.
If the leases were genuine, then liability for business rates would sit with the tenant, albeit the judgment inferred it was unlikely such rates would have been paid. Alternatively, if the leases were considered to be shams, Isle would be liable for the business rates as the owner of the premises.
The Magistrates’ Court originally found the leases were sham arrangements, with the District Judge clearly concluding, following a review of the evidence, that a dishonest approach had been formulated to avoid Isle’s liability for business rates.
What did the High Court decide?
After reviewing previous authorities relating to sham agreements, particularly in a ratings context, the High Court saw no reason to disturb the finding of the Magistrates’ Court. It held that the District Judge’s decision in the Magistrates’ Court was one which was open to her on the evidence. It therefore refused the appeal and consequently Isle was liable for business rates of around £105,000 for the period between May 2018 to March 2020.
In reaching this decision, the Court did not fully grapple with the distinction between the rates avoidance measures in this case and similar schemes, such as in Secretary of State of Business Innovation and Skills v PAG Management Services Ltd  EWHC 2404 (Ch) and Rossendale Borough Council v Hurstwood Properties (A) Ltd  EWHC 3461 (Ch) which the Courts have declined to classify as shams. In Rossendale the High Court considered that parties were entitled to arrange their affairs to their best advantage within the law, and a transaction could not be challenged merely because it was entered into for the sole purpose of obtaining an advantage as a result of a statutory provision, such as to avoid business rates. Instead the Judge in Isle Investments rationalised his refusal to interfere with the Magistrates’ Court decision by affirming that he was satisfied that the District Judge in the Court below had reached a conclusion that was reasonably and logically open to her on the evidence.
What are the effects of the judgment?
The key message from this judgment is that the viability of rates avoidance schemes remains uncertain. There may be fine line between arrangements which fall on the right side of the line (i.e. arranging affairs so as to minimise tax) and those which fall on the wrong side (i.e. shams).
The Supreme Court’s judgment in Rossendale is currently awaited and it is hoped that decision will provide some certainty as to the viability of the rates avoidance schemes under scrutiny. However, that judgment is not expected to address when a scheme may or may not amount to a sham arrangement given that issue was not argued in the Supreme Court (having been decided at an earlier stage and permission to appeal refused).
The outcome of this case could well increase the appetite of local authorities to challenge other schemes on a similar basis unless the legal position is clarified. In the meantime, parties implementing rates avoidance schemes would be well-advised to very carefully consider the arrangements they are putting in place and whether they will stand up to the “sham test” particularly when a thorough review of the evidence by the lower Courts will not be easily disturbed upon appeal.