In a decision to be welcomed by ratepayers, the Court of Appeal in Rossendale Borough Council and others v. Hurstwood Properties (A) Limited and others [2019] EWCA Civ 364 has confirmed that certain types of mitigation schemes are not sufficient to pierce the corporate veil and transfer liability for business rates to the beneficiaries of those schemes.

Liability for business rates

National non-domestic rates, commonly known as business rates, are normally charged to the person entitled to legal possession of commercial premises, whether or not that person is in actual occupation. However, if a landlord is neither in occupation nor entitled to possession (i.e. because they have let the premises to a tenant) the liability to pay business rates falls on the occupying tenant.

In those circumstances, the occupying tenant will need to have the benefit of the relevant statutory exemptions if it wishes to mitigate its liability for business rates.

Piercing the corporate veil and the Ramsay principle

The key legal concepts considered in this case are:

  1. the doctrine of "piercing the corporate veil"; and
  2. the court's ability to disregard artificially created losses for the purpose of tax avoidance (the principle in Ramsay).

Piercing the veil

Although a topic currently disputed by senior members of the judiciary, it is widely accepted that, in very limited circumstances, a court can "pierce the corporate veil", and hold a third party liable where liability would normally fall on the "pierced" company. Those circumstances are:

  1. where the court determines the company is in effect an agent of the third party or a means of deception to disguise the true involvement of the third party as an owner of assets (as per the Supreme Court in Prest v. Petrodel Resources Ltd [2013] UKSC 34); and
  2. the "evasion principle" demonstrated in Jones v. Lipman [1962] 1 WLR 832, where a legal right against the person in control of the company exists, independent of that company's involvement, and the company is imposed in the circumstances for the purpose of frustrating enforcement of that legal right.

The Supreme Court in Prest was clear that, while the test may apply in other circumstances, this will be extremely rare.

The principle in Ramsay

In the case of WT Ramsay Ltd and others v. Inland Revenue Commissioners and others[1982] A.C. 300, the House of Lords (as it then was) held that, where a transaction:

  1. could be interpreted under the relevant legislation (i.e. giving rise to payment of a tax) to be an artificial tax avoidance scheme with no commercial reality; and
  2. disclosed no actual loss to the party proposing to benefit from the tax avoidance scheme, the court could disregard the transaction for the purposes of determining liability for the tax/rate owed under the legislation. In Ramsay, the taxpayers had orchestrated artificial transactions that suggested a loss had been incurred by each taxpayer, which in reality did not exist but had they existed would have resulted in favourable tax treatment. As a result, the court disregarded the losses claimed by the taxpayers.

Background

This case involves two business rates mitigation schemes employed by ratepayers which were argued to be unlawful by Rossendale Borough Council (RBC) and Wigan Council (WC) respectively.

In RBC's case, the ratepayer (Hurstwood) had granted leases to special purpose vehicle companies (SPVs) with no assets or liabilities, which were allowed to be struck off the register of companies (under section 1000 of the Companies Act 2006) or were voluntarily struck off (under section 1003 of the Companies Act 2006) on the grounds that no business had been carried on by the SPVs for three months and they were dormant. The purpose of this strategy was to allow the lease to transfer to the Crown bona vacantia on dissolution of the SPVs. This would result in the Crown becoming liable for business rates until it elected to disclaim the lease.

In WC's case, the ratepayer (Property Alliance Group) had granted leases to SPVs without any assets or liabilities, which were placed into voluntary liquidation within days of the lease being granted. It was accepted by both sides that the sole purpose of this strategy was to allow the SPVs, which became liable for business rates as the occupying tenant, to benefit from the exemption under regulation 4(k) of the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, which applies to property owners that are companies being wound up voluntarily under the Insolvency Act 1986.

Legal arguments

In short, both RBC and WC argued that:

  1. the corporate veil of the SPVs should be pierced as the SPVs had only been created and imposed as tenants under the leases for the sole purpose of avoiding liability for business rates; and/or
  2. the principle in Ramsay should apply and the leases granted to the SPVs should be disregarded for the purpose of determining liability for business rates.

If either RBC's or WC's arguments succeeded, the effect would be that the SPV's landlord would be liable for business rates as the SPV's legal right to possession would be usurped by the (presumably unlawful) conduct of the landlord. It was common ground between the parties that, unless the leases could be disregarded as a result of the arguments above, the leases were valid and the SPVs would remain the party liable to pay business rates.

The ratepayers applied for RBC's and WC's claims to be struck out. At first instance, the judge struck out the claims under the Ramsay principle but refused to strike out the claims in respect of piercing the corporate veil on the grounds it was an arguable case. Both parties appealed the aspects of the strike-out application in which they were unsuccessful.

Decision

The Court of Appeal allowed the ratepayers' appeals and dismissed RBC's and WC's appeals, with the effect the claims were struck out in their entirety.

Piercing the corporate veil

The court confirmed the principle in Prest that any extension to the circumstances in which the corporate veil could be pierced would have to involve facts which were rare or novel. The court noted that the use of companies to avoid liability for tax or business rates was neither rare nor novel. Indeed, the court went as far as to highlight that ratepayers can (and evidently do) organise their affairs to avoid liability to pay rates.

Turning to the "evasion principle", the court confirmed the judge at first instance had incorrectly stated how liability for business rates is accrued under the relevant legislation. As liability for business rates is accrued daily, a ratepayer is only liable to the extent the ratepayer remains entitled to possession of the property. Once the ratepayer grants another party a right to possession (in this case the SPV), the liability passes to the other party. On this basis, it was incorrect as a matter of law to hold that the landlords were deliberately evading an existing liability to pay business rates.

Ramsay principle

The court also rejected the assertion that Ramsay applied on the facts. The court rightly confirmed that, under the relevant legislation, liability for business rates may only be imposed on the owner of the relevant hereditament. Under the relevant legislation, "owner" means the person with the immediate legal right to physical possession. On the facts, the owners were the SPVs. The court confirmed the legislation did not allow for a purposive (or moral) interpretation of why the SPVs were granted leases, with the result that the leases could not be disregarded when considering liability for business rates.

Conclusion

This is a huge result for ratepayers, in particular the substantial number of ratepayers currently subject to similar proceedings across England and Wales. The court acknowledged that 53 other cases were being contested in the same region alone, and the test cases raised by RBC and WC concerned business rates worth £10 million alone.

Notwithstanding the high level of avoidance these schemes are facilitating, the legal position is clear: the court will not shoehorn a moral judgement of a ratepayer's actions into legislation which does not envisage such a judgement. As the legislation for business rates focuses almost exclusively on ownership and possession, ratepayers are entitled to mitigate their exposure to rates by granting possession to a third party. The fact that a grant is made solely to avoid liability for business rates remains irrelevant.

It is possible that this decision, as well as other recent decisions decided in favour of ratepayers (such as the decision on POLL schemes discussed here), may result in further anti-avoidance legislation being passed. However, until this occurs, ratepayers can continue to benefit from a number of decisions permitting mitigation schemes to avoid liability for business rates