In Rossendale Borough Council v Hurstwood Properties, the Council challenged schemes whereby property owners granted leases of empty properties to special purpose vehicles (SPVs) on uncommercial terms for the purpose of avoiding business rates liability.
The Court of Appeal considered the application of the ‘Ramsay’ principle and the doctrine of ‘piercing the corporate veil’ but decided to up-hold the schemes. As this was a “test” case for 55 similar claims in the High Court, the Council is left unable to recover approximately £10 million in rates.
How did the schemes work?
Liability for business rates falls on the entity “entitled to possession” of the property. However under the Local Government Finance Act of 1998 (the Act) companies subject to dissolution or winding up are exempt. In this case, the property owners set up a scheme which involved the letting of vacant premises to Special Purpose Vehicles without assets or liabilities. They argued that these SPVs, as tenants, were the “owners” of the properties for the purposes of liability to pay rates. Once the leases were completed, the SPVs were then placed into voluntary liquidation or allowed to be struck off the register of companies and dissolved, making them exempt from paying business rates.
How did the Council challenge the schemes?
The Council put forward two arguments challenging the schemes, claiming that the rates were due because:
- The “corporate veil” of the SPVs should be “pierced”; meaning that the Court should look beyond the separate legal personality of the SPVs and attribute the rates liability to the property owners as the ultimate shareholders.
- Where there is a pre-ordained series of transactions designed to avoid liability, the so-called ‘Ramsay Principle’ applies, with the result that these steps can be disregarded, in this case would leave the liability for rates with the property owners.
What did the Court of Appeal decide?
The Court of Appeal rejected both arguments put forward by the Council for following reasons:
Business rates are not an ongoing or rolled-over liability
The Court emphasised that the doctrine of piercing the corporate veil is a narrow one. It may be applied where a company is interposed for the sole purpose of avoiding an existing liability, but this was not the case here.
This was because rates liability accrues day-by-day, ending on the date that the ownership changes. Before the grant of the leases, the property owners were liable for and had paid the rates. Following the grant of the leases, each daily liability accrued to the SPVs which were exempt. Therefore the purpose of the SPV schemes could not be said to be solely for the avoidance of existing tax liabilities on the part of their shareholders, as there was no rolled-over, ongoing or pre-existing tax liability that the scheme sought to avoid.
The motives behind the legal structure (in this case the landlord and tenant relationship) are irrelevant if these legal roles are genuine. Structuring property with the deliberate intention of reducing rates liability is valid providing that genuine legal roles are created. In particular the judgment noted it was not open to the Court of Appeal to treat SPVs as nullities or “ineffective”. The High Court had already ruled that they were not “shams” (which would have required some element of dishonest intention or an “appearance” of legal rights that did not actually exist), and permission had not been given to appeal this finding.
The Ramsay principle is not a blanket ban on tax avoidance schemes
The essence of the Ramsay principle is that all relevant legislation must be interpreted in the context of the transaction. The principle requires a statutory provision to be given a purposive construction, and then the transaction in question to be analysed to determine whether it fits that statutory purpose.
In this case, though, the statutory requirement for entitlement to possession of the property could be answered unambiguously (in that the SPVs were clearly entitled to possession). There was therefore no room for the provision to be given a wider interpretation that could have led to a different result. The motive behind the lettings was irrelevant.
What will be the impact of the decision?
Local authorities are predictably disappointed by the outcome, as hopes of recovering millions of pounds in unpaid business rates from vacant units have been dashed.
For retailers, who have long cited high business rates as one of the biggest challenges to British high streets, the ruling may well feel like a breath of fresh air. As the number of empty units rise, and the time taken to re-let units lengthens, the Court of Appeal confirming the legality of structures to minimise or mitigate rates during these periods should offer some comfort.
The Court emphasised that a transactional structure might be immoral but that does not make it illegal. However with the likely inevitability of a rise in similar schemes designed to take advantage of this precedent, the government may consider closing this “loophole” in the ratings legislation.