Jonathon Crook of Shoosmiths discusses the recent decision of the Court of Appeal in Secretary of State for Business Enterprise and Industrial Strategy v PAG Asset Preservation Limited in which the Court of Appeal dismissed a public interest challenge to a scheme for the mitigation of business rates on empty property and where he acted for the successful companies.
The decision is significant for landlords seeking to reduce their liability on such property and also for insolvency practitioners. The case considers the extent to which a scheme which utilises the exemption from rates for a company in voluntary liquidation can be said to be an abuse of the insolvency process and whether the motive for a liquidation is relevant and in doing so rejected the attempt by the Secretary of Sate to wind up the operators of the scheme in the public interest.
The fact that landlords are liable to pay national non-domestic rates (NNDR) on their vacant property has been a source of frustration for over 10 years. NNDR on empty property is a tax on a non-incoming producing asset or, as it has been termed, a “tax on failure”. When landlords through no fault of their own are victims of an economic downturn (COVID-19 being a dramatic instance of that) to have to carry the cost of NNDR on empty property is regressive and often counter-productive. It can deprive landlords of the capital needed to re-develop or re-purpose properties (the process of which creates jobs and promotes economic development) and can affect their commercial viability altogether. There are very few landlords who are content to leave their properties vacant.
And it was not always this way. Until 2007, landlords enjoyed full exemptions on unoccupied industrial property and a 50% relief on offices and other commercial hereditaments. The exemptions were withdrawn in 2007 as part of a policy (driven by the Barker Review and the Lyons Report) aimed at increasing the supply of property and driving competitiveness by forcing landlords to put their properties to commercial and rateable use or be taxed if they did not. However, the aim was not expressly to raise tax revenue. In what was at the time a buoyant property market that macro-economic thinking can be understood. But a well-intentioned policy does not always survive subsequent events.
Following the financial crash in 2008, the impact of the changes was significant, with landlords now required to pay NNDR on properties from which they often could no longer derive revenue. Some responses were dramatic, with viable properties being demolished to take them out of the rating list. In addition, a range of NNDR avoidance schemes were developed which from the perspective of local authorities remain an abuse and deprive them of much needed funds.
So it is not surprising that rates mitigation has been a fertile area for disputes between authorities and landlords, with the courts being asked to adjudicate on the lawfulness of various schemes. They have done so but have avoided being drawn into what can be viewed as issues of morality which, in the tax field, is a risky endeavour. Tax avoided can be a loss to the Exchequer but can also equate to capital re-invested. Taxes are imposed by legislation. Taxpayers can (and do) arrange their affairs to minimise their tax liability. Either the relevant taxing legislation applies, or it does not. While the courts have developed principles to be applied in cases of tax avoidance, those are principles of statutory construction, not ethics.
That judicial trend has continued with the recent decision of the Court of Appeal in Secretary of State for Business Enterprise and Industrial Strategy v PAG Asset Preservation Limited and Anor which upheld a decision that an NNDR mitigation scheme which utilised the exemption from NNDR available to companies in voluntary liquidation was not an abuse of the insolvency regime. The result was that the companies operating the scheme were acting lawfully and so were not liable to be wound up in the public interest.
The scheme in question involved the granting by participant landlords of leases to an SPV which then entered a members’ voluntary liquidation (MVL). The leases were entirely transparent as to their purpose (avoidance of the landlords’ NNDR liability) and in each case contained provisions for the payment by the landlord of a determination premium to the liquidator on the determination of the lease, with the landlord having the right to determine the lease at any time. The evidence was that leases were surrendered during their term (because, for example, properties had been re-let). As a result, determination premiums were incurred and paid to the liquidator and these formed assets for the purposes of the liquidation. The validity of the scheme was upheld at trial and the Secretary of State appealed against the finding that the scheme was not an abuse of the insolvency regime. The Court of Appeal unanimously decided that even though the assets (the contingent determination premiums) were admittedly created solely for the purposes of the liquidation and were to that extent artificial, they were realised and so were genuine assets representing real money. As a result, the liquidation was a genuine process. The accepted motive for the liquidation (tax mitigation) was irrelevant and the liquidators acted properly and thus the scheme achieved its purpose and was lawful.
It might be thought that in focusing on insolvency law, the case missed the real point that the scheme was about NNDR avoidance. However, in previous proceedings in 2015 involving a similar MVL scheme, the Secretary of State had failed to persuade the court that the scheme was contrary to public interest because its objective was the avoidance of NNDR. The court accepted what it described as “impressive” evidence which addressed from the landlord’s perspective the commercial reasons for mitigating liability on empty property. The court understandably took the view that the issue of rates mitigation was essentially a matter of tax policy for Parliament, not an issue for the courts. (That scheme nonetheless failed as the court found there were no assets actually created for the purposes of the MVL. The new scheme was devised, quite openly, to address that deficiency and succeeded).
In seeking to appeal, the Secretary of State did not challenge the evidence from landlords and conceded that the scheme in question could not be challenged on public interest grounds because it achieved the non-payment of NNDR (and the Court of Appeal gave short shrift to attempts to water down the effect of that concession). The issue was therefore a simple one: did the scheme misuse or abuse the insolvency process and the Court of Appeal was unanimous that it did not.
The entire issue of business rates is now (again) the subject of a government review. As matters stand, however, there are viable options for landlords who are confronted with liability of NNDR on their vacant property and which might, in the current climate, provide at least some much-needed breathing space.