Business rates – whose place is it anyway?

Hurstwood Properties (A) Ltd v Rossendale BC 

[2021] UKSC 16

Business rates have been a bone of contention for a long time, which has led to property owners looking for schemes and loopholes to reduce their liability. The recent Supreme Court decision in Hurstwood Properties (A) Ltd v Rossendale BC closes one such loophole.

Research* published in July 2019 by the Local Government Association (LGA) in relation to the amount of business rates lost to avoidance schemes. The report estimated that 1% of the total business rates payable are lost to avoidance schemes; this equates to approximately £250 million per annum.

Background

Non-domestic rates are, essentially, payable by the party entitled to possession of relevant business premises. However, where that party is in liquidation, they become exempt from liability for business rates.

In this case, the property owners implemented a scheme whereby they granted leases of the relevant premises to special purpose vehicles (“SPVs”) in the form of companies without any assets or day to day business. Following the grant of the leases, the SPVs (which were then the “party entitled to possession” of the premises on the face of it) were immediately put in to liquidation, or dissolved. The liquidation or dissolution would then be allowed to “drift” for as long as possible, before liquidators or the Crown (in the case of dissolution) disclaimed the relevant lease. In fact, the SPVs in liquidation are often left without so much as a liquidator being appointed for as long as possible. The property owners / landlords, not being the “party entitled to possession” for as long as the leases remained in place, therefore avoided liability for business rates until the leases were disclaimed.

The relevant local authorities challenged the property owners’ scheme on the following grounds:

• the leases to the SPVs were, if not a sham, ineffective to make the SPV the “owner” of the unoccupied property within the meaning of the applicable [rates] legislation; or
• that the separate legal personalities of the SPVs ought to be disregarded in this instance.

Court of Appeal 

In the Court of Appeal, the local authorities’ claims against the property owner landlords for the unpaid rates were struck out on the basis of the existence of the leases to the SPVs, meaning the SPVs were the “owners” and liable parties for the purpose of the relevant rates legislation and that there were no grounds to justify setting aside the separate legal personalities of the SPVs. The local authorities appealed.

The Appeal 

The first ground raised by the local authorities is essentially a statutory interpretation argument; the local authorities contended that the nature of the lease was such that in reality, the property owner landlords remained the party entitled to possession of the relevant premises throughout the existence of the leases to the SPVs. The second ground is an attempt by the local authorities to “pierce the corporate veil” – i.e. to ignore the fact the SPVs amounted to separate legal entities, and instead look at the people/parties in control of the SPVs. 

“Piercing the corporate veil” is rarely permitted, though previous court decisions indicate that there are certain circumstances in which the separate legal personality of a company can be ignored or set aside, including where corporate entities are created or used to frustrate the law or evade liability.

Supreme Court Decision

The Supreme Court agreed with the Court of Appeal that there was no principle in this case which would apply to justify “piercing the corporate veil” of the SPVs. 

However, the Supreme Court allowed the local authorities’ appeal on the basis of their first ground of appeal – i.e. that the leases to the SPV did not make the SPV the owner of the relevant premises for the purposes of section 65(1) of the Local Government Finance Act 1988. Instead, the “person entitled to possession” of the relevant premises remained at all material times the property owner landlords.

Comment

This decision will be a blow for landlords exploring ways to minimise rates liability on empty premises, especially in current times where so many retailers and other occupiers are failing and so premises are empty and there is limited demand for them.

Other “avoidance schemes” include letting empty premises to charities,  granting short term tenancies (of 6 weeks or more) in order to trigger a new “rate free period” when the premises become vacant again, and the use of rates mitigation companies remain common.

There is no doubt local authorities will continue to try and close as many loopholes as possible, given the estimated “loss” of business rate income estimated at £250 million per annum. Property owners / landlords will therefore be keen to ensure that any schemes they use are as resilient to challenge as possible.

* Business Rates Avoidance Survey Report 2019: https://www.local.gov.uk/sites/default/files/documents/Business%20Rates%20Avoidance%20Survey%20Report%202019.pdf

This decision will be a blow for landlords exploring ways to minimise rates liability on empty premises, especially in current times where so many retailers and other occupiers are failing and so premises are empty and there is limited demand for them.”