A recent Court of Appeal decision may significantly limit retailers’ liabilities in respect of unoccupied property. The landmark decision effectively validates a scheme used to avoid Non-Domestic Business Rates (“NDR”) where properties are unoccupied. The case, Rossendale Borough Council v Hurstwood Properties (A) Ltd and others, acted as a test case in relation to two of over 50 similar cases. The NDR claimed by the local authority in this case was at least £10 million, so this case could have notable financial consequences for retailers and local authorities alike.
What was the scheme?
The scheme involved corporate owners of largely unoccupied properties (the “First Company”) granting leases to special purpose vehicle companies (“SPVs”), set up by the First Company, with the SPVs having no assets or liabilities. The relevant SPV therefore became the tenant of the property and liable to pay NDR.
However, the SPV could then be either voluntarily wound up, or allowed to be struck off the register and dissolved, and no longer liable to pay NDR under the relevant regulations. Under the regulations, the liability to pay NDR rates is not transferred to the First Company, meaning that NDR goes unpaid.
What was the Council’s argument?
The local authority argued that:
- the corporate veil should be pierced, to allow the Council to recoup the unpaid NDR from the SPV’s shareholders (i.e., the First Company); and
- the Ramsey principle should be applied (which sets out that in certain circumstances, steps undertaken to avoid tax could be disregarded, and therefore liability transferred).
What did the Court find?
The Court rejected both of the Council’s arguments.
The Court considered that the corporate veil could not be pierced. The veil can be ‘pierced’ in some circumstances, including where a person interposes a company in their control in a deliberate effort to frustrate or evade the enforcement of an existing legal obligation or liability. However, the Court found that, as liability for rates accrued on a daily basis, the First Company had no existing liability to evade when it initially granted the lease to the SPV. From the date of the grant of the lease, liability accrued each day, but to the SPV, which was exempt. Prior to the date of the lease being granted, the First Company had paid any rates due, and therefore had no liability itself.
The Ramsay principle was interpreted by the Court to not be a blanket ban on schemes which include steps which are purely designed for tax avoidance. Instead, the Court considered that the relevant regulations should be applied to the circumstance in question, and held that the motivation behind the scheme was not relevant.
What should retailers do?
Retailers who currently hold unoccupied property and are paying NDR should take note. This decision could mean that retailers may be able to avoid liability for NDR on unoccupied property, although any decision to do so should be balanced with the risk of adverse publicity – whilst currently lawful, the scheme may not align with a retailer’s brand and values.
However, close monitoring of this area will be required. Now that local authorities are aware of this apparent ‘loophole’, the government might consider changing the regulations such that the scheme is no longer lawful.
Read more about this decision in CMS’ recent LawNow article here.