Business Rates Avoidance: A Warning To Companies
Companies need to think twice before setting up a special purpose vehicle (SPV) for the purpose of avoiding business rates on empty properties, following a landmark ruling1.
For those unfamiliar with such schemes, they involve the grant of a lease of an empty property at nominal rent to an SPV, who then becomes the ‘owner’ and liable to non-domestic rates liability rather than the company itself.
The SPV is then either dissolved or goes into voluntary liquidation for the purpose of avoiding business rates liability. A property occupied by a corporate occupier which is being wound up legally qualifies for empty rates relief.
The ruling
The question for the Supreme Court was, did the companies behind the schemes in question remain legally responsible to pay non-domestic rates for periods when they leased unoccupied properties to the SPVs. In an important win for the local authorities (who successfully appealed the appeal court ruling), the answer was – there is a triable issue.
The court found that the sole purpose of the SPVs was to avoid liability for business rates – even though they were legally entitled to possession under property law. The SPVs had no assets or business, and it was never intended that the empty property rate would ever be paid by them.
The SC found that before the leases to the SPV was granted, the respondent companies were liable for accrued business rates. Once the lease was granted, only the SPV (as owner) was liable. Therefore, the interposition of the SPV itself was not an abuse of corporate personality.
However, it found that the abuse was the way in which the SPV’s liability for rates was handled. In fact, it said both the dissolution and the liquidation schemes were an abuse of legal process.
And this was key: the “abuse” in this case was found to lie in the way in which the SPV’s liability for rates was then sought to be dealt with, by the abusive processes by which the SPV is either dissolved or put into liquidation.
The Supreme Court also said the appeal court had not adopted a purposive approach to its interpretation of the relevant legislation, something it was itself prepared to do. It said parliament must have intended that the owner with entitlement to possession required a practical ability to exercise the right – including to pay business rates.
Finally, the CA said that it was not for the courts to pierce the corporate veil of the SPVs and thus could not disregard the leases. The SC made clear that there are comprehensive remedies for such abusive behaviour which do not require the piercing of any corporate veil. As such, the SC upheld the CA’s view on this.
However, the Supreme Court found that the leases were ineffective to make the SPVs the owners of the relevant properties, with the result that the defendants were potentially liable for business rates.
What does this mean?
The ruling paves the way for local authorities to bring proceedings against the original property owners to recover unpaid business rates. We will be watching this space with interest.
Importantly, it is also a warning shot to businesses seeking to circumventing their legal responsibility to pay business rates on their properties.
1Hurstwood v Rossendale BC [2021] UKSC 16
2In re PAG Management Services Ltd [2015] EWHC 2404
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