The Rates Escape

Empty commercial property can prove expensive for landlords, reducing their rental income, so they will welcome recent rulings that schemes implemented to avoid business rates on empty properties are unlawful.

Business rates are payable by the individual or entity who is entitled to possession of it – ie. the tenant. The landlord becomes liable for business rates if the property is unoccupied. However, if a limited company is in liquidation it is not liable for business rates because the landlord is not entitled to possession.

This has led to a trend for the creation of special purpose vehicles (SPVs) enabling landlords to avoid the payment of non-domestic rates on vacant commercial properties. An SPV is a limited company which has no assets or track record. The landlord then rents the unoccupied property to the SPV at a peppercorn rent or at a higher rent which is then waived.

The landlord then places the SPV into voluntary liquidation for the remaining term of the lease – during which time the SPV, being a company in liquidation, is exempt from business rates. Rating authorities cannot recover rates from a landlord with an ‘SPV tenant’ as the landlord is not in (or entitled to) possession of the property.

The cases

In Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation [2019] EWHC 28, the secretary of state (SOS) argued that companies who engaged in business rates mitigation schemes were subverting the purpose of insolvency legislation.

Two companies operated what the SOS called a rates avoidance scheme (the first company started it and the other carried it on). However, the companies themselves described it as a rates mitigation scheme setting up SPVs for landlords. The SPV would take a lease for three years at a nominal rent. Each lease allowed the landlord to end the lease at any time on payment of a determination premium which increased during the lifetime of the lease.

The SOS argued that the business model adopted by the business companies subverts the purpose of liquidations and that such misuse of the insolvency legislation demonstrates a lack of commercial probity, to the extent it was just and equitable to wind them up.

However, the High Court ruled that the schemes were not unlawful and were not to be wound up on public interest grounds. The Court’s decision centred in part around motive. It took the view that “it should not matter if the motive of those involved in so doing is to enable the company in MVL to act as an asset shelter or for the purposes of furthering some artificial transaction designed to avoid tax, since this does not involve the misuse of companies legislation or the insolvency legislation so long as the MVL does nonetheless objectively and without sham transactions involve the collection and realisation (where necessary) and distribution of its assets.”

It found “no proper objection, either in relation to the business rates legislation, the insolvency legislation, by reference to specific statutory provisions or the application of the Ramsay principle, to the members of a company putting the company into an SPV for the purpose of avoiding business rates after creating and placing an artificial asset … into the tax ‘shelter’ created by the company being in MVL - so long as putting the company into MVL and maintaining the company in MVL is, considered objectively in law and in fact, for the purpose of the collection, realisation and distribution of the assets of the company. It was not against the public interest.”

In its ruling, the appeal court commented that the use of companies to avoid the incidence of tax or business rates can hardly be described as rare or novel. Furthermore, it noted that they are frequently inserted in tax avoidance schemes for no reason other than to mitigate or avoid taxation. And as the judge said, it has long been recognised that ratepayers or potential ratepayers can and do organise their affairs so as to avoid liability to pay rates.

Here, the SPVs were not used “as engines of fraud or to take an unconscionable advantage” and it was not open to the courts to pierce the corporate veil of the SPVs.

What does this mean?

It’s a tough economic climate for the commercial sector. Unless a different decision is reached by the courts on the use of SPVs (or similar) to avoid a tax liability, these rulings are good news for commercial landlords and their finances, but not for local authorities whose budgets are already tightly squeezed.

However, it’s worth noting that the judge in PAG conceded that there is legitimate scope for disagreement as to the argument that devising and implementing a lawful scheme to avoid business rates is itself lacking in commercial probity or otherwise contrary to the public interest.

HHJ Stephen Davies commented: “Local authorities and many members of the public would doubtless strongly believe that rates avoidance is contrary to the public interest and that companies whose business it is to earn healthy profits by enabling property owners to avoid paying business rates on vacant property are lacking in commercial probity.”

The issue may once again exercise the courts sooner rather than later.



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