Timothy Morshead QC and James Souter answer queries on schemes to reduce empty rates liability.
Question
My client is paying empty rates for its commercial property while it tries to find a tenant. Can it mitigate its rates liability?
Answer
Perhaps.
Explanation
In origin, rates are a tax on occupation of land, not on its ownership. This changed with the introduction of empty rates.
Bolting on a tax on empty property to a tax on occupation has created several anomalies. One of these anomalies might work in favour of ratepayers, like this: empty rates start after three months, but they cease if an occupier can be found who occupies for as little as six weeks. Thus, short-term occupation can “reset” the three-month exemption from empty rates.
Billing authorities are therefore motivated to show that the short-term occupation does not “count” for one reason or another, so that they can collect empty rates on a continuous basis, without any “reset”. For this, in turn, they are motivated to argue that “occupation” has a narrow meaning. But because rating developed as a tax on the occupation of land, rather than ownership of it, the law has developed a broad concept of “occupation” (to capture more tax), not a narrow one. So there is a tension between the general law of rating, and the law of empty rates.
The High Court had to consider this in R (on the application of Principled Offsite Logistics Ltd) v Trafford Council [2018] EWHC 1687 (Admin); [2018] PLSCS 125. Principled were “professional occupiers” occupying otherwise empty property for periods of six weeks by storing boxes (filled with low-value items for eventual resale, but assumed to be worthless for the sake of argument), in return for a share of the rates saved by the owner of the property.
The billing authority argued that “occupation” would only count if it achieved some purpose over and beyond the fact of occupation. Principled argued that “occupation” was present wherever there was an outward presence on land coupled with a volition to occupy.
The court agreed with Principled, largely because otherwise it would have had to make a value judgment to distinguish between different activities, each involving similar outward use of land, but producing different legal consequences. There was no appeal to the Court of Appeal.
Thus, on the basis of the law as presently stated, it is relatively straightforward to achieve a significant mitigation of empty rates. Other rates mitigation schemes have also been considered by the courts.
To some, it seems surprising that empty rates can be so readily mitigated (or, under some schemes, avoided). But (a) empty rates are conceptually unlike conventional rates, so bolting them onto conventional rates is like forcing a square peg into a round hole; and (b) parliament, presumably on purpose, chose not to list rates among the various taxes subject to the general anti-abuse rule introduced in the Finance Act 2013. So perhaps it should not seem so surprising.
Question
My client has been advised about a scheme to mitigate their liability for empty rates which involves granting a series of short-term lettings. They are concerned this will require active management over a period of time and have asked if there are any other mitigation schemes?
Answer
There are other mitigation schemes which might be seen as more risky. The Court of Appeal recently approved one in what some consider a surprising decision.
Explanation
As we know, rates are a tax on the occupation of land. In cases where there are both freehold and leasehold interests, the liability will fall on the tenant.
But what if the freeholder of empty premises grants a lease in favour of a special-purpose vehicle (SPV) and then puts the SPV into liquidation to avoid payment of rates? This is what happened in Rossendale Borough Council v Hurstwood Properties (A) Ltd and others [2019] EWCA Civ 364; [2019] EGLR 20, which involved two test cases from a group of around 55 cases involving similar mitigation schemes.
It will come as a surprise to many to hear that the Court of Appeal approved this and other similar schemes, finding that the SPVs shielded the freehold owner from any liability to rates.
The court considered two lines of attack by the local authority. The first was that the corporate veil of the SPV should be pierced. The lease was found to be genuine and not a sham and therefore, as a matter of law, from the date of its execution passed the liability for rates to the SPV. The fact that the sole purpose of the lease was to avoid rates was considered to be irrelevant, as were any concerns around the morality of the freeholder’s motivation.
The second line of attack was what is known as the Ramsay principle (WT Ramsay Ltd v Inland Revenue Commissioners [1981] UKHL 1), which involves a purposive approach to the construction of statutes. Having carefully reviewed section 45(1) of the Local Government and Finance Act 1988, the Court of Appeal in Rossendale found that the ownership condition which triggers a liability to business rates was concerned with the immediate entitlement to legal possession. As a matter of law, it was satisfied the moment that a valid lease was granted.
While this decision might come as a surprise, it is probably best summed up by an extract from the judgment of David Richards LJ: “The use of companies to avoid the incidence of tax or [non-domestic rates] can hardly be described as rare or novel. They are frequently inserted in tax avoidance schemes for no reason other than to mitigate or avoid the incidence of one form or another of taxation.”
Timothy Morshead QC is a barrister at Landmark Chambers and James Souter is a partner in the property litigation group at Charles Russell Speechlys LLP
