Changes to empty rates relief have prompted ratepayers to try out different schemes to mitigate liability for business rates. In Rossendale Borough Council v Hurstwood Properties (A) Ltd and Wigan Council v Property Alliance Group Ltd [2019] EWCA Civ 364; [2019] PLSCS 49 the owners of empty properties had granted leases, which were too short to register, for peppercorn rents, and without forfeiture clauses, to special purpose vehicle companies. The companies did not have any assets or liabilities and did not trade. In due course, the companies were put into voluntary liquidation, or were struck off the register as dormant companies, but the leases were left to run their course.
As a result, the rating authorities were unable to collect business rates. They challenged the schemes, asking the court to apply the Ramsay doctrine (a principle of statutory construction developed in WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, often used in cases involving tax avoidance), or to pierce the corporate veils of the companies because the schemes were an abuse of corporate personality. Reports suggest that 55 or more similar cases depended on the outcome of the case and that the sums at stake exceeded £10m. But the Court of Appeal has struck the proceedings out.
Lord Justice David Richards addressed the question of separate legal personality. He explained that the court will pierce a company’s corporate veil only in very limited circumstances. In Prest v Petrodel Resources Ltd [2013] UKSC 34, Lord Sumption indicated that it may be an abuse of corporate personality to use a company to evade or frustrate the enforcement of the law. But it is not an abuse to cause a legal liability to be incurred by a company in the first place.
Liability for non-domestic rates arises newly, on a daily basis. So it was impossible to say that the landlords had had an existing obligation or liability, which they had evaded by interposing a company under their control. Ratepayers, or potential ratepayers, can and do organise their affairs to avoid liability for business rates. The judge at first instance had decided that the leases were not shams. And the companies had not been used to take an unconscionable advantage, or as engines of fraud.
Lord Justice Henderson addressed the Ramsay principle, which applies when transactions involve a series of steps. In such cases, the court will look at the effect of the transaction as a whole, as opposed to the tax effect of each individual step. He explained that the mere fact that some elements of a composite transaction are devoid of commercial purpose will not necessarily mean that the transaction will fail in its objective of escaping a charge to tax, or of falling within an exemption from tax. Facts must be analysed in the light of the statutory provision being applied and what, on a purposive construction, a tax statute actually requires (and not simply on the basis that “Parliament cannot have intended to allow this”).
The non-domestic rates scheme applies to persons legally entitled to possession of a hereditament, and the leases were not shams. The newly created companies had a legal right to possession, regardless of the reasons for entering into the leases, and there was no scope for a wider, purposive construction of the legislation that would allow the Ramsay principle to apply.
Allyson Colby, property law consultant
