It has long been recognised that ratepayers, or potential ratepayers, can and do organise their affairs so as to avoid paying rates. And the fact that the motive for a transaction may be to avoid a tax liability will not necessarily invalidate that transaction.
The question that arose in Isle Investments Ltd v Leeds City Council [2021] EWHC 345 (Admin); [2021] PLSCS 40 was whether leases of three office units in Leeds were genuine, or whether they were shams – in which case, Isle would be liable for business rates, in the sum of £105,728, as the owner of the premises concerned.
The offices were part of an office complex and had been sitting empty. They were also expected to remain empty in the medium term. So Isle had approached Crusader, a firm specialising in empty property rates mitigation. Crusader identified newly created shelf companies to take a series of short, 21-week leases at a rent of £1. The leases obliged the companies to pay the business rates. But, if a company were to be chased for business rates, it could have been put into administration very quickly in order to avoid the claim.
Furthermore, although all eight leases were “on the face of it” capable of being valid leases, the only permitted use in five of the leases was “heliciculture” – ie snail farming – and the premises were offices. It followed that no legitimate business could have taken place in the units and, although the permitted user was described as “property management/marketing” in three of the leases, the Magistrates Court decided that the lettings were shams.
Isle appealed to the High Court, which noted that the court in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 had described shams as “acts done or documents executed… which are intended… to give to third parties or to the court the appearance of creating… legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create”. Furthermore, there is a presumption of regularity and, because an allegation that something is a sham carries with it a degree of dishonesty, the court is generally slow to rule that an agreement is a sham.
But the judge also took note of the fact that Isle had not carried out any due diligence checks on the tenants, which suggested that it did not believe that there would be any meaningful occupation of the property. Furthermore, a genuine lease would have created an exclusive right of occupation – and the only user allowed by five of the leases was one that was a practical impossibility. Consequently, the court decided that the conclusion reached by the magistrate was reasonably and logically open to her on the evidence and that she had given legally adequate reasons for her decision.
Cases in which the court has decided that arrangements to mitigate liability for business rates are a sham are few and far between. Does this case – together with the decision in Broxfield v Sheffield City Council [2019] EWHC 1946 (Admin); [2019] PLSCS 169 – mark a possible shift in judicial thinking? We shall have to wait and see.
Allyson Colby is a property law consultant
