Court of Appeal Unim-Prest with Attempts to “Pierce the Veil” of Rating Mitigation Scheme

March 8, 2019

Summary

Empty property rates are a tax on failure; the failure of the owner to let premises or to find its own use for the premises. Given they are charged at the same rates as occupied property, it’s no wonder property owners seek to mitigate such onerous liabilities. The Court of Appeal in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2019] EWCA Civ 364 has thrown a lifeline to these owners and paved the way to prevent billing authorities interfering with perfectly legal corporate ownership arrangements, even if they are designed with a desire to avoid empty business rates.

The Schemes

The key features of the mitigation schemes were:

  1. The scheme provider incorporated a new company (“B”).
  2. The property owner (“A”) leased the unoccupied premises to B.
  3. B therefore became the “owner” for rating purposes and A was no longer liable to pay future business rates.
  4. B was then either voluntarily liquidated or struck off the register at Companies House, effectively exempting it from rates liability, without returning the liability to A either.

However, the rating authorities attempted to fix A with the rating liability regardless.

First Instance

In Rossendale Borough Council v Hurstwood Properties (A) Ltd [2017] EWHC 3461 (Ch) the Judge declined the ratepayers’ applications to strike out the claims against them.

 He found that the leases were genuine and not a sham. He also found that, the way statute is drafted, the consequences of Step 4 above (even if it was designed to avoid the rating liability) were not something the Court could interfere with by applying the principles of statutory construction established by the decisions in W.T.Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 and later cases.

However, the Claimants also argued that the Court should exercise its limited powers to look behind “abusive” transactions and the Judge found that this had a reasonable chance of succeeding at a full trial. He held this was a developing area of law and that the Supreme Court’s ruling on “piercing the corporate veil” in Prest v Petrodel Resources Ltd [2013] UKSC 34 still left further questions open which may be relevant in this case.

The Appeal

The ratepayers appealed on the “piercing the veil” aspect of the ruling. The local authorities appealed on the Judge’s decision that the statute could not be construed to require the leases to be disregarded as transactions undertaken for the purposes of tax avoidance.

The Court of Appeal unanimously both allowed the ratepayers’ appeal and rejected the appeal of the local authorities.

The Court made it clear that, in Prest, the Supreme Court identified very limited situations where one may look past a corporate personality to what was “behind the scenes”, and that this could not be such a case.

This ability to “pierce the veil” would ordinarily be confined to situations where the purpose of a company was to evade an existing obligation. Since business rates accrue on a day-to-day, forward-looking basis, it was clear that up to the date of the lease A was liable and thereafter B was liable. A was not evading any past or future liability by having B established and nor was B evading the liability it would accrue each day. That the statute as worded clearly exempted B from actually having to pay rates whilst it was in liquidation or once it had been removed from the register, did not alter these facts.

The Court then went on to consider whether the Ramsay principles could be used to disregard the leases rather than the separate personality of the SPVs. They could not. It was clear that the correct interpretation of the statute required the person entitled to possession on the given day to pay rates. The valid lease unambiguously meant that person was B not A, regardless of the motivation of the parties in entering into the lease.

There was therefore no prospect of the local authorities’ arguments developing further at trial, and the claims that the original property owners “behind” the scheme should be liable for rates were to be dismissed.

This decision is a boost for mitigation products using leases to SPVs. Therefore, it will bring welcome relief to landlords hit hard by the decline of the high street, providing them breathing room as they seek to re-let empty spaces. However, the local authorities may yet seek permission to appeal to the Supreme Court.

If you would like further advice on the current state of the law dealing with rating mitigation schemes, please contact me at roger.cohen@bclplaw.com.