Clear success for rates mitigation scheme for unoccupied properties in landmark Court of Appeal decision

The Court of Appeal struck out the local authority’s claim to recover Non-Domestic Business Rates (“NDR”) from the defendant companies, who were using rates mitigation schemes. It held that it was not possible to “pierce the corporate veil” in the circumstances, and that the Ramsay principle (W. T. Ramsay Ltd. v. Inland Revenue Commissioners, Eilbeck (Inspector of Taxes) v. Rawling [1982] A.C. 300) likewise had no application.

The schemes considered here were two of over 50 similar cases currently pending in the Liverpool District Registry of the Chancery Division alone. The total value of the NDR claimed by local authorities in these cases stands at least £10 million. The outcome is therefore significant for landlords and local authorities alike.

The schemes

The defendants were circumventing liability for NDR on largely unoccupied properties by granting leases to special purpose vehicles (“SPVs”).

Since the properties were unoccupied, under s45(1) of the Local Government Finance Act 1988 (“LGFA”), the person liable for paying the rates is the “owner”, here being the SPVs. These SPVs were either placed into members’ voluntary liquidation, or struck off the register of companies, thereby meeting the exception for NDR created by regulation 4(k) of the Non-Domestic Rating (Unoccupied Properties) (England) Regulations 2008.

Background

The local authorities accepted that the SPVs were the owners of the leases, unless either the leases or the SPVs themselves could be disregarded as a matter of law. If this argument succeeded, the defendant companies would be treated as the owners of the properties for the purposes of NDR liability.

The case was heard on appeal by both the claimants and the defendants:

• On appeal by the defendant companies, that the doctrine of piercing the corporate veil was not applicable to the SPVs; and
• On appeal by the claimant local authority, that the Ramsay principle applied so as to disregard the leases.

Piercing the Corporate Veil

It is one of the mainstays of English corporate law that once a company is registered under the Companies Act, it has a separate legal personality, owning its own rights and liabilities (Salomon v A Salomon & Co [1897] AC22). More recent case law has suggested that, in very limited circumstances, the court may disregard the separate legal entity of the company and treat the rights and obligations of the company as those of its shareholders. One of these circumstances is where a person interposes a company within their control to deliberately frustrate or evade the enforcement of an existing legal obligation or liability against them (Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 215).

The claimants questioned in their submissions whether this principle could be extended to the present situation, whereby the defendant company “divests [itself] of an anticipated, on-going and existing liability for business rates by the interposition of a newly incorporated company or SPV” (Richards LJ [29]).

The decision

The Court agreed with the defendant companies that there was no present application of the doctrine of piercing the corporate veil.

They held that for the doctrine to apply, the defendant companies must have intended to interpose the SPVs in order to avoid an existing or continuing liability. The key point here was that liability for NDR is not a continuing liability, as a fresh obligation to pay arises on each day that a person is the “owner” of a property.

Therefore, it would be impossible for the defendant companies to interpose the SPVs to evade or frustrate their liability for NDR, as, for them, the obligation to pay the rates never existed. Instead, it arose afresh each day for the SPV, being an incorporated company and the owner of the lease.

Further, the court declined to extend the principle beyond previous case law.

The Ramsay Principle

In brief, the Ramsay principle directs the Court towards two questions when interpreting statute:

1. What was Parliament’s intention when drafting the statute in question?
2. Would Parliament have therefore intended the individual transaction in question (which may also be considered in its role in a series of transactions) to come within the remit of that statute?

The principle is most often applied to cases involving tax avoidance schemes. Usually, this involves the court considering any uncommercial elements of a transaction, and particularly whether the fact that a transaction was solely entered into in order to avoid tax liability removes the transactor from the protection of a statutory exemption.

The claimant local authorities argued that the Ramsay principle was applicable here due to the “unreal” nature of the lease transactions between the defendant companies and the SPVs. They pointed to the uncommercial elements of the transactions, for example that the rent was either minimal or non-existent and not collected. They argued this demonstrated that the sole purpose of the lease terms was to effect the avoidance of NDR.

The decision

The Court again agreed with the defendant companies that there was no application of the Ramsay principle.

s65(1) of the LGFA defines the “owner” as “the person entitled to the possession”. The Court held that entitlement to possession is inherently a legal concept and that as soon as the lease to the SPV was executed, it became the owner for the purpose of the statute. The judge stated that the rates avoidance motivation behind the schemes was irrelevant to the legal concept of possession.

What could this mean going forward?

This outcome is something of a victory for ratepayers. The court’s historic reluctance to pierce the corporate veil in cases involving NDR has traditionally worked to ratepayers’ detriment, causing them to lose the benefit of quantum business rates relief where different parts of a building are occupied by separate but linked companies.

More generally, the outcome of this case will be welcomed by landlords, especially those in the increasingly disrupted high-street retail sector, who continue to be affected by arguably onerous empty-rates liabilities. However, further increases in the use of such schemes of course leads to the possibility that government will legislate to close this proven loophole.

In the meantime, the legal world has further evidence that the Courts are unwilling to stretch the application of both the doctrine of piercing the corporate veil, and the Ramsay principle beyond their current iterations.

A copy of the transcript for Rossendale Borough Council v Hurstwood Properties (A) Ltd and others can be found here.

Co-authored by Hannah Jones.