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Supreme Court rules that special purpose vehicle rates mitigation scheme is ineffective

Gary Gardner, speaking with LexisNexis comments on the recent Supreme Court ruling on special purpose vehicle mitigation rates.

In Hurstwood Properties (A) Ltd and others (Respondents) v Rossendale Borough
Council and another (Appellants), the Supreme Court has allowed the appeal of the
local authorities, Rossendale Borough Council and Wigan Council, ruling that the
leases in question were ineffective to make the special purpose vehicles (SPVs) the
owners of the properties in question. Therefore, the defendants remained liable for
business rates. Gary Gardner, Partner at Blick Rothenberg, provides comment on the
judgment.

Background

The appeal related to whether the local authorities had reasonable grounds for claiming business rates, from the respondent companies that were the registered owners of various unoccupied commercial properties. The local authorities’ claims are regarded as test cases, representative of 55 cases that are similar in which the value of unpaid rates ranges from thousands to millions.

Under section 45 of the Local Government Finance Act 1988 (LGFA 1988), business rates are
charged for a property if four conditions are met on a given day—the first condition being that the ratepayer is regarded as the owner of the entire property, with LGFA 1988, s 65(1) providing a definition. Another condition is that the property falls within a class established in the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, SI 2008/386, under which it states that rates are charged on all non-domestic properties, other than those excluded. The exclusions include a property whose owner is a company which is being wound up (regulation 4(k)).

The rates avoidance schemes involved granting a short lease of the unoccupied property to a SPV, such that the SPV became the ‘owner’ and liable to the business rates liability rather than the respondent company. The SPV was then dissolved or put into liquidation to escape rates liability.

The local authorities had argued that they were entitled to the unpaid business rates from the respondents, firstly because the lease to the SPV was ineffective to call the SPV the owner of the unoccupied property under LGFA 1988, while applying the statutory interpretation ground in WT Ramsay Ltd v Inland Revenue Comrs [1982] AC 300 (Ramsay). Secondly because the SPV should be ignored, therefore, relying on the piercing the corporate veil ground in Prest v Petrodel Resources Ltd [2013] UKSC 34.

The respondents applied to the High Court to have the local authorities’ claims struck out and the High Court agreed with the respondents on the statutory interpretation ground, however, not on the piercing the corporate veil ground. On appeal, the Court of Appeal agreed with the SPVs on both grounds and struck out the local authorities’ claims.

Judgment

The Supreme Court unanimously allowed the local authorities’ appeal with Lord Briggs and Lord Leggatt giving a joint judgment.

The rates avoidance schemes

In both the dissolution and the liquidation schemes, it was common ground that the leases granted to the SPVs were not shams, meaning the SPV’s were entitled to possession. Nevertheless, neither scheme had any business or other ‘real world’ purpose because their sole purpose was to avoid liability to pay the business rates. The SPVs did not have business or assets, and, it had never been intended that the empty rate would ever be paid by the SPVs. The lease included a rent clause, but the rent was not intended to be paid or demanded.

The dissolution scheme involved letting the SPV incur a liability for the business rates, but not paying it, before it was dissolved under the Companies Act 2006. When dissolution occurred, the SPV’s property passed to the Crown, consequently the Crown became liable for the rates as an owner under LGFA 1988, s 65A(2)(b). The scheme relied on the local authorities not finding out about the dissolution for a while after it had occurred. The dissolution scheme was an abuse of legal process and, depending on the facts, may also have involved unlawful conduct by the directors that ran the SPVs. The liquidation scheme involved putting the SPVs in voluntary liquidation after granting the lease to trigger SI 2008/386, reg 4(k). To maintain the existence of the SPVs and therefore the exemption from the rates, the liquidation was artificially maintained. Following Re PAG Management Services Ltd [2015] EWHC 2404, this was an abuse of the insolvency legislation.

The statutory interpretation ground

The Ramsay principle is often regarded as tax-specific, however, it is based on the wider and modern approach to the interpretation of legislation. The court must ascertain the class of facts intended to be caught by the exemption or charge by interpreting the statute in the context of the whole statutory scheme as well as its purpose. Further, a decision must b made on whether the facts fall within the class. The court must avoid tunnel vision.

The legislative history of charging rates for unoccupied property reflects the purpose – to prevent owners from leaving their property unoccupied to gain a financial advantage as well as encouraging the owners to bring an empty property back into use to benefit the community. By imposing rates charged on the person entitled to possession under LGFA 1988, Parliament aimed to encourage the person with the ability, in the real world, to bring the unoccupied property in question back into use to do so.

Normally, the definition of owner as the ‘person entitled to possession’, would be that person that has the immediate legal right to the actual physical possession of the property. However, in the present case and its unusual circumstances, it would defeat the purpose of the legislation. Parliament cannot have intended that person to be the SPV under a scheme in which the SPV is designed to have no real or practical ability to exercise its legal right to possession and where that legal right has been conferred for no purpose other than the avoidance of rates liability. In this case, the SPVs were not entitled to possession for the purposes under LGFA 1988. Therefore, the entitlement to possession stayed with the respondent companies since they could decide whether to leave the property unoccupied and had not passed that real entitlement to the SPVs by the leases. LGFA 1988, s 65(1), is concerned with the real and practical entitlement. This includes the ability to occupy the property or to place someone else into occupation.

Consequently, there was a triable issue as to whether the respondents throughout the duration of their lease, remained liable for business rates and so the local authorities’ claims should not be struck out.

The ‘piercing the corporate veil’ ground

In the alternative, the local authorities had argued that the respondent companies interposed SPVs to avoid rates liability that would have otherwise been the companies’ liability. This was an abuse of the SPV’s separate legal personality, which justified piercing the corporate veil. In light of the Court’s decision on the statutory interpretation ground, this alternative ground fell away as it depended on the SPVs being ‘owner’. Nonetheless, the court addressed and rejected this ground of appeal.

Gary Gardner had the following to say on the Supreme Court’s judgment:

“This is an important decision by the Supreme Court in reinforcing the application of the Ramsay doctrine or the need for the Courts to take a purposive approach to statutory interpretation, although the judgment also illustrates the difficulties of relying on arguments involving piercing the corporate veil. The judgement is a resounding victory for the local authorities seeking legal redress to protect their revenues. For Landlords and the promoters of these schemes the judgement is undoubtedly disappointing but it should also serve as a clear warning that such arrangements around either the dissolution or liquidation of the SPVs could constitute an aggravated criminal offence where it is found that there was a policy or practice of deliberately not informing the local authority of the application to liquidate or dissolve the company under the provisions of the Companies Act 2006. Insolvency practitioners will also need to carefully consider this judgment in the wider context of corporate liquidations and dissolutions. As well as the two cases considered by the Supreme Court there are 55 cases pending this decision, involving millions of pounds but there may be other similar schemes and overall the amounts at risk may be much greater.”

This article was originally published by LexisNexis on 14th May 2021.

Would you like to know more?

If you would like to discuss any of the above in more detail or have any question, please get in touch with Gary Gardner using the details on this page.