Ever since the government introduced 100% business rates charges on empty commercial premises in 2008, property owners have looked for ways to mitigate these rates.
An argument put forward by councils in a recent combined test case (Rossendale BC v Hurstwood Properties & Wigan Council v Property Alliance Group) in the Court of Appeal challenged the ability of commercial property owners’ to organise their affairs in order to avoid liability for business rates on vacant commercial properties.
The property owners in the cases are separate legal entities with no commercial connection other than a common interest in the proceedings and being represented by Irwin Mitchell LLP.
Whilst the schemes adopted by the two properties owners are not identical they share a number of key elements:
- A special purpose vehicle (SPV) is incorporated by a scheme provider
- The property owner grants the SPV a lease of the empty property
- The SPV becomes the “owner” and the property owner is no longer liable for future business rates
At this point the two methods vary. In the scheme used by Property Alliance Group, the SPV is placed into members’ voluntary liquidation and is therefore exempt from liability for business rates. In the scheme adopted by Hurstwood Properties, the SPV ends up being struck off the register and all property, including the leasehold property in question, is deemed to be bona vacancia therefore belonging to the Crown (or Duchy of Lancaster or Duke of Cornwall). Until the Crown or Duchy disclaims the leasehold they become the “owner” and are therefore liable to business rates.
The councils argued that the methods used by the two property owners in order to mitigate their rates liabilities abused corporate personality allowing the court to ‘pierce the corporate veil’.
The Court of Appeal unanimously rejected the councils’ arguments and struck out the case. Lord Justice David Richards said: “The use of companies to avoid tax or rates can hardly be described as rare or novel. They are frequently inserted in tax avoidance schemes for no reason other than to mitigate or avoid the incidence of one form or another of tax.” Lord Justice Henderson said “as is the case with most honest tax avoidance schemes, the parties’ intention was to enter into transactions that are valid and have their purported effect”.
Charging property owners business rates on empty properties is essentially a tax on failure and does not encourage investment in speculatively building or the refurbishment of existing properties. This judgement by the Court of Appeal provides property owners with options and is a welcome decision.
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