07 June 2021

SPVs and business rate mitigation - closing the loop hole

Alexandra Ottley Senior Solicitor

Earlier this month the Supreme Court ruled that leasing an unoccupied property to a special purpose vehicle, is not sufficient enough to transfer the liability for business rates to that SPV.

This decision brings local authorities one step closer to shutting down another business rates mitigation scheme and protects the public purse from those looking to avoid payment of the empty rate.

It is a well-known position in the local authority world that pursuant to s45 of the Local Government Finance Act 1988 that the person or entity liable for business rates on unoccupied properties is the person or entity entitled to possession. This well-established statutory provision means, with some exception, that the person or entity under a valid lease is liable for the business rates. This stance has meant that there has been a loophole in the law for property owners to abuse when their properties have become unoccupied by entering into short leases with special purpose vehicles (“SPVs”) which are then quickly wound up or dissolved after a lease has been granted, leaving the local authority unable to collect unoccupied rates. This is a common rates mitigation scheme used by many up and down the country allowing Landlords to avoid unoccupied business rates and costing the public purse.

Rossendale and Wigan boroughs sued Property Alliance Group Ltd and Hurstwood Properties (A) Ltd over local levies they claimed were owed on empty properties. The two companies had entered into schemes where SPV’s took short leases of the properties and became liable for tax, however no taxes were paid as the SPV’s were either dissolved or put into liquidation.

Earlier this month the Supreme Court considered whether the defendants were still liable on the basis that either an SPV lease was ineffective to make the SPV the “owner” or alternatively whether the legal personality of the SPV should be ignored under the principle of piercing the corporate veil.

Whilst the Supreme Court agreed with the lower decision of the Court of Appeal that the corporate veil could not be pierced, Lord Michael Briggs condemned the rates avoidance schemes stating that “The whole purpose of the schemes was to avoid payment of the empty rate, rather than to transfer the responsibility for its payment. Apart from rates avoidance, the schemes had no separate business purpose of any kind.” Lord Michael Briggs considered the intended purpose of the unoccupied rates legislation meaning that the lease to an SPV was not sufficient to transfer liability to that SPV. The Supreme Court ruled that it would allow the local authorities case to proceed to a full trial and said there was an arguable case that the original owners remained liable for the rates.

This is an excellent decision for local authorities who have now taken a further step towards closing down business rates mitigation schemes.

This is definitely an area of law that is evolving and hopefully in a more favorable way for local authorities, but some cynics may say that if this is the end of these two schemes then another is only around the corner for local authorities to be aware of. It is now a case of “watch this space” to see what result the trial brings.

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