Case law: Scheme used by landlords to avoid business rates on empty commercial properties is valid
Landlords with unlet, unoccupied commercial properties will welcome a Court of Appeal ruling that a scheme allowing them to avoid paying business rates on them is valid and lawful.
This update was published in Legal Alert - April 2019
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Business rates are payable by the individual or entity 'entitled to possession' of a non-domestic property. Where a landlord has let a property, this is usually the tenant. If the property is unoccupied and the landlord is entitled to possession, the landlord becomes liable for business rates.
However, there is an exception: tenants which are limited companies subject to winding up or dissolution are not liable to pay business rates. Nor can the rating authorities recover rates from a landlord with such a tenant - because the landlord is not actually in, or entitled to, possession.
In a number of cases, landlords with empty properties have set up a limited company with no assets and no track record - a 'special purpose vehicle' - specifically to take a lease of the property at a nominal rent. They have then either wound the special purpose vehicle up voluntarily or allowed it to be struck off the Companies Index at Companies House - and argued that neither they nor their tenant is liable to pay business rates.
Local authorities brought two test cases challenging these schemes. However, the Court of Appeal has refused their claims and found that the schemes are valid and lawful. It rejected their argument that the rating authorities should be allowed to 'look through' the special purpose vehicles and levy rates on the landlords.
The Court also rejected the argument that a general anti-avoidance rule (known in law as the 'Ramsey principle') should apply to such schemes. Under the Ramsey principle, if the only reason for including particular pre-ordained steps in a commercial transaction is to avoid tax, those steps can be disregarded - the transaction should be taxed as if those steps had not been taken. The local authorities' arguments therefore failed.
- Landlords of unoccupied properties should consider whether they can use a special purpose vehicle to avoid liability for business rates, which they might otherwise have to pay.
Case ref: Rossendale BC v Hurstwood Properties (A) Ltd  EWCA Civ 364
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.
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