Rossendale Borough Council v Hurstwood Properties
The Court of Appeal has handed down a decision in Rossendale v Hurstwood that will have an impact on business rates avoidance schemes and the ability for commercial property owners to limit their liability for business rates by using Special Purpose Vehicles (SPVs), should they find themselves with an empty commercial property on their hands.
As councils are aware, there are a variety of business rates avoidance schemes in existence and the case of Rossendale Borough Council v Hurstwood is a result that doesn’t bode well for local authorities looking to maximize business rates revenue.
This article will look at the case in more detail.
What are special purpose vehicles (SPVs)
Special purpose vehicles are legitimate companies created for a specific acquisition or a transaction. They generally have a single purpose and are used to protect funds and assets owned by the parent company. SPVs allow the parent company to be free from risk and mean that the SPV can fail without the parent company experiencing any financial loss.
Use of SPVs
The case involves business rates avoidance using special purpose vehicles. The SPV is set up as an incorporated company, with the property owner leasing the property to the SPV, with the SPV holding the tenancy therefore becoming liable to pay the business rates.
The SPV is then placed in voluntary liquidation - in some cases liquidation does not take place - but in more recent cases the process of liquidation has taken place, including either a section 1000 strike off being initiated by Companies House or a section 1003 voluntary strike off under the Companies Act 2006.
As the SPV is in liquidation, an exemption from business rates is applicable until the lease is disclaimed.
Piercing the corporate veil
The Court of Appeal rejected both arguments put forward by the billing authorities. The first being that the corporate veil should be pierced. The argument being that a separate company had been set up deliberately to evade business rates and therefore as a transaction should be ignored and liability remain with the landlord.
The Ramsey Principle
The second argument being Where there is a pre-determined series of transactions designed to avoid tax liability, the ‘Ramsay Principle’ applies. This argument was not upheld because the SPV is entitled to possession and therefore liable for the business rates.
The Court was clear in the verdict it made in that the processes and procedures used may be immoral, but they are not illegal and therefore commercial property owners will continue to make use of schemes modeled on these steps and companies offering advice and guidance to commercial landlords will continue to thrive.
100% rates retention
With the scaling up of rates retention there is hope that the Government will step in so that local authorities aren’t handed an empty glass as, after all, 100% of £0 is not particularly helpful in a climate of increased demand for statutory services.