Menu
A Supreme Court judgment normally represents the end of the matter concerned. But, in Hurstwood Properties (A) Ltd and Others (Respondents) and Rossendale Borough Council and Another (Appellants) [2021] UKSC 16, the Supreme Court’s decision is not, or at least not quite, the end of the matter. The reason for this is that the Supreme Court’s decision concerned the striking out of claims by two local authorities, Rossendale and Wigan, for nondomestic rates in respect of empty properties owned by the respondent companies. The Supreme Court set aside an order striking out the claims and determined that there was a triable issue as to whether the defendants remained liable for nondomestic rates. This means that that issue will return to the lower courts for final determination.
The cases concerned empty rates mitigation schemes which involved setting up special purpose vehicle (SPV) companies, which were without any assets or business, but which took leases of unoccupied properties. The aim of granting the leases was to transfer the empty rate liability from the owner of the property to the SPV. The SPV was then either put into member’s voluntary liquidation, or dissolved. Those SPVs in member’s voluntary liquidation would benefit from the exemption from empty rate which applies where the owner of the property is being wound up. Where the SPV was dissolved the lease was automatically transferred by law as bona vacantia to the Crown, which had the effect of relieving the owner from empty rates until the lease was either terminated, or disclaimed by the liquidator or by the Crown.
In these cases, the claims by the local authorities had been selected as test cases representative of 55 further cases where similar schemes have been employed. The local authorities contended that, either, the leases to the SPVs were ineffective in making the SPV the “owner” of the vacant property under rating legislation or, alternatively, that the separate legal entity of the SPV should be ignored for the purpose of determining rate liability. These arguments were directed towards identifying the defendants, rather than the individual SPVs, as being liable for empty rates.
The defendants had sought to have these claims struck out on the basis that there were no reasonable grounds for bringing the claims. In the High Court, Judge Hodge QC had ruled that the first ground put forward by the local authorities had no reasonable prospect of succeeding, but that the second ground could potentially succeed and was a triable issue. The Court of Appeal determined that neither of the grounds had any reasonable prospect of success and had struck out all the claims. The local authorities appealed to the Supreme Court on both grounds.
Before the Supreme Court, the local authorities’ first claim, that the leases were not effective in making the SPVs the “owners” of the vacant properties, and thereby liable for empty rates, relied upon a purposive interpretation of the statutes concerned, derived from the case of WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300, and known as “the Ramsay principle”. The result of such an approach, the local authorities argued, should be that transactions or elements of transactions which have no business purpose, and which have as their sole aim the avoidance of tax, should be ignored.
The Supreme Court judgment makes clear that applying the Ramsay principle involves consideration of both what the legislation intended to tax, or exempt, as the case may be, and whether the facts of a particular transaction fall within that class. This involved consideration of the purposes of charging unoccupied rates, which were deterring owners from leaving property unoccupied and encouraging them to bring it back into occupation, and the classes of exemption from unoccupied rates. Three main categories of exemption were identified by the Supreme Court, first, cases where the owner may be unable to bring the property back into occupation, secondly, cases where the owner may be regarded as having a reasonable excuse for not bringing the property back into occupation, and thirdly, cases where the owner may be making some other valuable contribution to society by being the owner and in lieu of paying rates.
Whilst the legislation makes clear liability for empty rate falls upon the person “entitled to possession”, a purposive interpretation of that legislation requires consideration of why should the legislation impose the burden in this way? The Supreme Court was of the view that the aim of the legislation to encourage owners to bring vacant property back into occupation made clear that the focus of liability should be on the person who, in the real world, had the ability to achieve that objective. This involved considering leases that have been granted. The Court concluded that the leases were not sham documents and created genuine legal rights and obligations, but that they had been entered into solely for the purpose of avoiding liability for business rates, and for no other purpose. The leases were not granted with the genuine intention of allowing the SPV to make any use of the property, or giving the SPV role in the property being brought back into use. On the contrary, the success of the schemes relied upon the SPVs not making use of the properties. The practical ability to decide whether the property should be brought back into use continued to rest with the landlord. Whilst the leases transferred liability for business rates to the SPV tenants there was no intention that rates would, in fact, be paid. The consequence of these findings was that each of the schemes where a lease was granted involved the misuse of the legal process: either the law governing the dissolution of a company; or the liquidation process and insolvency legislation. In the case of those SPV’s that were dissolved the process was also likely to have involved committing a criminal offence of failing to notify creditors of the application to strike the SPV off the register of companies.
Applying these findings regarding the leases to the legislation imposing liability for empty rate, the Court concluded that the SPVs to which the leases had been granted had not thereby become “entitled to possession” of the vacant properties. The person that was entitled to possession, throughout the period concerned, was the landlord of the property. This conclusion was not arrived at by ignoring the leases, but rather by an examination of their context, leading to the conclusion that they did not transfer an entitlement to possession to the SPV. The conclusion was not founded on the fact that the motive for granting the leases was one of rates mitigation. Instead, it was based on a purposive interpretation of the statutory provisions and an analysis of the facts of these cases in the light of that interpretation.
In the light of this conclusion there was a triable issue as to whether the defendants remained “entitled to possession” and the claims of the respective local authorities should not be struck out.
The alternative argument of the local authorities was that the separate legal identity of the SPVs should be ignored in determining the liability for rates under the “evasion principle”. The Supreme Court rejected this argument because there was no scope for applying the principal in a manner so as to hold a person who owns or controls the company liable for breach of an obligation which has only ever been undertaken by the company itself. Even if there were scope to do so, it would not have applied to the facts of these cases because liability for rates accrues on a daily basis and, if the leases were effective in transferring liability from the landlord to the SPV, then in these cases the only person liable for rates after the granting of the lease would be the SPV. The Court was therefore satisfied that any attempt to apply the “evasion principle to these cases was misconceived.
The Supreme Court has allowed the appeals by the local authorities and reinstated the claim by the local authorities for non-domestic rates on the basis that the leases were ineffective to make the SPVs liable for rates, and that the landlords therefore remained liable.
Until the issue of liability is actually tried these cases cannot be regarded as having been concluded. However, the Supreme Court’s judgement suggests that schemes of this nature are unlikely to be effective in mitigating empty rate liability because they do not make the SPV the person “entitled to possession”, and thereby liable for empty rates. They also carry a clear risk of committing a criminal offence in cases where the SPV is dissolved and creditors, including the local authority, are not notified of this. Those operating the schemes, and those promoting them, are now faced with the difficult task of showing that the leases granted under the schemes do, indeed, transfer an entitlement to possession in the light of the Supreme Court’s interpretation of that phrase.
