Business rate avoidance schemes

November 6th, 2019 by James Goudie KC

In cases brought by the Secretary of State [2019] EWHC 2890 (Ch) the High Court declined to wind up companies in the public interest that operated business rate avoidance or mitigation (but not evasion) schemes. The companies relied upon the exemption from business rate of companies that are being wound-up, compulsorily or (creditors or members) voluntarily. The respondent companies operated schemes to allow landlords of vacant commercial premises to avoid paying business rates. That was achieved by the landlords leasing the properties to a special purpose vehicle (SPV) incorporated by the respondents, with the effect that the SPV became the property owner for the purpose of business rates. Each lease had a fixed term of three years and provided that its purpose was to transfer liability for business rates to the SPV, that the landlord would pay a monthly fee, and that the landlord was able to determine the lease at any time on payment of a determination premium, which increased as time passed. Once the SPV held several leases, it would be placed in members voluntary liquidation. The respondents accepted that the determination premium provisions were entirely artificial and had been devised with a view to creating something of value to the SPV so that the liquidator would be required to maintain the members voluntary liquidation for the duration of the lease, so as not to lose the opportunity of receiving the determination premium.The Court held that the incorporation or acquisition of the SPVs, the entry into the leases and the putting of the SPVs into members voluntary liquidation were all legally effective transactions as opposed to sham transactions even though: they were all pre-arranged; the leases were artificial in the sense that they were not the produce of arms-length negotiations, contained non-commercial terms and had no purpose other than to enable the landlords to avoid paying business rates; the motive of their sole member was simply to engineer the situation whereby the landlords were able to avoid paying business rates and the companies to obtain fees. Even though the determination premium provisions of the leases were themselves artificial, they were not sham transactions because they were legally effective terms of a legally effective lease, and the landlords did expect to, and did actually, pay the determination premiums to the liquidators of the SPVs. Furthermore, the liquidators of the SPVs were genuinely entitled to decide that because of the existence of the determination premiums it was appropriate to continue the members voluntary liquidations until all of the leases were either determined or expired. That process therefore genuinely involved the collection of assets with a view to their distribution among the members once all liabilities had been discharged. Therefore, although it was a wholly artificial process, where all involved were fully aware that the motive and effect was to avoid business rates, the liquidation was a genuine process whose purpose was the collection, realisation and distribution of assets. There had to be something more to justify a finding that the operators of such a scheme were not acting with commercial probity or were otherwise contrary to the public interest.

The Judge added:-

“123.  I accept, of course, that the court when exercising its jurisdiction in relation to public interest winding up petitions is exercising a wider jurisdiction which goes beyond simply deciding whether or not Scheme 3 complies with the provisions of the business rates legislation and/or the insolvency legislation and which might, in appropriate cases, involve reaching a conclusion that a particular activity, legal in itself but involving the use of artificial transactions, was lacking in commercial probity in a way which was contrary to the public interest and which justified the company being wound up.

124     However, … it is important that such a decision is made on the basis that the ways in which the activity lacks commercial probity and is contrary to the public interest are identified so that it can clearly be seen how and on what basis the exercise of this jurisdiction is justified.

    1. I accept Mr Chivers’ submission that it cannot be said and, indeed, is specifically not said by the SOS that to devise and implement a lawful scheme to avoid business rates is itself lacking in commercial probity or otherwise contrary to the public interest. It is obvious that there is legitimate scope for disagreement about this. Local authorities and many members of the public would doubtless strongly believe that rates avoidance is contrary to the public interest and that companies whose business it is to earn healthy profits by enabling property owners to avoid paying business rates on vacant property are lacking in commercial probity. The property owners who use the services of the Companies and other similar schemes doubtless strongly disagree. The court cannot make a decision one way or another. It is clear from the material which Mr Chivers put before me that the business rating system in general and rates avoidance schemes on empty property in particular is the subject of consideration and consultation by government and that differing approaches are being taken in England, Wales and Scotland. There is no evidence of harm to individual members of the public or to anyone or anything through the activities of the Companies other than a reduction in the monies which would otherwise be paid into the coffers of the local authorities. The court cannot rule upon the extent of the loss suffered by the general public either within the local authority area or more generally since it would depend on an investigation as to: (a) whether or not landlords might simply use other similar schemes if the Companies were wound up; (b) whether or not landlords might simply use different avoidance schemes if the result of this judgment was to close the insolvency schemes so far at least as limited companies promoting the scheme were concerned; (c) what wider losses might result if one way in which landlords could avoid payment of business rates on empty property was removed. In those circumstances it would be wrong for the court to conclude on this basis that Scheme 3 is inherently objectionable or that the Companies are operating in a way which is seriously lacking in commercial probity or against the public interest.”


“130.  …I am not satisfied that the SOS has made out her case for a public interest winding up order against either of the two Companies.”

The general anti-abuse rule in Part 5 of the Finance Act 2013 does not apply to business rates avoidance.

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