Business rates are an important source of funding but assessment and enforcement of liability require local authorities to address a complex range of issues. Paul Hilsdon and Clare Hardy examine two recent cases have shown that courts are prepared to look closely at the arrangements under which premises are occupied.
In the case of Hurstwood Properties Ltd & Others v Rossendale Borough Council and Another potential ratepayers had established special purpose vehicle companies, to which they granted short-term leases of unoccupied properties, so that the SPVs became liable for business rates as the owner of the properties. The SPVs were then dissolved, so that the relevant local authorities could not enforce payment of business rates.
The local authorities referred the court to section 65(1) of the Local Government Finance Act 1988, which defines the owner of a hereditament or land as the person entitled to possession of it. The schemes in this case involved SPVs who had no real control over whether the properties were occupied or not. The local authorities argued that Parliament could not sensibly have intended the legislation to provide for the person entitled to possession to include a company which had no real or practical ability to exercise its right to possession. The local authorities also argued that the Ramsay principle meant that the leases could be disregarded.
This principle, which was established by the case of WT Ramsay Ltd v Inland Revenue Commissioners, requires that steps in a transaction that have no commercial purpose apart from avoidance of tax should be disregarded.
In Hurstwood, the Supreme Court found that the course of action adopted by the respondent companies fell into this category and there was a triable issue as to whether they remained liable for business rates throughout the duration of the leases.
A similar approach was taken by the High Court earlier this year in the case of Isle Investments Ltd v Leeds City Council. The High Court upheld a finding from the Magistrates Court that short-term leases which a company had granted to newly created companies were sham arrangements, which had been entered into for the purpose of avoiding liability for business rates. Since the court found that the leases were not valid, the landlord company was liable for the payment of business rates.
Charities and rate relief
The case of Nuffield Health v Merton London Borough Council involved a judgment from the Court of Appeal on the eligibility of charities for mandatory relief from liability for non-domestic rates.
Section 43(6)(a) of the Local Government Finance Act 1988 provides for 80% relief from liability for rates if “the ratepayer is a charity or trustees for a charity and the hereditament is wholly or mainly used for charitable purposes (whether of that charity or of that and other charities)”.
This case involved a charity, whose objects were to advance, promote and maintain health and healthcare of all descriptions and to prevent, relieve and cure sickness and ill health of every kind, all for the public benefit. It sought to deliver public benefit through core trading activities carried out at its hospitals, clinics and fitness and wellbeing centres. The charity operated a gym in the local authority’s area and applied for mandatory and discretionary relief from payment of business rates.
After initially applying mandatory relief, the local authority later withdrew this because it decided that the premises were not being used wholly or mainly for charitable purposes.
The charity challenged this and the High Court and Court of Appeal found that the charity was entitled to rate relief of £930,823.95 on the property that was being used as a gym.
The court found that the charity purpose required by section 43(6)(a) of the Local Government Finance Act 1988 was subsumed in the status of the charity ratepayer. The point was made in the judgment from the Court of Appeal that the relevant question is whether the charity is using the hereditament for its charitable purposes, not whether the activity carried on at the hereditament would qualify as a charitable activity in its own right. The Court of Appeal concluded that it was not Parliament's intention that the question of public benefit should be assessed separately for each site on which a charity carries out its charitable activity.
Although the court concluded that the charity was eligible for rate relief, comments made in the judgment suggest that this may not be the end of the story for charities if there is any question about the charitable nature of the activities that they carry out from particular properties. Peter Jackson LJ observed that although the charity had succeeded under the rating legislation, its failure to show that it was using the particular premises in question for public benefit may not be without consequences in the context of charity law. He went on to say “Its trustees are obliged to satisfy themselves in good faith that its provision is for the public benefit. If the situation at the premises is replicated across its several hundred fitness centres and gyms, the organisation may face scrutiny through the Charity Commission and ultimately through the courts."
Local authorities should consider whether their current arrangements are maximising the potential to secure income from business rates. Actions they could take include:
- Reviewing their lists of persons liable for business rates and exploring whether any details would merit further investigation to identify any sham arrangements.
- Reviewing their processes for obtaining details of liability for business rates and considering whether these are robust enough to enable them to identify sham arrangements for the purpose of avoiding business rates.
- Identifying whether there is any potential for them to apply to court to challenge arrangements which have enabled owners of properties to avoid liability for business rates.
- Reviewing their approach to assessing relief for charities to ensure that it is consistent with the judgment in Nuffield Health v Merton London Borough Council.