Business rates mitigation
Business rates mitigation
The Local Government and Finance Act 1988 significantly altered the statutory basis on which business properties are subject to local taxation – that is to say rating- in England and Wales. There have since been various rules brought in and subsequently altered for the rating of empty properties but the Act remains the foundation upon which the rating of commercial properties rests, and the rating of non-productive properties has been a hot topic of debate amongst property professionals ever since.
I wrote an article for the Estates Gazette in the late early 1990s identifying two possible methods by which the financial burden of rates on empty properties might be mitigated: the utilisation of the exemption enjoyed by the liquidators of companies and use of the three month voids “holiday” when combined with the six weeks plus period for the re-engagement of that holiday.
The position in respect of the liquidator’s exemption was clarified in 2015 by the case of Secretary of State v PAG Management Services Limited (2015) EWHC 24, where it was held that a scheme involving the liquidation of special purpose vehicle companies specifically set up for the purposes of operating a rates mitigation scheme was an abuse of the insolvency regime as such was not allowable (although the judge did not accept that such a scheme failed because it was a sham).
There has now been further clarification on the effectiveness of rates mitigation schemes, this time involving the second scheme mentioned above. In the High Court decision in R (Principled Off-Site Logistics Limited) v Trafford Council (2018) EWHC 1687, Mr Justice Kerr decided that the morality of any such scheme had to be set aside and consideration instead focused on whether the arrangements concerned fell within the statutory rules in such a way as to make the scheme under consideration permissible.
Regulations made under the 1988 Act provide that landowners do not become liable for rates on properties for the first three months after the occupier vacates. If the premises are re-occupied during that period then the re-occupation must last for more than six weeks before the three month “vacant properties” relief comes back in to play. This has allowed specialist businesses to sell rates mitigation services by offering to take leases of empty premises for periods of at least six weeks plus one day before vacating in order to trigger a further 3 month rates “holiday”, an arrangement which can continue for so long as the property concerned has no identified productive use. The mitigation company has to demonstrate that its occupation satisfies the four requirements for rateable occupation, that is to say that it has actual occupation of the premises, that it has exclusivity of possession, that the occupation has value to the occupier and that the occupation is not too transient. However subject to this, HHJ Kerr held that his role was not to investigate the morality of such a scheme and if it is effective and valid. The operation of the scheme in itself had value which rendered the occupation beneficial to the mitigation company so long as it could demonstrate actual occupation.
It is possible that this case will be appealed but that is perhaps less likely than the Government eventually getting around to bringing in legislation to close off this scheme in the name of coming to the aid of assisting hard-pressed local authorities: the political centre of gravity is such that Government effectively controls the rules under which this particular tool for funding local government (business rates) is operated notwithstanding that it is generally thought of by the public as a local matter.