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Rates – avoidance ploys

There are three main ploys (or ‘mitigation products’) for avoiding business rates.

In considering these, bear in mind the words of the High Court in Kenya [2013]: ‘if the parties were indulging in tax avoidance, I do not consider that this is a matter to which weight should have been attached’ (ie from a legal perspective, rates avoidance is not a question of ethics or morality).

1) Three months’ occupation by third party: empty shops and offices can claim a rate-free period of three months, so the owner can claim that three-month rate-free period when the premises are unoccupied. Once the three-month period is up, then the owner has to pay the full rates. If the property is re-let, then the new occupier will be liable for the rates and, when that occupier leaves, the owner will then become liable for the rates again – subject to being able to claim another three-month rate-free period (provided that there was at least three months’ occupation by the intermediate occupier). This allows there to be a succession of ‘genuine’ short-term lets to exploit successive three-month periods. As we noted in the September 2018 issue (p18) there are specialist companies that will arrange this: typically the company will take a lease of the premises at a nominal rent, for short-term storage (perhaps charging 20% of the rates saved). After three months, the company vacates and L can claim the three-month rate-free period. That ploy can be repeated again and again, provided the leases are ‘genuine’ and T takes up ‘occupation’ (ie actual occupation, exclusive occupation, and not too transient). The motive for this is irrelevant (the word ‘occupation’ and the rating legislation does not involve a motive element). As long as there is some genuine storage then the ploy will almost certainly succeed, as confirmed in R v Trafford [2018] EWHC 1687 (Admin).

2) Leasing to a company that goes in to liquidation: a third party incorporates a company, and L then grants a lease to that company. For rating purposes, the company becomes the ‘owner’, meaning that L is no longer liable for business rates. Typically (but not necessarily) the company will then be liquidated, which exempts it from rates liability. The effectiveness of this ploy was upheld in Rossendale [2017] (noted on p16 of March/April 2018 issue). In particular, the High Court did not accept that this was an invalid ‘sham’ agreement; the leases were genuine, and thus the requirements of rating law were met. Moreover, the court was reluctant to go behind ‘the corporate veil’, which it is entitled to do if there is a suggestion of an ‘abusive’ transaction. However, that does remain a potential weakness of this sort of ploy, and it is understood that the case will go before the CA by the end of this year.

3) Residential guardians: an empty office building was occupied by a ‘guardian’ (to protect the property from trespass and damage). However, the Valuation Tribunal decided that the occupation of the guardians was heavily restricted and under the control of the owner (who therefore remained the ratepayer). In the Tribunal’s view, the owner was in paramount occupation of the property as a single rateable unit, and there was simply not the evidence to prove that the premises were be using by the guardians for residential purposes. Thus, the presence of the guardians was merely to provide ‘security’, and that was not a ground for a relief from rates. Accordingly, the ploy failed – though residential occupation, might, in certain circumstances, be sufficient. See Ludgate House v Ricketts (5 July 2018).

Reading the above, it is quite clear that the most effective ploy is likely to be to arrange a short-term (more than three months) let to a third party for storage purposes, and then claim the three-month rate-free period (before repeating that process again).

 

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