Analysis
Two schemes to avoid the payment of National Non-domestic Rates (NDR), by granting a short lease of unoccupied properties to special purpose vehicle companies (SPVs), which were then allowed to be dissolved, either by voluntary winding up or as dormant companies. Under the NDR legislation, the liability to pay rates on unoccupied property fell on the ‘owner’, being the person entitled to possession, which would include a lessee. However, properties owned by a company being wound up voluntarily were excluded under the applicable Regulations from being subject to NDR at all.
The claimant local authorities brought claims for the unpaid rates against the defendant lessors, contended that the leases in favour of the SPVs could be disregarded, either under the doctrine of piercing the corporate veil or the Ramsay principle, such that the defendant lessors remained the true owners for the purposes of liability for NDR. They contended that the leases were granted on uncommercial terms for the purpose of the tax avoidance scheme only, left running until the lessors wished to occupy the properties again, that the SPVs were set up and controlled by or on behalf of the lessors, carried on no business and had no assets other than the leases themselves, and that no meaningful steps had been taken in their liquidations.
The defendants applied to strike out the claims.
The Judge at first instance held that the doctrine of piercing the corporate veil arguably applied, and refused to strike out the claimants’ claims for NDR. However, he held that the Ramsay principle did not apply, nor were the leases shams. The Defendants obtained permission to appeal on the corporate veil point, and the Claimants obtained permission to cross-appeal on the Ramsay point. Permission to appeal on the doctrine of sham was refused.
Held
Allowing the Defendants’ appeal and dismissing Claimants’ cross-appeal, and therefore striking out the Claimants’ claims:
1) It was not open to the Court to treat properly incorporated companies as ‘nullities’. This part of the claimants’ case was unsustainable.
2) Liability to pay NRD on unoccupied properties under the Local Government Finance Act 1988, s45, accrued on a day-by-day basis. Accordingly, the defendants were under no pre-existing legal obligation or liability to pay NDR on the properties for any period after the grant of the leases, the enforcement of which they had sought to frustrate by interposing a company under their control. It was therefore not possible to apply the so-called ‘evasion principle’, identified in Prest v Petrodel Resources Ltd, [2013] UKSC 34 to the facts of this case, so as to allow the court to pierce the corporate veil. Extension of the principle of piercing the corporate veil beyond those instances identified in Prest could only occur in rare and novel case, whereas the use of SPVs in tax-avoidance schemes is widespread. Judicial disapproval of tax avoidance it is not a sufficient basis to invoke the doctrine of disregarding the separate legal personality of a registered company.
3) Applying Barclays Mercantile Business Finance Ltd v Mason, the Ramsay principle was one of purposive construction of revenue statutes. The mere fact that there was a composite transaction including elements devoid of commercial purpose intended to escape a charge from tax does not necessarily mean that the composite transaction will fail in that purpose. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically. The legislation in question was straightforward, and since it depended on the essentially legal concept of the immediate right to possession, it could not be given a purposive interpretation beyond its literal terms. The leases when granted (not being shams) made the SPV the ‘owner’ for the purpose of the legislation. The defendants could not simultaneously be the ‘owner’ and were therefore not liable for the NDR.
Note: the General Anti-Abuse Rule (GAAR) under the Finance Act 2003 was of no application in this case, because it does not apply to NDR.
JUDGMENT DAVID RICHARDS LJ: [1] These appeals concern two schemes designed to avoid the payment of National Non-Domestic Rates (NDR) on properties which in most instances were unoccupied. Both schemes involved the grant of leases of the properties to special purpose vehicle companies (SPVs) without assets or liabilities which, as part of the scheme in …Continue reading "Rossendale Borough Council v Hurstwood Properties & ors [2020] WTLR 253"