Business Rate Avoidance

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Business Rate Avoidance
Presented by Gordon Heath BSc IRRV
(Hons) for IRRV East Midlands Association
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Empty Rate History in England

• City of London Sewers Act 1848 - half the general
  rate, not the poor rate, hence about 10, no free
  periods, City of London only.
• Local Government Act 1966 - discretionary 50
  empty rate, with 3 months free period and various
  exemptions
• 1974 discretion increased to 100 empty rate
• 1974 - Rating surcharge soon abolished
• 1983 - industrial exemption, 50 limit on empty
  rate
• 1990 - compulsory 50 empty rate with exemptions
• 2008 - compulsory 100 empty rate, exemptions
  changed
• Imposed by Gordon Brown and Alistair Darling in
  England and Wales but not in Scotland

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100 Empty Rate the Reaction in 2008
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100 Empty Rate the Reaction

• Coincided with the 2008 credit crunch
• Ratepayers not very happy
• Properties demolished
• New starts and completions delayed
• Innovative methods of avoidance
• Meanwhile uses of empty buildings
• Relief given for small empty properties in
  2009/10 and 2010/11
• Contributed to losing the 2010 General Election ?

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Purpose of 100 Empty Rate?

• Meanwhile Project set up in 2009 by last
  Government
• Led by Development Trusts Association
• 2010 - SQW Consulting - business case
• Meanwhile uses of otherwise empty buildings for
  socially beneficial purposes
• www.meanwhile.org.uk
• DCLG guidance on suitable sub-leases
• Also planning changes to make change of use
  easier
• Is it about empty rate revenue or encouraging
  use?
• Effect of local rates retention on authorites
  attitudes?

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The Right to Minimise Tax Liability

• The Westminster Principle
• Inland Revenue Commissioners V Duke of
  Westminster 1936 (H. of Lords)
• Payments to domestic employees by deed of
  covenant that amounted to renumeration
• House of Lords refused to disregard the character
  of the deeds merely because the same result could
  be brought about in another manner
• Principle applies to any form of direct taxation
• Arrange the use of empty property to avoid empty
  rate

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The Right to Minimise Tax Liability

• Lord Tomlin Every man is entitled if he can to
  order his affairs so as that the tax attaching
  under the appropriate Acts is less than it
  otherwise would be . If he succeeds in ordering
  them so as to secure this result, then, however
  unappreciative the Commissioners of the Inland
  Revenue or his fellow taxpayers may be of his
  ingenuity, he cannot be compelled to pay an
  increased tax.
• Lord Atkin It has to be recognised that the
  subject whether poor and humble or wealthy and
  noble has the legal right to dispose of his
  capital and income as to attract upon himself the
  least amount of tax
• BUT this case only avoided a single avoidance
  step

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The Right to Minimise Tax Liability

• The Ramsay Principle
• W.T. Ramsay Ltd v Inland Revenue Commissioners
  1982 (H. of Lords)
• Company made a large capital gain and entered
  into a series of self cancelling transactions to
  generate an artificial capital loss and avoid CGT
  
• Where a transaction has pre-arranged artificial
  steps which serve no commercial purpose other
  than to save tax, then the proper approach is to
  tax the effect of the transaction as a whole
  referred to as the Ramsay Principle
• BUT it is limited to a series of self cancelling
  financial steps

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The Right to Minimise Tax Liability

• Furniss (Inspector of Taxes) v Dawson D.E.R.,
  Furniss v Dawson G.E., Murdoch v Dawson R.S. 1984
  (H. of Lords)
• Selling family company shares a pre-arranged
  plan to exchange shares for shares in a newly
  formed investment company that immediately sold
  the family shares at an agreed price.
• CGT exemption applies to company amalgamation
  and there was no gain or loss by investment
  company
• Steps inserted in a preordained series of
  transactions with no commercial purpose other
  than tax avoidance should be disregarded for tax
  purposes, notwithstanding that the inserted step
  had a business effect
• Significant extension to Ramsay Principle
• Now applies to a linear series of financial
  transactions

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Empty Rate Avoidance

• Most empty rate avoidance either relies on a
  series of occupations for six weeks or the
  granting of an exemption
• The Westminster Principle establishes a right to
  minimise tax
• The Ramsay Principle, as extended, enables
  artificial financial transactions to be ignored.
• Can the Ramsay Principle be extended to occupying
  premises ?
• Perhaps, but it goes beyond the existing
  decisions
• It requires a High Court decision
• We already have case law on rateable occupation
• We have new case law on empty rate avoidance

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Rateable Occupation

• John Laing Son Ltd v Kingswood Area Assessment
  Committee 1949 (Court of Appeal)
• London County Council v Wilkins 1956 (House of
  Lords)
• Four elements of occupation
• 1. it must be actual
• 2. it must be exclusive to the occupier
• 3. it must be of some benefit to the
  occupier
• 4. it must not be for too transient a period
• SI 2008/386 reg. 5 prescribes that no further
  rate free period applies if occupation is less
  than 6 weeks

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Rateable Occupation

• Rateable occupation is a question of fact
• Further periods of relief are allowed
• There is nothing in the regulations that prevents
  a ratepayer from repeatedly occupying for 6 week
  periods to claim repeated empty periods
• Key test is probably beneficial occupation
• My suggested question Ignoring the empty rate
  saving, would the ratepayer be prepared to pay a
  rent to obtain that benefit from the occupation?
• No requirement for rent to be passing
• Paramount Occupation Legal occupier is not
  always
• the same as the actual occupier

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De Minimis Occupation

• There is no de minimis rule in the legislation
• Wirral BC v Lane 1979
• Empty House undergoing building works - No
  overnight stays
• Most goods removed but use of telephone
• Cumming-Bruce LJ the magistrates .. decided to
  apply the maxim de minimis non curat lex to these
  valuable chattels.
• on the facts found by the magistrates, they
  could have very well come to the opposite
  conclusion
• I am not prepared to hold as a matter of law
  that the magistrates were not entitled thus to
  relegate these objects to a lowly grade of value
  or importance

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Plant, Machinery and Equipment

• LGFA 1988 s 65(5) - Plant, machinery and
  equipment.which was used. or is intended for
  use can be ignored
• Sheafbank Property Trust PLC v Sheffield MDC 1988
• A disused sports ground and premises was held to
  be unoccupied because it only contained plant,
  machinery and equipment that were last used on
  the premises
• Items included a snooker table, music facilities,
  tables, chairs, the bar and associated equipment,
  freezer, dishwasher, kitchen items, TV,
  refrigerator, settee, grass cutting equipment

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6 weeks Occupation

• Sheffield City Council v Metis Apartments Limited
  2010 - Magistrates Court
• THIS IS NOT A LEGAL PRECEDENT
• THERE IS SUBSEQUENT CASE LAW
• 13/8/09 - moved boxes of files from head office
  and storage to 3 empty properties
• 8 or 9 boxes in each property
• 2/10/09 - moved back to head office

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6 weeks Occupation

• 12/2/10 - moved boxes back in
• 20 to 27 boxes in each property
• 27/4/10 - moved back to head office
• Council informed at every stage
• Claimed benefit - reducing storage costs,
  enabling access, freeing up office space

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6 weeks Occupation

• The District Judge said I am of the view that in
  all the circumstances of this case, there has not
  been rateable occupation for the relevant periods
  when the boxes were placed at the three
  properties. There was no actual occupation. The
  use of the properties in the way described and
  photographed was so minimal. It is beyond slight
  in the sense that it is de minimis.

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6 weeks Occupation

• Beyond placing the boxes of files at the three
  properties, there is little evidence of the use
  to which they were put, or of the frequency of
  access or reference to them. They are boxes
  containing archived files. It occupied a very
  small percentage of the available floor areas.
• Liability order granted
• Not appealed
• Not a legal precedent

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6 weeks Occupation

• Makro Properties Ltd and Makro Self Service
  Wholesalers Ltd v Nuneaton and Bedworth BC 2012
• Decision given on 29 June 2012
• Appeal against liability order granted in the
  Magistrates Court
• Former cash and carry warehouse used for
  temporary storage
• Rowleys Green, Coventry
• 0.2 of floor space of 140,000 sq.ft.
• Storing16 pallets of documents
• Between November 2009 and January 2010
• Sufficient to trigger a further 6 months rate
  free period
• Would an appeal in Sheffield have succeeded ?

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6 weeks Occupation

• Ratepayers should tell the billing authority when
  they occupy for 6 weeks to enable inspection and
  makes sure it is occupied - then tell the
  authority when it is vacated
• Under LGFA 1988 s65(5) plant, machinery and
  equipment that was used or is intended for use
  should be ignored
• Includes shop fittings, counters and shelves
• Could include desks and chairs
• More than de minimis occupation
• 0.2 occupation appears to be sufficient

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6 weeks Occupation

• Occupation by empty boxes - not occupied
• Occupation by a few boxes of files probably
  occupied, given the 2012 Makro decision
• Occupied by tents - where is the benefit?

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6 weeks Occupation Blue Tooth

• Occupation by a small electronic box broadcasting
  messages on blue tooth
• Not in occupation if it is just a to let
  advertisement !!
• Occupied - if the occupier is paying a rent and
  is being paid to broadcast messages - appears to
  be beneficial, actual and exclusive
• It does not matter if it is a lease, licence or
  an easement
• Does it matter if no rent is passing?
• Paramount control remains with the landlord if he
  controls the use of the hereditament - not merely
  the access

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6 weeks Occupation Blue Tooth

• Could it be valued as a communication station? -
  6 weeks is probably too transient
• Is the occupation de minimis? - probably not if
  the ratepayer is obtaining benefit by
  broadcasting
• Its not the size of the equipment that
  determines if a benefit is being obtained from
  the occupation
• If the only benefit is avoiding empty rate, that
  is not beneficial occupation
• There must be a beneficial use

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Occupation Prohibited

• Occupation Prohibited By Law where an empty
  property contains asbestos ?
• Asbestos surveys sent with the requests detailing
  varying levels and types of asbestos
• Just because an empty property has asbestos in it
  this does not mean it cant be occupied

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Occupation Prohibited

• Not an issue when occupied but when empty it may
  be difficult to refurbish for a new tenant
• Regent Lion Properties Ltd v Westminster City
  Council 1990 - Notice under Health and Safety at
  Work Act 1974 - refurbishment must cease until
  asbestos removed
• Not only asbestos - Construction (Design and
  Management Regulations) 2007

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Letting to a Charity

• Letting to a charity only works if the charity
  occupy or intend to occupy it for charitable
  purposes of THAT charity (or that charity and
  others)
• If there is no intention for the charity to use
  it for a charitable purpose, the charity will be
  liable for 100 charge
• Occupation of only part is sufficient to
  establish liability
• If it is occupied, it must be wholly or mainly
  used for charitable purposes to qualify for
  relief
• All of the hereditament - not just all of the use
  made?

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Letting to a Charity

• English Speaking Union Scottish Branches
  Educational Fund v City of Edinburgh Council 2009
• Judicial review of refusal of mandatory relief
• Tenants of whole building - 8 floors -only used
  the ground floor - must be wholly or mainly used
• Ratepayer - wholly used for charitable purposes
• Council - only partially used
• Councils argument is consistent with the
  ordinary meaning of the language used in the
  legislation

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Letting to a Charity Blue Tooth

• Letting to a charity that occupies with a
  bluetooth box broadcasting charitable messages
• Evidence of broadcasting ?
• Is it a charitable purpose ?
• Occupation of all or part is sufficient to
  establish rateable occupation
• Everyone knows the 4 elements of occupation in
  the John Laing case - thats not the point
• Charitable relief ONLY applies where it is wholly
  or mainly used by that or that and other charities

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Letting to a Charity Blue Tooth

• Could it be valued as a communication station ?
• 9 months would not be too transient
• Some have now been valued at about RV 100
• However it must be a separate occupation - not
  occupied by the same ratepayer as the main
  hereditament and for the same purpose
• Occupied rate on box, Empty rate on remainder
• No further 3 months if re-merged
• Moving the box around might frustrate this

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Letting to a Company in Liquidation

• Just one of many examples
• 5/8/2010 - Company is formed
• 1/9/2010 - Company takes 15 leases on empty
  property in two Boroughs
• 1/9/2010 - Declaration of solvency
• 1/9/2010 - Members voluntary liquidation later on
  the same day - Liquidator appointed
• Liability falls on leaseholder in liquidation -
  exempt from empty rate

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Letting to a Company in Liquidation

• The are only peppercorn rents and no rate
  liability - company remains solvent
• No creditors to turn the voluntary liquidation
  into a compulsory liquidation
• No pressure to disclaim the leases
• No pressure to complete winding up

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Letting to a Company in Liquidation

• Company wound up 3 months after notice from
  liquidator to Registrar at Companies House
• Remaining leases revert to the Crown as bona
  vacantia - vacant goods
• Treasury Solicitor Bona Vacantia Division
• Crown accepts no liability - landlord not
  entitled to possession and therefore not liable
• No one is liable
• Within a year the Crown will disclaim the leases
  and the landlord will become liable from then

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Letting to a Company in Liquidation

• Various companies referred to the Companies
  Investigation Unit of the Insolvency Service
• Following investigations - IS presented petitions
  to wind up companies on 31 May 2011
• 27 July 2011 - 13 Companies wound up in the High
  Court
• 29 July - Insolvency Service press release
• Scheme initially used for own properties but in
  April 2009 extended to approximately 100 third
  party landlords

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Letting to a Company in Liquidation

• Scheme avoided 8.9M empty rate
• Generated a fee income of 1.4M
• Companies never traded - no liquidator
• Investigating Supervisor In making the decision
  to wind-up these companies, the court is sending
  a clear message that schemes which abuse the
  insolvency regime to avoid paying business rate
  liabilities are not acceptable
• Companies and directors listed in press release
• BUT IT IS STILL HAPPENING because it works?

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Instant Rate Saver Plan

• As advertised by articles in Property Week
• Environmental charity - Healthy Planet
• Healthy Planet sign a short term lease with a
  retail landlord to install posters advertising
  its work in shop windows in return for a donation
• Landlords benefit by avoiding empty rate
• Charity said the initiative would help landlords
  to cut their empty rates bills, improve the look
  of empty shops, and help the charity

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Instant Rate Saver Plan

• May improve the look of vacant shops
• CLG has given money to some authorities to use
  vacant shops
• Could ask VO to split assessment between shop and
  advertising right, BUT- it is only a separate
  hereditament if there is a separate lease for the
  advertising right
• Is the charity in beneficial occupation by virtue
  of the posters in the window? - not in my opinion

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Instant Rate Saver Plan

• Charity exemption from empty rate only applies if
  it appears that when next in use it will be used
  by that charity or that charity and others for
  charitable purposes
• If it is not the case - 100 liability remains
• Are free standing advertising boards inside the
  windows occupation?
• Is advertising a charitable purpose?
• Is it mainly used for a charitable purpose?
• Have some local authorities given relief?

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Instant Rate Saver Plan

• Article in FT Nov 2011 - Charities paid by
  retailers in rates deals
• JJB Sports and Blacks Leisure confirmed that they
  have paid charities to occupy empty shops
• 9,000 charity shops - 28.5 increase since 2008
• Charity Commission considering issues - concerns
  would be whether decisions to occupy are to
  further charitable purposes and any benefit to
  the landlord is incidental

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Instant Rate Saver Plan

• Article in FT Nov 2011 - Treading a fine line
  between scam and service
• Healthy Planet being paid to occupy about 60
  empty shops by posters in the windows
• Also operates 13 Books for Free shops
• HMRC has taken issue with Healthy Planets 2010
  accounts
• Donations increased from 13,000 to 1.1M in one
  year
• However it seems that it was Healthy Planet that
  approached HMRC, which is not the impression
  given by the article.

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Instant Rate Saver Plan

• HMRC - payment in return for occupying an empty
  shop is not really a donation
• Healthy Planet has now paid several thousand
  pounds in tax
• Intend to turn all shops into Books for Free
  shops
• 3Space also receives donations for occupying
  shops but lets community groups use them for
  nothing

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Part Occupied Relief under section 44A

• It is at the Local Authoritys discretion
• The discretion is exercised when the Local
  Authority applies for an RV apportionment
• The Valuation Officer must give it
• The Authority must operate it
• It must appear to the Authority that part is
  unoccupied and will remain so for a short period
• CLG Non-domestic rates Guidance on rate reliefs
  for charities and other non-profit making
  organisations - updated June 2009
• Can be successive periods
• Phased occupation/vacation
• Depends on RV of empty part

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Section 44A CLG Advice

• 8.2.2 It is not intended that section 44A be
  used where part of a property is temporarily not
  used or its use is temporarily reduced ..
  Instead section 44A is aimed at situations, for
  example, where there are practical difficulties
  in occupying or vacating a property in one
  operation . and it is phased over a number of
  weeks or months. In such cases it would be
  reasonable to reduce the liability on that part
  of the property which is unoccupied. Similarly,
  where a building or buildings on a manufacturing
  site become temporarily redundant it might be
  reasonable to take the unoccupied part of the
  property into account rather than levy full rates
  on the whole property.

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Section 44A CLG Advice

• 8.2.4 ........So, for instance, where the
  rateable value of the apportioned, unoccupied
  part of the property is below the relevant
  threshold no rates will be payable on that part
  until the end of the operative period (see
  further paragraph 8.2.7). It should be noted that
  the threshold has been increased from 2,200 to
  15,000 for a one year period covering the
  2009/10 business rates year
• Threshold 18,000 for 2010/11
• Automatically reverted to 2,600 in 2011/12

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Telephone Masts

• Valued as Communication Station (and Premises)
• Valued on rent for site plus any plant and
  machinery
• VO will not TOR unless incapable of beneficial
  occupation
• Entry in the list does not prove occupation
• Not the same as an advertising right where the
  right is rated

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Telephone Masts

• Kennett v British Telecom. 1983 (H. of Lords)
• Exchange in occupation as soon as some equipment
  moved in
• LGFA 1988 s65(5) - can ignore plant and machinery
• If equipment switched off and disconnected it can
  be ignored
• No beneficial occupation - grant empty allowance
• N.B. There is no empty rate liability because a
  telephone mast is a structure, not a building

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Relevant Hereditament

• SI 2008/386 - unoccupied property regs.
• Relevant hereditament for empty rate liability -
  building (or part) or building (or part) plus
  land
• Communication station is a structure not a
  building - outside the definition of
  hereditaments subject to empty rate
• Similarly no empty rate on land including surface
  car parks and land used for storage
• This is not empty rate avoidance, they are simply
  not subject to empty rate.
• There is no empty rate on an advertising right
  because it is defined in the regulations to be
  occupied while there is a rent
• being paid for the right and when this stops
  it should
• be taken out of rating

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Duty to Bill as Soon as Practicable

• Encon Insulation Ltd v Nottingham City Council
  1999
• Regentford Ltd v Thanet District Council 2004
• R (on the application of L. B. Waltham Forest v
  Waltham Forest Magistrates Court (ReYem Yom
  Ventures Ltd) 2008
• JJB Sports plc v Telford Wrekin Borough Council
  2009
• The North Somerset cases 2010
• Specific requirement in regulations
• Can go back to 1 April
• Probably back into last year
• Only earlier if the billing authority has taken
  all reasonable steps

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Duty to notify the VO

• Secerno Ltd, Sportsworld Ltd Xou Solutions Ltd
  v Oxford Mag. Ct. and Vale of White Horse
  District Council 2011
• High Court (QBD) Administrative Court
• 2011 EWHC 1009 (Admin)
• 27 January 2011, London
• Judicial Review
• Liability Orders granted 25 November 2009 in
  Oxford Magistrates Court
• No dispute on occupation by ratepayers, entries
  in the list and correct demands

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Duty to notify the VO

• Alleged that the Council had been in breach of
  its statutory duty to notify the VO of
  information relating to entries in the list
• LGFA 1988 Schedule 9 para. 6(1A)
• Reg. 42 NDR (Alteration of Lists and Appeals)
  (England) regulations 2005/659
• Now replaced by 2009/2268 reg. 24
• Duty to supply information to the VO as soon as
  reasonably practicable
• Failure to supply information to the VO on time
  resulting in list not being altered as soon as it
  could have been
• Caused difficulties to ratepayers

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Duty to notify the VO

• Ratepayers claim Magistrates should have refused
  liability orders
• Statutory duty not just obligation
• Failure to serve a demand as soon as reasonably
  practicable in accordance with 1989 Collection
  and Enforcement regulations does result in
  invalidity if the ratepayer would suffer
  prejudice
• Ratepayers claim that failure to notify the VO of
  information resulting in delay leads to prejudice
  and therefore invalidity
• Cannot go behind the list R (Vitesse Networks)
  v NW Wiltshire Mag. Ct. 2009
• Appeals regulations have nothing to do with
  collection and enforcement
• Concerned with content of Local List
• Reg. 42 is an irrelevance
• Liability Order correctly granted

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The Future

• Local Rates Retention from 2013
• Local authorities gain from increased local rate
  income AND suffer the cost of reduced local rate
  income
• More inspections
• Tougher line on evasion
• Less discretionary relief?
• Encourage local business development
• Current review of empty rate by 7 MPs
• Possible 3 year exemption for new developments ?
• Possible full rate relief for low RV properties ?
• Impact assessment of empty rates ?

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Conclusions

• Empty rate avoidance is legal Westminster
  principle
• The Ramsay Principle is a red herring
• De minimis occupation can be ignored
• S65(5) occupation can be ignored
• Minimal occupation is sufficient
• Beneficial Occupation is the key issue
• Paramount Occupation Legal occupier v actual
  occupier
• Local Rates Retention in England may encourage
  more effort
• A reduction to 50 empty rate would not reduce
  avoidance
• Government has helped with avoidance
• Notifying the VO is irrelevant
• Bill as soon as practical

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