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Business Rate Avoidance

Business Rate Avoidance. Presented by: Gordon Heath BSc IRRV (Hons) for IRRV East Midlands Association. 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.

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Business Rate Avoidance

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  1. Business Rate Avoidance Presented by: Gordon Heath BSc IRRV (Hons) for IRRV East Midlands Association

  2. 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 Gordon Heath Ltd 2

  3. 100% Empty Rate – the Reaction in 2008 Gordon Heath Ltd 3

  4. 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 ? Gordon Heath Ltd 4

  5. 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? Gordon Heath Ltd 5

  6. 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 Gordon Heath Ltd 6

  7. 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 Gordon Heath Ltd 7

  8. 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 Gordon Heath Ltd 8

  9. 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 Gordon Heath Ltd 9

  10. 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 Gordon Heath Ltd 10

  11. 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 Gordon Heath Ltd 11

  12. 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 Gordon Heath Ltd 12

  13. 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” Gordon Heath Ltd 13

  14. 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 Gordon Heath Ltd 14

  15. 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 Gordon Heath Ltd 15

  16. 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 Gordon Heath Ltd 16

  17. 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. Gordon Heath Ltd 17

  18. 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 Gordon Heath Ltd 18

  19. 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 ? Gordon Heath Ltd 19

  20. 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 Gordon Heath Ltd 20

  21. 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? Gordon Heath Ltd 21

  22. 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 Gordon Heath Ltd 22

  23. 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 It’s 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 Gordon Heath Ltd 23

  24. 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 can’t be occupied Gordon Heath Ltd 24

  25. 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 Gordon Heath Ltd 25

  26. 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? Gordon Heath Ltd 26

  27. 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 Council’s argument is consistent with the ordinary meaning of the language used in the legislation Gordon Heath Ltd 27

  28. 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 - that’s not the point Charitable relief ONLY applies where it is wholly or mainly used by that or that and other charities Gordon Heath Ltd 28

  29. 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 Gordon Heath Ltd 29

  30. 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 Gordon Heath Ltd 30

  31. 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 Gordon Heath Ltd 31

  32. 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 Gordon Heath Ltd 32

  33. 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 Gordon Heath Ltd 33

  34. 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? Gordon Heath Ltd 34

  35. 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” Gordon Heath Ltd 35

  36. 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 Gordon Heath Ltd 36

  37. 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? Gordon Heath Ltd 37

  38. 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 Gordon Heath Ltd 38

  39. 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 Planet’s 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. Gordon Heath Ltd 39

  40. 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 Gordon Heath Ltd 40

  41. Part Occupied Relief under section 44A It is at the Local Authority’s 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 Gordon Heath Ltd 41

  42. 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. Gordon Heath Ltd 42

  43. 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 Gordon Heath Ltd 43

  44. 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 Gordon Heath Ltd 44

  45. 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 Gordon Heath Ltd 45

  46. 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 Gordon Heath Ltd 46

  47. 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 (Re:Yem 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 Gordon Heath Ltd 47

  48. 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 Gordon Heath Ltd 48

  49. 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 Gordon Heath Ltd 49

  50. 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 Gordon Heath Ltd 50

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