When assessing whether tax mitigation schemes are effective, judges must interpret legislation in the real world and with regard to the likely intentions of Parliament. The Supreme Court made those points in a test case concerning schemes designed to avoid non-domestic rates (NDR) liabilities on vacant commercial premises.
The schemes involved the proprietors of various empty buildings granting leases of the premises to single-purpose corporate vehicles (SPVs). The intention was that NDR liabilities would fall upon the SPVs on the basis that, when the leases were signed, they became ‘owners’ of the premises in the sense that they were legally entitled to possession of them. The SPVs were subsequently either dissolved or placed in liquidation, leaving NDRs unpaid.
Two local authorities launched proceedings on the basis that they were entitled to unpaid NDRs from the original proprietors. They argued, amongst other things, that the leases did not have the effect of rendering the SPVs ‘owners’ of the premises within the meaning of the Local Government Finance Act 1988. The councils’ claims were, however, struck out by the Court of Appeal on the basis that they stood no real prospect of success.
Upholding the councils’ challenge to that outcome, the Supreme Court noted that there were 55 similar cases waiting in the wings with the value of unpaid NDRs ranging from a few thousand to millions of pounds. It was agreed on all sides that the leases were not shams and that the SPVs were, as a matter of property law, entitled to possession of the premises. However, the schemes had no business or real-world purpose other than the avoidance of NDRs.
The SPVs had no assets or business and it was never intended that they would pay NDRs. Although the leases on the face of it placed rent obligations on the SPVs, there was no intention to demand or pay such rent. In those circumstances, the schemes, which relied upon hoped-for administrative inertia on the part of local authorities, involved abuse of the legal process or insolvency legislation.
Taking a modern approach to statutory interpretation, the Court noted that the Act should be construed as a whole, in the light of its historical context, and with a view to giving effect to the intention of Parliament. The purpose of charging NDRs on unoccupied premises was to deter proprietors from leaving properties unoccupied for their own financial advantage and to encourage them to bring vacant premises back into use for the benefit of the community at large.
The Court interpreted the word ‘owner’, as used in the Act, as requiring more than an immediate legal right to physical possession of a property. Given that the SPVs had no real or practical ability to exercise their possession rights, and the fact that those rights were conferred for the sole purpose of avoiding NDRs, Parliament could not have intended that the SPVs would qualify as ‘owners’ within the meaning of the Act.
The Court found that, notwithstanding the leases, the entitlement to possession of the premises remained with their original proprietors. They, rather than the SPVs, had retained the real ability to decide whether to leave the premises unoccupied. There was thus a triable issue as to whether the original proprietors remained liable for NDRs throughout and the councils’ claims should not have been struck out.