Ruling on rates avoidance scheme – sham or legitimate vehicle question examined

I do know that not everyone finds the world of rating as fascinating as me, but I ask you to embrace your inner geek for a few minutes and read on.

The decision I’m looking at is Wigan Council v Property Alliance Group Limited [2017] EWHC 3461 (Ch).

At first glance it looks like a poor result for the local authorities, but there are still dozens of other similar – not identical – cases to be heard.

The Judgement of HHJ Hodge QC came at the back end of last year on the Respondents’ applications to strike out the claims against them.

The Respondents operated rates’ avoidance schemes by creating a Special Purpose Vehicle (SPV) to which a lease was granted, divesting the owner of liability.

In the PAG cases the SPV would be placed into voluntary liquidation once the lease had been granted with a slow liquidation process following. In Hurstwood the SPV was simply left to be struck off the register as allowed by either section 1000 or 1003 of the Companies Act 2006.

Both cases brought by the LA sought declaratory relief based on the fact that the rates avoidance schemes were ineffective and/or that the SPV should be disregarded for the purpose of rating either as a sham, a nullity or as agent of the landlord.

The Council’s case stated that elaborate arrangements had been put in place to establish a rates’ avoidance scheme which otherwise would not have been undertaken and which had no genuine commercial or other justification. It also maintained the separate corporate existence of the SPVs was to be disregarded by piercing the corporate veil. The defendants countered saying the Councils had no “reasonable grounds” for bringing the claims.

The Judge was very clear and said he would need to decide 3 points:

1. Were the leases to be regarded as sham transactions?
2. Does the Ramsay Principle apply to the transactions?
3. Can the SPVs be disregarded and the corporate veil pierced?

To the first question: An End to Arguing a Lease is a Sham? The Respondents were successful as the court accepted its argument of what constituted a sham:

(1) An artificial transaction is not the same as a sham transaction.
(2) Persons are entitled to arrange their affairs to their best advantage, so long as the law allows it.
(3) A transaction cannot be challenged merely because it was entered into solely to obtain an advantage as a result of a statutory provision.
(4) The court has no power to fill a gap in a statute.
(5) A transaction is only a sham if the parties thereto have the dishonest common intention that the transaction is not going to create the legal rights and obligations which it gives the appearance of creating.
(6) The court is slow to find that an agreement is a sham.

The ruling stated that an artificial transaction is not the same as a sham transaction and cannot be challenged merely because it was solely entered into for the purpose of gaining an advantage as a result of statutory provision. A transaction is only a sham when the parties to it have dishonest intentions, and the transaction should not, in fact, create legal rights and obligations which it gives the appearance of creating.

The statement of the Court’s approach to sham is a reaffirmation of the law rather than anything new.

Despite the Court finding that the leases granted to the SPVs could not be treated as shams, this will not see the end of Local Authorities maintaining this argument in court as the judge stressed this was a specific case and subsequent cases should be dealt with on their own merit.

On to the Judge’s second question: A Continued Use for the Ramsay Principle? The Ramsay Principle is the application of the House of Lords’ decision in Ramsay v IRC [1982] AC 300. It gave guidance on applying statutory provisions in tax avoidance cases.

The decision here hinged on whether at the point of granting the lease the SPV was given an immediate right to possession. The Judge was satisfied that it was and remained entitled until there was a subsequent disclaimer. As the SPV was the party entitled to possession, it was the party subject to non-domestic rates (although exempt due to insolvency) and not the landlord.

The final point: can the SPVs be disregarded and the corporate veil pierced? The judge sums up by saying: “The schemes may involve, and have undoubtedly been motivated by, the avoidance of liability of business rates, but that is simply a consequence of the way in which the statute operates. It is not for the court, as distinct from Parliament, to alter the effect that statute has imposed.”

For those still with me, the full judgement can be read here: http://www.bailii.org/ew/cases/EWHC/Ch/2017/3461.html