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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

Presented by:

Gordon Heath BSc IRRV (Hons)

for

IRRV East Midlands Association


Empty rate history in england
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
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
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 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 liability1
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 liability2
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 liability3
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
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
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 occupation1
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
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
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
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 occupation1
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 occupation2
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 occupation3
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 occupation4
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 occupation5
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 occupation6
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
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 tooth1
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

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Occupation prohibited
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

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Occupation prohibited1
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

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 charity1
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

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Letting to a charity blue tooth
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

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Letting to a charity blue tooth1
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
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 liquidation1
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 liquidation2
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 liquidation3
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 liquidation4
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
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 plan1
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 plan2
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 plan3
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 plan4
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.

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Instant rate saver plan5
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
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

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Section 44a clg advice
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 advice1
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
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 masts1
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
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
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

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Duty to notify the vo
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 vo1
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 vo2
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
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
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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