Local authority enjoys rare win over “sham” business rates schemes

By Aaron Mcleod, Director

Leeds City Council has claimed a significant win at the High Court of Justice after successfully proving that leases taken out on a series of city centre offices had been created specifically for the business rate avoidance.

This is a relatively rare victory for Local Authorities which will be experiencing immense pressure over the coming months and years to maximise business rates revenues as part of the post-Pandemic recovery. Most recent cases have found against Local Authorities –   for e.g. R (Principled Offsite Logistics Limited) v – Trafford Council [2018] EWHC 1687 (Admin)  – which then have legal costs as well as lost revenue to contend with.

This particular case centred around three empty office units close to Leeds city centre. The owner engaged rates’ mitigation firm Crusader which created a number of 21-week leases at nominal rents that could be terminated on a seven-day written notice period. Several of the leases contained user covenants requiring the premises to be used for heliculture – the farming of snails.

The Council contended the company – Isle Investments Ltd – used the leases which had no commercial reality and were part of a rates’ avoidance scheme. After hearing the evidence, Mr Justice Fordham agreed and concluded the leases were shams.

Barrister William Hanbury, who represented Leeds City Council, said the case “contained one of the most thorough considerations of law in shams, the judge having been referred to approximately 30 cases, many of them in recent years.

“The sham test: whether there was deliberate intention to deceive third parties into believing that what was created was different from that which it actually purported to create, was clearly a difficult test to surmount.

“The burden rested on the person asserting it, in this case the local authority. There is a presumption of regularity, i.e. that legal instruments do what they say they are supposed to do. This lease actually granted, or purported to grant, exclusive possession to the claimant. That, said the unsuccessful appellant, was the end of the matter. The judge said it was not.  He could look at the reality of what was created including looking at what happened subsequently.”

Other cases you may find of interest in relation to this issue are:

  • Sheffield CC v Kenya Aid [2013] EWHC 54 (Admin)
  • Secretary of State for Business Innovation and Skills v PAG [2015] EWHC 2404 (Ch)
  • Rossendale v Hurstwood[2017] EWHC 3461 (Ch) which went to the Court of Appeal [2019]