Court of Appeal—business rates avoidance scheme legitimate (Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation)

Court of Appeal—business rates avoidance scheme legitimate (Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation)

Nicholas Trompeter, barrister at Selborne Chambers, examines the Court of Appeal’s decision that the respondent companies did not have to be wound up for operating a scheme to enable property owners to avoid liability for business rates in respect of unoccupied commercial properties.

Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation Ltd; Secretary of State for Business, Energy and Industrial Strategy v MB Vacant Property Solutions Ltd [2020] EWCA Civ 1017, [2020] All ER (D) 02 (Aug)

What are the practical implications of this case?

Substantively, the judgment provides a strong reminder that legitimate tax avoidance schemes are neither morally reprehensible nor contrary to the public interest.

Furthermore, where a transaction is genuine (ie not a sham) and means what it says, then (i) its meaning and effect, and (ii) the general law, must not be distorted or manipulated on the grounds that the outcome of the transaction (whether tax avoidance or otherwise) might be considered by some to be socially reprehensible.

In this regard, the Court of Appeal followed the approach in a trilogy of cases involving schemes designed to avoid the effects of a statute:

  • Aldrington Garages Ltd v Fielder [1978] 2 EGLR 70—concerning a licence designed to avoid the provisions of the Rent Acts
  • MacFarlane v Falfield Investments Ltd 1998 SC 14—concerning a limited partnership designed to avoid the provisions of the Agricultural Holdings (Scotland) Act 1991, and
  • National Westminster Bank v Jones [2001] 1 BCLC 98, [2000] All ER (D) 857—concerning the incorporation of a company and the grant of a lease designed to protect farmland and assets from a mortgagee

Procedurally, the judgment also provides a salutary warning about properly identifying and pleading the grounds for winding up a company.

In this case, the appellant Secretary of State advanced a single ground for winding up against the respondent companies, ie that they lacked commercial probity in their operation of business rates avoidance schemes on the ground that the schemes ‘misused and/or abused and/or subverted the insolvency legislation’.

However, in substance, the appellant’s complaint went far wider than this, ie complaining that the very object of the schemes was to avoid payment of rates. The Court of Appeal made it clear that it was not open to the appellant to pursue this argument, given how the winding-up petition had been framed. This left the appellant to advance an academic case about an alleged misuse or abuse or subversion of ‘the insolvency legislation’ which caused no harm or loss to any member of the public either specifically or generally. Perhaps unsurprisingly, the Court of Appeal did not consider that this justified the winding-up of the respondent companies.

What was the background?

This case concerned a scheme to enable property owners to avoid liability for business rates in respect of unoccupied commercial properties. The scheme was referred to as ‘Scheme 3’ (being a modified variant of two earlier schemes).

A person is liable to pay a business rate in relation to an unoccupied hereditament in respect of a chargeable financial year if the conditions in section 45(1) of the Local Government Finance Act 1988 (LGFA 1988) are met. These include the condition at LGFA 1988, s 45(1)(b) that in respect of any day in that year, the person is the owner of the whole of the hereditament.

LGFA 1988, s 65(1) provides that the owner of a hereditament is the person entitled to possession of it.

A further condition, contained in LGFA 1988, s 45(1)(d), is that the hereditament falls within a class prescribed by regulations. Regulation 3 of the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, SI 2008/386 prescribed all non-domestic hereditaments other than those exempted by SI 2008/386, reg 4. SI 2008/386, reg 4(k) contains an exemption in respect of: ‘Any hereditament…whose owner is a company which is subject to a winding up order made under the Insolvency Act 1986 or which is being wound up voluntarily under that Act.

Under Scheme 3, business rates were avoided by the landlord leasing its empty commercial property to a special purpose vehicle (SPV) company incorporated by the respondent companies. The effect of the grant of a lease was that the SPV became the owner of the hereditament for the purposes of LGFA 1988, s 45(1)(b), as a result of LGFA 1988, s 65, and liable for business rates in relation to it. The SPV was then placed into members’ voluntary liquidation (MVL) with the effect that it was relieved of liability to pay business rates as a result of SI 2008/386, reg 4(k).

The MVL continues until the lease expires, by which time, if not before, the landlord may well have been able to find a new commercial tenant.

What did the court decide?

The Court of Appeal upheld the decision of the lower court, which had dismissed the appellant’s winding-up petitions.

Giving the only reasoned judgment, Asplin LJ rejected the contention that the operation of Scheme 3 involved the misuse or abuse or subversion of the insolvency legislation.

Under Scheme 3, the scheme leases were genuine contingent assets in the liquidation of the SPVs. The liquidators of the SPVs were entitled to continue the liquidation until all of the leases were determined or had expired in order to be satisfied that they had collected in all the potential assets. Furthermore, once it was accepted that the leases were genuine and not shams, then they could not be undermined by the motive behind their creation.

The Court of Appeal also held that, in determining whether it was just and equitable to wind up a company under section 124A of the Insolvency Act 1986 (IA 1986), the court was required to identify for itself the aspects of the public interest which would be promoted by making a winding-up order. In this case, however, there was no challenge to the judge’s finding that there was no evidence of harm to the public. Thus, an essential element of the winding-up in the public interest was missing.

Therefore, the judge at first instance had been entitled to exercise his discretion in the way he did. Having evaluated all the evidence and balanced all the relevant factors, even if there had been a misuse of the insolvency process, it was not sufficient to warrant winding up under IA 1986, s 124A. This conclusion could not be interfered with on appeal.

Case details

  • Court: Court of Appeal, Civil Division
  • Judges: Lady Justice Asplin, Lord Justice Floyd and Lord Justice Newey
  • Date: 31 July 2020

Nicholas Trompeter is a barrister at Selborne Chambers. If you have any questions about membership of LexisPSL’s Case Analysis Expert Panels, please contact

Interviewed by Robert Matthews.


Related Articles:
Latest Articles:
About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.