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The court was concerned with public interest winding-up petitions presented against companies which operated schemes to help customers to avoid liability for business rates. The schemes involved the setting up of special purpose vehicles (SPVs) which would accept liability in principle for business rates in respect of a property, and which would shortly afterwards be placed into members’ voluntary liquidation (MVL), thus exempting them from liability for business rates. While the schemes were artificial, they were nevertheless genuine and legally effective. The court held that there was nothing objectionable against companies which operated such tax avoidance schemes. Oberon Kwok, barrister at Selbourne Chambers, considers the judgment, the background to the case and the practical implications.
PAG Asset Preservation Ltd—MB Vacant Property Solutions Ltd  EWHC 2890 (Ch)
This case demonstrates that it is legitimate to use the MVL or creditors’ voluntary liquidation (CVL) process for the intended effect of tax avoidance, as long as the objective purpose of the liquidation does not stray from the collection, realisation and distribution of assets. Provided that is the case, the courts are unlikely to strike down such arrangements.
Care must therefore be taken by those involved—including the insolvency office-holder and the members—that there is a genuine reason for the liquidation to carry on. A liquidation which has no objective purpose except the avoidance of tax is unlikely to be legitimate. However, a liquidation which retains the objective purpose of the collection, distribution and realisation of assets will be legitimate despite the fact that those involved intend to thereby avoid liability for tax at the same time.
The companies operated schemes to help landlords of vacant commercial premises to avoid business rates. The companies would set up SPVs for the purpose of the schemes. Landlords would grant three-year leases over the vacant properties to the SPVs, which caused the SPVs to become the liable entity for paying business rates on the leased premises. Shortly after the leases were granted, the SPVs would be placed into MVL. The SPVs were exempt from paying business rates as a result of being in MVL.
Landlords were entitled to determine the leases at any point, but if they did so they were liable to pay the SPV a determination premium which increased as time passed. As a result of the increasing determination premium, the MVL processes of the SPVs were often more protracted due to the fact that there was a possibility of the SPV receiving a determination premium before the three-year lease expired.
The Secretary of State brought public interest winding-up petitions against the companies, on the basis that the activities of the companies subverted the purpose of liquidations and that there was a misuse of insolvency legislation which demonstrated a lack of commercial probity.
The judge refused to wind up the companies.
It was common ground that the leases were artificial. The determination premium was uncommercial as it increased over time—while in fact a lease is normally a wasting asset as time passes. The real motive behind the existence of the determination premium was that the MVL of the SPVs would continue so long as there was a possibility that the leases would be determined before they expired, leading to the potential payment of the determination premium by the landlords to the SPVs. Many landlords did in fact determine those leases early and paid the determination premiums to the SPVs if they found more profitable uses for the properties (although sometimes the companies paid the landlords to offset some of those premiums).
Moreover, there was nothing inherently wrong or unusual about a SPV being incorporated to act as an asset shelter or to further an artificial transaction to avoid tax. It was not suggested that any of the transactions were shams. They were legally effective and genuine.
In relation to the MVL, as long as the objective purpose of the MVL was to collect, realise and distribute assets, it didn’t matter what the underlying motive behind the MVL was. The underlying motive of tax avoidance did not lead to a contravention of the policy behind insolvency legislation. It was legitimate for the liquidator of the SPV to wait for either the three-year leases to expire or to the date when they were determined early by the landlords leading to the payment of the determination premium by the landlords to the SPV. The possibility of the determination premium meant that the continuation of the MVLs was legitimate, even if the effect of this was to avoid liability for business rates while the MVLs were in place.
It was not possible to conclude that harm to the public was being caused by the schemes, or that there was a lack of commercial probity. It was perfectly proper for entities to be set up, for assets to be transferred to those entities, and for those entities to be placed into liquidation, all with a view to obtaining a fiscal advantage. This was the case provided that the transactions (artificial though they may be) were legally genuine and effective, did not involve a sham, and did not contravene a general or specific legislative purpose. No such purpose had been contravened in the present case.
Interviewed by Alex Heshmaty.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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