Rates avoidance decision lawfully based on authority’s assessment of rent comparators
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On 12 August the Court of Session threw out a challenge to a local authority’s decision that commercial leases for £1 annually were a rates-avoidance scheme, with the result that the landlord rather than any occupying tenants was liable for non-domestic rates.
The petition for judicial review in Heptagon Portfolio Arbroath Ltd, Petitioner [2025] CSOH 75 was heard by Lord Lake in the Outer House. David Thomson KC and Neale Tosh, advocate, instructed by Addleshaw Goddard LLP appeared for the petitioner; Michael Upton, advocate, instructed by Anderson Strathern LLP appeared for the respondent.
Lord Lake set out the governing legislation in sections 37 to 40 of the Non-Domestic Rates (Scotland) Act 2020 and regulation 4 of the Non-Domestic Rates (Miscellaneous Anti-Avoidance Measures) (Scotland) Regulations 2023. They provide that a tenancy or series of tenancies may be held to be an “artificial non-domestic rates avoidance arrangement”. The authority must treat the owner of a building as liable for the rates if “it would be reasonable to conclude that obtaining an advantage is … one of the main purposes of the arrangement” (section 39(1) and regulation 4(2)). “Advantage” includes “avoidance of a possible assessment” for rates (section 38(1)(a)). An arrangement is artificial if it “lacks economic or commercial substance” (section 40(3), for example because it “is carried out in a manner which would not normally be employed in reasonable business conduct” (section 40(4)(a)) or it “results in an advantage that is not reflected in the business risks undertaken” (section 40(4)(e)).
The duty to treat the landlord as liable arises only where the main-purpose test is met (regulation 4(2)) and the tenancy “is considered not to be on a commercial basis” (regulation 4(4)(a)), which will be the case where for example “the rent charged … is significantly below the level of the rent which could reasonably have been obtained … on the open market at the time when the tenancy … was entered into” (regulation 4(6)(d)).
After a hearing before the authority’s committee, Angus Council had issued a decision letter concluding that Heptagon was liable to pay the rates, where it had granted leases for £1 p.a.
Heptagon argued that the authority had erred firstly because in assessing the main purpose of the tenancies it had not considered the subjective intentions of the directors of the corporate landlord, tenants and sub-tenants.
Lord Lake stated:
“In terms of the Court of Appeal decision in JTI [JTI Acquisition Company (2011) Limited v HMRC [2024] EWCA Civ 652] … it is the subjective intention that ultimately matters … That does not exclude, however, the task of the court being to decide on the basis of that evidence what the subjective intention had truly been. Intention is a state of mind and unless the court is to proceed only on the basis of the say-so of the relevant party, it will always be necessary to infer what their state of mind truly was by reference to objective evidence.”
“The committee noted that, but for the tenancies, the petitioner would be liable for non-domestic rates. They also reached conclusions that the arrangements were not carried out in a manner which would normally be employed as reasonable business conduct and that the result is to confer an advantage that is not reflected in the business risks. These are sufficient bases on which to draw an inference as to the purpose or main purposes of the arrangements. … This means that it cannot be said that the committee have directed themselves to the wrong test or have made a decision not supported by evidence.”
It had also adequately stated its reasons.
Secondly, Heptagon argued that the council had wrongly considered only whether a higher rent could have been achieved, where it said that proper question was whether the rent was significantly below the level of rent reasonably obtainable in the open market. The council had irrationally relied on rental figures which were not true comparators, failed to take into account criticisms of them, and failed to take into account that the petitioner had sought to let the property without success. The council’s reasons had also been inadequate; they made no finding as to the level of rent that could reasonably have been obtained, and did not say why it rejected evidence that the petitioner had been unable to obtain a higher rent.
Lord Lake held that “reading the letter as a whole, it describes the difference between the passing rent of £1 per annum and the comparators put forward by the council as a ‘gulf’ that was ‘significant’. … the petitioner seeks to subject the contents of the letter to unduly exacting scrutiny. The letter … is sent to parties who are presumed to know the background circumstances, it must be read in a straightforward manner, and the reasons it contains can be briefly stated (South Buckinghamshire District Council v Porter [2004] 1 WLR 1953). Taking that approach, it is reasonable to conclude … that the committee had in mind the test set out in regulation 4(6)(d) that the rents were significantly below the rents that could have been obtained.”
The criticism of the comparator evidence of rental values used by the authority was also rejected:
“challenge of the decision on the basis of the quality of the comparators is not possible in a judicial review. It is for the council to reach a view on potential rents and in doing so they may have regard to any relevant evidence. … the decision as to whether to rely on a comparator is for the council. The petitioner is, in effect, arguing that the council were ‘wrong’ to rely on these particular comparators. For the court to substitute its own view as to the value of these comparators and the weight to be placed upon them would be reviewing the decision on its merits and that is not lawful. … The rents passing in respect of other properties are clearly matters capable of being a relevant consideration. … The position is not changed by posing the challenge as being to the weight accorded to particular considerations. The decision remains for the council to make. It is not appropriate for this court to decide whether certain factors should be accorded more or less weight in reaching a decision.”
The lack of discussion of Heptagon’s criticisms of the comparators was “inconsistent with the approach in the South Buckinghamshire case. A decision need not refer to every material consideration. It is enough that it refers to the conclusions reached in relation to the most important issues. That has been done here by the council and, as the decision states that higher rents could have been obtained, it is clear that they had regard to the evidence that was submitted by the council. It is also clear from the letter that they have considered some reasons why those properties may not be considered to be exact analogues of the petitioner’s properties.”
Thirdly the petitioner argued that the decision had taken unfairly because the Council’s evidence of rental values had only been disclosed to them shortly before the committee hearing.
Lord Lake considered that:
“the observations of Lord Sutherland in Clancy v Caird [2000 SC 441] … are in point. Where a party has proceeded with a hearing in the awareness of some factor which they might have relied on to raise an objection, they should be taken to have passed from their right to object. If this were not the position, it would be possible for the party to conduct the hearing on the merits of their position and then, if the decision did not go in their favour, to get a second bite of the cherry by taking the objection at that stage. That is inconsistent with notions both of fairness and good administration.”
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