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Publication - Advice and guidance

Local government finance circular 5/2023: non-domestic rates relief guidance

Published
30 March 2023

General information relating to current arrangements for non-domestic rates reliefs in 2023 to 2024

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Anti-avoidance measures

  1. From 1 April 2023, local authorities have powers to prevent or minimise advantages arising from known non-domestic rates avoidance practices. Within prescribed circumstances, councils can make the owner, rather than the occupier, liable for the payment of rates, or disregard deliberate physical changes to the state of the property solely for the purposes of avoiding or reducing the rates liability.

  2. The key legislation is The Non-Domestic Rates (Miscellaneous Anti-avoidance Measures) (Scotland) Regulations 2023.

Artificial non-domestic rates avoidance arrangements

  1. A local authority must be satisfied that there is an artificial avoidance arrangement and the main purpose, or one of its main purposes, is to gain an advantage. The Non-Domestic Rates (Scotland) Act 2020 explains what is meant by an “advantage”, “non-domestic rates avoidance arrangements” and “artificial”.[1]

  2. An ‘advantage’ is anything that reduces the amount of rates payable, delays payment of the rates or results in repayment of rates.
  3. A non-domestic rates ‘avoidance arrangement’ includes any agreement, transaction, undertaking, action and event, whether legally enforceable or not, that has the main purpose, or one of the main purposes, of gaining an non-domestic rates advantage.
  4. Arrangements are ‘artificial’ where either of the following apply:
  • entering into, or carrying out, the arrangement is not a reasonable course of action in relation to the non-domestic rates provisions, in the circumstances. Factors to be taken into account include whether the substantive results of the arrangement are consistent with express or implied principles on which the provisions are based and the policy underpinning the provisions, and whether the arrangement is intended to exploit shortcomings (or loopholes) in them.
  • the arrangement lacks economic or commercial substance. A lack of economic or commercial substance may be indicated by:
    • the arrangement is carried out in a manner which would not normally be employed in reasonable business conduct,
    • the legal characterisation of the steps in the arrangement is inconsistent with the legal substance of the arrangements as a whole,
    • the arrangement includes elements which have the effect of offsetting or cancelling each other,
    • transactions are circular in nature,
    • the arrangement results in an advantage that is not reflected in the business risks undertaken.
  1. This only applies to tenancies or other arrangements entered into, or physical changes to a property, on or after 1 April 2023. 

Transferring liability to an owner

  1. In certain circumstances, a local authority may transfer non-domestic rates liability from the occupier of a rateable property to the owner. These circumstances are where the tenancy or arrangement is not on a commercial basis, where a new occupier enters insolvency within 12 months and/or where the occupier or liable person displays particular characteristics or behaviours.  

Tenancy is not on a ‘Commercial Basis’

  1. Common features distinguish a tenancy not on a ‘commercial basis’ from legitimate leases entered into for a legitimate commercial reason. The circumstances for a tenancy not being on ‘commercial basis’ are:

  • there has been no change to the occupation of the lands and heritages since the tenancy or other arrangement took effect
  • the lands and heritages are being occupied by a person or body other than the person or body named in the tenancy or other arrangement
  • payment of the rent for the lands and heritages is optional in terms of the relevant tenancy or other arrangement
  • the rent charged for the lands and heritages is significantly below the level of the rent (nominal or peppercorn rent) which could reasonably have been obtained for the lands and heritages on the open market at the time the tenancy or other arrangement was entered into
  • payment of the rent for the lands and heritages is offset or cancelled, in whole or in part, by other transactions or arrangements, whether individually or as a whole
  • the arrangement has been identified in the tenancy or other arrangement as being for the purpose of mitigating rates liability
  • the occupier, or the person or body entering the tenancy or other arrangement, has no assets that are directly linked to the economic use being made of the lands and heritages.

Wound up within the first 12 months of Tenancy

  1. Where a new occupier enters into insolvency within 12 months from the start of the lease the owner can be treated as liable for non-domestic rates in the following circumstances.

  2. The liable occupier is a body being wound up voluntarily under the Insolvency Act 1986, within a period of 12 months from the date on which the property first became occupied under the lease agreement, and:
  • the property continues to be occupied, including by a person or body other than the body which has entered the tenancy or other arrangement; or
  • the liability holder is in receipt of mandatory non-domestic rates relief.

Characteristics and Behaviours of the Occupier

  1. There are a number of characteristics and behaviours of the occupying party which, when coupled with the presence of a non-domestic rates advantage, are strong indicators of avoidance. As listed in the Regulations these are:   

  • the occupier fails to provide the name of a person who is liable for payment of the rates, or who is liable on behalf of the occupier;
  • the person liable for payment of the rates, or liable on behalf of the occupier, is a person who has no connection to the operation taking place on the lands and heritages;
  • the person liable for payment of the rates, or liable on behalf of the occupier, is a person who is an employee or a contractor of the owner of the lands and heritages, or who is the partner or a close relative of the owner,
  • the person liable for payment of the rates, or liable on behalf of the occupier, has within the period of two years prior to the date on which the tenancy or other arrangement was entered:
  • carried out the business or exercised the borrowing powers of a public company which did not have a trading certificate, contrary to section 761(1) of the Companies Act 2006,
  • have been declared by a court to be liable to make a contribution to the assets of a company, in the course of its winding up, as a result of:

(i) knowingly having been a party to the carrying on of business in the manner described in section 213(1) of the Insolvency Act 1986 (fraudulent trading) or section 246ZA(1) of that Act (fraudulent trading: administration), or

(ii) being or having been a director to whom section 214(2) of that Act (wrongful trading) or section 246ZB (wrongful trading: administration) of that Act applies,

  • have had a disqualification order made against them, or a disqualification undertaking accepted, under the Company Directors Disqualification Act 1986,
  • have been convicted of a contravention of section 216 of the Insolvency Act 1986 (restriction on re-use of company names),
  • have been subject to a bankruptcy restrictions order, or a bankruptcy restrictions undertaking, under the Bankruptcy (Scotland) Act 2016, the Insolvency Act 1986, or the Insolvency (Northern Ireland) Order 1989, or
  • have been issued a notice under section 20 of the 2020 Act (non-use or underuse of lands and heritages: notification) in relation to which the local authority has, following the expiry of the period mentioned in section 20(5)(b) or receipt of an explanation from the ratepayer, concluded that either of the conditions in section 20(3) or (4) of that Act have been satisfied.

Requirement to notify – information notice

  1. Before transferring liability the local authority must notify the owner of the intention to treat them as liable for non-domestic rates, explaining the reason, the dates from which it will take effect and where relevant, the discontinuation of any relief. 

  1. The owner can make written representation within 28 days to demonstrate that the tenancy or other arrangement does not have as a main purpose the gaining of an artificial advantage, or to agree an alternative payment arrangement. 
  2. A final notice must be issued by the local authority before liability can be transferred to an owner. The final notice should set out that the owner is to be treated as liable to pay the non-domestic rates, the reason for the decision, including a summary of consideration of any representations received; the rates liability (and any relief removed); and the date it will have effect.
  3. A final notice must be issued within 28-days from the last day on which representation can be submitted. The date of effect must be no earlier than 28 days after the date on which the final notice is to be presumed to have been received, unless they have engaged in the practice in the past. If there is a repeat engagement within the next five years, then they may be treated as liable from the start of the lease or other arrangement which is ongoing at the time of the transfer.

Disregarding Physical Changes to Empty Properties

  1. Where physical change has been made to a property certain conditions are met, and the action deemed as artificial and for the purposes of gaining an advantage, a local authority can treat the property as if the change had not taken effect and levy rates based on the rateable value which applied prior to that change to the property.

  2. The following conditions must be met:
  • prior to 1 April 2023 the property was either not charged rates, or charged lower rates, due to being unoccupied;
  • the change was made and took effect after 1 April 2023;
  • there is no evidence of an intention to use the lands and heritages for economic activity in the future;
  • the local authority is satisfied that the change was artificial with a main purpose of gaining of an advantage and avoiding rates liability.

Requirement to notify – information notice

  1. Before a change can be disregarded, the local authority must notify the owner or occupier of the intention to counteract the change, and the reason for it.
  2. The owner can make written representation within 28 days to demonstrate that the change was not intended to gain an artificial advantage. 
  3. A final notice must be issued within 28-days from the last day on which representation can be submitted. This must include the final decision on whether the liability should be adjusted to reflect the change, reasons for it and any change in rates liability arising as a result. Liability will be based on the rateable value which applied the day before it was revised to reflect the change to the premises. 

[1] Part 4, section 38-40 Non-Domestic Rates (Scotland) Act 2020

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