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Business Rates – A Cautionary Tale

Are you sitting comfortably? Then I will begin my story.

Once upon a time, there was a company called Relaxed Limited. Relaxed Limited ran a small business from a light industrial unit that it owned in North London, business was good and it grew to the extent that Relaxed Limited needed to move the business to larger premises and accordingly it sold the light industrial unit to Purchaser Plc who moved its small business into the industrial unit.

Some months later Relaxed Limited received a demand for business rates that had been sent by the Local Authority to its registered office demanding the payment of rates in respect of the period of time after it had sold the light industrial unit to Purchaser Plc. Relaxed Limited was relaxed. It assumed that a mistake had been made and ignored the demand for rates.

Some months later Relaxed Limited received a further letter at its registered office but this time it was a Summons from the local Magistrates Court in respect of a failure to pay business rates. It said that the Local Authority proposed to apply for a liability order in respect of the unpaid rates that Relaxed Limited should attend the hearing if it wished to oppose the application. Relaxed Limited was relaxed. It wrote to the Local Authority with evidence that it had sold the light industrial unit to Purchaser Plc. Relaxed Limited did not hear anything further from the local authority and so was relaxed.

Some months later, the registered office of Relaxed Limited received a visit from a bailiff. The bailiff had arrived to recover unpaid business rates from Relaxed Limited. It transpired at the hearing before the Magistrates Court earlier in the year, the Magistrates had made a liability order against Relaxed Limited in respect of the unpaid rates. Relaxed Limited was no longer relaxed. But what could it do?

This scenario, with a few tweaks here and there befell one of our clients recently and is a good example of why it is important to take a proactive stance in relation to payments for business rates.

It is well known that the party that is liable for business rates is, in general terms, the person or company who is entitled to possession of a business property. Thus when the freehold of a property changes hands or the lease of it is assigned or surrendered it is unwise to assume that the Local Authority will become aware of this and update its records. If demands for business rates ought to be quickly and proactively followed up. The reason for this is that a local authority that is owed unpaid business rates may apply in the local Magistrates Court for a liability order. A liability order has the same status as a judgment of the Court and can be enforced in a similar way.

One might assume that once a liability order has been made against someone that probably is not responsible to pay the business rates that such a liability order could be set aside. However, liability orders are surprisingly difficult to set aside and thus it is important that if a summons is received in respect of an application for a liability order that proactive steps are taking to avoid such an order being made.

In R (Brighton and Hove City Council) v Brighton and Hove Justices they held that there were three conditions that had to be met in order to invoke the Court’s jurisdiction to set aside a liability order. Those conditions are:

  1. A “genuine and arguable dispute as to the defendant’s liability for the rates in question” (genuine and arguable dispute).
  2. A “substantial procedural error, defect or mishap” which results in the order (procedural mishap).
  3. A prompt application “after the defendant learnt that an order has been made or has notice that an order may have been made” (prompt application).

Each of the limbs of the test needs to be met on a cumulative basis. In other words, unless each of the hurdles is cleared the liability order will stand. This is different to a default court judgment that can be set aside purely on the merits of the case. In the case of a liability order the applicant needs to go much further.

Genuine and arguable dispute

The ratepayer must show that on the merits it has a defence to the claim for business rates. In the case of a demand made of the wrong person, it is likely that the Court will need to be satisfied as to who the correct person was. The threshold to meet the balance of probabilities notwithstanding that the application is heard in the Magistrates Court which is usually a Court of criminal jurisdiction.

Substantial procedural error, defect or mishap

There is, in essence, two parts to this. The ratepayer needs to show not only was a serious procedural error made but also that that error caused the liability order to be made. Thus, it is not enough that a procedural error took place, the applicant needs to show a link between the making of the error and making of the liability order.

For example, in Liverpool City Council v Pleroma Distribution ratepayers on the way to the Magistrates Court to attend the hearing were victims of a traffic accident on the way to Court and a liability order was made with the Justices in ignorance of the accident. It was accepted that the ratepayers would have been heard had they not had the accident and so the making of the order in ignorance of the accident was an error.

Importantly - and this is why it is vital to take a proactive role in relation to these matters - a mere failure to attend Court when the ratepayer knows there will be a hearing it does not amount to a procedural mishap. In the case of Hamdan the Court said “A failure of the defendant to attend the hearing because he assumes, without good reason, that the local authority would not seek an order, or because he is absent abroad, will not of itself satisfy this requirement. A defendant who will be unable to attend the hearing because of his absence abroad may request an adjournment in writing, or instruct a solicitor to appear on his behalf; but if he does nothing, he is not entitled to an order of the Magistrates to set aside a liability order made against him.”

Prompt application

Ratepayers that sit on their hands and wait before making an application set aside a liability order do so at their peril. The application must be made promptly: “within days or at most a very few weeks, not months and certainly not as much as a year”. While each case turns upon its own facts the question of promptness of the application is a matter of impression and the longer it is left before the application is made the greater the impression will be that the ratepayer has waited too long to challenge the liability order.

The moral of the story is vigilance pays. A ratepayer that receives a demand for business rates that it believes is not due should take the matter up with the Local Authority and follow it up proactively. If the matter gets as far as a Summons to attend the Magistrate’s Court ratepayers should take advice and certainly attend the hearing with good evidence as to why the rates are not due. It may be much more difficult to put things right after the event than it is at the time the liability order is considered.

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