Non-Domestic Rates – Anti-avoidance framework

The scale of non-domestic rates avoidance in Wales, through various methods, has previously been estimated as at least £10 million to £20 million of lost revenue per year. This is equivalent to more than 1 to 2% of the income received from non-domestic rates. The Welsh Government is committed to reducing the opportunities for avoidance within the non-domestic rates system.

Sections 63F to 63M of the Local Government Finance Act 1988 (the 1988 Act) establish a general anti-avoidance framework for the counteraction of advantages gained from artificial arrangements for the avoidance of non-domestic rates liability. An advantage is the avoidance or reduction of non-domestic rates liability and may occur during or following an arrangement. There must be such an advantage for an artificial avoidance arrangement to exist under the framework.

Many of the most widely known arrangements for the avoidance of non-domestic rates rely on exploiting the definition of beneficial occupation which has been established through case law. The aim of such arrangements is often to re-set eligibility for empty property relief, whereby the advantage of reduced liability is obtained following a period of occupation. Other advantages are also possible (e.g. if the occupier is eligible for other reliefs or makes an arrangement to prevent payment from being collected).

The anti-avoidance framework enables the Welsh Government to define avoidance arrangements which are considered to constitute artificial occupation, so that the advantages gained can be counteracted. The Non-Domestic Rating (Artificial Avoidance Arrangements) (Local Lists) (Wales) Regulations 2026 give effect to the framework by defining a range of artificial avoidance arrangements it counteracts, from 1 April 2026 onwards.

The anti-avoidance framework counteracts a range of artificial avoidance arrangements falling within four broad types. 

Arrangements often involve tenancy or lease agreements which are designed to enable the avoidance of non-domestic rates liability. Such arrangements have a range of common features which distinguish them from legitimate agreements entered into for genuine commercial reasons. An agreement for occupation which is not on a commercial basis could constitute an avoidance arrangement in its own right, or be a feature of another type of avoidance arrangement.

There are four specific arrangements of this type which are counteracted by the anti-avoidance framework. In each case, the arrangement is artificial where it makes a person (“P”) the occupier of the property which is not occupied on a commercial basis because the specified circumstances apply.

In the first arrangement, P is not required to make payment for their occupation of the property. Leases containing rent clauses in which payment is not intended to be demanded or required have been features of identified cases of avoidance. Any commercial agreement for genuine occupation would be expected to require the payment of rent. This is reflected in the established use of market rents for comparable properties as the basis for assessing rateable values for non-domestic rates purposes.

In the second arrangement, the payment which P must make for their occupation of the property is significantly below the level which could reasonably have been obtained on the open market on the day the arrangement was entered into, or is offset or cancelled (in whole or in part) by other transactions. Where payment is required, a minimal or ‘peppercorn’ rent has been noted as a feature of prominent case law which has formed the foundation for widespread avoidance practices. In addition, separate payments to the ‘tenant’ from the landlord for services to enable avoidance often offset or exceed the rent paid.

In the third arrangement, one or more parties to it (including a provider of services relating to non-domestic rates) has identified the mitigation of non-domestic rates liability as a purpose or motivation. Rates mitigation is considered to be a term which, in practice, refers to artificial avoidance arrangements which seek to exploit shortcomings in legislation and the outcome of case law. The aim of an arrangement achieving occupation for the purpose of rates mitigation is often identified in lease agreements, or on the websites of third-party providers which openly advertise the rates mitigation services they offer.

In the fourth arrangement, P does not have the assets which would enable them to use the property in the manner which is claimed. This means they cannot genuinely occupy and use the property for the stated purpose. An occupier having no business attributes (e.g. no Companies House entry which includes the staff and assets which would be required) is a feature of some avoidance arrangements which have previously been identified.

Each of the arrangements of this type is considered to be artificial on the basis that it is not a reasonable course of action because it lacks economic or commercial substance (other than obtaining the advantage of avoiding or reducing non-domestic rates liability). The features of these arrangements demonstrate that the occupation is not intended to make genuine commercial use of the property. They are, therefore, considered to be strong indicators of avoidance.
 

Some relatively sophisticated avoidance arrangements involve the leasing of properties to ‘special purpose vehicles’ and ‘phoenix companies’. A special purpose vehicle is a separate legal entity established by a parent organisation, often to isolate financial risks or liabilities. Phoenix companies are used for the practice of carrying on the same business or trade through successive companies, each of which becomes insolvent and cannot pay its debts.

A company is installed as the ratepayer of the property so that the registered owner or landlord is not liable for non-domestic rates. This company will usually be wound-up voluntarily, often (but not always) following a period of occupation during which non-domestic rates liability is owed but not paid. Once the company is being wound up voluntarily, the property it has been made the ratepayer of ceases to attract non-domestic rates liability. This benefit can persist for a long time where the winding up process is intentionally protracted.

The ratepayer typically has a ‘qualifying connection’ with the registered owner or landlord (e.g. a connected company structure or the same director) or, as part of a pattern of repeat avoidance, a previous company installed as the ratepayer. Alternatively, arrangements are sometimes established at an arm’s length from the landlord, by a third-party provider of rates mitigation services with which the qualifying connection exists.

A qualifying connection means, where both persons are companies, one is a subsidiary of the other, both are subsidiaries of the same company, or the same person is (or was) either a director or individual with significant control in respect of both companies. It also means, where only one person is (or was) a company, the other person has (or had) such an interest that would make it the holding company (if it were itself a company). The definition is intended to capture connections which have previously been identified in relevant arrangements.

There are three specific artificial arrangements of this type which are counteracted by the anti-avoidance framework. In each case, the arrangement is entered into between the person (“L”) who granted the agreement for occupation and the person (“P”) who is made the ratepayer for the property.

In the first arrangement, prior to entering an arrangement with P, L entered into an arrangement which made another person (“X”) the ratepayer for a property (either the same property which is the subject of the current arrangement, or a different property). X was subsequently wound-up voluntarily, whilst still a party to the arrangement. On the day the current arrangement (with P) was entered into, P had a qualifying connection with X.

In the second arrangement, on the day it was entered into, P had a qualifying connection with L or a person providing services relating to non-domestic rating (e.g. a rating agent or tax adviser) to L. Prior to entering an arrangement with P, L entered into an arrangement which made another person (“Y”) the ratepayer for a property (either the same property which is the subject of the current arrangement, or a different property). On the day that previous arrangement was entered into, Y had a qualifying connection with L (or a person providing services relating to non-domestic rating). Y was subsequently wound-up voluntarily, whilst still a party to the arrangement.

The first and second arrangements reflect patterns of behaviour noticed by local authorities, which involve the repeated installation of special purpose vehicles or phoenix companies as ratepayers under arrangements with the same landlord, before they are dissolved (often with unpaid liabilities). During a period of occupation by a new ratepayer, the local authority is aware of a relevant qualifying connection with a previous ratepayer which was eventually wound up voluntarily. In such cases, it is intended that the local authority is able to counteract the arrangement before the current ratepayer progresses to voluntary wind up. It will not be possible to capture a first occurrence prior to a company being wound up, due to the reliance on evidence of past behaviour.

In the third arrangement, on the day it was entered into, P had a qualifying connection with L or a person providing services relating to non-domestic rating to L. Within three years of L and P entering into the arrangement, P was or is in the process of being wound up voluntarily. Defining this arrangement ensures that, where a local authority has not been able to identify and counteract the arrangement before the winding up process is commenced, it will be able to do so once that step is taken.

The arrangements of this type represent different stages in what may be a complex and repeating cycle of actions to transfer non-domestic rates liability to a company established for the purpose of avoidance. 

The fundamental basis of the non-domestic rates system is that a legitimate occupier of a property is the ratepayer and that liability is correctly attributed and paid. Certain characteristics and behaviours of the owner or occupier would undermine the intended operation of the system in ways that, when combined with an advantage, are strong indicators of avoidance.

There are four specific arrangements of this type which are counteracted by the anti-avoidance framework. In each case, the arrangement is artificial because the specified characteristics or behaviours apply.

In the first arrangement, the owner, occupier or person who granted the agreement for occupation failed to provide the name of the ratepayer in response to a statutory request for information from a local authority. Withholding identify of the ratepayer undermines the non-domestic rates system, by preventing liability being correctly attributed and collected. This arrangement may, for example, be used to avoid paying liability during an initial period of occupation, before a ratepayer is wound up voluntarily as part of a ‘Type 2’ arrangement described above.

In the second arrangement, a person (“P”) is made the ratepayer, but P has no connection to the operation or economic activity taking place on the property. A ratepayer with no assets or business connected to the claimed use of the property will not be able to occupy and use it for the stated purpose.

In the third arrangement, entered into between a person (“L”) who granted the agreement for occupation and another person (“P”), P is made the ratepayer for the property and, on the day the arrangement was entered into, P was an employee, contractor, partner or close relative of L. Where such a connection exists, it is often the person who granted the agreement who intends to retain control over the property in practice. Local authorities have reported the use of this arrangement to avoid the two-property limit per ratepayer in each local authority for Small Business Rates Relief.

In the fourth arrangement, a person (“P”), or the company, firm or trust for which P is a director, partner, charity trustee or an individual with significant control, is made the ratepayer. On the day the arrangement was entered into, one or more of the following circumstances applies:

• Within the previous 2 years, P had carried out the business or exercised the borrowing powers of a public company without a trading certificate. Doing so is an offence.
• Within the previous 2 years, P was subject to a declaration issued by a court for fraudulent or wrongful trading before or during the wind up of an insolvent company. The courts may impose liability on a person who has been dishonest or is to blame in respect of debts incurred by an insolvent company.
• P was disqualified from being a company director. A person can be disqualified from being a company director if they do not meet their legal responsibilities. Disqualification can apply for up to 15 years, during which time a person cannot be a director of a company registered in the UK, or be involved in the formation, promotion or management of a company.
• P was disqualified from being a trustee of a charity. A person can be disqualified from being a trustee for a variety of reasons related to offences, mismanagement or misconduct in the administration of a charity. Some disqualifications can apply for up to 15 years, during which time a person cannot hold office or employment in senior management functions for a charity.
• Within the previous 2 years, P was convicted for breaching restrictions on the re-use of company names. This would reveal that P is carrying on the same business as the insolvent company, which is a common feature of arrangements involving phoenix companies and special purpose vehicles.
• P was subject to bankruptcy restrictions. The courts may impose restrictions on a bankrupt person who has been dishonest or is to blame for their debts. Restrictions may be imposed for a period between 2 and 15 years, during which a person may not (among many other things) be a director of a company, or form, manage or promote a company.

The definition of the fourth arrangement captures a range of circumstances where the ratepayer has recently conducted their business in an unlawful manner, been convicted of a related offence, been disqualified from senior company roles or been subject to bankruptcy restrictions. These are strong indicators that they are not a genuine ratepayer who is able to conduct a legitimate business unhindered.

Each of the arrangements of this type are considered to be artificial on the basis that they frustrate the intended operation of the non-domestic rates system. They either prevent the identification of the correct ratepayer or install a ratepayer who, because of their recent business conduct, is not able to legitimately conduct a business. 
 

The thresholds for determining ‘actual’ and ‘beneficial’ occupation have been established in case law, generally in response to local authorities seeking to challenge avoidance arrangements. The Welsh Government considers these thresholds to be too low, allowing for advantages to be gained from arrangements which are inconsistent with the broader principles and policy objectives on which the non-domestic rates system is based.

There are two specific arrangements of this type which are counteracted by the anti-avoidance framework. In each case, the arrangement is artificial because the occupation has the specified characteristics which are strong indicators of avoidance.

In the first arrangement, the occupation is beneficial primarily because it contributes to the carrying on of a non-domestic rates mitigation business. Case law has established that leasing a property for the purpose of rates mitigation alone can be ‘beneficial’, even if there is no other benefit to the ratepayer under the arrangement. It has also established that occupation is ‘actual’ where items of no material value or consequence are placed on the property. The Welsh Government does not agree with this position as it has allowed for properties which are, in effect, unoccupied to be treated as occupied for the purposes of non-domestic rates.

In the second arrangement, the benefit of the occupation arises from a WiFi or Bluetooth transmitter used for electronic marketing or advertising (often referred to as ‘proximity marketing’). Case law has established that occupation can be ‘actual’ where only a very small proportion of a property’s floor space is used. Proximity marketing is a known arrangement which exploits the ease with which this test is satisfied. This intends to capture a specific example of inappropriate or minimal use of a property which does have a benefit. While proximity marketing is a legitimate enterprise, it is not the reasonably expected sole use of non-domestic properties. As very little physical space is required, it could easily be accommodated alongside and without interfering with the main use of a property.

Both arrangements of this type have proven effective in achieving occupation through minimal or no real use of a property. The aim is often to re-set the eligibility of the owner for a period of empty property relief, once the arrangement has ceased, although other advantages may arise.

Where local authorities have reason to believe an artificial avoidance arrangement has been made, resulting in an advantage, they may need to gather further evidence. The relevant evidence depends on the specific arrangement and may include publicly available information from a range of sources. These sources include, but may not be limited to the following:

• Companies House publishes information about companies, including the nature of their business and assets, the identity of directors, partners, and individuals with significant control, and insolvency information
• the Insolvency Service publishes the Individual Insolvency Register, which combines information about bankruptcies and insolvencies
• details of disqualified directors are published by the Insolvency Service (in relation to the most recent 3 months) and on the Companies House database of disqualified directors (for the duration of the disqualification)
• the Charity Commission published the Charity Register, which includes the identity of trustees, and the Register of Removed Trustees, which provides details of persons disqualified as a charity trustee
• information may also be available from the courts about relevant convictions and offences

Some relevant evidence which is not available in the public domain may be accessed by other means. Existing powers for local authorities to request information and to enter and survey a property (under paragraphs 5 and 7A, respectively, of Schedule 9 to the 1988 Act) may be used to obtain such evidence. Examples of ways in which these powers may be used include, but are not limited to the following:

• a copy of a lease agreement may be requested, to provide details of the arrangement for occupation of a property (e.g. the parties to the agreement, its purpose and the associated rent)
• a survey of a property may be undertaken, to determine the extent and characteristics of any occupation
• a copy of an agreement with a third-party provider of services relating to non-domestic rates may be requested, to provide details of the provider, the service being provided and its purpose

There may be other circumstances and sources of information known to local authorities which are relevant to identifying whether any of the proposed arrangements has been made. Once a defined arrangement has been identified, it will be addressed by the local authority, in accordance with the anti-avoidance framework.

In relation to all of the defined arrangements, local authorities may determine that a particular arrangement is not artificial, having regard to all the circumstances of an individual case, which may include (but are not limited to):

• whether the occupier is (or was) operating a business whose predominant purpose is or was not related to reducing non-domestic rates liability
• the proportion of the hereditament that is (or was) being occupied to conduct the business operated by the occupier
• the period of time for which the hereditament is (or was) occupied
• whether the characteristics of the hereditament are compatible with the predominant purpose of the business being conducted there

A local authority may have local knowledge about the occupier or the property, which results in such a determination. No determination is necessary to treat a defined arrangement as artificial, which is the default outcome.

When an artificial avoidance arrangement has been made, the anti-avoidance framework requires the local authority to counteract the advantage gained. The advantage will typically be the reduction in non-domestic rates liability which has been obtained since 1 April 2026 (the date from which the Regulations defining the artificial avoidance arrangements have effect) or the date on which the arrangement was first made (whichever is later).

To counteract the advantage, the local authority must treat the person who would have been the ratepayer as liable for the amount of non-domestic rates which would have been payable, as if the arrangement had not been made. The occupier of a property is normally liable for non-domestic rates. The owner (person entitled to possession) of a property is liable if it is unoccupied. Each arrangement is defined to ensure that, when it is ignored, the person who would have been the owner of the property in the absence of the artificial occupation is treated as liable for the amount which would have been payable.

The local authority must give notice to a person who is to be treated as liable, setting out the reasons for doing so and information about the review and appeals processes. A person may request a review of the notice that they will be treated as liable, within 30 days of receiving it. The local authority must notify the person of the outcome within 30 days of receiving the request for review.

Where a notice has been confirmed following a review, the person may make an appeal to the Valuation Tribunal for Wales (“VTW”) within 30 days. An appeal must include a copy of the notice and a statement of the reasons why the appellant considers the local authority should not have issued it. A further appeal to the Upper Tribunal may be made in respect of a decision made by the VTW within 28 days.

A person treated as liable is subject to the existing framework for collection and enforcement of non-domestic rates liability (set out in the Non-Domestic Rating (Collection and Enforcement) (Local Lists) Regulations 1989). Once the time for a review and appeal has expired, the local authority will issue a demand notice in respect of each chargeable financial year affected by the arrangement. Aside from the potential for an additional penalty for failure to pay an amount due (see below), the established arrangements for enforcement of non-domestic rates liability which is not paid following a demand notice will apply.

The anti-avoidance framework allows a financial penalty to be imposed for failure to pay an amount due in consequence of having made an artificial avoidance arrangement. In the context of the collection and enforcement processes set out above, this could only occur if an amount due in a demand notice (following the opportunity for a review and appeal) was not paid. It is important that the framework is supported by a proportionate sanction to help ensure artificial avoidance arrangements can be effectively addressed.

A penalty of £500 plus 3% of the rateable value of the property (on the date of the notice that the person will be treated as liable) applies in relation to all types of arrangement. The local authority must serve a penalty notice on a person who has failed to pay an amount due in a demand notice, served to counteract the advantage gained from an artificial avoidance arrangement and following expiry of the opportunity for a review and appeal described above. The notice must require payment of the penalty within a period of at least 21 days. If the penalty is not paid, the local authority will be able to recover it as a civil debt.