Legal loophole costing councils millions in unpaid business rates, says LGA

20 Sep 16

Councils are being forced to write off millions of pounds of debt owed to them in business rates because of a loophole in licensing laws, the Local Government Association has said today.

The LGA has said that some councils are facing debts of up to £1.5m, while others have been forced to write off unrecoverable sums of around £300,000 owed by licensed premises including pubs, clubs and off-licenses.

It is calling for new powers to allow town halls to suspend the licenses of business that willfully or persistently fail to pay business rates. Under current laws, councils cannot refuse or suspend a premise’s licence for outstanding business rate debts.

According to the LGA, the problem is due to the practice of companies going bankrupt, only for a second ‘phoenix company’ to start up over night with the same directors. At present, this second company has no obligation to pay the old company’s debts, including any owed business rates.

Under current laws, as long as licensees meet four requirements and pay their annual licence fee, councils have to grant them a licence. The four requirements are, the prevention of crime and disorder, public safety, the prevention of public nuisance, and the protection of children from harm. 

Business rates will be fully devolved to councils from 2020. In today’s statement, the LGA said new licensing powers would help councils manage rates when the devolution process has been completed.

The umbrella group highlighted the case of Newcastle Council, which is facing £1.47m in business rate debts accrued by licensed premises, accumulated over several years. Meanwhile, it said, South Norfolk Council is owed around £190,000 is business rates, of which £115,000 is attributed to one business.

LGA licensing spokesman Simon Blackburn confirmed councils were willing to work with businesses struggling to pay. However, he said that some business were deliberately avoiding paying their rates, in the knowledge they could continue to operate without fear of being stripped of their licence.

“Giving council powers to refuse or suspend a premises licence at an earlier stage of the debt recovery process would be a simple way to tackle this problem and protect local services,” he said.

In light of recent funding cuts, business rates debt meant that councils were being deprived of large sums of money, which should be being spent on key services, such as roads, schools and caring for the elderly.

This was unacceptable, he added, but councils were powerless to stop vast sums of unrecoverable money from building up, or from taking action if a business closes and reopens under a different name.

He urged the government to close the phoenix company loophole by making it a legal requirement for directors of bankrupt companies who start up a new business to pay their old company’s business rate debts. “It must be particularly galling for law-abiding businesses who pay their rates on time but see competitors go bankrupt owing hundreds of thousands of pounds, only to legally reopen under the same directors scot-free.”

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