The UK’s highest court ruled on Friday that local authorities can sue two property developers over unpaid business rates, a decision with far-reaching implications for owners of empty high street shops.

The Supreme Court hearing centred on a test case brought by two councils against the developers over a business rates avoidance scheme.

Rossendale and Wigan boroughs sued Property Alliance Group Ltd and Hurstwood Properties (A) Ltd over local levies they claimed were owed on empty properties.

The two companies had entered into schemes where special purpose vehicle companies (SPVs) took short leases of the properties and became liable for tax. However, no taxes were paid because the corporate vehicles were either dissolved or put into liquidation.

Owners of most unoccupied commercial properties start paying business rates after a three-month grace period, but there is an exception where the owner is a company in liquidation.

The Supreme Court ruled that it would allow the local authorities’ case to proceed to full trial and said there was an arguable case that the original owners remained liable for the rates. The two developers had argued the case could never succeed and should be struck out.

The case is significant given the increase in empty shops following the recession caused by the coronavirus pandemic. These do not qualify for the business rates holiday even if the departing tenant was a retail or leisure business.

The ruling has implications for dozens of other lawsuits by local authorities. The two councils were chosen as a test case out of 55 similar lawsuits with a value of around £10m, filed in the Liverpool District Registry of the High Court. It is unclear how many other cases have been filed outside the north-west of England.

Handing down the ruling, Lord Michael Briggs, a Supreme Court justice, said: “The whole purpose of the schemes was to avoid payment of the empty rate, rather than to transfer the responsibility for its payment. Apart from rates avoidance, the schemes had no separate business purpose of any kind.”

Chris Perrin, partner at law firm Addleshaw Goddard, representing Property Alliance and Hurstwood, said the decision could have far-reaching consequences for property law and the principles of “possession” and “occupation”.

Property Alliance said it had won a number of legal points. It urged the government to reform the rates system for empty properties, adding: “We are naturally disappointed that the court did not agree with our position. But we remain confident that once the full facts and evidence are placed before the court they will find in our favour.”

Matthew Whyatt of ASW Solicitors, which acted for the two councils, said he would not be surprised if “significant numbers” of local authorities now pursued claims. “During what have been difficult times for local authorities, it is clear that the schemes have deprived numerous local authorities of significant sums for front-line services,” he said.

There are several other exemptions from empty rates, including listed buildings and agricultural property.

Jerry Schurder, head of business rates at property consultancy Gerald Eve, said retail landlords often install charitable enterprises as tenants at a very low rent. Charities pay business rates but receive an 80 per cent discount.

They may also take advantage of “intermittent occupation” rules by installing a shop selling seasonal goods, such as Christmas decorations, Schurder said, adding: “After 43 days of occupation, you can then apply for another three months of empty rates relief.”

The Treasury is currently holding a consultation on business rate reform, but its conclusions are not due until the autumn. Meanwhile, the government has tabled legislation to prevent landlords appealing against rateable values on the grounds that Covid-19 has reduced both rent levels and the likelihood of finding a tenant.

Robert Hayton, president of property tax at Altus Group, said that while he advised against using SPVs to avoid business rates, their existence illustrated the flaws in the existing system.

“No one likes empty rates which are, in effect, a tax on the absence of income,” he said. “If the tax was more affordable, owners wouldn’t be forced to find complicated ways to mitigate their liabilities.”