Julie Carr discusses recent cases of charities claiming business rates relief. 

There has been much press comment about the uptake by charities of space on the high street in what critics and rating authorities suggest is a ploy for landlords to avoid business rates.

The current ‘schemes’ have centred around landlords making donations to the charity which are at least equivalent to 20 per cent of the business rates for the property. The net result is that the lease obligations should be cost-neutral to the charity and the landlord saves 80 per cent in business rates. The scheme’s success is dependent upon the charity’s claim for mandatory relief from the rating authority under section 43(6)(a) of the Local Government Finance Act 1988 (LGFA) being successful.

Many rating authorities are investigating lease arrangements with charities to determine whether they feel the arrangements meet the relevant criteria for rating relief. If a rating authority can establish that the charity is not entitled to rating relief, then the charity will be liable to pay full rates, with dire financial consequences for the charity.

Recent cases

Two recent cases have examined these types of schemes: Kenya Aid Programme v Sheffield City Council [2013] EWHC 54 (Admin) (‘Kenya’) and Preston City Council v Oyston Angel Charity [2012] EWHC (Admin) (‘Oyston’).

Kenya concerned a scheme where the rating authority felt the minimal extent of the area of the properties actually used by Kenya Aid Programme (‘KAP’) meant it could not be considered use for “wholly or mainly charitable purposes”. Sheffield City Council (‘Sheffield’), sought a liability order against KAP of over £1.6m.

The property was used for storage of furniture, but Sheffield was concerned that KAP had taken far more property than was necessary for its purpose – effectively twice the amount of space needed – and that it could have organised the use of space more efficiently. The High Court decision is expected in June 2013, but the Court did clarify that the rating authority could, in deciding whether the use of the property for was “wholly or mainly charitable purposes”, consider the extent of the use made of the property.

However, while the High Court agreed with Sheffield that a rating authority should be able to take a common-sense approach evaluating the extent of actual use made of the property, it felt that it had gone too far in some irrelevant considerations.

Oyston concerned the charity being given the right to occupy a unit for charitable purposes only and to then sublet it, provided that the subtenant’s use was only for charitable purposes.

Here, the tenant did not intend to occupy the property and argued that under 45A LGFA, the empty property would be zero-rated on the basis that “it appears that when next in use the hereditament [property] will be wholly or mainly used for charitable purposes (whether of that charity or of that and other charities)”. The case proved successful for the charity, although there were warnings on tax avoidance.

Charity Commission investigation

The Charity Commission is investigating charities entering into such arrangements with landlords. While it continues its investigations, it has reminded charities to employ a reasonable decisionmaking process before entering into arrangements for premises and to carefully consider whether entering into these arrangements is in the best interests of the charity.

For example, will the benefit be exclusive to the charity? Does it further the purposes of the charity? Is the property genuinely required and is it fit for purpose? Are there risks of hidden costs? Could the transaction affect the charity’s reputation? Could the charity suffer other legal or financial consequences, perhaps falling foul of tax avoidance principles, or even the new tainted charity donation rules?

Julie Carr is a partner at DWF