Treasury warned of ‘big danger’ for charities from proposed tax rule changes

13 Sep 2023 News

The government has been told to consider a potential “big danger” for charities caused by proposed changes to business rates rules.

At an event yesterday, Charity Tax Group (CTG) urged the government not to scrap the “next in use” exemption for charities and community amateur sports clubs (CASCs) as it could have unintended consequences on the sector.

The consultation was also accused of using inflammatory wording to describe the current state of business rates avoidance, which amounts to an estimated £250m a year.

‘Misleading legitimate charities into occupying an unsuitable property’ 

In July, the Treasury and Department for Levelling Up, Housing and Communities opened a joint consultation looking at the causes of – and potential measures to address – avoidance, evasion and poor rating agent behaviour in the business rates system.

The consultation, which closes on 28 September, seeks views on proposals to reform empty property relief (EPR), which it says has been “misused as a long-term method to avoid paying business rates on empty property”.

EPR exempts certain properties, including those owned by charities and CASCs, that are empty and unused from business rates for up to three months, or six months for industrial properties.

These properties can only benefit from a further period of EPR if they are occupied for a minimum six-week “reset period” before becoming vacant again. 

The government proposes increasing this requirement to up to six months or potentially removing it altogether. 

Its consultation says that there is evidence of “avoidance of business rates through repeated periods of artificial or contrived occupation to access EPR, and exploitation of the charity or CASC ‘next in use’ exemption from unoccupied rates, as particular risks to the tax base”.

“The exemption can be misused as a long-term method to avoid paying business rates on empty properties. This includes, in some cases, owners misleading legitimate charities into occupying an unsuitable property at a low cost. Alternatively, there may be instances where a charity is an artificial construct, used as a vehicle to secure the exemption.

“This method of avoidance is effective because the exemption provides relief from rates for an indefinite period. Additionally, the exemption applies regardless of whether or not a charity or CASC ultimately occupies the property or not.”

CTG: Don’t remove exemption

At yesterday’s webinar, CTG chair Richard Bray said that some of the government’s proposed reforms could be appropriate.

However, he added: “What we’ve found in the charity sector is very often, the government will use a sledgehammer to crack a nut.

“So, in a sense, I think what we’d be looking for is something that might tighten up empty property relief a little bit, but not certainly getting rid of next in use, for example. 

“Sometimes we neglect rates, and the reliefs we get, which are £2bn a year. The concern would be if it was replaced with something else, that we would have to be very active to make sure that we still got the relief that we should from whatever might replace business rates. That could really be the big danger.”

Consultation wording is ‘inflammatory’

According to the Local Government Association, around 1% of the total business rates income, or £250m, is lost to tax avoidance in England every year.

John Webber, head of rating at real estate services firm Colliers, said during the webinar that the wording of the consultation is “quite inflammatory because it rather suggests that there’s an army of pretty unscrupulous people out there that are trying and avoid paying business rates”.  

Webber argued that the “abuse” described in the consultation is not widespread, saying: “Clearly, it does happen. But what will happen, as a consequence, is that there are, say genuine cases that will be clobbered at the same time. Genuine charities will potentially fall foul of that.” 

CFG: Charities shouldn’t be ‘penalised by changes’

Clare Mills, director of policy and communications at Charity Finance Group, said: “We haven’t seen any data on how often this exemption is being exploited for business rates avoidance or evasion, and it’s really important that charities making legitimate use of tax exemption and reliefs are not penalised by changes. 

“There’s always a concern that changes to address any issues can be disproportionate, and create greater problems than they are intended to solve.

“It is vital that HM Treasury listens to charities and CASCs before making any decisions on EPR.”

Treasury: No intention to scrap EPR

A spokesperson for the Treasury told Civil Society that EPR is worth around £1bn in 2022-2023 and that “there are no plans to abolish EPR for anyone”.

“While this relief provides important support to landlords with vacant properties, local authorities and previous respondents to consultations have identified it as a significant channel for avoidance activity.

“The government is therefore seeking views on proposals that aim to balance support for those who require it with the need to tackle abuse.” 

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