The High Court recently ruled that the extent of a charity's charitable use of a landlord's empty building was relevant to whether the charity should be granted relief from business rates.
Full business rates are now due on empty commercial properties that remain unoccupied for 3 months in the case of retail and 6 months in the case of industrial and warehouse properties. However, charities occupying a commercial property qualify for a mandatory 80% discount on business rates, provided that the property is used wholly or mainly for charitable purposes. Over the last few years, landlords have granted tenancies of hard-to-let premises to charities, which has had the effect of reducing the landlords' business rates liability. Charities may only pay a peppercorn rent and may receive a donation from the landlord which can cover the remaining 20% liability and in some circumstances also incorporate an additional charitable donation. As occupier the charity will become the rate payer and the landlord’s rates liability will be zero. All being well, the charity will be entitled to the 80% relief and the arrangement is hence financially mutually beneficial.
However, there have been concerns as to whether the practice amounts to rates avoidance and, in 2011, the Charity Commission announced that it was examining over 700 tenancy structures like this. In Kenya Aid Programme v Sheffield City Council, the High Court looked at whether the charity will always qualify for rates relief. It considered whether the charity Kenya Aid Programme (KAP) was using the properties "wholly or mainly for charitable purposes".
In this case the landlord leased two warehouses to KAP at a peppercorn rent. KAP used the premises to store furniture but did not fill all the available space. The landlord paid KAP an amount equal to its remaining 20% rates liability and an additional donation. The City Council refused to grant KAP the 80% charities rates relief and the District Judge upheld this position. KAP appealed to the High Court.
The High Court held that the District Judge had taken the wrong approach in deciding whether the use of the premises was wholly or mainly for charitable purposes. It therefore remitted the case back to the District Judge to reconsider.
Some key points from the judgment are as follows:
- Lord Justice Treacy thought the question to be asked was whether the charity’s use of the premises was directly to facilitate the carrying out of its main charitable purposes. He confirmed that general fundraising does not come into this category.
- It held that the District Judge had been correct to take into account the extent to which the premises were used.
- However the District Judge had also taken into account factors which were not relevant. In particular he should not have considered whether the furniture storage at the premises was efficient or whether it was necessary for KAP to occupy both warehouses.
- The District Judge had not analysed what he described as “the mutual advantages” to KAP and the landlord of the letting. If he was referring to tax avoidance, this was not relevant. If what he was referring to was that one use of the premises was to produce revenue for KAP, he should have considered this in more detail. Although fundraising is not a use that qualifies for the relief, the fact that it was taking place did not necessarily mean that furniture storage was not the whole or main use of the premises. The fundraising use would only affect eligibility for the relief if it was extensive enough to stop the "charitable" use being the main use; the District Judge needed to consider this.
This is not an end to the matter as the District Judge has not yet reconsidered the case. The hearing is expected in June. In the meantime, the decision may be welcomed by local authorities as they will now be able to consider the extent of the charitable use of a building before deciding whether to grant a charity rates relief. Charities and landlords should be aware that this type of arrangement may be challenged in the future.
For more information, please contact James Simpson on 01223 461155 or click here to email James.