There have been several high profile Court cases concerning the operation of charitable reliefs but none so polarising as this one.
A registered charity that uses a property wholly or mainly for charitable purposes qualifies for a mandatory 80% exemption on its business rates bill, with the local authority having the discretion to award the further 20%. Various organisations benefit from this exemption by claiming charitable status, including private hospitals and public schools. Local authorities also have a discretion to award up to 100% relief to non-profit making organisations, so long as they concentrate on public benefit systems and beliefs: religion, social welfare, art, education and recreation among them.
As matters stand, state schools and public hospitals are not able to benefit from business rates exemption. The seventeen NHS Trusts have elected to challenge the status quo, questioning a system that allows a large private hospital to save £100,000s a year while an equivalent NHS hospital is charged at full rate. Depending on the outcome a similar challenge may well arise from state schools.
While it is not difficult to understand the motivation and the logic behind the Trusts’ challenge, it could leave a multi-billion pound gap in public finances and could open the floodgates to other claims. There is also the issue as to whether it will muddy the waters with charities and their own applications for relief. With the government not looking likely to intervene, the challenge could also take years to resolve as the sheer numbers involved make appeals to the Court of the Appeal and Supreme Court probable, no matter the initial result.
After several well-known cases over recent years that have clarified the status of charitable relief, charities will keep a firm eye on the outcome of the challenge as to whether it shifts the goalposts at a time when coherence was within touching distance.
Charities and business rates relief: where are we now?
The takeaways from recent litigation, while not being comprehensive, have marked out a relatively clear path as to how a charity can qualify for business rates relief:
- The charity should be registered with the Charity Commission or be treated as a charity for tax purposes by HMRC, unless the charity falls within a limited “excepted charities” rule.
- The premises which the charity uses should be “wholly or mainly used” for “charitable purposes”.
- “Wholly or mainly used” refers to the extent of the premises, so a property’s floor space which is at least 50% used by the charity should fall within this provision, although that may not necessarily be the cut-off figure in all cases.
- “Charitable purposes” refer to all purposes which further the objects of the charity.
- The occupation should be substantially and in real terms for the public benefit.
- There should not be scrutiny of whether the charity is using the space efficiently.
The risks for a charity to address
In the vast majority of cases, local authorities will award at least the mandatory relief without undue delay. However, what has made the local authorities more probing in their investigations of charities, is the proliferation of “charities” that have been created mainly or solely to exploit the relief granted. Rating is one of the few taxes where artificial mitigation schemes are allowed, but these schemes must be exercised with caution and in line with the legal guidelines. The reliefs afforded to charities make them tempting to any entity who wishes to cut costs simply because of the level of relief offered. Charities obtain at least 80% relief when occupied but can also obtain 100% relief when unoccupied, so long as the next occupation will satisfy the charitable criteria.
In the past few years, the provision of free wireless internet and the installation of an art gallery (without any customers) have drawn the ire of the Courts. This has had a clear and negative impact, in that local authorities will regularly make enquiries of legitimate charities as to their use of their administrative offices, shops or storage spaces.
Trustees of a charity must employ common sense principles when agreeing to occupy property in order to comply with their duty of care, as well as to stave off threats of litigation and of negative PR. These can be summarised as:
- Consider the ramifications if the property were to be taxed at full rate with no relief.
- Make sure the property is genuinely required for the purposes of the charity.
- Make sure the occupation is solely for the benefit of the charity, furthers the charity’s purposes and is in the charity’s best interests.
- Make sure the Trustees have maintained their independence throughout and have not been influenced by costs saving.
- Obtain independent advice if uncertain about any issue.
The inescapable reality is that - with revenue over £33 billion a year, with local authorities under pressure to increase income and with the system provoking widespread disapproval - business rates form a taxation system that is becoming ever more litigious and caution is required in order to maintain independence and keep a charity free from scrutiny. Any developments prompted by the NHS Trust challenge will be reported in due course.