Briefing Note

Clarity on Charitable Relief

Updated August 2016

Introduction

The High Court has allowed a charity’s appeal in a case concerning its application for charitable relief in respect of its occupation of two large industrial units. The decision provides clarity on some of the issues surrounding charitable relief cases.

This Briefing Note should not be relied upon as legal advice and you should contact us for advice on your specific circumstances.

Background

Since 2008 the rates for warehouses and most other commercial properties left unoccupied for over three months have been the same as for those that are occupied (before 2008 rates were not payable on unoccupied warehouses). This change in the law has given rise to a new type of tax planning scenario wherein a landlord effectively achieves a substantial reduction in rates in return for donating funds to a charity.

If the landlord allows a charity to occupy the warehouse, the charity becomes the rate payer and, as long as the property is ‘wholly or mainly used for charitable purposes’, is entitled to 80% relief from rates. It can therefore make financial sense for a landlord to pay a charity to occupy an otherwise unoccupied property and to repay the charity the 20% liability it incurs through its occupation (discretionally a local authority may waive a charity’s 20% liability, providing 100% rates relief).

Provided the landlord’s expenditure is less than the 100% liability they would incur for an unoccupied property, they stand to benefit financially. From the charity’s perspective, the landlord’s donation in return for occupying a property represents a worthwhile fundraising opportunity.

The case

Sheffield City Council obtained liability orders against the Kenya Aid Programme for just over £1.5 million for its occupation of the industrial units, for which the charity had received a payment for 20% of the Non-Domestic Rate liability along with a £17,000 donation from the landlord. Under the lease the charity paid a peppercorn rent and the agreement was terminable on seven days’ notice.

The Kenya Aid Programme asserted that it was entitled to standard charitable relief of 80% based on the fact it was a charity in rateable occupation using the premises purely for charitable purposes. The extent or efficiency of its use of the two industrial units (they had been used to store furniture and were evidently sparsely filled) was irrelevant.

Sheffield City Council, meanwhile, argued that the court should consider the nature and extent of the charity’s use of the premises when deciding whether they were ‘wholly or mainly used for charitable purposes’.

The district judge who assessed the case decided the approach set out in English Speaking Union v City of Edinburgh Council [2010] should be used to determine whether the premises were ‘wholly or mainly used for charitable purposes’. Using this as a guide and taking into account witness evidence that the charity had spread out furniture inside the premises that covered less than half of the property, the judge was unable to conclude that the premises were being ‘wholly or mainly used for charitable purposes’, given the absence of substantial use of the premises.

In the appeal hearing, the High Court held that the district judge was right to take into account the extent to which the premises were used. However, he incorrectly placed weight on other factors, such as the efficiency of the furniture storage use of the premises and the necessity of Kenya Aid to occupy both industrial units, and so his judgement could not be sustained. The High Court lacked the evidence needed to form its own judgement, so it remitted the case to the original district judge to reconsider.

In allowing the appeal Lord Justice Treacy made it clear it was the court’s role to ‘interpret the legislation’ and that the use of tax planning measures was ‘not of direct concern to the court’.

Expert legal advice for charities

With retailers and landlords approaching charities with offers of donations in return for the occupation of hard-to-let properties, and some charities actively marketing their willingness to enter such agreements, the ramifications of business rates relief cases are increasingly a concern for charities.

Before it enters into a tenancy agreement in exchange for funding, it is vital for a charity to seek legal advice.

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