22 April 2015
Charities warned about business rates
In March the government published its Business rates review: terms of reference and discussion paper. It involves a call for evidence and includes some key questions that charitable organisations and churches may wish to check out.
Among a number of discussion questions, the consultation asks "What evidence and analysis should the government take into account when evaluating the impact of and any changes to the range of reliefs and exemptions present in the business rates system?"
The Evangelical Alliance was recently involved in a case impacting one of its member churches which, out of the blue, was landed with a six-figure business rates tax bill assessed on the basis of how much of its physical footprint could be construed as recognised 'church activity'. After much political and professional negotiation the bill was significantly reduced, being applied only to what was considered to be profit-making activity of nursery provision.
Currently, Church of England and Church in Wales churches are exempt from non-domestic rates, together with other religious buildings in England and Wales registered under the Places of Worship Registration Act 1855. In addition, buildings used by charities for charitable purposes attract an obligatory 80 per cent discount on business rates, whilst local authorities have discretion to remit the other 20 per cent. However, there are exceptions where religious activity is deemed not to be taking place. For example, cathedral bookshops and gift shops are rateable and are usually separately assessed. Where activities associated with churches are involved – most notably 'Big Society' type activities – most rating authorities have by long established policy and practice tended not to assess those sections of church property devoted to such activities.
It is the 20 per cent discretionary discount which has recently been under threat from certain cash-strapped local authorities which, encouraged by the Inland Revenue, feel pressured to find new ways of raising income. Because places of worship in England and Wales do not attract rating valuations there is no certain way to calculate precisely what the exemption for places of worship amounts to in total, but it can be assumed to be significant and therefore a highly attractive potential target for hard pressed valuations officers.
It is therefore important for churches and religious charitable organisations to consider responding carefully to this consultation (see page 25), whose deadline date is 15 June.
In addition, it should also be noted that the Government and the Charity Commission have published new regulatory guidance for charities and others participating in business rates avoidance schemes.
Eager to protect reputational damage to charities and the charitable sector as a whole, the Charity Commission is concerned about charities that may enter into business rates arrangements that exploit tax legislation artificially and end up serving to benefit private interests. The charities enjoy a benefit as a by-product rather than as the result of a principal aim. The Commission is warning that charitable organisations are advised to take appropriate professional advice on reliefs such as business rates.
Following a court judgment on 14 May 2013 in the case of the charity The Public Safety Charitable Trust Limited, an important issue for the Charity Commission relates to possible avoidance of business rates where charities may lease empty properties from private landlords whilst effectively carrying out little or no charitable activity, though still seeking to take advantage of business rates relief. Such arrangements can enable property landlords to save money on empty properties. Full business rates are due on empty commercial properties that remain unoccupied for three months. However, charities occupying such properties and using them wholly or mainly for charitable purposes are entitled to the usual mandatory 80 per cent discount from business rates and the grant of additional relief of up to 20 per cent at the discretion of the local authority.
The Charity Commission is also aware of cases where charities are being approached by retailers and landlords of hard-to-let property to enter into tenancy agreements that would relieve landlords of the requirement to pay full business rates. It can seem advantageous for charities to enter such agreements and may offer good opportunities for them to lease accommodation for charitable uses for low or nominal rents. They may also sometimes receive charitable donations from landlords that reflect a percentage of the business rates that they would otherwise be liable for.
However, such arrangements can represent a significant risk for charities and trustees. If a charity is not making sufficient use of the premises for charitable purposes which would attract appropriate business rate relief, then it may be liable for the full business rate liability. In addition, the trustees may find themselves subject to personal liability if they have not carefully considered the proposed future use of the property before entering into any agreement and subsequently the claim for rate relief is not available.
The Charity Commission advises that before entering into any tenancy agreements to occupy empty properties, charity trustees must:
- Be assured that the tenancy agreement is for the exclusive benefit of the charity, will further the charity's purposes and is in its best interests;
- ensure the property is genuinely required and is fit for purpose;
- consider the potential liability of the charity to pay outstanding rates if the local authority disputes use of the premises and refuses rates relief;
- very carefully safeguard the charity's independence and ensure the charity is not being abused for the benefit of a commercial company;
- where appropriate, take suitable professional advice, including legal advice, before entering into a tenancy agreement. The Charity Commission says that it has been made aware of a number of charities who have entered tenancy agreements and is examining whether the trustees of the charities involved have properly discharged their trustee duties when making the decisions to occupy those properties to further their charitable purposes, and whether any benefit to the landlord is incidental to that.