In the past fortnight, I have written two stories about charities that have come a cropper over unpaid business rates to local authorities.
The stories go like this: charity leases premises in ‘hard-to-let’ area for peppercorn rent on flexible terms and then claims the mandatory 80 per cent discount on business rates from the local authority. The landlord, in some cases, also pays the charity an annual donation that reflects a proportion of the discount on the full business rates they would otherwise have paid to the local authority, even if the property had remained unoccupied.
In some cases, the local authority can even offer a discretionary discount on the remaining 20 per cent of business rates, making it an even better deal for the charity – on the face of it, at least.
Still following? This is where it starts to get complicated.
The mandatory 80 per cent business rate discount is only applicable if the property is “wholly or mainly used for charitable purposes”.
Different legal definitions on what constitutes “wholly or mainly used for charitable purposes” have emerged from rulings in the court cases I have written about.
In one, the buildings were occupied only by a transmitter sending out messages to mobile phone users in the vicinity and the High Court judge in that case ruled that the buildings were not mainly used for charitable purposes because they were largely empty. The charity in question is now potentially liable for about £2m, once the local magistrates court has reconsidered the case at the behest of the High Court.
The second case involved a charity that was storing furniture in the property it was renting. The charity lost its case at the magistrates court because the local authority successfully argued that the properties were only around 50 per cent full of furniture.
However, the High Court has since told the magistrates court to look at this case again because it may have applied an incorrect legal test.
If the charity loses this next round of the legal battle, it will owe more than £1.6m in unpaid business rates.
In these hard financial times, local authorities are, like every other institution, under pressure and trying to shave money off their budgets wherever they can.
This means they are paying increasing attention to these arrangements over rates and, where they do not accept that they are being used wholly or mainly for charitable purposes, challenging them in court to recoup unpaid business rates.
It should also be noted that some local authorities view these arrangements between charities and landlords, as little more than an elaborate tax-dodging exercise.
If I were the chief executive or trustee of a charity, I would be extremely wary of entering into one of these arrangements with a landlord unless I was sure it would not leave the charity open to future liability in unpaid business rates.
The only way to do that is to make sure the property is fully occupied and only used for your charitable aims. Anything less and a random inspection by the council could lead to a court date and a liability order which could leave the charity insolvent.