Business rates: what legacy officers need to know

Many charities have a retail arm, which will have experience of dealing with commercial property and the associated business rates. It can also be helpful to have a working knowledge of the rules when receiving gifts of commercial property. In this article, we provide an introduction to business rates and highlight some of the pitfalls for charities to be aware of if seeking to claim charity exemptions from those rates.

In the early 2010s, there was a raft of cases where charities were found to have been claiming business rates relief to which they were not entitled. This led the Charity Commission to issue an alert to charities about the risks of entering into business tenancies and claiming relief in cases where it is unclear whether the property will in fact be used for charitable purposes. The alert has since been withdrawn but the risks remain – particularly at a time when budgets are becoming ever tighter and local authorities are at pains to maximise their income from takes and other levies.

In a legacy context, it is important to understand when the exemptions can and cannot be claimed and to avoid getting caught up in inappropriate schemes. Otherwise, philanthropic context could lead to a failure to identify those offers that are too good to be true.

What are business rates?

Business rates are a tax that is charged by local authorities on most non-domestic properties such as shops, offices, pubs, warehouses, factories, holiday rental homes and guesthouses in England and Wales. Different rules apply in Scotland and Northern Ireland.

It is important to note that business rates are charged on the area of the property that is being used for business purposes. This may only be part of a property, and so references in this article to "property" include reference to part of a property.

The occupier of the premises is responsible for paying business rates. This will usually be the owner or the tenant. Sometimes the landlord of a property will charge the occupier a rent that includes an amount to cover the relevant business rates, but this is less common.

How are business rates calculated?

Business rates are based on the "rateable value" for the relevant property. This is an estimate of what the annual rent would be if the area in question was offered on the open market on a fixed date. The Valuation Office Agency makes this estimate and sets the ratable value for each ratable property every three years.

The rateable value is then multiplied by a standard rates multiplier, which is the number of pence currently payable per pound of the rateable value. The multiplier varies depending on the size of the business, but it is currently a little over 50 pence in the pound, so the business rates payable are generally around half of the rateable value.

Why is this important for charities?

If a property remains empty for three months or more, the landlord becomes liable to pay business rates on it. As charities benefit from certain exemptions from business rates, landlords are sometimes keen to rent property to them at preferential rates to avoid having to meet those costs. They may do this even if it is not clear that the property will be utilised strictly for charitable purposes.

Charities should not become involved in such schemes, but the risk of doing so unwittingly is high. Where they do become involved, charities can end up having to pay the business rates for the property in full for the period of the lease. They also risk:

• The additional cost of court proceedings.
• Significant reputational damage.
• Serious damage to their relationship with the relevant local authorities, which can lead to the withdrawal of the discretionary relief referred to below.

Importantly, charities cannot simply claim the exemption without having a use for the property and actively using it for their charitable purposes. Consequently, the exemption will not apply where a charity is simply holding commercial property as a personal representative or holding for itself pending development of a legacy gift.

What exemptions are available to charities?

Charities may occupy commercial property because it is from there that they deliver their charitable purposes. They may also use commercial property for office space or as a base from which to plan and organise the charity's activities elsewhere. In the retail context, charities may occupy property for shops or for warehouses and ancillary functions.

During the term of the lease

Charities currently receive mandatory relief from the payment of business rates at 80%. The relief is available in respect of commercial properties where the ratepayer is a charity and uses the site "wholly or mainly" for charitable purposes (whether of that charity, or of that and other charities). In the case of charity shops, the 80% mandatory relief applies where the shop is used "wholly or mainly" for the sale of donated goods and the proceeds of sale are used for charitable purposes (that is, that the profits made are used to further the charities' work).

Local authorities may also award discretionary relief in respect of the remaining 20% (and more widely in respect of organisations that do not qualify for mandatory relief), although policy varies from authority to authority. Consequently, charities never have to pay than 20% of the rates that would be paid by a non-charity occupier, and sometimes pay less than this or even nothing. However, our conversations with charity clients indicate that the award of discretionary relief by local authorities is becoming less common. Perhaps inevitably, there appears to be a correlation between the authorities' approach to discretionary relief and their squeezed resources.

At the end of the term

For all occupiers (not just charities), once a lease has come to an end, empty property relief of 100% is available for three months after the property becomes empty.

A further three months' empty property relief is then available in limited circumstances, including where:

• The property is being repaired or refurbished and cannot be used.
• The rateable value is below a certain amount.
• The property is owned by a charity and the next occupier will use it mostly for charitable purposes.

If the property is (or is in) a listed building, empty property relief applies until it is next occupied.

When is relief not available?

If a charity is genuinely using a property for charitable purposes, difficulties are unlikely to arise. Where the purpose of the occupation is not clear cut, however, there is a risk of the arrangements not qualifying for relief.

Examples of arrangements that have been found not to qualify include a charity occupying property and/or more space in a property than it actually requires or can use, so that relief is being claimed in respect of a larger area than is actually being used for charitable purposes.

Although less likely to arise in a legacy context, it should also be noted that, if a charity is offered a lease (perhaps by personal representatives of an estate), it could also find itself unwittingly involved in an illegitimate claim for business rates relief in the following circumstances:

• It is allowed to occupy the property for nominal or no rent, on the condition that it will apply for relief; or
• where it has no real use for the property:
  • the landlord paying it a "reverse premium" (i.e. refunding some of the rent) in return for claiming relief; or
  • the landlord permitting occupation of additional space without charging extra rent.

In all of the above scenarios, there is a risk of the arrangements constituting business rates fraud. Where this is found to be the case, it is the charity (not the landlord) that becomes liable for the unpaid business rates, together with costs and interest.

What is meant by "wholly or mainly"?

The key here is to consider the difference between "occupation" and "use". Business rates relief is not available when a charity merely has the right to occupy a property: it must actually use the property wholly or mainly for charitable purposes if it is to qualify.

Case law suggests that, to satisfy this test, a charity must actively be using at least 50% of the property to further its purposes in some way, although the authorities vary as to the actual amount.

Examples include:

• A charity using a property to deliver its services directly to beneficiaries (e.g. a hospice).
• A charity using a property as office or storage space to facilitate the furtherance of its purposes elsewhere.
• A charity using a shop to sell mainly donated goods and applying the proceeds in furtherance of its purposes.

Key considerations

To help avoid the possibility of entering into arrangements that will not qualify for relief, charities should:

• Be wary – where an arrangement sounds too good to be true, it probably is.
• Take legal advice before signing any leases or claiming any relief in a legacy context.

If your charity is gifted commercial property or offered what appears to be an advantageous lease in a legacy context, or if you have any questions about business rates and business rates relief generally, please contact a member of the team.