Charity rates relief – a helpful Supreme Court decision

On 7 June 2023, the Supreme Court held unanimously that Nuffield Health is entitled to charitable relief at 80% from business rates in respect of its members-only gym in Merton, despite it being, as the court put it, "for the rich and not the poor". 

The judgment has clarified the test to be applied by rating authorities when determining eligibility for mandatory relief in England and is likely to benefit the whole sector – particularly charities which operate across multiple sites.

Background

Nuffield Health is a registered charity established "to advance, promote and maintain health and health care of all descriptions and to prevent, relieve and cure sickness and ill health of any kind, all for the public benefit".

One of the UK's largest charities, it operates hospitals and medical centres, and runs 114 fitness and wellbeing centres nationwide, including Merton Abbey Gym in Colliers Wood, London.

The Local Government Finance Act 1988 provides that, where (1) a ratepayer is a charity (or trustees for a charity) and (2) uses a site wholly or mainly for charitable purposes (whether of that charity or that and other charities), it qualifies for mandatory charitable relief at 80% from business rates on that site.

Local authorities also have discretion to award additional relief as to the remaining 20% (and more widely in respect of organisations that do not qualify for mandatory relief), but policy varies from authority to authority.

Nuffield Health applied for mandatory rates relief in connection with Merton Abbey Gym, but the London Borough of Merton Council refused it, on the grounds that membership fees were set at a level that precluded people of modest means from joining.

In the council's view, this meant that the gym was not being wholly or mainly used for charitable purposes because the public benefit test was not being satisfied at the site. The charity applied to the High Court, which granted a declaration of its entitlement to the relief. The High Court's decision was upheld by a majority on appeal by the Council to the Court of Appeal, and the Council appealed to the Supreme Court.

Supreme Court's analysis

The main question for the Supreme Court was whether or not the charity was using the Merton site wholly or mainly for charitable purposes.

The council argued that this question had to be answered by looking at the charity's use of the site in isolation – in other words, the council contended that all the tests as to what constitutes "charitable purposes" needed to be satisfied at that site if the charity was to qualify for relief there.  Because people of modest means were, in the council's view, excluded from the site, the public benefit test was not satisfied, and relief was not available.

In the charity's view, however, the requirement that the site be used for charitable purposes meant simply that it must be one of the (many) sites where its charitable purposes are carried out.  The court found unanimously in favour of the charity.

In reaching its decision, the court considered the fact that a charity's property is not necessarily used to further its purposes – many charities own investment property, for example, which does not qualify for relief. With this in mind, the court examined the test in the 1988 Act, finding that it imposes two distinct conditions that must be met if mandatory relief is to be available.

First condition

The first condition is that, in order to qualify, the ratepayer must be a charity (or trustees for a charity).  If the ratepayer is a registered charity, this condition is automatically satisfied because the charity has, by definition, purposes that are exclusively charitable and therefore for the public benefit.

Only if the ratepayer is not registered does the question as to whether it is a charity arise, and this has to be determined by reference to its constitution (if it has one), its activities and the purposes that they serve, looked at in the round, including an assessment of whether, from a charity law perspective, the public benefit requirement is satisfied.

Second condition

Assuming that the first condition is met, the second condition is that the site in question must in fact be being used wholly or mainly for the (necessarily charitable) purposes of the charity, or in a way that is closely connected with those purposes. This is a factual matter and does not require the rating authority, in the words of the judgment, to "don the cloak of the Charity Commission" to decide whether those purposes are charitable, as this has already been established in the first part of the test.

The court determined that Nuffield Health satisfied both conditions in respect of Merton Abbey Gym: it is a registered charity, with purposes that are "irrebuttably presumed" to be charitable wherever they are carried out and, viewed overall, to satisfy the public benefit requirement.  It also "plainly" uses the site for the direct fulfilment of those purposes.

The charity is therefore entitled to mandatory relief from business rates on the site – and has been since 1 August 2016 – despite people of modest means reportedly being unable to afford to train there.

Significance of the result

Had the court reached a different decision, the result would have been to enable rating authorities, in effect, to apply their own public benefit tests on a site-by-site basis, despite applicant charities being able to demonstrate that, taken as a whole, their operations satisfied the requirements of charity law. 

This could have led to incongruities, with charities that operate across multiple sites perhaps being able to claim rates relief in respect of some of those sites but not others, despite them being used in a similar manner.

However, it is now clear from the judgment that, where a rating authority does have to assess whether or not an organisation is a charity, and that assessment turns on whether or not the organisation's purposes satisfy the public benefit requirement, the authority must have regard only to the manner in which the organisation fulfils its purposes overall, and not whether it does so in any particular place where its activities are carried on. 

If the organisation operates from a large number of sites, "the question whether provision for the poor is only token or de minimis cannot be answered by looking only at the site or sites where provision is made for the poor, or only at the site or sites where no such provision is made".  In other words, public benefit remains a matter of general charity law and should not be a question of local judgment or policy.

Charity rates relief is worth over £2 billion each year and is the largest tax relief claimed by charities. The judgment will, therefore, be welcomed by the sector as a whole for clarifying the test that applies in respect of eligibility for the mandatory element. 

It will be particularly welcomed by charities that operate, like Nuffield Health, from multiple premises throughout England but do not necessarily use them all to provide identical, universally affordable services.  It may also be welcomed by the rating authorities whose task it is to apply the test – although whether the London Borough of Merton Council will see fit to extend discretionary, as well as mandatory, rates relief to Nuffield Health in future remains to be seen.

What should charities takeaway from this case?

Charities will note the continued emphasis in the first limb of the test on the ratepayer (that is, the occupier) being the entity able to claim relief. Some local authorities will apply discretionary relief to trading subsidiaries where the majority of sales are of goods donated to a charity and the proceeds of sale are also applied for the purposes of that charity.

However, the Local Government Finance Act 1998 makes no specific allowance for this arrangement.  Consequently, charities often take the leases of charity shops themselves and/or adopt a licence arrangement with their subsidiary. This position remains unchanged.

Charities should also be careful not to assume that the Nuffield judgment gives carte blanche to claim relief regardless of the use of the relevant premises. It is important to remain conscious of the second condition of the test that the premises in question must be used wholly or mainly for the purposes of the charity (or of the charity and other charities).

The effect of this is that, were a charity to simply take a lease and claim relief where, in fact, there is no charitable use, this would amount to business rate fraud. Consequently, charities should, as ever, be alive to landlords offering to grant leases for no rent – or even reverse rent, where the landlord pays the charity to take the lease – if the premises are not usable or will not actually be used.

A raft of claims were brought against charities in 2013 in this respect. In such situations, the likely result is the charity subsequently being found liable for significant sums of mandatory business rates, penalties, interest and potential costs. Affected charities can also face reputational damage and the potential loss of discretionary relief for their remaining portfolio.

In addition, the Charity Commission warnings in this respect include the sobering message that, where a charity becomes involved in such scheme without proper due diligence, its trustees may find themselves in breach of trust and personally liable for any loss caused to the charity.