Risks to charities linked to business rates relief
Full business rates are due on empty commercial properties that remain unoccupied after three months, including lower value properties such as small shops. However, charities occupying commercial property qualify for a mandatory 80% discount on business rates, provided the property is used wholly or mainly for charitable purposes. Local authorities also have the discretion to grant the remaining 20% as a further discount.
The Charity Commission, the independent regulator of charities in England and Wales, is 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 the landlords of the requirement to pay full business rates. Equally, some charities are actively marketing their willingness to enter into tenancy agreements with commercial landlords.
This can be advantageous for charities and provide good opportunities for them to lease accommodation 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, this does raise potential risks for the charities involved if they do not follow a proper and reasonable decision making process before entering into these tenancy agreements, and if they are not physically occupying the premises.
We have received information from a number of local authorities concerned about situations where charities are entering into tenancy agreements on commercial property but where in practice the property is, or appears to be, empty. Charities often claim they require the properties for storage or other purposes.
As the regulator, we are concerned that these charities may find themselves involved in what local authorities might consider to be business rates avoidance by landlords. This could potentially result in charities losing the discretionary discount and being required to pay 20% of the business rates.
Before entering into any tenancy agreements to occupy empty properties, charity trustees need to:
- 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 occupation and refuses discretionary 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 has been made aware of over 700 tenancy agreements where this may be the case. We have been 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.
Visit HM Revenue Customs website for more information about charity business rates relief.