The Charity Commission has reissued a warning to charities about the risks involved in arrangements relating to tenancy agreements and business rates relief.
The commission first warned charities and trustees in December 2011 and repeated its alert this May, following a court judgment relating to registered charity the Public Safety Charitable Trust Limited.
Full business rates are due on empty commercial properties that remain unoccupied after three months. However, charities occupying commercial property qualify for a mandatory 80 percent 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 percent as a further discount.
In the court ruling, the judge held that it was reasonable to infer that Parliament intended the mandatory exemption from rates should depend on the charity making extensive use of the premises for charitable purposes rather than leaving them mainly unused.
The Charity Commission said it was aware of cases where charities were being approached by retailers and landlords of hard-to-let property to enter into tenancy agreements that would remove the requirement on landlords to pay full business rates.
In some cases, this provided good opportunities for charities to lease accommodation for low or nominal rents and even receive donations from landlords that reflected a percentage of the business rates they would otherwise have to pay.
But it added: “If the charity is not making sufficient use of the premises for charitable purposes which would attract the 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 commission said it was examining cases involving a number of charities that have entered tenancy agreements to see whether their trustees had properly discharged their trustee duties when making the decisions to occupy those properties to further their charitable purposes and whether any benefit to the landlords was incidental to that.
Michelle Russell, head of investigations and enforcement at the Charity Commission added: “Where we have evidence that trustees are not exercising their duty of care and taking proper decisions, or systematically not using leased properties and allowing the good name of charity to be abused for the benefit of commercial companies, we have and we will take firm regulatory action. Trustees must ensure they do not enter into agreements that could jeopardise that public trust.”
The commission has received information from a number of local authorities concerned about situations where charities are entering into tenancy agreements on commercial properties but where, in practice, the properties are, or appear to be, empty and/or only minimally used.
The commission is concerned that these charities may find themselves involved in what local authorities might consider to be business rates avoidance by landlords. As in the case involving the Public Safety Charitable Trust Limited, this could result in charities losing not just the discretionary discount but being required to pay full business rates.
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
As accountants experienced in working with charities, Nicklin can provide advice and support to help charities and their trustees to fully understand their responsibilities. For more information, please contact us.