Non-domestic rates liability - Charitable exemptions

• Real estate dispute resolution

20-05-2013

Owners of commercial properties in England and Wales are obliged to pay non-domestic rates in respect of their properties (section 43, Local Government Finance Act 1988 (LGFA 1988)). Where a property is occupied, the ratepayer is a charity and the property is wholly or mainly used for charitable purposes, the ratepayer is entitled to a mandatory 80% relief from rates (section 43(1), LGFA 1988). A further 20% rates relief is within the discretion of the billing authority (section 47 LGFA 1988).

Kenya Aid Programme v Sheffield City Council [2013] EWHC 54 (Admin)

Kenya Aid Programme (“KAP”), a registered charity, leased two large warehouses which they used to store furniture to send to Africa. Under the leases KAP paid a nominal rent and was liable for the payment of all non-domestic rates, although it was in fact dependent upon donations from the landlord to meet this liability (from whom it also received a financial donation). The level of use of each warehouse was estimated to be 30-35% for one and 25-30% for the second. On this basis the district judge ruled that the properties were not used ‘wholly or mainly’ for charitable purposes and refused KAP the mandatory relief.

KAP appealed to the High Court, submitting that the phrase ‘wholly or mainly’ should be construed as referring to the purpose of the use, and that the district judge had been wrong to consider the extent to which the charity had actually used each property. Although the appeal was allowed on the basis that the district judge had been wrong to take into account the efficiency with which furniture had been stored and whether it had been necessary for KAP to occupy more than one warehouse for this purpose (where one would have sufficed), the High Court held that the judge was entitled to consider the extent of the actual use by KAP. In reaching this decision, the Court held that it was not prepared to accept that the term ‘wholly’ meant that, so long as a charity was occupying a premises for a particular charitable purpose, the extent of that use was irrelevant. This would, in effect, replace the term ‘wholly’ with ‘solely’, for which there was no legal basis.

The High Court further considered that the use of mutually advantageous arrangements by landlords and tenants (here the landlord avoided paying unoccupied rates and the tenant received a financial donation and use of a property at effectively no cost) for tax avoidance purposes was not a relevant consideration for whether the property was ‘wholly or mainly’ used for charitable purposes. It was, however, prepared to recognise the possibility that producing revenue (through donations from the landlord) could potentially amount to a ‘use’ of a property for the purposes of section 43(1), LGFA 1988. Given that general fundraising cannot amount to a ‘charitable purpose’ this could potentially undermine the right of a ratepayer to claim the mandatory relief.

Public Safety Charitable Trust & another v Milton Keynes Council & Others [2013] EWHC 1237 (Admin)

The facts of this case are broadly similar to those in Kenya Aid Programme. The Public Safety Charitable Trust (“the PSCT”), a registered charity, took leases of commercial properties for a nominal rent and received reverse premiums from its landlords. The PSCT placed broadcasting transmitters in each property, connected to an existing power supply, which provided free wifi to anyone within range and also broadcast Bluetooth messages on crime prevention and public safety to Bluetooth users in the vicinity. These transmitters were operated remotely and, apart from occasional maintenance visits, the properties were otherwise unused. The extent of each property used for the charitable purpose was minimal (estimated to be around 0.1%).

This was a test case for the PSCT and actually involved three separate appeals. In two of the cases the relevant billing authorities had successfully obtained liability orders for rates against the PSCT, on the basis that it was not entitled to mandatory rates relief. In the third case, a liability order had been refused by the district judge who had ruled that the PSCT was entitled to the relief. The appeal in this third case was brought by the billing authority.

The key issue for the High Court was whether the correct test for whether a property is ‘wholly or mainly’ used for charitable purposes is the extent of use of that property or the purpose of the use.

In Kenya Aid Programme the High Court had clearly determined that the former approach was the correct test. Unsurprisingly, Mr Justice Sales was not prepared to depart from that decision. He considered that it was reasonable to infer that Parliament’s intention behind the mandatory exemption for charities in occupation of a building was that the use of that building be “substantially and in real terms for the public benefit, so as to justify exemption from ordinary tax in the form of non-domestic rates”.

It is noteworthy that in one of the cases, where the PSCT had placed 13 transmitters in the building in question, the billing authority had notified the Valuation Office Agency (“VOA”) about the nature of the PSCT’s occupation. The VOA subsequently decided to amend the rating list to distinguish between a main hereditament for the building and a wifi hereditament in respect of the PSCT’s equipment at the site. The rateable value of the latter was listed as £100. The rateable value of the main hereditament was £52,500. The billing authority allowed the mandatory relief in respect of the wifi hereditament but not in respect of the main hereditament. When considering whether to grant a liability order against the PSCT for the main hereditament the district judge construed the wifi hereditament very narrowly, ruling that it comprised only one of the 13 transmitters. That meant that the remaining 12 transmitters were located in the main hereditament which was therefore being used ‘wholly or mainly’ for charitable purposes (it appears the judge wrongly applied the ‘purpose of use’ test). It seems likely that the judge’s narrow interpretation of the wifi hereditament was influenced by the fact that, although he doubted the validity of the wifi hereditament (because it was moveable and transient), he recognised that it was not open to him to determine whether the VOA’s decision was lawful, there being a distinct procedural route for this.

On appeal the billing authority contended that the district judge had been wrong to interpret the wifi hereditament so narrowly and that he should have interpreted it to include all 13 transmitters, such that none of the transmitters formed part of the main hereditament. The High Court also upheld this point of appeal on the basis that it was clearly not open to the district judge to question the VOA’s decision to list a separate wifi hereditament: “until such time as the designation of a hereditament in the list is challenged by the proper avenue and changed, it is conclusive in law as to the meaning of the hereditament”.

These latest two judgments are only the most recent in a series of cases where we have seen billing authorities taking a far more robust approach towards tackling rates mitigation schemes and the landlords that use them to reduce their rates liability. This may well stem from the fact that local authorities now have a vested interest in pursuing collection of non-domestic rates, as they retain a significant proportion of the amount they collect. Kenya Aid Programme and Public Safety Charitable Trust cast serious doubt on the viability of such schemes that involve charities that do not make substantial use of the properties. Such schemes are, however, distinguishable from the type seen in Makro Properties Limited v Nuneaton and Bedworth BC 2012, where the key issue to be determined is whether the occupier is in rateable occupation of the property, as opposed to the use they make of it. In Makro the High Court upheld a long line of case law that established that even slight usage (in that case 0.2%) can amount to rateable occupation. A principle confirmed in Kenya Aid Programme. More helpfully for the landlords the Court has confirmed again that the fact such schemes might be used for tax avoidance purposes is not a relevant consideration when determining whether there has been rateable occupation or the use of the property.