The decision by Medway Council to change its policy in relation to charging business rates to charity shops and cafés in its area has caused a great deal of consternation in the charity world. Charities in the area operating shops, and to a lesser extent cafés, are now dealing with a considerable increase in core costs which is affecting their ability to raise funds. This is not an issue just for charities in Medway, as other councils throughout England are also reviewing the discretionary element of business rate relief for charities.
Rates and charity relief
Local taxes for businesses based on property ownership have been in existence since Elizabethan times. First introduced in 1572, they were further developed in the 1601 Poor Law, considered at the same time as the Statute of Elizabeth which codified the meaning of charity for the first time. Therefore, property rates and charity have always been closely connected.
At first charities were not affected by property rates as under the Statute of Elizabeth and the Poor Law landed property held for charity was not taxed. However, as charity developed, a need for relief for charities from these rates was identified. Specific statutory exemptions were provided in the Victoria Era, an example being the Scientific Societies Act 1843, and subsequent case law codified the position.
Non-domestic rates or “business rates” in their current form, as an occupation of property tax, were introduced by the Local Government Finance Act 1988 and took effect in 1990. They are designed to allow local authorities (LAs) to fund local services and are based on the value of the occupied property.
Under the current arrangements occupiers of property in England are entitled to 80% mandatory relief from business rates, provided the property is used wholly or mainly for charitable purposes. Local authorities also have the power to supplement this relief by providing additional discretionary relief, up to 100%. Whilst this affects all charities, it has particular relevance to those operating shops on the high street, whether national or local.
The rate relief for charities is not dependent on the charity being registered, but on the purposes undertaken at the premises. Therefore, the meaning of “wholly or mainly for charitable purposes” is a key, albeit grey area.
The legislation does not provide any direction as to the application of charitable purposes save in relation to charity shops. However, we can assume that a charitable purpose is a purpose that falls within one of the thirteen descriptions of charitable purposes within the Charities Act 2011.
In effect, this means that when a charity is registered with the Commission and it is undertaking purposes which the Commission considers is charitable at the premises, and these form the majority of activities undertaken at the property, then the exemption will apply. It will not apply to property owned by a charity for investment purposes.
In relation to charity shops the legislation clearly states that premises are “wholly or mainly used for charitable purposes at any time if at the time it is wholly or mainly used for the sale of goods donated to a charity and the proceeds of sale of the goods (after any deduction of expenses) are applied for the purposes of a charity”.
Particular situation of cafés
Therefore, if the shop generally sells a majority of purchased goods or the goods are not directly applied to the purposes of a charity, it is unlikely that the mandatory relief will apply, let alone the discretionary element. This does cause problems for cafés operated by charities on a “high street” which are unconnected with other activities of the charity, as local authorities have held that they do not meet the criteria to be entitled to the mandatory relief.
Where the food sold has been donated, there is a clear basis for application – for example, a café operated by the Women’s Institute where the members donate the cake, sandwiches and other food and the café is operated to raise funds for the charity. Where a café which is simply owned and operated by a charity which purchases supplies in a similar manner to a commercial café, it’s not likely to meet the criteria.
Where a café is located in premises operated by a charity – for example, a museum café – it is likely that the exemption will apply to the café as the premises will be used for mainly charitable purposes – for example, the cafes attached to museums in many historic town centres.
Where a charity operates the café for the purposes of charitable activity – for example, youth training or to bring people back into employment similar to Centrepoint’s café in London – even if there is commercial purchasing, the mandatory relief requirement will be met by the training and reintroduction activities.
There has been a considerable amount of case law on what “wholly or mainly for charitable purposes” means. The case law is best summarised by the Kenya Aid Programme (KAP) case, where KAP, a charity, was taken to court by Sheffield Council in the belief that KAP was ineligible for the claimed mandatory relief. The decision was a balance between whether KAP simply had to physically occupy more than 50% of the property, or whether the context, extent and efficiency of use impacted on the decision.
The High Court decided that a charity must occupy more than 50% of the space and photos and evidence suggested less than half the floor space had been used by KAP. Therefore, KAP was ordered to pay £3.27m in unpaid business rates.
Funding relief for charities
In April 2013 central government amended the basis of the funding for local authorities. Until April 2013 the mandatory 80% was fully funded by the Government, and the funding of the discretionary element was split: 25% from the Government and 75% by the relevant LA. From April 2013 the funding model for LAs changed and for all new reliefs the LA must fund 50% of the relief. Therefore, from a position of 85% of the relief being funded by the Government, funding has reduced to 50% on each new relief.
Whilst a limited number of LAs are reviewing decisions, the historic funding agreements mean that the main changes are to new applications. This is because local authorities are finding it much harder to cover the funding gap and are taking decisions to reduce or limit the scope of the discretionary relief element. This is likely to get worse.
Discretion of each local authority
In some cases the relief is removed completely and in others criteria are applied as to whether the use is wholly charitable and the impact of charity trading taking place at the premises. The biggest problem for charities is that the application of the discretionary element is completely at the discretion of each local authority. This does mean that the application is subject to both political whim and funding availability.
Whilst there are guidelines produced by the Government, these relate to ensuring that the process is clear and fair rather than how the relief is applied so as not to fetter the discretion of the applicable LA. The scope for appealing a decision is limited. Very few charities have successfully challenged a LA discretionary ruling. Further, the LA only has to show that it has applied its policy, clearly and fairly. Therefore, provided it has been consistent, there is little scope in appealing a decision.
Reform of business rates
There are a number of proposals being considered in relation to the wholescale reform of business rates. One such proposal is to move away from a funding formula based on the value of the premises occupied and to look at turnover. This has been considered as a possible formula since the 16th century without finding one that works on a national and local level.
In these Brexit days where Government time has been curtailed, success now appears unlikely. Whilst a turnover model may favour a local charity, as the preponderance of charity shops are national, such a model appears to be impossible to apply and may allow manipulation as charities do not account on a shop by shop basis.
A resurgence in the belief of the “high street” and a wish to “rebuild” communities with local shops as the strategic centre, does mean that there is a clear move to discourage a high proportion of charity shops in any one locale. Local authorities in favour do appear to be rigorously enforcing the charitable purposes test for mandatory relief and limiting the scope of the discretionary relief to achieve this goal.
The funding squeeze, the recalculation of local authority funding and varying political pressures are badly affecting local charities. Unfortunately, the issues can be different in each LA, as some will continue to fully relieve business rates and others are seeking to review whether the mandatory 80% actually applies.
The application of the discretionary relief is now a political toss up, with some LAs only offering the relief to charities providing local support. There is no silver bullet and charities will need to keep policies at a local level under constant review, keeping a good relationship with each LA where they have a shop.
First published by Charities Management.