In recent years, increasing numbers of landlords faced with paying business rates on their empty properties have started to offer donations to charities, which are entitled to 80 per cent rate relief, in return for occupation of their premises.
It is believed that thousands of properties have been occupied in this way. But two recent court cases have highlighted the dangers of the practice for charities, which can face large bills if the scheme goes wrong.
The first case involved the Public Safety Charitable Trust, which installed Bluetooth and wi-fi devices that transmitted public safety messages in 2,000 properties. The charity argued that the presence of the devices made it the occupier, and claimed rate relief. But the High Court ruled earlier this month that the charity was liable for full business rates on the grounds that the properties were "mainly unused".
The Local Government Association has recommended that councils that have granted rate relief to the trust should seek to reclaim the money. The charity already faces bills of almost £2m from three authorities and could face demands from 240.
The second case involves the Kenya Aid Programme, which might face a bill of £1.6m after Sheffield City Council challenged its right to rate relief for two warehouses used to store furniture. The council successfully argued in the city magistrates court that its occupancy was insufficient, but the district judge has been directed to look at the issue again by the High Court.
To claim business rate relief, charities have to pass two tests. The first is whether they occupy the building; the second is whether they do so "wholly or mainly" for charitable purposes. The first hurdle is relatively easy: several recent cases suggest that the courts still recognise a historical precedent that "occupation of the part is occupation of the whole". However, there is a dispute over what constitutes "wholly or mainly"; a previously used rule of thumb concerning charitable rate relief is that at least half the property must be used for charitable activity in order to qualify.
In some cases, the occupation seems to be tokenistic and the Charity Commission appears concerned that charities are, in effect, selling their tax reliefs. It warned last week that it would take "firm regulatory action" if trustees were not taking "proper decisions" and were becoming involved in "business rates avoidance".
It is legitimate, however, for charities to occupy empty properties and save landlords business rate costs. The National Council for Voluntary Organisations works in partnership with an organisation called Zero Rent for Charity Tenancies to connect landlords with charities. The crucial aspect of the scheme is that the charities concerned actually use the properties, rather than set up token occupations.
Richard Williams, director of enterprise at the NCVO, says: "If it’s done right, it can be a symbiotic relationship."
Mike Heiser, a senior finance adviser at the LGA, says that other charities might face sanctions in the wake of the PSCT case. "There are several other charities that have taken a closed shop, covered the windows in posters and claimed occupation," he says. "I’m not aware of any cases in the offing against those, but I wouldn’t be surprised if councils did pursue them.
"If I was a charity I would be very cautious about using that tactic. I would pay close attention to the guidance given by the Charity Commission."