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In the first of a series, this article examines the impact of Derby Teaching Hospitals NHS Foundation Trust and others v Derby City Council and others, 2019 EWHC 3436 Ch (“the Derby case”), on how local authorities should apply and charities can claim business rate relief.
Identifying a “charity” for the purpose of the Local Government Finance Act 1988 & Charities Act 2011
Under section 67(10) of the Local Government Finance Act 1988, a charity is defined as “an institution or other organisation established for charitable purposes only or any persons administering a trust established for charitable purposes only.” This definition is only used when looking at business rates.
Similarly, section 1(1) of the 2011 Act defines a charity as:
- Established for charitable purposes only (one or more of the 13 categories of purposes which benefit the public); and
- Is subject to the control of the High Court in the exercise of its jurisdiction with respect to charities.
In the Derby case, Morgan J commented on whether the two meanings were the same. While the 1988 Act does indeed provide a different definition, the defendants argued the definition should be read to include a test of High Court control, just as the 2011 Act definition requires.
Morgan J said that, had Derby Teaching Hospitals NHS Foundation Trust (Derby FT) been established for charitable purposes only, it would have been under the jurisdiction of the High Court. This implies that the two definitions are considered the same.
Charities occupying part of a building – what are the business rate consequences?
In order to qualify for business rates relief, charitable organisations should ensure that their use of business property is wholly for charitable purposes. The relief also applies where the main (but not sole) use of the property is for charitable purposes, though, wherever possible, it is safer to ensure the sole, therefore whole, use of the property is for charitable purposes. As such, the relief may not apply where charities occupy only part of NHS-owned property or other commercially owned properties.
To illustrate the difference, a charity will benefit from business rates relief where it is based in a building owned by an NHS Foundation Trust, provided it is the sole occupier of the building. In contrast, where a charity is based in a hospital-owned by a Foundation Trust but the charity only occupies a small room, it would not be entitled to the mandatory relief; the main use of the building is providing the NHS services which, under the Derby case, are not charitable. The charity may still qualify for relief were it operating in a wing of the hospital that was considered its own, separate unit for business rates purposes.
In 2011, the Charity Commission warned charities against landlords who might seek to take advantage of the charitable relief when letting out their empty, commercial property. If the property is let out to a charity, a landlord can claim the mandatory relief (where the property is being used by a charity for a charitable purpose), rather than pay the full business rates on otherwise unoccupied commercial premises. The Commission found agreements whereby charities paid a low rent, so landlords could claim relief on the full business rates. In some cases, landlords donated to the charities an amount equal to the remaining business rate the landlord would otherwise have been required to pay.
However, in the reported cases the charities’ use of the property failed to satisfy the criteria of business rates relief, leaving the charity liable for the full business rate liability. Care should be taken where low rates are offered as helping unscrupulous landlords avoid paying business rates could mean that the charity’s reputation is damaged by the business rates avoidance and the trustees could become personally liable.
Local authorities granting business rates relief to charitable organisations
In the Derby case, the court looked at the law behind the trusts to consider their objects and to determine whether they are wholly charitable. It is likely that local authorities will adopt the same approach, examining the objects of the charities seeking mandatory relief to assist in determining whether the use of the property is wholly for charitable purposes. As a result, charities may find themselves under greater scrutiny to evidence their charitable versus non-charitable activities taking place at the premises. Similarly, charities may find themselves challenged where they have broadly-drafted constitutions which allow them to undertake commercial activities in support of their charitable objectives.
For more information
For guidance and assistance in charging business rates as a local authority, please contact Stuart Evans. For support and guidance in respect of your charity’s governance, charitable and commercial activities, please contact Edwina Turner or Emma Watt.
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