Rates avoidance – all right for some?

A number of recent cases have considered the validity of schemes designed to minimise/avoid business rates liability.

A number of recent cases have considered the validity of schemes designed to minimise/avoid business rates liability. Two common methods tried by landowners are (1) making a temporary letting (of over 6 weeks) in order to benefit from empty rates relief upon the premises becoming vacant again, or (2) letting premises to a charity, which can benefit from an 80% charitable relief against business rates.

Empty rates relief

Empty industrial and warehouse property are eligible for 100% relief from non-domestic rates for 6 months (the exemption period is 3 months for other types of commercial premises). If the premises are occupied (e.g. by a tenant or licensee) for more than 6 weeks: (1) non-domestic rates will be payable during the period of occupation, and (2) a new 6 month exemption period will start when the premises become vacant.

There are four conditions for rateable occupation:

  • Actual occupational possession (i.e. actual use of the land)
  • Occupation or exclusive possession
  • Occupation of benefit or value to the occupier; and
  • Occupation or possession with a sufficient degree of permanence.

How much of the premises must be occupied to constitute “occupation”?

Makro Properties Ltd v Nuneaton and Bedworth Borough Council [2012] and Sunderland City Council v Stirling Investment Properties LLP [2013] both considered how much of the premises must be occupied to constitute “rateable occupation” for the purpose of triggering a fresh 6 month exemption period at the end of such occupation.

In Makro, the High Court concluded that using 0.2% of the floorspace of warehouse premises for the storage of documents amounted to “rateable occupation”, and therefore when such occupation ceased, a new 6 month exemption from paying non-domestic reliefs commenced.

In Stirling, the High Court concluded that a tenant occupying under a 43 day lease, installing a Bluetooth server with a battery and hanging a wire aerial hung from a window, also amounted to rateable occupation. Therefore, whilst business rates were payable during the time the premises were used for the purposes of Bluetooth marketing, when the equipment was removed, a new 6 month exemption arose. In this case, it was irrelevant that the premises were used for the purposes of advertising instead of for warehousing, even though the premises were described in the ratings list as “warehouse and premises” but were not (and, under the terms of the lease, could not be) used for warehousing.

Charitable relief

After the initial exemption period for vacant premises (3 months for most properties, 6 months for industrial properties), landowners must pay 100% of the business rates payable on unoccupied properties. To minimise liability, landowners may let empty property to a charity for a nil rent, on the basis the charity takes on business rates. Business rates payable by the charity will be only 20% of the full rates, provided the property is “wholly or mainly used for charitable purposes”. Landlords may also agree to contribute to the charity as, if the contribution is less than full business rates, the landlord will still be better off.

Mandatory relief from business rates is available in respect of occupied premises where the ratepayer is a charity or trustees for a charity, and the premises are wholly or mainly used for charitable purposes (whether of that charity or of that and other charities).

Extent of use for purposes of charitable relief

Kenya Aid Programme v Sheffield City Council [2013] considered whether the extent of use of premises was a relevant consideration when determining whether charitable relief was available. In this case, a charity stored furniture in a way the court described as an “unusual way to store furniture and [which] makes poor use of the space available”. Effectively, only approximately 50% of the premises were in use.

The local authority argued charitable relief was not available because the charity did not use the premises “wholly or mainly” for charitable purposes. The original court took the local authority’s view and ordered the charity to pay the full business rates liability.

On appeal, the High Court concluded that the correct approach is to consider all the evidence on a “broad basis” to determine whether premises are being used for a “wholly or mainly” charitable purpose. Mere occupation by the charity was not enough. The extent of the use may be a relevant factor, but the efficiency of that use and the charity’s need (or otherwise) of the premises will not.

In a recent test case, Public Safety Charitable Trust v Milton Keynes Council [2013] confirmed the Kenya Aid decision and determined that the charitable relief will only be available if the charity makes extensive use of the premises for charitable purposes, rather than leaving them mainly unused. Therefore in PSCT, the charity’s use of premises for the installation of broadcasting equipment (used to provide free WiFi and to distribute (via Bluetooth) crime prevention / safety messages) was not sufficient to enable PSCT to claim charity relief.

Comment

It seems that there is a conflict between the decisions relating to empty rates relief and those relating to charitable relief. The rules for each relief are different. The court in Makro acknowledged that the decision there meant a scheme designed to avoid paying tax had succeeded, and that landowners can and do organise matters so as to minimise tax liabilities. However, the court considered in that case that changes to the legislation would be required in order to prevent such schemes.

The courts may be reluctant, where it is avoidable, to uphold the effectiveness of rates avoidance schemes. Local authorities may therefore want to review the premises on which they collect rates, whilst both landowners and charities should carefully consider their position carefully before signing up to any agreement designed to avoid rates.

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