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DON’T PANIC, MR MAINWARING!!! Nothing has changed, really – except Localism

AN ARTICLE by Peter Scrafton FIRRV, FCIArb, MRSA(Hon) Solicitor (Non-Practising)

August 2013.

It seems that the Revenues Departments of the Town Halls of England and Wales are full of headless chickens, running around, pumping blood but still clucking, over the recent decisions which have emerged in connection with (I am sorry, readers) charitable relief from the rate.


In truth, nothing has changed, really, as far as the substantive law is concerned. The real problem seems to be that billing authorities are waking up to one of the realities of “Localism”, namely that half the cost of any relief given now falls on the municipal purse. Was the making redundant of all of those Bumble-like rate inspectors such a good idea? In retrospect, perhaps not. No doubt that policy is being reversed; and it is to be hoped that the recruits will study for and obtain the Institute’s new Level 3 Certificate in NNDR, at the very least.


For the time being, however, confusion reigns, as billing authorities try to get ratepayers to do their work for them. One authority, to my knowledge, having made liable for the occupied rate an entirely genuine and bona fide short-term, local occupier of a vacant unit as a temporary overflow, is now refusing the six-month exemption because, it says, it has no evidence that the property in question was actually occupied. Er……?


But the classic is this list of peremptory demands (not requests) from an authority for the following:-


  • Date and time-stamped photographs taken when the purported occupation commenced and immediately before it ceased
  • Evidence that the photographs relate to the subject property
  • A full inventory of the goods/merchandise that were kept within the property during the material period
  • The address(es) from which the goods/merchandise were removed immediately before their removal to the subject property
  • The address(es) to which the goods/merchandise were taken immediately after their removal from the subject property
  • Evidence in the form of orders/emails requesting the transfer of goods/merchandise between the specified locations
  • Evidence in the form of delivery/despatch notes to support the removal of all of the goods/merchandise (as described in the above-mentioned inventory) to and from the subject property

So the Council wants the public not only to pay the rates but also to do its job for it, does it? They won’t. They are under no duty to a billing authority to do this, and it is wrong to give the impression that they are. Reasonable questioning is permitted, we know: and it may be that some of the information is available; but it will probably also be the case that not all ratepayers are professionally advised, and simply will not have pre-planned rate relief action in any way. It certainly is also the case that not all ratepayers are dishonest.


In charitable relief cases, it has come to my attention that some billing authorities are refusing to make mandatory relief payments to a registered charity, even if that charity has worked in that Council’s area for some time. One Council told a charity that it had reported them to the Charity Commission (which turned out to be untrue) while another refused payment until it was explained that the charity concerned had vacated the premises during 2012/13, whereupon the Council officer responded that the money could, and would, be paid (because it would cost the Council nothing).


With attitudes and approaches such as those outlined above, which are all within my personal experience, local authorities are begging to be sued. My dorsal fin may already be visible, circling your offices….


The answer is, of course: more inspectors, and more training for NNDR staff, generally, the standard of which declined, dramatically, while billing authorities were little more than debt collectors for central government. If more attention were to be given to staff training, then these, and many other needless disputes, should be capable of being avoided, leading to more efficient and cheaper collection.


Here endeth the commercial for the Institute’s examinations. Now let us have a look at the recent cases which, I hope you will be able to agree at the end of this review, are in fact helpful to all, and which clarify several matters which were, perhaps, in need of a closer look. I will start with the background: the more-experienced practitioners might to skip to where the commentary on the cases themselves, starts.


I will not go into all of the statutory detail on this part, but all property which is classified as “non-domestic” and which falls to be shown as a separate entry in a Local, or the Central Rating List, is assessed to a rate. That which is rateable is the occupation of the occupier, who is liable to pay a sum, being the product of the rateable value and the applicable multiplier, plus or minus certain other site-specific or local adjustments. Where the hereditament is unoccupied, then the person entitled to occupy is rateable in respect of their deemed occupation, and the amount chargeable is the same as that which the occupier would pay, were there to be one.


There are certain exemptions and reliefs available; but for present purposes that which is of interest is the relief available to charities The relevant provision is s43(6) Local Government Finance Act 1988 (as amended):-


(a) the ratepayer must be a charity or trustees for a charity; and
(b) the property must be wholly or mainly used for charitable purposes (whether of that charity or of that charity and other charities)


Not all charities are registrable, and issues can arise as to whether the activity in respect of which relief is sought, is indeed charitable in nature; and so enquiry of any potential occupier should be made.


The approval extends to other, not-for-profit organisations, which are not registered charities, as long as they are occupying all or part of a hereditament, and the occupation is for the purposes of one or more institutions, and each of whose main objects are charitable or are otherwise philanthropic or religious or concerned with education, social welfare, science, literature or the fine arts; or is wholly or mainly used for purposes of recreation, and all or part of it is occupied for the purposes of a club, society or other organisation not established or conducted for profit. This category is now the subject of a consultation as to its future.


Although the point seems not to have been tested, as yet, it would seem that, in the case of a shared occupation, the “primary” entity, namely that having paramount control of it under the terms of a lease or licence, should still have an active presence on the site for the purpose of achievement of its charitable objectives, unless those objectives be, for example, the provision of cheap, or free, space for other charities.


It is a well-established principle that, put very shortly, to qualify for relief, premises occupied by charities must be used for the purpose of fulfilling the charitable objectives of that charity, and not merely for fundraising. The House of Lords established this principle in the Oxfam case in 1974, but a Bill was introduced into Parliament on the same day on which judgment was given, which effectively separated the functions of fundraising and execution of charitable objectives, from the rating standpoint.


I now turn to look at the four cases recently and most prominently before the Courts.


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


Kenya Aid Programme, a registered charity, leased two large warehouses which they used to store furniture to send to Africa. Under the leases the charity 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 held that the properties were not used “wholly or mainly” for charitable purposes and refused mandatory relief.


The charity appealed to the Divisional 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 the charity to occupy more than one warehouse for this purpose (where one would have sufficed), the Divisional Court held that the judge was entitled to consider the extent of the actual use by the charity.


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 hereditament 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.


With the view reported above I respectfully agree. It leaves open, however, the question of the extent to which a hereditament must be used for a charitable purpose before it qualifies for the mandatory relief. It serves, I feel, to question the approach hitherto taken by the more aggressive billing authorities, that there is a certain proportion of a hereditament which must be used for the charitable purpose before the occupation can qualify for relief (based on the Scots case of English Speaking Union). This point arises again, later.


It also leaves open the problem for the billing authority of trying to argue de minimis occupation not counting, when successive Councils have been arguing, successfully, since the Aberystwyth case in 1808, that occupation of any part of a hereditament constitutes occupation of the whole thereof, for rating purposes, and therefore, liability to the rate in respect of the entirety of the premises. Again, this question arises, later in this article.


The Divisional 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 in answering whether the property was “wholly or mainly” used for charitable purposes. This point was dealt with in favour of the ratepayer concerned, by the then Lord Chief Justice in a case decided in 1903, which latter decision was followed, emphatically, in Makro (see below)


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 s43, Local Government Finance Act 1988. Given that general fundraising cannot amount to a qualifying “charitable purpose” (see the Oxfam case above) this could potentially weaken a claim for mandatory relief; but I suggest that, having regard to the unanimity of the courts in rating and, indeed, in tax cases over the past century, a billing authority might have quite a hill to climb, other than in a pretty clear and flagrant case – after all, everyone needs money!


The ratepayer’s appeal was allowed, but, as the Divisional Court did not have before it all of the evidence before the district judge, it felt that it could not give a final decision as to whether or not relief should be given, and accordingly it remitted the case to the district judge for reconsideration in the light of the judgment of the Divisional Court. It is probably, therefore, that this case will return to the higher courts – and indeed, such a thing may be desirable in order to promote certainty.


Sunderland City Council –v- Stirling Investment Properties LLP [2013] EWHC 1413 (Admin)


By sheer chance, the point about de minimis occupation came up in a case which was decided, again in May, which concerned whether or not the existence of a single Bluetooth device, with battery and wires, in a hereditament with a rateable value of over £50,000. The Court reviewed the authorities on the “actual occupation” limb of the so-called “ingredients” of rateable occupation, and decided that occupation by the Bluetooth device was sufficient to found a finding of rateable occupation, on the basis that the Bluetooth occupier actually occupied a part (albeit a small part) of the hereditament, and that such use was within the contemplation of the occupier when it took its lease, notwithstanding that the hereditament was originally constructed with a different use in contemplation.


The finding in Stirling was that the “hurdle” of de minimis occupation, if such it be, was overcome. It should be noted, also, that the trial judge received written submissions from the very eminent counsel, on both sides, following the decision in PSCT and held (rightly in my view) that, in PSCT, rateable occupation was assumed and thus the latter case was on a different point from Sunderland, namely that of entitlement to charitable relief.


Public Safety Charitable Trust and Another –v- Milton Keynes Council & Others [2013] EWHC 1237 (Admin)


The facts of this case have broad similarities to those in Kenya. The Public Safety Charitable Trust, a registered charity, took leases of commercial properties for a nominal rent and received reverse premiums from its landlords. The Trust 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 series of cases for the Trust, and involved three separate appeals. In two of the cases the billing authorities had successfully obtained liability orders for rates against the Trust, on the basis that it was not entitled to mandatory relief. In the third case, a liability order had been refused by a district judge who had found for the Trust. The appeal in this third case was brought by the billing authority.


The 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 the Divisional Court had clearly determined that the former approach was the correct test. Unsurprisingly, the judge in the Trust case was not prepared to depart from that decision (which was by a superior Court in any event). 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”


The view which the judge expressed seems to me to be a reasonable and pragmatic way forward, excluding the more esoteric approaches, on the one hand, but not laying down any strictly-calculated arithmetical proportion of floor use for a particular purpose in order to achieve relief, on the other. The latter course would be inappropriate and could lead to an unjust result in circumstances where, for example, weight loading restrictions limit the proportion of floor area which may be employed, but which do not prevent use within the definition suggested at above.


Frankly, I was not at all surprised by the decision in the Trust case, and it is clear from comments received from practitioners of some seniority and experience, that they were not surprised, either. In these days of the purposive construction of legislation, rather than strict construction against the taxing authority, it was perhaps to be expected that the Trust would fail. But let us not be judgmental: mine is only a personal view, based on the published judgment, and the Trust, of course, may have a right of review, which it may choose to pursue.


There was a further issue, in connection with the consideration by a district judge of the extent of a particular hereditament, when deciding whether or not charitable relief should be given. It does not impact on the issues surrounding the giving or withholding of the relief, save that it confirms that the district judge was right to hesitate when considering whether or not a hereditament had been identified, correctly, by the Valuation Office Agency. In the instant case the district judge seems to have fallen into error; and the High Court has done no more, in declaring that regard should not be had to the extent of a hereditament, if challenged in collection proceedings, than repeating that valuation matters cannot be challenged in collection proceedings, and vice versa, as regulations provide.


Makro Properties Limited –v- Nuneaton and Bedworth BC [2012] EWHC 2250 (Admin)


This case is not directly relevant to the bulk of charitable relief cases, as it deals with the question whether a putative rateable occupier was in fact in rateable occupation, as the term is currently understood, even though it occupied only 0.2% of the floor area. In the bulk of charitable relief application cases, the facts of rateable occupation are fulfilled, and the questions relate to the purpose for which the premises are used, and the extent to which they are used for such purpose.


In Makro the High Court, in the person of a judge of the Lands Chamber of the Upper Tribunal, reviewed long lines of authority and gave what is, in my view, a good and firm view of what constitutes rateable occupation and that occupation of but a small part thereof can be treated as occupation of the whole. This principle was affirmed in the Kenya case.


Unoccupied Property held by Charities


In relation to unoccupied property held by charities, the second qualification to the statutory definition (see s43(6) above) is modified so that it must appear that when next in use the hereditament will be wholly or mainly used for charitable purposes (whether of that charity or of that and other charities). This provision has not been challenged by these decisions. Some billing authorities make it their pragmatic practice to withhold relief until the charitable use starts, which is understandable but which can make life difficult for smaller charities, in particular.


The Charity Commission


As this article is partly to do with charities, it is appropriate to be aware of what the Charity Commission is saying. The Commission registers and regulates charities, and has been taking an interest in charities which take empty property belonging to others, whether by lease or licence, and which thereby potentially expose themselves to a risk of being required to pay unaffordably large rate bills, should applications for mandatory charitable relief fail.


In a statement released following the judgment in Kenya, Michelle Russell, Head of Investigations and Enforcement at the Commission, said:-


“Being able to lease properties at a low cost to use for charitable purposes helps charities keep their costs down. Where we have evidence that trustees are not exercising their duty of care and taking proper decisions, or systematically not using leased properties and allowing the good name of charity to be abused for the benefit of commercial companies, we have and we will take firm regulatory action. Charities are held in high esteem by the general public, and trustees must ensure they do not enter into agreements that could jeopardise that public trust.

‘The Commission has received information from a number of local authorities concerned about situations where charities are entering into tenancy agreements on commercial properties but where in practice the properties are, or appear to be, empty and/or only minimally used. The Commission has been engaging with a number of local authorities who have raised concerns. The Commission is concerned that these charities may find themselves involved in what local authorities might consider to be business rates avoidance by landlords. As seen in this case involving The Public Safety Charitable Trust Limited, this could result in charities losing not just the discretionary discount, but being required to pay full business rates.

‘Before entering into any tenancy agreements to occupy empty properties, charity trustees must:

- be assured that the tenancy agreement is for the exclusive benefit of the charity, will further the charity’s purposes and is in its best interests
- ensure the property is genuinely required and is fit for purpose
- consider the potential liability of the charity to pay outstanding rates if the local authority disputes use of the premises and refuses rates relief
- very carefully safeguard the charity’s independence and ensure the charity is not being abused for the benefit of a commercial company
- where appropriate, take suitable professional advice, including legal advice, before entering into a tenancy agreement.

‘The Charity Commission has been made aware of a number of charities who have entered tenancy agreements and is examining whether the trustees of the charities involved have properly discharged their trustee duties when making the decisions to occupy those properties to further their charitable purposes, and whether any benefit to the landlord is incidental to that.”


There was, it seems, already an ongoing investigation into Kenya prior to the hearing in the Divisional Court; and, if there was not a similar investigation on foot in relation to the Trust, doubtless there will be now, if reports that its accounts disclose that there are no funds available to pay the rates now falling due, are correct. It is said that up to seven hundred charities are subject to investigation, or, at least, enquiry.


Conclusion


I do not believe that the substantive law on rateable occupation or on charitable relief from rates has been changed by these decisions. It has been clarified, perhaps, as to what constitutes “wholly or mainly” and it will be interesting to see what emerges in the re-run of the Kenya case


Otherwise, in summary:-


  • neither statute nor regulations have been amended
  • what constitutes rateable occupation has not been changed, although, where the use of a hereditament is small, the door would seem to be open to a billing authority to try to argue some concept of de minimis occupation, although the ratepayer would be able to pray in aid over two centuries of cases holding that occupation of part constitutes occupation of whole (argued aggressively by billing authorities until the advent of the present empty rate in the 2007 Act (see 12. above). Ratepayers would also be able to argue the animus revertendi (intention to return) principle adverted to, albeit indirectly, by the judge in Makro. They will also have the support of the Stirling case
  • tax avoidance is not likely to be a relevant factor in this area ; and so there is no objection to charities receiving donations from landlords/licensors provided that the premises are not used for fundraising, and the Charity Commission’s warning (in the case of a charity) is observed.
  • billing authorities will need to become steadily more attentive as the implications of “localisation” of rates sinks in and it will therefore behove ratepayers to follow the principles and guidance, as strictly as may be, and to liaise with local authorities closely, throughout, if only to seek to avoid the kind of aggressive interrogation, mentioned above.

So, Mr Mainwaring – DON’T PANIC, train your staff, and avoid any unnecessary litigation.


Peter Scrafton

©J.P. Scrafton, 2013

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