Charity closed after failed attempt to benefit from business rates scheme
Commission concluded trustees mismanaged the charity.
The Charity Commission today (22 March 2017) published the report of its inquiry into Africa Relief Trust (former registered charity number 1077946). The Commission concluded that the trustees mismanaged the charity because they did not undertake appropriate due diligence and failed to manage the risks of a business rates scheme they entered into.
The charity was dormant when it was contacted by a company that ran a business rate mitigation scheme for landlords. The scheme appeared to work by identifying charities which could occupy empty commercial premises. Landlords benefited financially from these arrangements because they were no longer liable to pay full business rates (as charities can receive an 80% discount on the rates).
In order for charities to benefit from business rates relief they need to use the premises wholly or mainly for charitable activity. If they do not, they may be found liable to pay a proportion of the rates to the local authority.
The charity received donations from the company that operated the scheme and entered into numerous lease arrangements at peppercorn rents. The inquiry found that that the charity had not properly considered its potential liability to pay outstanding rates. This placed it at significant financial risk. The inquiry identified that numerous local authorities were pursuing the charity for unpaid business rates, totalling in excess of £800,000. This sum eclipsed the donations the company had made.
The Commission concluded that the trustees mismanaged the charity because they did not undertake appropriate due diligence when the scheme was implemented. The trustees failed to properly consider and manage the risks including the liability of the charity to pay outstanding rates if the local authority disputed and refused rates relief.
The Commission also concluded that the trustees did not carefully safeguard the charity’s independence and ensure the charity was not being abused for the benefit of a commercial company or landlords. Some decisions were made by a trustee who had conflict of interests, which were not managed and were based on an unproven interpretation of the law.
On 23 September 2015 the trustees told the inquiry they had closed the charity and confirmed there were no longer any tenancy agreements in its name. Although prior to entering into the scheme the charity had little income, the liability arising from the scheme was the main contributing factor to the closure of the charity and has prevented it from providing any future support to its beneficiaries.
In view of these serious mismanagement issues the Commission is considering the fitness of individuals involved in this case to be trustees and the use of its powers under section 10 of the Charities (Protection and Social Investment) Act 2016 to disqualify the individuals from holding future trustee appointments.
Michelle Russell, Director of Investigations, Monitoring and Enforcement at the Charity Commission, said:
This case exposed more widely a practice of some retailers and landlords of hard to let properties approaching charities to entice them to enter into tenancy agreements that would relieve the landlords of the requirement to pay full business rates. These types of arrangements pose serious risks for charities if the charity is not making sufficient and proper use of the premises. In this case the arrangement backfired. It was the charity that ended up being liable for paying the business rates and had to close.
It’s a warning for other charities to be wary of similar deals or arrangements. They may sound attractive, but do not enter into them without researching what you are getting into, considering all the risks carefully and taking proper professional advice before you commit. Trustees must be assured in taking on the occupation of a property in such schemes that it is for the charity’s benefit and in its best interests.
Charities are held in high esteem by the general public, and these kind of agreements that turn sour and look to benefit others, jeopardise that public trust.
The Commission has issued alerts to charities explaining the potential risks for the charities involved in entering into arrangements with landlords to occupy commercial property where in practice the property will be empty. This included the risk that these charities may find themselves involved in what local authorities might consider to be business rates avoidance by landlords and therefore be liable for those sums.
The full report is available on GOV.UK.
Notes to editors
- The Charity Commission is the independent regulator of charities in England and Wales. To find out more about our work, see our annual report.
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Published: 22 March 2017
From: The Charity Commission