Environmental, social, governance (ESG) Tax and VAT

Business rate relief for charity shops in Wales: why it matters elsewhere too

The business rates relief available to charities has been thrust into the spotlight of late. As well as a number of high profile cases linking charity rate relief to tax avoidance by landlords, they have also been the subject of debate in Wales, following a report by the Business Rates Task and Finish Group commissioned by the Welsh Government.

At present charities occupying commercial property are entitled to relief on business rates, provided it is used wholly or mainly for charitable purposes.  This includes 80% mandatory relief funded by central government, which local, or ‘billing’ authorities can choose to top up with an additional 20% discretionary relief.

The Welsh report, Business Rate Relief for Charities, Social Enterprises and Credit Unions makes a number of recommendations; most notably to stagger the level of relief available based on the ratable (rental) value of the shop, and slash the mandatory element from 80% to 50%.  It even goes as far as to question whether charities should be eligible for relief at all.  The recommendations and position taken in the report signify a deeply worrying direction of travel. Why?  Simply put, business rates relief is hugely valuable to the sector, the mandatory element covered by HM Treasury is worth approximately £1.48bn in 2012/13 in the UK and growing steadily year on year according to HMRC.  To put this into context, charities earned the slightly more modest £1.06bn from Gift Aid in the same year – a relief we spend hours deliberating, debating and ensuring charities maximise.  Given its scale even seemingly small chips away at the relief will have a significant impact: the Charity Retail Association estimate that if implemented, the Welsh recommendation to reduce relief to 50% would cost affected charities £1.54 million (or 11% of profit), and lead to the closure of 18% of Welsh charity shops.

A key driver for the Welsh Government’s focus on charity rates relief is concern over the decline of the high street, particularly in smaller retail centres and market towns.  The report suggests that given the relative commercial success of charity shops, rate relief provides an unfair advantage over other retailers, and that the ‘clustering’ of charity shops can even contribute to high street decline. We disagree with the position taken in the report and find it disappointing that there was scant reference to the valuable contribution charity shops make to local high streets and communities.  Not only that, but it appears to fundamentally misunderstand the rationale for charity tax reliefs, which exist in recognition and support of charities’ role in delivering public benefit, not to correct commercial underperformance.  There is further detail in our consultation response.

Many others have also challenged the Task and Finish Group’s report and there has been a strong voice of opposition.  However, even if the recommendations are not taken forward we should be concerned because many of the arguments put forward resonate here in England too.  A melting pot of factors including high street decline, public funding cuts, localism and an increasing focus on local economic growth, along with heightened scrutiny of all charity tax reliefs due to poor economic conditions, has led to worrying noises from some quarters about whether the relief should continue. An additional red flag is the package of measures, introduced in April 2013 by the Local Government Finance Act, which mean that local authorities in England have to fund a greater proportion of any new reliefs they offer – 50% of any new reliefs, as opposed to three quarters of the discretionary relief under the old system.  Coupled with wider funding pressures, the overall effect is that local authorities may now have greater incentive to focus on raising business rate revenue, and less to granting additional new reliefs.  As a result, discretionary reliefs may come in the firing line in some local areas – and admittedly, with local authorities under enormous financial pressure, their position may find some sympathy.  

However, for now it’s too early to say how these changes will affect behaviour, but it’s certainly an area we’ll need to keep a close eye on. So while we may be preoccupied with Gift Aid on a day-to-day basis, given its scale and value to the sector rate relief is not charity benefit to be dismissed lightly or taken for granted.

This post was last reviewed on 6 August 2018 at 15:11
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