At the end of April, HMRC published a Consultation Document proposing changes to charity tax rules to tackle non-compliance. It is clear from the Consultation Document that HMRC is targeting a minority of charities and donors who are either non-compliant or are seeking to abuse the available reliefs. As is often the case with changes such as these, there is a risk of unintended consequences, including increasing administrative burdens of otherwise compliant charities. This article gives an overview of the proposals and possible implications for the sector to consider.
Charity trustees and advisers are urged to respond to the Consultation, which closes on 20 July 2023.
Tainted Charity Donations
The Tainted Charity Donations (TCD) rules are anti-avoidance measures that apply where a donor enters into an arrangement with a charity or a CASC that results in the donor receiving a financial advantage in return for the donation and the main purpose of the arrangement was to obtain that advantage. The TCD rules do not apply where there are no additional arrangements, any benefit is within the Gift Aid benefit limits or the benefit is the tax relief arising from the donation.
HMRC is concerned that the rules do not allow them to tackle certain abusive arrangements. For example, a significant donation to a charity is then loaned back to the donor at a commercial rate of interest but perhaps with no real intention of repaying that loan. The Consultation proposes three possible options for reform by:
- Re-writing the TCD rules to ensure that any ‘arrangements’ are for the benefit of the charity and not the donor. This may incorporate limits on the amount of financial assistance provided to a donor. Where these limits are breached, the donation would be treated as chargeable income and charitable reliefs would be reduced by a corresponding amount.
- Removing the ‘main purpose test’. HMRC could then challenge any donation that provides anything more than an incidental benefit for the donor.
- Changing the ‘main purpose’ test to refer to ‘financial assistance’ or financial benefit’ rather than ‘financial advantage’. HMRC says that this would allow it to better challenge an arrangement made to benefit the donor, rather than the charity.
The Charity Tax Group is currently evaluating each of these options. Option 1 is likely to involve introducing new risks to the legislation and take time and resource to formulate alternative rules. Option 2 risks introducing uncertainty for charities and their major donors. So, our present preference is for Option 3, provided that it is accompanied by good definitions and accompanying guidance.
Abuse of the charitable investment rules
Section 511 CTA 2010 (charitable companies) and section 558 ITA 2007 (charitable trusts) set out the 12 types of charity investment that are approved by HMRC. Where an investment or loan is made outside of these 12 types, the expenditure is deemed to be ‘non-qualifying’ and can lead to clawbacks of previously obtained charity tax reliefs.
The first 11 types are regarded as ‘safe’ investments and carry automatic approval without the need for a claim. Type 12 is a catch all and covers any loan or other investment made for the benefit of the charity and not for the avoidance of tax. Unlike Types 1-11, Type 12 requires a claim and HMRC must be happy that the Type 12 test is satisfied.
HMRC has identified a shortcoming arising from the automatic approval of Types 1-11. For example, Type 5 covers “any interest in land, other than an interest held as a security for a debt”. So, if a charity were to purchase a foreign property which is used as a holiday home by its trustees for their sole use with no benefit to the charity, HMRC would find it difficult to challenge under the current rules.
As a result, HMRC now wishes to apply the “for the benefit of the charity and not the avoidance of tax” test to all 12 Types. This seems a perfectly reasonable approach although, given the long term nature of some charity investments, there may be potentially unforeseen record-keeping implications.
Closing a gap in non-charitable expenditure rules
Charity tax reliefs are predicated on the basis that the funds raised are used only for charitable purposes. Where a charity incurs non-charitable expenditure (NCE), HMRC may clawback tax reliefs claimed, initially in the current accounting period and, if excess of NCE remains, from the previous six years starting with the most recent period.
There are two issues that HMRC seeks to address. The first where, in an accounting period, a large amount of NCE is incurred but, in that period, the charity has received both income that is exempted from tax (such as gift aided income, payroll giving or gifts of shares or property) and income that is outside of the scope of tax such as legacy income. At present, HMRC has to match the NCE to both the tax exempted income and the outside of the scope income. This limits the clawback of relief to the amount of NCE that is matched to tax exempted income. HMRC would like only to match NCE to tax exempted income in a particular accounting period meaning that it could then match any excess NCE to tax exempted income in a prior period. We question whether or not such an approach is logically justified.
HMRC would also like to carry back excess NCE for more than 6 years. While this may be logical in the case of a charity that has earned modest amounts of tax relieved income each year over a long period followed by a very large amount of NCE in a later period, it does present record-keeping issues, tracking the relevant income and expenditure over potentially long periods, particularly in smaller charities where key personnel change significantly over time.
Sanctioning charities that do not meet their filing and payment obligations
Typically, it is only larger charities that are required to submit tax returns every year. HMRC sends notices to file a return to other charities on a periodic basis.
HMRC reports that some charities fail to meet their obligation to file a return when requested but continue to claim tax reliefs such as Gift Aid and expect it to be paid. This puts the Exchequer at risk of paying out Gift Aid, or giving reliefs, to charities that do not qualify. Consideration is therefore being given to withholding payments of Gift Aid and disapplying other tax reliefs from charities that have fallen behind on their reporting and filing obligations.
Among the questions that HMRC asks in the Consultation is whether smaller charities should be dealt with more leniently than larger charities. CTG considers that they should since smaller charities are often run by volunteers with limited knowledge of how to complete tax returns and who may need to seek help. Notices to file may also be sent to a previous correspondence address. We therefore consider that smaller charities should be afforded a grace period before vital Gift Aid income is withheld.
What are your thoughts?
CTG would welcome your views on the subjects covered by the Consultation. If you have particular thoughts, please email them to info@charitytaxgroup.org.uk. If you are submitting your own response, CTG would be grateful to receive a copy of your submission.
The Charity Tax Group has been representing charities on tax for the last forty years. Its aims are to create a fairer tax system for charities and to better equip charities to deal with the tax system though newsletters, online training sessions and the resources available on its website – which has been called the taxopedia of charity tax! It is estimated that the Charity Tax Group has secured tax savings of over £10 billion for charities during its lifetime. Find out more at www.charitytaxgroup.org.uk or contact us at info@charitytaxgroup.org.uk.
*The views expressed are the author’s and not ICAEW’s.