Preventing Charity Tax Abuses: Respond Now To Consultation
New rules to prevent abuses of charity tax reliefs have been proposed, and time is running out to respond to the HMRC’s consultation (it closes on 20 July). The intention is to tackle non-compliance and protect the integrity of the charitable sector, which has seen its fair share of tax scandals and poor publicity in recent years.
The open consultation on highlights four key areas of concern around what HMRC describes as the “small group of charities” who abuse or take advantage of charitable reliefs in unintended ways. HMRC is focusing on four key areas:
Preventing donors from obtaining a financial benefit
The Tainted Charity Donation rules work to prevent ‘circular’ transactions which enable a donor to receive a benefit back from the charity. However, the rules have apparently proved “overly complex” in certain abusive situations involving significant donations by donors in order to secure a financial advantage.
Three conditions must be met for a donation to be ‘tainted’. HMRC is therefore considering removing or amending the second condition – that the main purpose of entering into the arrangements is for the donor, or someone connected to the donor, to receive a financial advantage directly or indirectly from the charity.
Alternatively, it is considering or completely replacing the Tainted Charity Donation rules.
Preventing abuse of the charitable investment rules
Certain types of investment income are not taxable, enabling charities to invest excess funds and further their charitable aims. However, HMRC has identified cases where investments are being made through a charity to benefit others. The sticking point is that under existing rules, ‘approved’ investments are automatically accepted as exempt.
HMRC is considering how the charitable investment rules can be updated to ensure all approved investments and loans made by charities must be for the charity’s benefit - and not for tax avoidance.
Closing a gap in non-charitable expenditure rules
HMRC says it is concerned at the gap in the non-charitable expenditure rules and existing ‘carry back’ provisions, potentially preventing it from recovering the right amount of tax if there has been insufficient ‘attributable income and gains’ in the preceding 6 years.
One option being considered is a review of the definition of ‘attributable income and gains’ and extending the types of income stream that become chargeable following non-charitable expenditure. It would also directly impact the treatment and amount of excess non-charitable expenditure available to carry back to previous periods.
The 6-year carry back restriction is also be reviewed.
Sanctioning charities that fail to meet their filing and payment obligations
There are concessions available to charities allowing them not to file a tax return if they have no tax to pay. However, some charities are still evidently failing to meet their obligation to file tax returns when requested to – with some of these charities still claiming tax reliefs, such as Gift Aid and expecting it to be paid. This is unfair.
One option being considered is to withhold Gift Aid payments (and disapply other tax reliefs) from charities that have fallen behind on their reporting and filing obligations. HMRC stresses this would not be intended as a punitive measure, rather to ensure returns are filed when required or on request.
What’s next?
This is the first stage in reviewing options to update the charity tax compliance rules, so any legislative changes are a long way off.
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you