HM Revenue and Customs have launched a new consultation ‘Charities tax compliance’ which explores possible changes allowing HMRC to tackle charities that obtain reliefs in ways that are not intended.
The consultation seeks views on policy design and any suitable possible alternatives. Specific proposals for reform would be consulted on later. Four key areas are explored:
- Preventing donors from obtaining a financial benefit from their donation (tainted donations).
- Preventing abuse of the charitable investment rules.
- Closing a gap in non-charitable expenditure rules.
- Sanctioning charities that do not meet their filing and payment obligations.
- The tainted donation rules have proven to be overly complex to apply to certain instances of abusive behaviour, including where individuals who make large donations to charity derive significant financial benefits by entering into arrangements linked to their donation.
- Three possible options are considered:
- Replacing the current tainted donation rules with a new rule that would ensure arrangements made in relation to a donation are done to benefit the charity and not the donor.
- Removing the condition that, for a donation to be considered tainted, it must be demonstrated that arrangements relating to the donation were made to benefit the donor or a connected party.
- Making amendments to allow HMRC to better challenge arrangements made to benefit the donor rather than the charity.
Approved charitable investments
- The approved charitable investment rules enable charities to invest excess funds to yield returns to advance their charitable aims, without treating the investment as non-charitable expenditure which might otherwise restrict tax exemptions.
- In some cases, investments are being made through a charity to benefit others via arrangements that would be difficult to challenge under the current rules.
- It is proposed that the current rules could be amended to ensure that charities are able to justify investments they make as benefitting the charity, allowing HMRC to challenge investments that generate little benefit for the charity.
- In some instances, it is possible for a donor to receive relief for a donation, for the charity to not pay tax and for the charity to then spend the donation on something other than its charitable purpose.
- Current rules can act as a blocker to fully clawing back relief where a charity has non-charitable expenditure.
- The consultation explores areas that would allow HMRC to tackle the gap in the current non-charitable expenditure rules and carry back provisions.
Charity filing obligations
- Some charities fail to meet their obligation to file tax returns when they are requested. In many cases, such charities still claim tax reliefs such as Gift Aid.
- The consultation considers withholding payments of Gift Aid and disapplying other tax reliefs from charities that have fallen behind on their reporting and filing obligations.
The government intends that any changes would not detract from the overall generosity of the reliefs or impact on legitimate charities.
Preventing donors from obtaining a financial advantage from their donation
1: Do you foresee any unintended consequences on legitimate charities from introducing this rule?
2: Do you foresee any significant challenges for charities to maintain appropriate records of any arrangements, such as substantial loans, they make?
3: Do you foresee any unintended consequences on legitimate arrangements from changing the rules in this way?
4: Do you believe proposed changes to the current wording would achieve our objectives or do you believe there will still be room for abuse?
Preventing abuse of the charitable investment rules
5: Are there any circumstances where a charity may need to make an investment or loan for reasons other than benefitting the charity?
6: Do you foresee any significant challenges retaining records and documents to justify, if requested by HMRC, the investment decision process and demonstrate how the investment benefits the charity?
Closing a gap in non-charitable expenditure rules
7: Do you agree that it is rational and proportionate to review ways to close the tax gap here? If not, please provide reasons why?
Sanctioning charities that do not meet their filing and payment obligations
8: What are the barriers to some charities not filing tax returns when requested to?
9: Do you think that this would adversely affect the operations of charities or CASCs and what might be the consequences of this?
10: How should changes be targeted to ensure they encourage charities to meet their obligations to file a tax return when required to do so – for example should small charities be treated differently to larger ones?
11: How would it be best to educate the sector about any new rules ahead of their introduction?
Other related issues and questions
12: Are there any changes which could be made to the charity and CASCs regimes which would ease the burden on the sector?
13: Will any administrative or other burdens be created if any of the above measures are introduced? Is so, what are they?
14: What are the estimated costs of any additional burdens?
15: Are there any other points you would like to raise or suggestions you would like to make to improve compliance in the Charity or CASC sector?
Useful guides on this topic
Gift Aid: How it works
HM Revenue & Customs (HMRC) pays around £1.3 billion a year to charities and other qualifying bodies through Gift Aid.
Other Gifts to Charity
Gifts to Charity: can you obtain tax relief on a gift to your local charity or community amateur sports club? What about gifts to your church, mosque or synagogue? Do you need to be a taxpayer? Are there any tax reliefs?
Budget 2023: Restriction of Charitable Reliefs
The Chancellor announced the following measures on Charitable reliefs in his Spring 2023 Budget.