In John Harvey & Keswick Enterprises Holdings Charitable Trust v HMRC [2024] TC09372 the First Tier Tribunal (FTT) found a series of ‘donations’ to charity were not ‘qualifying donations’ and a loss to tax had occurred due to excessive gift aid claims.
Mr Harvey and Keswick Enterprises Holdings Charitable Trust (KEH) reduced their chargeability to tax through the use of Gift Aid Relief, HMRC questioned the legitimacy of the donations after a series of loan transactions were linked to them.
- Mr Harvey is a successful and wealthy businessman who splits his time between business and charitable work.
- He is shareholder and director of Keswick Enterprises Group Ltd (KEGL) and the founder of KEH a charitable trust.
- Mr Harvey regularly made significant loans to KEGL which the company paid back by reduction of his Directors Loan Account.
- Significant donations were regularly made by Mr Harvey to KEH.
- An associate company of KEGL required funding for the purchase of new machinery.
- It was proposed that KEH would lend this money to the company as an investment opportunity in which KEH would receive 10% interest on the loan in line with current market rates.
- In 2016, a series of transactions occurred, KEGL repaid a sum of £200,000 to Mr Harvey for repayment of loans he had made to the company, Mr Harvey then donated the £200,000 to the charity who then lent £200,000 to the associated company to purchase the new machinery.
- Further similar transactions occurred at later dates.
- The charity then made a gift aid claim in relation to the series of ‘donations’ made by Mr Harvey.
HMRC initially claimed the donations were ‘tainted’ under s809ZJ Income Tax Act 2007 (ITA) but later changed this to claim the donations did not meet the standard requirements of a qualifying donation as per s416 (ITA).
HMRC had looked into Mr Harvey's tax affairs previously regarding another issued and closed the enquiry without withdrawing any gift aid claim.
An enquiry opened into the charity led to discovery assessments being raised on Mr Harvey. The discovery assessments were appealed as:
- There was a shift in the grounds for discovery.
- Information available to a hypothetical officer during the earlier enquiry meant HMRC were not within the usual time limits imposed by the Taxes Management Act 1970 (TMA).
HMRC argued:
- For a donation to qualify for gift aid, all conditions in s416 Income Tax Act 2007 must be met.
- Condition B, ‘the payment is not subject to any condition as to repayment’ was not met.
- Condition E, ‘the payment is not conditional or associated with an arrangement involving the acquisition of property by the charity’ was not met.
- Condition F, ‘no benefit should be associated with the donation’ was not met.
The tribunal stated that legislation at s416 existed to encourage genuine gifts by offering tax relief on the gifts, the legislation was designed to ensure no advantages were obtained by the donor making the gift.
The tribunal found:
- The donations made were ‘conditional on the acquisition of property by a person linked to Mr Harvey’.
- The series of transactions that occurred stipulated a form of arrangement was in place.
- Conditions B & F were unproven.
- The grounds for disocery changing does not change the fact that a loss of tax was discovered.
- A hypothetical officer would not have had reason or skill to make a judgement of a loss of tax during the earlier enquiry due to lack of information available.
The appeals were dismissed.
Useful guides on this topic
Gift Aid: How it works
What is Gift Aid? How does it work? What are the rules?
Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? Can HMRC issue two alternative assessments for the same period? What are your rights of appeal and defences?
Directors Loan Account Toolkit
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced (freeview) version with planning points.
Directors Loan Account Toolkit (Subscribers)
What is the tax treatment for an overdrawn director's loan account? What are the consequences of an outstanding loan to a participator?
External link
John Harvey & Keswick Enterprises Holdings Charitable Trust v HMRC [2024] TC09372
