The
Government has moved to end the exploitation of charity reliefs
for tax avoidance purposes. With a whiff of abuse fresh in
his nostrils, the champion of charitable giving Gordon Brown
has acted decisively to head off any miasmic threat to the
reputation of charities and their donors. His package of new
measures aims to protect existing charitable tax reliefs from
abuse and to ensure that the high public regard for charities
is maintained.
HMRC have become increasingly concerned that individuals are
securing tax relief on large donations to charity and then
extracting value from the charity in a variety of ways. They
have identified a number of loopholes which the Chancellor
has sought to close in his Budget by the introduction of the
following three anti-avoidance measures.
Transactions with substantial donors
In return for a substantial donation to a charity, individuals
and companies sometimes look for some benefit to themselves.
This first new measure aims to stop any mischief involving
transactions by a substantial donor with the charity on
uncommercial terms. The new rules mean that the charity
will lose its tax relief on income according to the benefit
received by the substantial donor.
A substantial donor is a person who gives £25,000
or more to a charity in a year or £100,000 or more
over six years. To prevent donations being made in one chargeable
period and a transaction that returns value to the donor
occurring in the next period, the substantial donor tag
will stick for a number of years.
The transactions in question include the sale or letting
of property, provision of services, the provision of financial
assistance (such as a loan or guarantee), or investment
in the business of the donor.
It is worth noting that a company which is wholly owned
by a charity will not be treated as a substantial donor.
This could be an issue for charities entering into transactions
with a wholly owned trading subsidiary or a joint venture
company, for example.
Generally speaking, certain transactions will be exempt
from the new rules if they are undertaken for genuine commercial
reasons or on arm’s length terms, provided they are
not part of an arrangement for the avoidance of tax. These
rules apply to transactions taking place on or after 22
March 2006.
Non-charitable expenditure
This second measure provides a direct link between non-charitable
expenditure incurred by a charity and loss of tax relief.
It works by restricting the income and gains eligible for
tax relief by £1 for every £1 of non-charitable
expenditure incurred.
Under the previous scheme exempt income and gains were compared
to qualifying (charitable) expenditure, and any excess was
taxed to the extent that the charity had non-charitable
expenditure. Now, in the majority of cases, non-charitable
expenditure will be treated effectively as if it were taxable
income.
The measure also scraps the de minimis limit of £10,000
applying to the charity’s exempt income. These rules
apply to such expenditure incurred in any accounting period
commencing on or after 22 March 2006.
Non-close Companies
Rules presently exist to restrict the benefits that a close
company can receive in return for a donation to charity
that is eligible for tax relief. The maximum benefit that
can be received is £250 a year in respect of any gift,
with lower limits for donations of below £1,000. This
third measure extends this restriction to all companies.
In addition, non-close companies will become subject to
the same rules as close companies and individuals where
a donation is potentially repayable, or are part of a scheme
involving the acquisition of property by the charity.
These new rules have effect in relation to payments to charity
made on or after 1 April 2006.
The Chancellor’s new measures to protect the reputation
of charitable giving and stem the loss of revenue to the
Exchequer have been broadly welcomed. It is thought they
will have no impact on genuine charitable giving or on a
charity’s use of its funds for the benefit of charity.
Clearly charities will need to be careful in the future
about what transactions they enter into with individuals
or companies, especially with donors of substantial amounts.
Where they enter into such transactions, by letting property
for example, they will now need to ensure that they keep
adequate records or formal documentation, and take steps
to ensure that they have done so on commercial terms. We
will need to wait and see if the rules throw up any significant
administrative burdens in practice.
Allan Holmes is head of the Private Client Tax
Department at Dickinson Dees
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