HMRC has been consulting on key tax issues for charities and community amateur sports clubs (CASCs). Here’s our guide to the main considerations, recent changes and future proposals.
What are the key tax considerations for charities?
The Gift Aid scheme
The Gift Aid scheme (Gift Aid) enables charities to increase the value of every donation received by 25%, assuming a 20% basic tax rate applies.
HMRC requires charities to keep an audit trail of their Gift Aid procedures and has published guidance on how to do this effectively. The most important record to keep is the Gift Aid declaration. No repayment claim can be made without it.
Gift Aid does not apply to:
- Payments made under the payroll deduction scheme (individuals only)
- Donations relating to the acquisition of property involving the donor or someone connected to them e.g. where a donor gives £100,000 to charity and the charity reclaims tax of £25,000 (assuming a 20% basic tax rate) and then it purchases property from the donor for £125,000
- Where the benefit in relation to the gift exceeds the following limits:
- Donations ≤ £100 – the limit is 25% of the donation
- Donations > £100 – the limit is £25 plus 5% of the amount exceeding £100
- Gifts of unlisted shares, or a company gifting shares in itself.
A donor company receives tax relief for a donation in the period when it is paid, unless it is owned by the charity solely or with other charities. Here, the company has an extra nine months from the end of the accounting period to make the payment.
Issues may arise where a company uses its accounting profits to determine its Gift Aid payments. As a company pays tax on its taxable profits, this amount must be used to calculate Gift Aid.
A company donating to its parent company is a ‘distribution’ under company law. This means the company must have sufficient distributable reserves at the date of payment. Any portion of the donation that exceeds the distributable reserves is repayable to the company. It cannot be deducted when calculating its taxable profits.
Tainted charity donation rules
The tainted charity donation (TCD) rules deny tax relief to donors for amounts paid to charities or CASCs where the main purpose is financial advantage for the donor or someone connected to them.
The TCD rules do not apply in the following situations:
- Where the financial advantage falls within the Gift Aid benefit limits (see above) for donations made under the Gift Aid scheme
- Where the benefit was taken into account when calculating the tax relief due for donations of shares, securities, real property or trading stock
- Where the person receiving the financial advantage applies it to charitable purposes
- Where the donation is made by a ‘qualifying charity-owned company’, or ‘relevant housing provider’ linked with the charity to which the donation is made.
A qualifying charity-owned company is one wholly owned by one or more charities, where one of these is the charity to which the donation was made (or a connected charity) that the donor didn’t control during the previous four years.
A relevant housing provider is a non-profit registered provider of social housing or a body entered on a register maintained under specified Housing Acts. It is ‘linked’ to a charity in the sense that one is wholly owned or controlled by the other, or both are wholly owned or controlled by the same person.
What has changed recently?
Charity and CASC definitions
The change to the definition of a charity and a CASC means only those located in the UK will qualify for charity tax relief from 15 March 2023. Previously, charities in the EU and EEA were also eligible. The change applies to income tax, VAT, CGT, corporation tax, IHT, stamp duty, stamp duty land tax, stamp duty reserve tax, annual tax on enveloped dwellings and diverted profits tax.
A UK charity is one that comes within the jurisdiction of the High Court in England, Wales and Northern Ireland or the Court of Session in Scotland. It must also meet the definition of a charity in Finance Act 2020.
A UK CASC is one situated in the UK which provides facilities for eligible sports in the UK. It must also be registered (or have applied to register) as a CASC under Corporation Tax Act 2010.
While transitional measures were introduced to extend the relief for another year to certain charities or CASCs, HMRC confirmed that only a small number took advantage of these.
Gift Aid on waivers and refunds
Previously, a charity could not claim Gift Aid on loan waivers or waived refunds on the cost of tickets for subsequently cancelled events, unless it repaid the amount to the donor first and the donor then donated it back.
Due to the pandemic and pressure from the Charity Tax Group (CTG), HMRC now accepts that the waiver of a refund or loan is eligible for Gift Aid where the following criteria are met:
- There is a legally enforceable document to record the waiver. The CTG intends to issue a template for this; and
- It meets all the general conditions to qualify for tax relief under Gift Aid.
Abolition of social investment tax relief
The social investment tax relief (SITR) scheme was introduced in Finance Act 2014 for investments in ‘qualifying social enterprises’. The scheme provided income tax relief of 30% of annual investments up to £1m, where certain conditions were met. It also allowed a deferral of CGT where gains were re-invested into a qualifying SITR scheme. But since 5 April 2023, the SITR scheme is no longer available.
What has HMRC proposed in its consultation?
On 27 April 2023, HMRC announced it would discuss with the charities sector a reform of the tax rules to address issues of non-compliance. The measures under review are:
Tainted charity donations
HMRC believes the TCD rules are not sufficiently robust to cover certain tax avoidance arrangements and has outlined three possible courses of action:
- Completely rewriting the TCD rules
- Removing the ‘main purposes’ test. This would enable HMRC to challenge arrangements where there is an incidental benefit to the donor or someone connected to them
- Changing the wording in the ‘main purpose’ test to refer to ‘financial assistance’ instead of ‘financial advantage’. This would make it easier for HMRC to challenge arrangements made to benefit donors.
The CTG supports option 3, which would amend the rules rather than completely change them.
Charitable investment rules
Investments made by a charity are generally regarded as non-charitable expenditure unless they fall into one of the 12 approved charitable investments categories.
The first 11 categories are considered ‘safe’ investments and HMRC approval is not required. Category 12, however, is a catch-all and requires HMRC approval.
HMRC would like to abolish the automatic approval of categories 1-11. But the CTG has suggested a more targeted approach, rather than HMRC’s blanket proposal.
Non-charitable expenditure rules
Where a charity incurs expenditure for non-charitable purposes, HMRC may claw back tax reliefs claimed in the accounting period when the expenditure arose. If there is any excess expenditure, tax reliefs from the previous six years can also be clawed back.
HMRC proposes increasing the carry back period to more than six years. But the CTG has argued against the extension, noting the risk that HMRC may end up clawing back relief that was not granted in the first place.
Sanctions for failing to meet filing and payment obligations
Only larger charities are required to submit tax returns annually. For other charities, HMRC issues notices to file a tax return periodically. HMRC notes that some charities fail to meet this obligation and continue to claim tax reliefs such as Gift Aid. In response, it proposes withholding these tax reliefs for charities that have not met their filing obligations.
The CTG has suggested more leniency for smaller charities which are often run by volunteers with limited knowledge of tax compliance matters. It has also urged HMRC to only withhold tax reliefs for non-compliance from charities that have deliberately and knowingly defaulted.
Summary
As we can see, HMRC intends to apply more scrutiny to the charities sector going forward. In light of this, we recommend that charities undertake a review of their internal processes and procedures to ensure compliance with the existing rules and develop methods to deal with HMRCs proposed changes.
