HMRC launches consultation on tackling abuse of charity relief
It has identified four areas in which the existing anti-avoidance rules are not working as intended, and says it will work with the sector to explore 'reasonable and proportionate' changes to the rules.
Four separate measures are being considered. The first is to tighten the 'tainted donations' rules intended to prevent donors and connected persons from obtaining a financial benefit from their donation. The rules target situations in which a donation is made to a charity in return for 'connected arrangements' for the donor or where the 'main purpose' of entering into the arrangements is for the donor to receive a financial advantage from the charity.
HMRC considers these rules to be too complex to apply to certain types of abusive behaviour, particularly where the purpose test element is used. Its consultation paper highlights circular arrangements whereby funds are donated to a charity to attract tax relief and are then passed back to the donor or a party that is connected to or controlled by the donor. In the scenarios it cites, the arrangement involves the charity investing the donation either by providing loan finance to the donor or in making an equity investment in an entity controlled by the donor. It says that, in some cases, a donation may be made solely to claim relief, with little real benefit to the charity. HMRC is therefore looking to remove or modify the purpose test or replace the tainted donor rules entirely.
'The focus on investment-related “arrangements” suggests that they may have been a particular area of regulatory interest for HMRC', comments law firm Farrer & Co. 'Charities will also wish to consider whether proposals for reform in this area, particularly the proposal simply to remove [the purpose test], risk creating a chilling effect amongst donors due to a lack of clarity around whether an “arrangement” may be caught by the revised rules and/or challenged by HMRC.'
The second measure being proposed concerns the charitable investment rules. Certain types of investment are currently accepted as 'approved' tax purposes, most of them automatically approved without scrutiny. However, so-called Type 12 investments such as investment loans are required to satisfy an HMRC officer that the investment is made for the benefit of the charity rather than anyone else and not for the avoidance of tax by the charity or any other person. HMRC is suggesting that this test should apply equally to all the other types of 'approved' investment. Instead of being automatically waved through, charities should be prepared to show why such investments are for the benefit of the charity and not for the avoidance of tax, says HMRC. This would make many more investment decisions open to HMRC scrutiny. Charities are likely to need to consider how those decisions are made and the length of time for which records of such decisions should be retained, notes Farrer.
A third proposal relates to HMRC's concern that it cannot always recover tax that charities should pay in connection with non-charitable expenditure that is not in furtherance of its purposes or where rules for overseas payments and charitable investments have not been complied with. HMRC has the right to raise tax charges against the charity's 'attributable income and gains' in such cases, but sometimes the definition of 'attributable income and gains' is not broad enough to recover all the tax due. It therefore wants to expand this definition and to reach back beyond the current six-year period.
The fourth area of review concerns sanctions against charities that do not meet their tax-filing and payment obligations. Currently, charities that fail to submit a tax return when requested to do so can still claim reliefs such as Gift Aid, even if it later emerges that they do not qualify. Some charities are continuing to claim reliefs while in default of the reporting rules, says HMRC, and it wants to be able to withhold Gift Aid payments and other reliefs for such defaulting charities, at least in certain cases.
The consultation closes on 20 July 2023.
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