Cloased - Substantial Donors to Charity: an HMRC review of anti-avoidance legislation around large donors to charity

Charities and their donors are entitled to a generous package of tax reliefs that are designed to encourage and support charitable giving. In total these reliefs are worth in excess of £3bn. Unfortunately this generosity attracts not only those who wish to support charitable activities but also those who seek to gain a financial advantage by avoiding tax. The balancing act for Government is to counter this type of abuse without discouraging charitable giving or creating unnecessary administrative burdens.

The Government introduced legislation in 2006 (now at sections 506A, 506B and 506C Income and Corporation Taxes Act 1988 and sections 549 to 557 Income Taxes Act 2007) to tackle those who influence or set up charitable structures with a view to avoiding tax rather than with any charitable intent. This “substantial donor” legislation is targeted at transactions between charities and those in a position of influence – i.e. the largest donors.

The rules apply to transactions between all charities and their largest donors (or persons “connected” to them) where tax relief has been claimed in respect of their donation(s). The rules start from the premise that all transactions between these parties will result in “non charitable expenditure” by the charity and the charity will have its exemption to tax on an equivalent amount of its income or gains removed. The rules then provide for exemptions to carve out
innocent transactions.

The substantial donor legislation specifies what constitutes non charitable expenditure in respect of a charity’s largest donors. It is therefore vital that the legislation exempts the correct transactions thus providing for tax relief for innocent transactions. It is also important that innocent charities do not suffer a significant administration burden.

A number of charities and stakeholder bodies approached HMRC with concerns over how the substantial donor rules are working in practice. This consultation suggests how those concerns might be met and includes draft legislation to:
• Exempt additional transactions that are currently caught
• Reduce the administration burden on charities

The aim of the consultation is to ensure that the substantial donor regime best reflects the needs of both Government and the charitable sector. That is one that deters avoidance but that exempts all transactions that a charity has cause to carry out in the course of its charitable activities and which minimises the administration burden for charities.

The consultation document is available by clicking here. 

Trustees can respond to the consultation in two ways –
• By sending your comments to CTN, who will then either pass them on or integrate them in CTN’s own response to the consultation. Send your comments to info@trusteenet.org.uk and mark the email ‘Consultation on Substantial Donors to Charity consultation’. The deadline for this is 21 September.
• Send your comments directly to the HMRC Charities section. The consultation document contains details of how to do this. The deadline for this is 7 October.