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No tax penalties for temporary public benefit failure 1

Finance | Tania Mason | 12 Jan 2010

HMRC has decided that those charities that are deemed by the Charity Commission not to be meeting the public benefit test when they are assessed, but who reorganise themselves and eventually make the grade, will not lose their tax reliefs for the period they were deemed to be failing.

Julian Smith (pictured), partner at Farrer & Co, raised the issue with the Charity Commission early last year, concerned that a judgement by the Commission that a charity is not providing public benefit could have tax implications.

“Some tax reliefs rely not just upon the institution concerned being regarded as charitable, but that it uses its property for charitable purposes,” Smith said.

“Our question for the Charity Commission was, if you judge a charity not to be using its property for charitable purposes, would it lose the tax reliefs and could the Revenue go to them and ask for several years’ worth of reliefs back?”

After receiving the question from Smith, the Commission liaised with HMRC and just before Christmas issued a joint response, effectively stating that HMRC would not seek to penalise charities that find themselves in that position.

“Luckily the Commission took it seriously and they gave the right answer,” said Smith.

“In my view it’s an unofficial concession from HMRC.”

However, if the organisation is unable to mend its ways and is removed from the Register of Charities by the Commission, HMRC is likely to take a rather different view, as outlined by BDO’s head of charities Don Bawtree in the December issue of Charity Finance.

Local authority rating concessions

The Commission also said that the subject of whether such charities are also allowed to keep their rates concessions, was a matter for each local authority, and that the Department for Communities and Local Government would be re-drafting its guidance to billing authorities on the charity relief next year.

Smith added: “Whether local authorities, and the guidance given to them by DCLG are as sympathetic as HMRC remains to be seen.”

HMRC confirmed to Civil Society that it had discussed with the Charity Commission the tax impact on charities in a range of circumstances, and gave the following response:
 
"For charities that are found to be acting within charitable aims but not currently operating for the public benefit, HMRC will follow the Charity Commission in allowing a period of transition within which the trustees can draw up and implement an action plan to bring the charity’s activities within the definition of public benefit.

"If the trustees do not act to bring the charity’s activities within public benefit requirements HMRC will review the circumstances in each case to determine whether tax relief is still available.
 
"For charities that are found to be acting outside their expressed charitable aims and not providing public benefit, HMRC will carry out a review of the circumstances to assess whether any tax liability arises, as would be the case for any charity that was found to be acting outside its charitable aims in any other circumstances."
 
See here for Julian Smith’s comprehensive explanation of the issue and the Charity Commission’s response.

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