Proposed legislation to prevent charities being set up to avoid tax could have “unintended negative implications” for the wider charity sector, the Charity Tax Group warned today.
On Friday HM Revenue & Customs published a discussion paper containing two proposals for legislation to prevent charities being set up to avoid tax.
The paper follows from an announcement by the chancellor in the Autumn Statement that legislation would be brought forward, and from a confidential consultation on one potential proposal with stakeholders including the Charity Tax Group (CTG).
HMRC initially proposed that a charity would be prevented from being recognised by HMRC if one of the main purposes or results of its establishment is to secure a ‘tax advantage’. The test in this approach is geared towards ‘tax advantage’ rather than ‘tax avoidance’.
But many, including CTG, were concerned about the approach.
“There were concerns that the scope of purpose in this approach could create doubt about recognition by HMRC of private charitable foundations and corporate charitable foundations," the paper said.
“They felt this because in these cases it is arguable that one of the main purposes of establishing a foundation is the obtaining of a tax advantage, specifically gift aid and other reliefs on donations.”
HMRC's paper includes its original proposal and also a new recommendation which would narrow the ‘purpose test’ from one of a number of purposes to a single main purpose.
HMRC says this reduces the likelihood that legitimate charities would be affected because it would be clear that the main purpose of a legitimate charity is philanthropy rather than getting a tax advantage. However, it adds that the narrower purpose test could make it easier for determined avoiders to subvert the legislation.
CTG said in a statement published today that it welcomed the HMRC’s decision to review its proposed legislation and reiterated its concerns about the original proposals (Version A).
“When consulted by HMRC on the draft legislation, CTG highlighted that a ‘tax advantage’ test could catch a charity established to seek money from donors and to claim repayments under gift aid to help funds its activities.
“The draft legislation also failed to address a situation where a charity that was established for genuinely wholly charitable purposes and then taken over with a motive to abuse the tax system.”
CTG also is concerned that Version A could create doubt about the recognition of private charitable foundations and corporate charitable foundations.
CTG is co-ordinating a working group to consider the implications of the draft legislation for charities and decide a position on HMRC’s new alternate legislation (Version B).
The deadline for response to HMRC’s consultation is 11 April 2014.
