Proposals to create a definition of a charity for tax avoidance purposes “attack charities, not tax avoiders”, a Charity Tax Group briefing on the Budget heard earlier this week.
The government announced in the recent Budget document that it was consulting on measures “to help deter the use of charities established for the purpose of tax avoidance”.
An HM Revenue & Customs consultation, published just before the Budget, proposes tightening the definition to say that a charity cannot receive tax relief if it has been established to obtain a tax advantage.
But John Hemming, head of tax at the Wellcome Trust and chair of the CTG, said the measures would focus on the wrong target.
“We aren’t going to say that measures to prevent charities being used for tax avoidance are the wrong thing,” Hemming said. “We wholeheartedly support measures to do so.
“But when we look at the legislative changes proposed to stop the abuse, we see they attack charities, not tax avoiders. We’re easier targets.”
Hemming also said that HMRC’s proposals were too wide-ranging because they used the term “tax advantage”.
“The government intends charities to receive tax relief,” he said. “That’s a form of tax advantage.”
He said HMRC have promised to explain the issue further in guidance, but this would not be sufficient to meet charities’ concerns.
“In five years time someone will look at the law, not at the guidance,” he said. “It will be no use us protesting we had a sweetheart deal, and that this legislation would only be used to tackle bad guys. A tax inspector who wasn’t there when that deal was agreed will shrug and say ‘sorry, that’s the law’. And there will be nothing we can do.”
Hemming said several measures had been introduced to control the management of charities, beginning with the fit and proper persons test, which allows HMRC to refuse tax relief to a charity if it believes a manager or trustee is not fit to hold a senior position. The rule has recently been expanded to say that anyone who has participated in or helped create a tax avoidance scheme is not a fit and proper person to run a charity.
“We’ve pointed out that large accountancy and legal firms have participated in setting up tax schemes,” Hemming said. “This means any partner at those firms will have been associated with legal tax avoidance, and may therefore feel they can’t sign the fit and proper persons declaration.”
The HMRC consultation into its proposals closes on 11 April.
