Government proposals to introduce a new definition of charity for tax purposes could give too much power to HM Revenue & Customs and deter genuine charities, the NCVO and the Charity Finance Group have said.
This week's Budget document said the government is consulting on “measures to help deter the use of charities established for the purpose of tax avoidance” and that new legislation could follow.
And last Friday HM Revenue & Customs published a discussion paper outlining two possible forms of legislation which could be used to prevent charities being set up in order to avoid tax.
The first version says that a charity will now be recognised by HMRC if it is set up to obtain “a tax advantage”. The second is a narrower “purpose test”.
However Andrew O’Brien, a senior policy officer at the NCVO, said that the first option was too vague, created too much uncertainty, and gave too much power to HMRC to decide what constituted tax avoidance.
“We’re concerned about the implications for individuals who set up charitable foundations,” he said. “They could be seen to obtain a tax advantage.”
He said the second option added little to existing rules.
“We completely support HMRC and the government in their drive to tackle this,” he said. “We don’t want to see charity used for tax avoidance. But we feel we need greater clarity.”
Jane Tully, deputy director of policy and engagement at the CFG, said: “The sector has been burned in the past by anti-avoidance legislation. We support the object that charitable structures aren’t used to avoid tax, but we also want to ensure the legislation doesn’t inhibit genuine charitable activity.”
The Charity Tax Group also expressed concerns earlier this week, saying the legislation could have “unintended negative consequences” for the wider sector.