A planned new definition of charity for tax purposes, intended to prevent charities being set up to avoid tax, should be radically altered to take into account existing legislation, the Charity Tax Group’s annual conference heard on Monday.

Earlier this year HM Revenue & Customs proposed measures to make it harder for charities to be set up in order to avoid tax, and published a discussion paper proposing a new condition that charities must satisfy before they are entitled to claim tax relief.

Two alternative versions of this “establishment condition” were proposed. One would say a charity could not claim tax relief if its main purpose was to obtain a tax advantage. The other is broader and would apply the rule if one of the charity's purposes was a tax advantage. 

The Charity Tax Group (CTG), along with NCVO, the Charity Finance Group (CFG) and the Association of Charitable Foundations, have all said they oppose the plans.

Neil Cohen, a professional support lawyer at Trowers & Hamlin, told the conference at the Wellcome Trust in London, that he “would be very surprised” if a test of some form was not introduced because HMRC had taken too much criticism over its handling of the Cup Trust, a charity established in order to avoid up to £100m in tax.

“There is too much political will behind this for nothing to happen,” Cohen said. “HMRC have taken a lot of criticism, and they need to be seen to be doing something."

He said the current proposals would lead to “piecemeal, blunderbuss legislation which is aimed at the charity, not the tax avoider”, and that changes were needed.

“Our strategy is to see if we can help them develop a test that actually works,” he said.

HMRC’s initial proposals say that a charity should not be entitled to tax relief if established to obtain a tax advantage, but he said this definition was too wide, and gave HMRC too much power to retrospectively remove tax relief it had already given out.

He said the new rule should say a charity cannot be established only if it would be caught by one of three existing anti-avoidance rules: the Definition of Tax Avoidance Schemes legislation, the General Anti-Avoidance Rule, and the Halifax Principle.

“In all these cases there is a paper trail we can look at,” he said. “There is a lot of law we can rely on, rather than wishy-washy guidance which HMRC can change on a whim."