The tax relief cap announced by the Chancellor in the Budget is another attempt by HMRC to stop people claiming tax relief on donations to suspect charities overseas, charity tax experts are claiming.
Sources have told civilsociety.co.uk that HMRC’s real motivation for the proposed cap is an attempt to circumvent the European Court of Justice decision in the case of Hein Persche v Finanzamt Ludenscheid. The Persche ruling in 2009 decreed that UK donors making gifts to charities in other European countries can claim tax relief under English law, a decision that horrified HMRC.
Bill Lewis (pictured), tax lawyer at Bates Wells and Braithwaite, confirmed that this was a highly probable theory.
“I don’t think we should underestimate HMRC’s aversion to tax reliefs being given to organisations outside of their control,” he said. “HMRC were aghast at the Persche decision and even more aghast when the Treasury made them implement the Persche ruling quicker than they would have liked.”
Lewis said HMRC has been looking for ways to scuttle the Persche judgment and has clearly decided that if it can’t stop overseas gifts being tax relievable in the UK, then it will cap the tax relief available instead.
He went on: “The tax relief cap is aimed at wider tax avoidance - not simply gifts to charity - and it is this wider avoidance that is the main target of the HMRC shotgun. HMRC has learned that every time they plug one avoidance rabbit hole two more pop up. The tax relief cap is a simple way of dealing with this. No matter how complicated you make your affairs only 25 per cent of your stores will escape the HMRC.”
HMRC is aware that donations to charity may suffer as a result of the cap, but believes that dealing with Persche is more important, Lewis said.
He added that he suspected HMRC has exaggerated the scale of the problem to the government, “just as they exaggerated the substantial donor issue to the previous government”. The Chancellor should test the assertions being made, he added.
Sector to meet with Treasury today
The claim comes just as sector leaders have been granted a meeting with the Treasury to discuss the tax relief cap. Charities Aid Foundation confirmed this morning that the meeting is scheduled for later today.
Stephen Lloyd, partner at Bates Wells and Braithwaite, added that the tax relief cap was an over-reaction by HMRC to the implications of Persche. He said that since Persche was handed down, HMRC had already put in place plenty of legal architecture aimed at limiting its effects, such as the tainted donation rules and the fit and proper persons test.
“The Revenue has already got plenty of teeth to deal with this," said Lloyd. "You only get higher-rate relief when you put in your tax claim, so if the Revenue doesn’t like the look of your donation to, say, the ‘widows of the Mafia’ charity in Palermo, they can simply say ‘we’re not going to give you this relief, we don’t like the look of it, it doesn’t pass any of the tests, sue us if you want to’.”
Lloyd said that all HMRC needs to do is ensure the onus remains on the taxpayer to prove entitlement to the reliefs being claimed. “They don’t need this cap, they already have all the tools in the box to protect the Exchequer without doing this.”
HMRC 'may compromise'
Lewis added, however, that he suspected HMRC would be willing to compromise if a way could be found for gifts to UK charities to remain unaffected. It is now up to the sector to press its case and propose alternatives.
HMRC did not respond specifically to the Persche allegation by deadline; however a spokesman said there was no evidence to suggest that charities would be badly affected by the tax relief cap. The bulk of charitable donations come from basic-rate taxpayers, not from the super-rich, he said.
The spokesman also pointed out that the cap was not aimed just at charitable tax reliefs, but at a whole range of reliefs.
CAF survey of major donors
CAF has also this morning published the results of a survey of 200 high-level philanthropists carried out since the Budget announcement. The research found that nearly half expected to reduce their donations by at least 40 per cent, and 83 per cent expected giving generally to be impacted.