The government has scrapped plans for a new definition of charity for tax purposes over fears it could hamper legitimate charities, a Treasury minister announced yesterday.
Earlier this year HM Revenue & Customs proposed measures to make it harder for charities to be set up to avoid tax, which would mean a charity could not obtain tax reliefs if it had been set up to obtain “a tax advantage”.
But in a letter sent yesterday, Nicky Morgan (pictured), financial secretary to the Treasury and the minister with primary responsibility for charity tax issues, said she did not intend to go ahead with the proposals.
HMRC originally published a discussion paper proposing a new condition that charities must satisfy before they are entitled to claim tax relief. Two versions of the condition were proposed, one of which applied to charities where a tax advantage was one purpose, the other where it was the principal purpose.
The proposals were opposed by the Charity Tax Group, the Charity Finance Group and NCVO. The umbrella bodies said the proposed rules would be difficult to enforce, and would harm charities, not tax avoiders. They also said it might discourage philanthropists from setting up new charitable foundations.
Morgan said she had been told that the first version of the proposed rule would harm innocent charities, while the second would add little to existing law.
“I have made it clear throughout that we are not prepared to jeopardise the status of legitimate charities carrying out charitable activities,” she wrote. “Considering the points raised, as well as further internal analysis of the impacts, HMRC has recommended not pursuing either of the options as they stand and I have agreed to this recommendation.”
Sector backs decision
John Hemming, chair of the Charity Group, said he was “delighted” at the government decision.
“Our members made it very clear to HMRC officials, at a special expert group co-ordinated by CTG, that we did not support the need for a new legislative solution,” he said. “Members explained how existing legislation provides effective safeguards against abusive activity. Ministers have accepted this argument. ”
Hemming said charities strongly supported the battle against abuse of charities’ tax status, but that the proposals were not the right way to tackle the problem.
Caron Bradshaw, chief executive of the CFG, said: “Charities often suffer as a result of disproportionate responses to the threat of abuse. In the light of the Cup Trust, it is good to see that government has not tarred all charities with the same brush. We all want to see a strong sector that is resilient against attempts of abuse and we are glad that government has seen sense in not impeding the sector’s ability to deliver social change.”
Charlotte Ravenscroft, head of policy and research, NCVO, said: “In our consultation response we made clear that while we support the Government’s objectives to reduce tax avoidance, this change would not reduce avoidance but could discourage the creation of new charitable foundations.
“We will continue to work with the government to ensure that charitable tax reliefs are not abused.”
