The Treasury will not exempt charities from complying with anti-tax avoidance measures being added to the Finance Bill because doing so could encourage more “sham charities”, Exchequer Secretary David Gauke said this week.
Charity Tax Group has raised concerns about amendments to Section 13 of the Taxation of Chargeable Gains Act 1992, which aim to ensure that a UK-resident person cannot arrange the artificial placement of assets overseas in order to avoid UK tax on profits.
CTG is concerned that the changes will adversely affect charities with large investment portfolios, such as the Wellcome Trust, Church Commissioners and Esmée Fairbairn Foundation.
It has highlighted a number of problems with Section 13. First, it allows a UK charity to invest in a UK company but has the unintentional effect of prohibiting investment in overseas companies.
Second, charities are already exempt from paying tax on gains, so to be covered by Section 13 is perverse, because there is no tax to avoid.
The third problem relates to the new 25 per cent limit that any investor “or connected person” can have in an overseas company before gains are caught by the new provisions.
CTG has argued that because many charities invest in investment funds, they do not know who their co-investors are, let alone where they are registered for tax purposes, and so cannot be aware of their collective holding or know whether they exceed the 25 per cent limit.
But most perverse of all, according to CTG chair John Hemming, is the fact that charities are already compelled to optain approval from HMRC that such investments as those covered by Section 13, are not for the avoidance of tax. "These investments are already monitored by the Revenue," Hemming said.
He added that charities only wanted equal treatment to that enjoyed by pensions funds, which are exempted from compliance with the legislation.
CTG has been in discussion with HMRC about these concerns, and during a Finance Bill committee debate on Tuesday Labour MP Catherine McKinnell asked David Gauke if he could give some assurance that they are being reviewed.
Gauke: exemption could encourage sham charities
But Gauke was unequivocal in his response. On the suggestion of a “specific exemption for charities”, he said: “We do not believe that would be appropriate.
“The vast majority of charities are genuine but, regrettably, the generosity of reliefs and exemptions afforded to charities can make them targets for those who wish to avoid UK tax.
“It is important that we protect the positive connotations of the word ‘charity’ in the public mind. An exemption for charities could encourage determined tax avoiders to set up sham charities to avoid UK tax.
“In practice, it will not be difficult for charities to comply with Section 13.”