Plans to create a new definition of charity in order to prevent tax avoidance should be abandoned altogether by HM Revenue & Customs, according to a document published yesterday by the NCVO, the Charity Finance Group and the Association of Charitable Foundations.

An HMRC discussion paper was published last month proposing two alternative pieces of legislation, both of which would prevent a charity being set up if its primary purpose was tax avoidance.

In their joint response to this discussion paper, the three bodies said these plans should be scrapped.

“We strongly recommend that HMRC abandons attempts to amend existing legislation to prevent the formation of charities for tax avoidance purposes and instead focuses efforts on collaboration with the Charity Commission and the voluntary sector to enforce existing legislation,” the document said.

The proposals to introduce a new definition of charity for tax purposes were introduced following criticism of HMRC and the Charity Commission by the National Audit Office and the Public Accounts Committee, over the two regulators’ handling of the Cup Trust, a tax avoidance scheme registered as a charity.

The Cup Trust received £176m in donations over two years, and users of the scheme claimed between £46m and £100m in tax relief over that period. But it gave only £55,000 to charity.

However existing legislation to prevent tax avoidance was successfully employed, and HMRC did not pay out any tax relief to users of the scheme.

The umbrella body response said that existing rules were sufficient to tackle tax avoidance using charities. They said that the government should allocate more resources to allow HMRC and the Commission to collaborate with one another and enforce existing legislation, rather than introducing new laws.

“We fully support the government’s objective to reduce tax avoidance and prevent charities from being exploited for such purposes,” the response said. “The credibility of our sector depends on money given to it being used for public benefit.

“However, after receiving legal advice, we do not believe that the specific legislative changes proposed are necessary in order to achieve the Government’s aim.

“Under existing legislation a charity has to exist for charitable purposes only. The authority to prevent the formation of charities in order to avoid tax avoidance or solely to gain tax advantages already exists.”

The response said the proposals were too general, and would give HMRC the power to refuse to register any charitable foundation.

“The issue is not the strength of the existing legal framework but the resources available to enforce this framework,” the response said. “Greater collaboration between the Charity Commission and HMRC would be a more effective way of tackling tax avoidance.”