This page contains information that has appeared on Sandy Adirondack's legal update website for voluntary organisations at www.sandy-a.co.uk/legal.htm. For current updates, including potential changes that are in the pipeline, see the legal update website.

These websites for each chapter update the 3rd edition of The Russell-Cooke Voluntary Sector Legal Handbook by James Sinclair Taylor and the Charity Team at Russell-Cooke Solicitors, edited by Sandy Adirondack (Directory of Social Change, 2009). The websites are not intended as a comprehensive update and should not be treated as such.

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Chapter 50
TAX-EFFECTIVE GIVING

HMRC 'FIT AND PROPER PERSONS' TEST

Updated 17/3/12. This information updates chapters 56 & 50 and ss.57.5, 58.7.2 & 61.10.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Since 1 April 2010, any charity or community amateur sports club (CASC) recovering tax on gift aid donations has had to satisfy HM Revenue & Customs that it meets the management condition set out in schedule 6 of the Finance Act 2010. From 1 April 2012 (or 6 April 2012 for charitable trusts) the same rule applies to charities and CASCs claiming any charity tax relief or tax exemption administered by HMRC. These include income tax and capital gains tax (for trusts), corporation tax (for companies and other incorporated organisations, and unincorporated associations), inheritance tax, stamp duty, stamp duty land tax and stamp duty reserve tax, as well as VAT charity reliefs and exemptions.

The stated intention of the Finance Act schedule 6 was to reduce the risk of people setting up sham charities to claim tax reliefs, and the risk of charitable/CASC funds and tax reliefs being used for non-charitable/CASC purposes. But the main reason for the legislation was because the European Court of Justice ruled that a donor in one EU state should be eligible for tax reliefs on donations in another EU state, so the EU now needs to ensure that all charities eligible for tax relief anywhere in the EU are legitimate.

As well as meeting the management condition, charities must also meet a registration condition, which means they must comply with any requirement to be registered with the Charity Commission, the Office of the Scottish Charity Regulator, or any comparable registration body in an EU member state, Iceland or Norway.

The management condition requires managers — governing body members, senior managers and others who are involved in claiming tax reliefs or who are able to exert control over how the charity's or CASC's funds are used — to be "fit and proper persons". "Fit and proper" is not defined in the legislation, but HMRC says a person is fit and proper if he or she ensures that funds and tax reliefs are used only for charitable or CASC purposes.

The governing body must be able to show, if required by HM Revenue & Customs to do so, that they "have given proper consideration to the suitability of people they appoint to positions of trust or influence in the organisation, where they are able to exert control over the organisation's finance and tax affairs". There is no defined procedure for this, but HMRC recommends that new "managers" (governing body members, senior managers and others meeting the definition above) are asked to read HMRC's basic guide on the fit and proper person test, and sign the declaration attached to the guide which the organisation should keep. The declaration should not be sent to HMRC unless requested.

If the "manager" has signed and there is no information of concern on the declaration, the organisation can assume the person meets the management condition unless HMRC contacts them. If the person refuses to sign the declaration and refuses to comply with any other attempts by the organisation to verify their suitability as a fit and proper person, the organisation should decide whether that person should be appointed as a "manager" and what financial responsibilities they should be given. If the person signs the declaration but adds information of concern in the 'additional information' box, the organisation will need to consider that information and decide whether to seek advice from HMRC on what to do.

HMRC does not need to be notified of all "managers". When a charity first registers with HMRC on form ChA1 or a CASC registers on form CASC(A1), the authorised official (the person within the charity or CASC notified to HMRC as authorised to deal with tax affairs, make gift aid or other repayment claims and, where necessary, sign and submit tax returns) and between two and four responsible persons, who will generally be members of the governing body, must be named. The authorised official and responsible persons must sign the form to confirm they have read the HMRC fit and proper persons guidance. Authorised officials or responsible persons appointed subsequently must also confirm on form ChV1 that they have read the guidance. The checks carried out by HMRC will depend on the level of control the person has over how charity funds are used, and whether the person has a history of, for example, tax-related fraud.

A nominee is a person or organisation outside the charity or CASC, who is authorised to submit gift aid or other repayment claims. Nominees are not "managers", but HMRC needs to be notified if a nominee is appointed or changed.

When senior managers are employed it may be sensible to make it a condition of employment that the employee must be and remain a fit and proper person, and to reserve the right to terminate the contract if HMRC makes a declaration that they are not.

Unless a charity is registering with HMRC to claim repayment of tax under gift aid or other tax repayment on form R68, there is generally no need to complete form ChA1 to claim other tax reliefs or exemptions.

Where charities are eligible for VAT zero rating (for example on fundraising materials, and some building works), suppliers may ask for confirmation that HMRC accepts the organisation as a charity. HMRC has advised that charities can use HMRC's letter confirming charitable status, with code CTY001 at the bottom, for this purpose.

HMRC's guidance on the definition of charity for the purposes of tax reliefs and tax exemptions, the fit and proper persons test and registering with HMRC for gift aid or other tax reliefs is at www.hmrc.gov.uk/charities/tax/recognition.htm. A short summary of the changes, issued on 14 March 2012, is at www.hmrc.gov.uk/news/charity-definition.htm.

The Finance Act 2010 schedule 6 is at www.legislation.gov.uk/ukpga/2010/13/schedule/6.
The orders extending the definition of charity to all relevant tax reliefs are at www.legislation.gov.uk/uksi/2012/735/made and www.legislation.gov.uk/uksi/2012/736/made.

CHARITY DONATIONS EXCLUDED FROM PROPOSED CAP ON INDIVIDUAL TAX RELIEF

Updated 11/2/13. This information updates s.50.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Following an active campaign by charities and philanthropists, chancellor George Osborne announced in an interview on 31 May 2012 that tax relief on donations to charity would not be included in the new cap on income tax reliefs. Civil Society eNews reported on 1 June 2012 that community investment tax relief (CITR) would also be excluded from the cap.

The government had announced in its budget on 21 March 2012 that from 6 April 2013 it would introduce a cap to ensure that individuals on higher incomes could not use tax reliefs excessively. For anyone seeking to claim more than £50,000 relief, a cap would be set at 25% of income. Gift aid donations, payroll giving and gifts of land and shares to charities, as well as community investment tax relief, would have been included in the cap, but the government did a u-turn on this.

Interestingly, the Treasury said it would not issue a press release on the sudden decision to exclude charitable donations and CITR.

The government consulted from 13 July to 5 October 2012 on how the tax cap would operate in relation to the other tax reliefs still included in the cap. A summary of responses to the consultation was issued on 11 December 2012. The consultation documents are on HM Treasury website via dtinyurl.com/84htj2z.

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Go to archived items about tax-effective giving (VSLH3 chapter 50)

PROPOSED CAP ON INDIVIDUAL TAX RELIEF

Updated 25/5/12. This information updates s.50.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
The government announced in its budget on 21 March 2012 (para 2.40) that from 6 April 2013 it will introduce a new cap on income tax reliefs, to ensure that those on higher incomes cannot use tax reliefs excessively. For anyone seeking to claim more than £50,000 relief, a cap will be set at 25% of income. Payroll giving, gifts of land and shares, and higher rate tax relief on gift aid donations will all be included in the cap, as well as community investment tax relief.

The government said it would explore with philanthropists ways to ensure this new limit on tax relief will not significantly affect charities that depend on large donations.

Response from the charity sector was immediate. Two days after the announcement, the National Council for Voluntary Organisations, Charities Aid Foundation, Charity Tax Group, Charity Finance Group (formerly Charity Finance Directors’ Group), ACEVO and a number of other sector bodies launched the Give it back, George: Drop the charity tax campaign, calling for tax relief on charitable donations to be exempted from the cap. Information about the campaign and an opportunity to sign up (it takes only a few seconds) is at giveitbackgeorge.org/back-the-campaign.

The campaign believes the cap would counteract the government’s previous initiatives to encourage philanthropy, by having a serious impact on major donors who give large donations to many charities and who are behind many of the grant-giving trusts and foundations that support both large and small organisations. There is also concern that charitable giving is being equated with avoiding tax, simply because the availability of tax relief may be a factor in such giving.

Since then there have been meetings, pronouncements and media attention, so there is a real possibility of influencing how the cap will operate — but it appears unlikely that the government will backtrack on the cap itself. One possibility is that tax relief on donations to charities and community amateur sports clubs (CASCs) will be excluded from the cap, but if the government will not agree to this there is no clear consensus within the charity sector about what the next best option would be.

When an individual makes a donation to a charity or CASC under the gift aid scheme, the organisation can claim from HMRC an amount equivalent to the basic rate tax the donor would have paid on the amount (currently 25p for each pound donated). The charity's or CASC's claims will not be affected by the cap. But individuals who pay tax at the higher rate can claim tax relief on the tax they would have paid at that rate. This relief would be included in the proposed cap — and so also will the amount of tax the organisation can claim under gift aid.

So if, for example, a donor gives £100,000 to charities or CASCs, the charities can still claim £25,000 gift aid (20% basic rate tax). This £25,000 to which the charities are entitled, plus any higher rate tax relief to which the donor would be entitled, count towards the cap on the donor's tax relief.

To make things even worse for donors, if charities or CASCs claim more in gift aid than the total relief to which the donor is entitled, the donor will have to pay that additional amount to HMRC.

As well as affecting wealthy donors to charities and CASCs, the cap on tax reliefs could also affect investors in social enterprises who are eligible for tax relief on their investments and the relief is not already capped.

The Treasury and HMRC issued a guidance note in March, described by the National Council for Voluntary Organisations' head of research as possibly "the most unhelpful clarification document ever written", on how the cap will operate. The guidance note is on the Treasury website via tinyurl.com/cbwokg7. Much more helpfully Bates Wells & Braithwaite Solicitors issued a briefing on 8 May 2012 on how the tax cap, as currently envisaged, would operate. This briefing can be accessed at tinyurl.com/brahp3p.

The government will issue a consultation document in summer 2012.

CHARITY DONATIONS TO AND FROM EEA STATES

Added 21/11/10. This information updates s.50.1.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
In January 2009 the European court of justice ruled that a donor in one EU member state should be eligible for tax relief on donations to a charity in another EU state, provided that the donor can show that the recipient meets the requirements for charitable status in the donor's home country.

This decision, in Persche v Finanzamt Lüdenscheid [2009] EUECJ C-318/07, led directly to the requirement that charities in the UK, as well as charities in other EU member states, Iceland and Norway which claim UK tax reliefs or on which UK donors claim tax relief, must meet the requirements in the Finance Act 2010 schedule 6. These are that the organisation must be established for charitable purposes as defined in the Charities Act 2006, must be subject to the jurisdiction of a UK court or a court in the EEA, must comply with any obligation in their country to be registered with a charity regulator, and must be run by fit and proper persons.

The Finance Act 2010 schedule 6 is at www.legislation.gov.uk/ukpga/2010/13/schedule/6.
Guidance for UK donors who want to claim tax reliefs on donations to charities in other EEA states, or UK charities which want to claim tax relief on donations from EEA states, is available from HMRC on 0845 302 0203 or charities@hmrc.gov.uk.

GIFT AID

Donor benefit
Updated 1/4/12. This information updates s.50.2.1 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
An individual or corporate gift aid donor cannot receive goods, membership services, or other services or benefits (including, for example, discounts on goods or services) in return for their gift aid donation unless these comply with the donor benefit rules. The maximum value of the benefits that a donor, or a person connected with the donor, can receive in return for his, her or its donations is:

• if the total donations are £100 or less, benefits worth up to 25% of the total gift aid donations (net of tax) in the tax year;
• if total donations are from £101 to £1,000, benefits worth up to £25;
• if total donations are more than £1,000, benefits worth up to 5% of the total donations, to a maximum of £2,500 (for donations on or after 6 April 2011). For earlier donations, the maximum donor benefit was £500.

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