Editorial: The tax authorities should think again on this draconian legislation

In his 2006 Budget, the Chancellor introduced measures giving HM Revenue & Customs powers to reclaim tax relief from charities on any financial benefits they grant to people - or to anyone connected with such people - who donate large sums of money to them.

In order, for example, to discourage the kind of arrangement whereby I give your charity £100,000 and the charity soon afterwards gives my daughter a job, the regulations say that her salary, in the circumstances, will not count as charitable expenditure and will not qualify for tax relief. In another example, if I give your charity £100,000 and you give me an interest-free loan, then the loan will not count as charitable expenditure and the loss of interest against the market rate will be deemed to be non-charitable expenditure. In principle, all well and good. Few doubt that tax avoidance through sweetheart deals of this kind does go on, and most charities accept there is a need for measures to prevent it.

What has become clear over the past two years, however, is that the fearsomely detailed and comprehensive section 54 of the Finance Act 2006 is a draconian piece of legislation that casts the net unreasonably wide. First, it means that charities have to identify all their substantial donors by looking at cumulative giving patterns over a period of as long as 18 years. Second, it also means charities have potentially to be able to recognise anyone who is, in the wide-ranging definition of the regulations, a person "connected with" the substantial donors - something even the substantial donors themselves might not be able to do. And third, it means charities have then to avoid any of the wide range of transactions listed in the legislation either with those substantial donors or any persons connected to them.

Charity lawyers and tax advisers have been looking carefully at the implications of the legislation and have established, as an extreme example, that if someone gives a charity a large sum of money and that person's son or daughter happens to marry, several years later, someone who happens to work for the same charity, then the salary of the new spouse will no longer qualify as charitable expenditure and tax relief obtained over the years will be liable to be clawed back. Examples like this make it look very much as if the desire to prevent any possible abuse has, somewhere along the way, parted company with common sense. No wonder lawyers and accountants call it a dangerous trap and an unfair burden on charities.

Fortunately, this year's Budget went some way towards redressing the situation by announcing a public consultation with a view to making the law more reasonable and proportionate. It would, of course, have made more sense to have the consultation before rather than after the offending legislation, but you can't have everything. The change of heart was to a great extent the result of the reasoned and persistent lobbying of organisations including the Charity Tax Group, the Institute of Chartered Accountants in England and Wales, Philanthropy UK and the church organisation Stewardship. Last week, they urged HMRC to think again about this question and devise a fresh approach. That sounds like a sensible proposal that other charities should support in their responses to the consultation.

 - Stephen Cook, editor

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