HMRC might target charities after tax relief cap U-turn, warns tax specialist

Bill Lewis of Bates Wells & Braithwaite says Revenue & Customs is likely to take steps to prevent tax avoidance involving charities

Bill Lewis
Bill Lewis

Charities might face a backlash from HM Revenue & Customs after Chancellor George Osborne’s U-turn on the tax cap for major donors, a charity law firm will warn its clients.

Bill Lewis, a tax specialist at solicitors Bates Wells & Braithwaite, said the cap – which would have limited the amount of tax a donor could reclaim to £50,000 or a quarter of their income, whichever was higher – was introduced partly because HMRC was worried about the possibility of large-scale fraud using charitable reliefs.

"Now it has been scrapped, HMRC will worry about tax avoidance and take steps to prevent it," he said. "The trouble is, HMRC tends to descend with a clunking fist. It tends to assume you’re guilty until you prove you’re innocent."

Lewis said he planned to warn clients in his firm’s next newsletter and on its website about how the HMRC might respond.

He said he expected small charities that rely on a handful of donors to face particularly close scrutiny, as will foundations where the major funders make up the majority of the board. "HMRC has a tendency to sulk when it loses, so I’d advise people to make sure their house is in order," said Lewis.

He added that he knew charitable tax reliefs had been used in complex scams to avoid paying tax, but he believed this could be prevented under existing rules.

"I’m aware of one complex set of transactions that involved the Cayman Islands, which was intended to allow donors to get tax relief for doing nothing, and nothing ended up with the charity," Lewis said.

But he said that HMRC should prosecute the rogues rather than introduce new rules for everybody. "What it needs is for current law to be properly applied by trained individuals," he said.

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