Mixed-motive investments without HMRC approval could be taxable, says charity lawyer

Julian Smith of Farrer & Co tells Charity Finance Group conference that tax breaks for social enterprise would be a 'retrograde step'

Julian Smith
Julian Smith

Charities that make 'mixed-motive' investments could face a tax charge if HM Revenue & Customs does not approve the investment, the Charity Finance Group tax conference heard yesterday.

Julian Smith, a partner at the law firm Farrer & Co, told the conference that the concept of mixed-motive investment had been approved by the Charity Commission when it rewrote its investment guidance, CC14: Charities and Investment Matters, last year.

The commission defines a mixed-motive investment as one that has elements of both financial and social investment, but cannot be wholly justified as either one or the other.

If HMRC decided an investment was non-charitable expenditure then it would be taxable, Smith said.

"What's missing is any statement from HMRC about how it is going to approach this," he told delegates at the conference in London. He said tax relief for any investment was limited to a handful of categories, including an investment "made for the benefit of the charity and not for the avoidance of tax", and that to attract tax relief an investment must fall into this definition.

He said HMRC would never give advance clearance confirming whether it considered any new scheme fell into this category.

"It has said it will produce guidance, but we're still waiting," said Smith.

He said the fact that mixed-motive investments would mostly be in small, non-listed organisations that did not themselves have charitable status, would make it hard to police whether they were legitimate. "This is an area that is redolent with the possibility of abuse," he said.

Smith told the conference he was concerned by moves to introduce tax breaks for social enterprise. "That could blur the boundaries between social enterprise and charity," he said. "I think that would be a retrograde step."

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