Beware the line between tax planning and tax avoidance, Charity Commission warns

A paper explaining the regulator's policy on tax reliefs was published on its website last week, although one tax adviser feels the guidance is over-cautious

The Charity Commission has warned trustees to take care not to cross the line between tax planning and tax avoidance. The warning comes in a new paper explaining the commission’s policy on charity tax reliefs.

The potential for abuse of charities for tax-avoidance purposes has been much discussed in recent years, especially in relation to the Cup Trust scandal, which led to legislative plans to crack down on such abuse. These  were dropped after the government said they would have had a "disproportionate and unacceptable effect" on legitimate charities.

The new document, which appeared on the commission’s website last week, says that trustees have a duty to "engage in reasonable and prudent tax planning". It says trustees should take advantage of available tax reliefs in line with the spirit in which they were created, while being wary of arrangements that afforded significant private benefit to third parties.

However, it warns against "tax arrangements which exploit tax legislation artificially, particularly where they serve to benefit private interests, as well as those of the charity". It says such arrangements risk investigation by the commission or HM Revenue & Customs, and that this could damage the charity and the reputation of the sector, which in turn could mean the "potential loss of other tax reliefs to the sector as a result of, or as a necessary by-product of, action to stop or close such schemes".

The document says: "Charities need to consider carefully the point at which reasonable and prudent tax planning becomes tax avoidance. In particular, when trustees are considering proposals for tax arrangements that are supported by favourable legal opinion from a tax specialist, they should in such circumstances always take professional advice from a reputable adviser unconnected with the proposed arrangements."

Graham Elliott, a consultant at the law firm Withers, which specialises in VAT, said he believed this was a reference to charities being approached by people who were trying to profit from selling a chance to join a tax-evasion scheme.

"If someone approaches you with a proposed scheme that wasn’t part of your thinking – a pre-packaged solution they're probably also trying to sell to others, which commonly comes with a supportive barrister's opinion – it tends to suggest a contrived arrangement, and the Charity Commission's view that you should get a second opinion seems sensible," he said.

Elliott said this did not mean that you should get a second opinion after you seek the guidance of a tax adviser.

According to Elliott, the guidance is over-cautious in its discussion of what is acceptable tax planning and what is unacceptable. He said: "Some of the examples they give of acceptable planning are not really planning at all, they're just good administration – and, by contrast, their examples of unacceptable practice are clearly unacceptable.

"This omits the critical middle ground, which is where the line in question is more likely to be found and in danger of being crossed."

The guidance says that engaging in "serial and contrived financial transactions involving charities and companies which seek to disguise what may have been a taxable transaction" would be considered a breach of trustee duties, and meanwhile makes clear that it is acceptable to encourage eligible donors to claim Gift Aid on donations.

Jane Hobson, head of policy at the commission, said: "The guidance clearly states that tax matters are for HMRC and that tax evasion, tax fraud and other abuses of the tax system are also dealt with by HMRC.

"However, where trustees use fiscal reliefs in a way that is in breach of their duty to act prudently and in the best interests of their charity, the commission will have very serious regulatory concerns."

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