The Charity Commission has released guidance on the involvement of charities in tax avoidance, evasion and fraud. All charities should read it.
Although its clear focus is to ensure that charities do not get involved with any of these activities, it is also helpful in providing some context to charities on the legitimate use of the reliefs available to them. The document reinforces that charities should be making proper use of Gift Aid, that trading subsidiaries are a normal method of generating tax-free profit if the profit is donated under Gift Aid, and that it is perfectly legitimate to arrange a charity's affairs to reduce exposure to irrecoverable VAT.
These points will probably be of more help to the average charity than the warnings about fraud and tax evasion. Here, the main message is that if charities are presented with a scheme that purports to save tax, they need to ensure the advice they are receiving is genuinely independent and is being provided only for the benefit of the charity itself.
One perfectly proper method of reducing the tax bill comes into effect in April. A new national insurance contributions relief targeted at younger staff might provide charities with cost savings.
From 6 April, the existing employer NIC rate of 13.8 per cent will reduced to zero for those staff aged under 21 and with earnings between the secondary threshold of £156 a week and the upper secondary threshold. The UST is a new concept, and for 2015/16 it will be set at the same level as the upper earnings limit of £815 a week, although this link to the UEL could change in future.
Depending on staff age, demographics and the level of earnings, this might reduce payroll costs for employers. Employers need to consider which of the new categories employees will fall into and make the necessary adjustments on their payroll systems. They will also need to monitor the age of each member of staff so that, when they reach 21, employer NIC deductions return to normal. Employees will not see any reduction in the NICs they pay and entitlements to state benefits and state pension will remain unaffected.
More detail is available in the HM Revenue & Customs guidance Abolition of Employer National Insurance Contributions for under 21s: employer guide.
UK tax rates
Progress towards the eventual break-up of the UK continues, with the possible introduction of more varied tax rates and tax-raising powers in the three jurisdictions of England and Wales, Scotland and Northern Ireland. The Smith Commission, which is examining the devolution of further powers to the Scottish parliament, has recommended that control over income tax should remain shared by the parliaments, but Scotland itself should have the power to set rates and thresholds for Scottish taxpayers.
There are two issues to watch. First, charities will need to be alert to the implications of cross-border donations under Gift Aid if personal tax rates differ. This might affect both the amount the charity can recover and the impact on the individual, and will make it even more important for charities to be sure they can keep track of their donors.
Second, this opens up the intriguing question of where a charity and its trading subsidiaries might choose to be domiciled. Recently, subsidiaries have been alerted to the problems of paying out profits as Gift Aid when they have negative reserves. One option to solve this is to retain more profits in the subsidiary, which means both a bigger tax bill and that the prevailing tax rate is now a genuine business issue to consider. All of this, of course, assumes that the UK stays in the EU.
Don Bawtree is lead partner for charities at accountants BDO LLP