Don Bawtree: Recent developments show the importance of managing tax well

A number of recent stories serve as a reminder to charities that they should manage their tax affairs seriously - and view them as both an opportunity and a risk, writes our finance expert

Don Bawtree
Don Bawtree

According to the latest statistics from HM Revenue & Customs, its take of inheritance tax has risen by 8.6 per cent. This is driven primarily by the continuing freeze on the tax threshold (£325,000) and rising property prices, which have contributed to the increase of 2.5 per cent in the number of estates that are now taxable. Residential properties make up nearly £34bn of estate valuations, but it is good to see that inheritance tax reliefs for charities rose to more than 12 per cent of total reliefs claimed. These sorts of figures will encourage a drive to raise the threshold to £1m but, in the meantime, charities should keep in mind the value to themselves and their supporters of the inheritance tax reliefs available.

In another sign of growth, the Office of Budget Responsibility has said that one in 10 people will pay the higher rate of income tax in the next two decades; it is estimated that the number of people who currently pay the 40p higher tax rate will double from 4.6 million today to 9.2 million by 2033. This will include many people who are not traditionally regarded as high earners, such as some teachers and nurses. Charities that promote Gift Aid often say that it is tax-neutral; however, it is worth pointing out that as things stand Gift Aid is actually tax-beneficial for 10 per cent of the population.

The finance bill received royal assent on 21 July; notably absent from it was the controversial plan to allow HMRC to deduct money directly from taxpayers' bank accounts where necessary. Currently, the taxpayer can dispute a tax liability and can be forced to settle only once the liability is agreed – a process that can take months or even years. The proposed changes would have allowed HMRC to access funds as a "payment on account" much faster. The proposals are still being considered, so charities should not be complacent. They benefit from a number of tax advantages, including Gift Aid, but getting things wrong can trigger liabilities. In the case of unincorporated trusts, these liabilities can accrue quickly to individual trustees if the charity does not have funds available to pay.

In July, HMRC also updated its website for two other matters related directly to charities. The first was an update to its guidance for payroll-giving agencies, which was triggered by the Finance Act 2014. The guidance explains the time limit for paying donations to charities (now 35 days) and the report that must be sent to HMRC when any donations cannot be paid to a charity. Second, it amended its guidance for charities that operate a simplified process for claiming Gift Aid on donations from the sale of donated goods.

The amendment explains how repayment claims will be affected when HMRC identifies donations given by non-taxpayers.

Relaxed conditions

With new Statements of Recommended Practice just released, larger charities might be concerned to see that the Financial Reporting Council has amended FRS 102, the underlying standard on which the Sorp is based.

Fortunately, the amendments relate to financial instruments, where they change hedge accounting requirements. These are rarely relevant to charities, but the new rules make the use of hedge accounting more readily available to entities where it is consistent with their risk-management processes.

Other amendments that might be helpful relax the conditions for treating financial instruments as "basic" – meaning that in future more financial instruments will be measured by reference to cost, rather than fair value.

Don Bawtree is lead partner for charities at accountants BDO LLP

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