The government has abandoned plans to introduce legislation that would make it tougher to set up a charity for tax-avoidance purposes because it would have had a "disproportionate and unacceptable effect" on legitimate charities.
George Osborne, the Chancellor of the Exchequer, announced in the Autumn Statement last year that the government would introduce legislation to combat tax avoidance through charities.
A subsequent consultation put forward two alternative legislative approaches.
The first would have prevented a new charity from being recognised by HM Revenue & Customs if one of its main purposes was to "secure a tax advantage". The second would have resulted in organisations being blocked if their single main purpose was to avoid paying tax.
Charity umbrella bodies, including the National Council for Voluntary Organisations and the Charity Tax Group, warned that legitimate charitable ventures, in particular new charitable foundations, could be wrongly caught up by the proposals.
A statement from HMRC, published yesterday, said the government had dropped the plans and would not be legislating on the matter in the Finance Bill 2014.
HMRC said that feedback confirmed the two approaches set out would have a "disproportionate and unacceptable effect upon the charity sector and legitimate donors. Possible damage to innocent charities and our existing and new controls mean that changing the law is not justified at this point.
"HMRC already has a wide range of tools available to tackle avoidance and has recently had considerable success in the courts in challenging certain schemes. Recent changes in powers such as the general anti-abuse rule and the fit and proper person test for charities, coupled with our new accelerated payments regime, will provide additional deterrence."
It said that HMRC would continue to monitor the situation and the government would act "if it becomes clear that more controls are needed".
A letter from Nicky Morgan, the Financial Secretary to the Treasury, to voluntary sector organisations involved in the consultation, said that she was "not prepared to jeopardise the status of legitimate charities carrying out charitable activities".
"Overall the potential for disruption to legitimate charities carrying out important good works is too great from both of the options," she said.
Responding to the decision, Charlotte Ravenscroft, head of policy and research at the NCVO, said: "In our consultation response we made clear that while we support the government’s objectives to reduce tax avoidance, this change would not reduce avoidance but could discourage the creation of new charitable foundations, at a time when we should encourage philanthropy.
"The financial secretary has made the right decision and we will continue to work with the government to ensure that charitable tax reliefs are not abused."
Caron Bradshaw, chief executive of the Charity Finance Group, said that in the light of the Cup Trust tax-avoidance affair it was good that the government had not "tarred all charities with the same brush" and made a disproportionate response.
"We all want to see a strong sector that is resilient against attempts of abuse and we are glad that government has seen sense in not impeding the sector’s ability to deliver social change," she said.
John Hemming, chair of the Charity Tax Group, said: "Our members made it very clear to HMRC officials that we did not support the need for a new legislative solution with members explaining how existing legislation provides effective safeguards against abusive activity. Ministers have accepted this argument."