Guidance over tax scams 'puts an unfair burden on charities'

Draft guidance from HM Revenue & Customs about the dangers of charities being used in tax avoidance schemes is being challenged by some charity finance directors and sector organisations.

The guidance suggests that, because charities receive tax benefits such as Gift Aid, they should conform not only to the letter but also to the spirit of the law. It says they should reject donations that are "complex or strange" or come from an unexpected source.

But some sector finance specialists say this requires charities to investigate the motives of perfectly plausible donors and conform to standards not required of other organisations. One commented: "Complicated tax avoidance might not be desirable but, while it remains permitted in law, why should people not take advantage of it?"

Another said: "If this goes through, the only safe option is for charities to give up fundraising altogether." A third called the document "one-way traffic in HMRC's favour".

The guidance has been prompted by instances of charities being used unwittingly in tax scams. For example, some donors have gained tax advantages by giving charities shares in companies that collapse soon afterwards, rendering the shares worthless.

A spokesman for HMRC said: "This is part of our practice of working with our customers through the exchange of thoughts and ideas. This draft guidance is simply intended to help trustees to appreciate the potential risks. Nothing has been finalised yet."

The document warns charities that a short-term gain might lead to the costs of an HMRC investigation, damage to reputation, the alienation of supporters, personal costs to trustees, damage to charities generally, the burden of new regulation and the possible removal of existing tax reliefs.

The Institute of Fundraising and the Charity Commission say the sector could benefit from guidance to help prevent charities being used for tax avoidance. But the commission has recommended major changes, including the removal of sections it sees as derogatory to tax advisers.

The commission suggests dropping a section called Discarding Security Blankets, which says of arrangements proposed to charities by qualified professionals: "Letters after a name do not necessarily mean someone has your best interests at heart."

Graham Leigh, director of development at the Directory of Social Change, said such guidance from HMRC could be interpreted as "an exercise in making spies of charities, getting them to do its dirty work.

"If it is widely distributed and leads with legal warnings about accepting money from fraudsters, it could discourage innocent charities from using tax-effective fundraising methods."

Helen Donoghue, director of the Charities' Tax Reform Group, said the group endorsed any guidance that helped charities protect themselves against being exploited for tax avoidance by unscrupulous donors.

But she added: "We are keen that the final guidance is as clear as possible and does not imply that charities should not engage in legitimate tax planning, which they are required to do under charity law."

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