HM Revenue & Customs has published a discussion paper asking for views on two possible approaches to reducing the use of charities as tax-avoidance schemes.
The paper, called Approaches to Preventing Charities Being Set up to Avoid Tax, says that the government’s approach to deterring charities from being set up for tax-avoidance purposes changed after the Autumn Statement last year, after consultation with the sector.
The paper says that HMRC’s approach has moved on from considering whether the main purpose of the organisation is to facilitate tax-avoidance arrangements to one that seeks to establish whether the organisation has been set up with "a motive of securing a tax advantage".
It has published two possible versions of draft legislation for consideration.
Version A is geared towards preventing a charity being recognised by HMRC if "one of the main purposes or results of its establishment is to secure a tax advantage", the paper says.
HMRC says sector representatives had expressed concern that this approach could adversely affect private and corporate charitable foundations, because it would be arguable that one of the main purposes of establishing such foundations would be to obtain a tax advantage.
Version B would narrow this "purpose test" from one of a number of purposes to a single main purpose.
This would reduce the likelihood that legitimate charities would be affected but could make it easier for determined tax avoiders, the paper says.
Commenting on the consultation, Alana Petraske, special counsel at the law firm Withers, warned that HMRC’s proposals could affect genuine charities.
"The proposals rely on establishing a motive of 'securing a tax advantage', which could, on the face of it, apply to those setting up a bona fide family foundation to structure charitable giving," she said.
"No assurance is made that the promised HMRC guidance will definitively exclude such legitimate structures and, in any event, this guidance will be open to unilateral change by HMRC."
She questioned whether the proposed approach would deter people from abusing charitable tax reliefs.
"Determined avoiders will find their way around this," she said. "For the rest, these proposals are a classic example of using a hammer to crack a nut."
The consultation is open until 11 April.