The government will introduce legislation to amend the definition of a charity to ensure that charities set up for tax-avoidance purposes cannot claim any relief, according to today’s Autumn Statement.
"The government will introduce legislation to amend the definition of a charity for tax purposes to put beyond doubt that entities established for the purpose of tax avoidance are not entitled to claim charitable tax reliefs," the document says.
It also says that the government will introduce "objective criteria" for identifying high-risk promoters of tax-avoidance schemes and will impose a stricter regime to govern them. Clients of high-risk promoters will also be required to identify themselves to HM Revenue & Customs.
The new definition for tax purposes has been introduced after the outcry over the Cup Trust, a charity that raised £176m in two years, claimed £46m in tax relief, but spent only £55,000 in that time on charitable activities.
John Hemming, chair of the Charity Tax Group, said that the sector must support any measures to make it more difficult to set up a charity for tax-avoidance purposes. But he said it should also ensure that it did not make it more difficult to operate a legitimate charity.
"We’ve been assured by HMRC that legitimate charities won’t be affected," he said. "This review must ensure it targets charities that have been set up by their ‘owners’ to secure a tax advantage.
"It will be a difficult process to create that definition, because it will have to be able to block something that wasn’t previously on HMRC’s radar. Often the charities won’t have done anything yet, so they need the flexibility to look on a case-by-case basis.
"We must accept that it’s very important to ensure that charity is not used as a vehicle for tax avoidance."
The document also confirms that a joint registration process will be set up to allow charities to register with the Charity Commission and HMRC at the same time.
HMRC confirmed in September that it was working on the process.
Margaret Hodge, chair of the Public Accounts Committee, described the existing system as "hopeless" at a PAC meeting in March.
Joint registration is intended to make it easier and cheaper for charities and the two organisations, but also to allow HMRC to check that charity administrators are "fit and proper persons" before a charity is registered.
Charlotte Ravenscroft, head of policy at the National Council for Voluntary Organisations, said the sector had been calling for a joint registration process for several years.
"It’s been long in the coming and it’s very welcome," she said.