New anti-tax-avoidance legislation 'unnecessary', charity bodies say

The NCVO (pictured), the Charity Finance Group and the Association of Charitable Foundations say HMRC should focus on enforcing existing law

National Council for Voluntary Organisations
National Council for Voluntary Organisations

Three charity umbrella bodies, including the National Council for Voluntary Organisations and the Charity Finance Group, have called on the government to drop plans to introduce new regulations aimed at reducing the risk of charities being used for tax avoidance, because they are "unnecessary" and could cause confusion.

HM Revenue & Customs last month published a discussion paper in which it detailed two approaches to reducing the use of charities as tax avoidance schemes.

Version A was aimed at preventing a charity from being recognised by HMRC if "one of the main purposes or result of its establishment is to secure a tax advantage," according to the paper. Under Version B organisations would be blocked if their single main purpose was to avoid paying tax.

In a joint response to HMRC from the NCVO, CFG and the Association of Charitable Foundations, the organisations said that the government should abandon the new approach and focus instead on enforcing existing preventative legislation.

The organisations said that after receiving legal advice they did not believe that the legislative changes would be necessary.

It said that "additional changes to the definition of a charity for tax purposes are unnecessary and would only cause confusion – potentially discouraging wealthy individuals from setting up new charitable foundations or making use of tax advantages when making donations".

It warned that the sector’s income has been under pressure in recent years and that "the greatest possible care should be exercised when considering any measures that may affect the funding of the sector".

The organisations said that HMRC’s decision to use the term "tax advantage" instead of "tax avoidance" could discourage people from making donations by giving them the perception that securing a tax advantage "is suspicious or makes a donation less laudable".

It said that the wording of Version A is too broad in scope and could give HMRC the power to refuse to register any charitable foundation.

"As currently drafted Version A would give HMRC complete freedom to refuse to register a charitable foundation," it said. "Such foundations enable the donor to make tax-effective donations that will subsequently be applied for charitable purposes. One of the main reasons to establish a foundation must be the obtaining of a tax advantage; specifically the relief from Gift Aid.

"We are concerned that Version A, as currently drafted, could therefore prevent or discourage the establishment of charity foundations, at a time when the voluntary sector is already experiencing significant funding pressures."

It said that Version B would be "unnecessary" because it would lack power to prevent tax avoidance.

"Version B still contains the same flaws as Version A and as HMRC’s discussion paper notes ‘would seem to add little, if anything, to the existing anti-avoidance defences for charity reliefs’," the response said.

"Given the lack of protection it would offer charities or the taxpayer coupled with the potential risks, Version B is unnecessary and should not be taken forward."

The consortium instead called for regulators such as the Charity Commission to be given the resources to police existing regulations, because "under existing legislation a charity has to exist for charitable purposes only".

The consultation is open until 11 April.

HMRC had not provided a response before publication of the story.

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