Tax fraud involving charities 'runs into tens of millions'

Estimated figures lie behind the introduction of new powers for HMRC

Tax fraud involving charities is estimated to cost tens of millions of pounds a year, charity finance experts have been told by official sources.

Figures ranging from £60m to £100m have been mentioned during Whitehall discussions to explain the introduction of anti-fraud legislation, Third Sector understands.

Many sector experts believe the estimates are exaggerated. Fraud is thought to centre on Gift Aid, which totalled £1,007m last year.

"I don't think they actually know the extent of fraud," said Nick Brooks, head of not-for-profit at auditor Kingston Smith, who was not involved in recent discussions. "When pressed for evidence about the level of fraud, they've never produced confirmed figures to support their estimates."

Fear of fraud was behind the introduction in April of the 'fit and proper persons' test: HM Revenue & Customs now has the power to refuse tax relief to a charity if it believes a trustee or senior manager is not trustworthy.

The test was introduced alongside new legislation that allows EU charities to claim tax relief on donations from UK taxpayers. There were fears that unscrupulous individuals could claim Gift Aid on donations to bogus charities in EU countries with scant charity regulation.

In a briefing document, HMRC has said that extending reliefs without the new test would cost an additional £450m a year in fraud. With the test, it still expects fraud from Europe to be £150m a year by 2019.

Many charity lawyers and accountants have pushed for UK charities to be exempt from the test. HMRC has issued a revised code of practice that says it will presume that UK charity staff are 'fit and proper persons'.

Bill Lewis, a tax specialist at legal firm Bates Wells & Braithwaite, said: "If HMRC believes there is a high level of fraud, it should not increase bureaucracy but hire more staff," he said.

An HMRC spokesman said: "HMRC pays about £1bn a year to charities under Gift Aid. Such large amounts of money inevitably attract fraudsters. HMRC is constantly working to tighten its security processes to protect its customers and the exchequer."

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