Tax relief and substantial donor law

Nick Brooks, head of not-for-proft at Kingston Smith LLP, navigates the minefield

In the recent Budget, the Government announced a consultation on substantial donor legislation, which was introduced to prevent the abuse of tax relief on large donations to charity. This legislation, encompassed in section 54 of the Finance Act 2006, is complex, confusing and has the potential to affect a great number of charities, many of which are still blissfully unaware of its possible ramifications.

So what is a substantial donor? In the first instance, a person or business who gives a charity at least £25,000 over a period of 12 months or £150,000 over six years.

But it's not quite that simple. Charities must also be aware of "connected persons" to any donor. These include - but are not limited to - spouses, relatives, spouses of relatives and people working for companies controlled by the person or anyone connected to them. It is estimated that each substantial donor may have several hundred connected persons.

Once a substantial donor is identified, it is important not to carry out any transactions that might bestow a benefit on that person or any "connected persons". If they were to receive any benefit, including a salary or grant, this would be classed as non-charitable expenditure and the charity would lose tax relief accordingly.

There are difficulties with the legislation, not least trying to establish if anyone receiving a benefit from the charity is connected to any substantial donor.

HM Revenue & Customs' interpretation of the law means that many legitimate transactions are caught. For example, if a former employee of a charity were to make a substantial donation after they left, the salary they received while being employed would fall foul of the legislation.

Similarly, if someone were to receive financial benefit from a charity because of, for example, personal hardship, then years later make a substantial donation as a means of thanks, the original payment made to that beneficiary would be deemed a benefit and would not be liable for tax relief.

Time limits are also an issue, because charities are required to maintain a register of all substantial donors for up to 18 years.

The sector has told HMRC it does not consider the legislation fit for purpose, but that it does not condone abuse of tax relief and will help put appropriate rules in place.


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