Closed consultation

Consultation: Charities tax compliance

Published 27 April 2023

Summary

Subject of this consultation

This consultation will examine some of the charity taxation rules to help tackle non-compliance and protect the integrity of the charity sector without changing the overall purpose of the reliefs. It will ensure the rules continue to be fit for purpose.

Scope of this consultation

This purpose of this consultation is to explore reasonable and proportionate changes, with the charity sector, on how to reform some tax relief rules that do not work as intended. This will help tackle non-compliance and protect the integrity of the sector. Any changes would not detract from the overall generosity of the reliefs or be intended to catch out legitimate charities.

Who should read this?

These proposals will be of interest to charities and Community Amateur Sports Clubs (CASCs) in general, as well as donors to charities.

Duration

The consultation will run for 12 weeks from 27 April 2023 to 20 July 2023.

Lead official

The lead officials are J Bell and S Perkins of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

Please send email responses to charitypolicy.taxteam@hmrc.gov.uk

Additional ways to be involved

HMRC will consider meeting interested parties to discuss the proposals in this paper.

Please contact the lead official at the above email address if you are interested in arranging a meeting.

After the consultation

All responses will be reviewed and, subject to those responses, a further consultation may be necessary.

Getting to this stage

This is the first stage in reviewing options to update the charity tax compliance rules.

1. Introduction

Charity tax reliefs

The tax reliefs available to charities and CASCs are a vital element in supporting charitable causes across the UK, with more than £5.5 billion in charitable reliefs provided to charities and CASCs in 2020 to 2021. The biggest individual reliefs out of this are Gift Aid at £1.3 billion and business rates relief at nearly £2.4 billion. This Government support delivers benefits to all areas of society across the UK.

Consultation scope

This consultation covers several proposals on the areas listed below. The intention is to examine the impact on the sector of some of the proposed options and how they might interact with charities and CASCs. It seeks to gather views and evidence that will help determine the impact of the proposed changes, ensuring that charities and CASCs are spared unnecessary bureaucracy whilst allowing HMRC to effectively monitor the sector.

We believe that most charities operate within the current guidelines, but to allow HMRC to tackle the small group of charities who obtain reliefs in ways that aren’t intended, the following areas are being reviewed as part of this consultation:

• preventing donors from obtaining a financial benefit from their donation
• preventing abuse of the charitable investment rules
• closing a gap in non-charitable expenditure rules
• sanctioning charities that do not meet their Filing and Payment Obligations

The giving of relief is balanced with certain obligations that HMRC ask of a charity or CASC as part of the process of managing charitable tax reliefs. Charities must undertake certain actions such as completing a tax return (if they are asked to do so or if they believe they have tax to pay), pay any taxes and duties as they fall due and ensure they comply with all the requirements for operation of a charity. In some instances, a charity may receive tax relief on income which is then spent on a non-charitable purpose. In an instance such as this HMRC would seek to claw back the tax relief that has been received on that income.

HMRC undertakes compliance checks into both charities and CASCs. Where appropriate, HMRC work to rectify instances where it is identified that the wrong amount of tax has been paid or a tax relief has been claimed incorrectly.

HMRC are consulting on the following areas where the charity rules are not working as intended and will use the feedback to make proportionate legislative changes to improve customer compliance, whilst targeting abusive arrangements and support HMRC compliance activity.

2. Preventing donors from obtaining a financial benefit from their donation

Background

The Tainted Charity Donations rules apply where a donor enters into an arrangement with a charity or a CASC that gives them, or someone else involved in the arrangement, a financial advantage in return for the donation. The rules exist to prevent circular transactions, such as individuals ‘donating’ money to a charity, obtaining tax relief on the donation, and then receiving a benefit back from the charity.

The Tainted Charity Donations rules don’t apply to a:

• simple donation to charity where no additional arrangements are entered into
• donation under Gift Aid that is within the Gift Aid benefit limits
• any benefit of which has been taken into account in calculating the relief due for donations to charity of shares, securities and real property, or trading stock

The Tainted Charity Donations rules are based on a purpose test which considers the effects of, and circumstances in which the donor or someone connected to the donor, entered into arrangements to make the donation, and to whether the main purpose of those arrangements was to obtain a financial advantage.

Three conditions, listed below, must all be met for a donation to be considered a tainted donation. Where all three conditions are satisfied, the donor loses any tax relief that they would have been entitled to claim, had the donation not been tainted. An additional charge to tax may also arise where the donation would have been eligible for relief under the Gift Aid Scheme (for individual donors only).

The conditions are:

• Condition A – the donation to the charity and arrangements entered into by the donor are connected

• Condition B – the main purpose of entering into the arrangements is for the donor, or someone connected to the donor, to receive a financial advantage directly or indirectly from the charity

• Condition C – the donation isn’t made by a qualifying charity-owned company or relevant housing provider linked with the charity to which the donation is made

Issue

In practice, the Tainted Charity Donation rules have proven to be overly complex to apply to certain instances of abusive behaviour including where individuals who make large donations to charity, derive significant financial benefits by entering into arrangements linked to their donation.

There are several ways a donor may be able to secure a financial advantage from a charity after making a significant donation.

For example, a donor makes a significant donation to a charity they control, this allows the donor to claim higher rate relief and the charity to claim Gift Aid on the donation. The charity could then return the donation to the donor, or a connected person to the donor, by way of a loan with a commercial rate of interest. The loan may never be repaid and is eventually written off.

In this arrangement, both the donor and the charity have claimed tax reliefs on the donation, but there has been little benefit to the charity as the funds generated by the donation have been returned to the donor.

Another example could be where a donor makes a significant donation to a charity, solely so that both the donor and charity can claim relief on the donation. For example, following a donation, the charity then invests the donation in a company or fund controlled by the donor. Here, the donation provides little benefit for the charity as the funds have been reinvested into the donor controlled company or fund. Although investments are a legitimate way for charities to generate additional income on any excess funds, here the donor can claim higher rate relief on the donation even though the arrangements do not benefit the charitable purpose as the donation was made solely to claim relief, before re-investing the donation in a donor controlled company or fund.

Where commercial returns are earned by a charity returning funds to donors, these are not automatically deemed to be a financial advantage for the purposes of the Tainted Charity Donation rules. These rules can be unnecessarily cumbersome to apply in these circumstances, requiring detailed inquiries into the purposes of the transaction, even where it is clear that the donor has benefited from such transactions, with little real benefit to the charity for whom the funds from the donation are tied up through the arrangements.

Options for updating the rules

We think there are several ways in which we could tackle such arrangements without increasing burdens on charities and not targeting genuine donations.

Option 1: Replacement of the current Tainted Charity Donation rules with a new rule

The first option is to conduct a review of the existing Tainted Charity Donation legislation to enable us to remove and replace with a new rule that is fit for purpose.

Any new rule could apply to any gift in the form of cash, shares, securities, or property and would ensure that arrangements made in relation to a donation are done to benefit the charity and not the donor.

We would like to explore implementing limits on the amount of financial assistance provided to a donor. Where these limits are breached, the donation would be treated as chargeable income and charitable reliefs would be reduced by a corresponding amount.

Question 1: Do you anticipate any unintended consequences on legitimate arrangements from introducing this rule?

Question 2: Do you foresee any significant challenges for charities to maintain appropriate records of any arrangements, such as substantial loans, they make?

Option 2: Remove Condition B

By removing Condition B there would no longer be the requirement to demonstrate that arrangements relating to the donation were made to benefit the donor or a connected party. Therefore, HMRC could challenge any donation that provides anything more than an incidental benefit for the donor.

Option 3: Amend Condition B

By changing the current wording of Condition B, in particular the reference to ‘financial advantage’ and replacing it with ‘financial assistance’ or financial benefit’, could allow HMRC to better challenge an arrangement made to benefit the donor, rather than the charity.

These proposals would not stop charities from providing benefits to donors to thank them for their donations as it would still be possible to continue providing modest gifts in line with the existing donor benefit rules. It would ensure that charity funds are used for the charities benefit, whether in meeting its charitable purpose or in generating sufficient returns to further fund those purposes.

Question 3: Do you foresee any unintended consequences on legitimate arrangements from changing the rules in this way?

Question 4: Do you believe proposed changes to the current wording would achieve our objectives or do you believe there will still be room for abuse?

3. Preventing abuse of the charitable investment rules

Background   

The purpose of the charitable investment rules is to enable charities to invest excess funds to yield a financial return, allowing them to advance the organisation’s charitable aims without treating the investment as non-charitable expenditure which normally restricts a charity’s tax exemptions.

Broadly, the following types of investment income are not taxable:

• any investment in a charity common investment fund, common deposit fund or similar scheme

• any interest in land (unless it is held as a security or a guarantee for a debt)

• shares or securities of companies listed on a recognised stock exchange

• units etc in a Unit Trust Scheme

• shares in an Open-Ended Investment Company

• bank deposits – other than deposits made as part of an arrangement under which the bank makes a loan to somebody else (such as back to back loans)

• certificates of deposit

• any loan or other investment made for the benefit of the charity and not for the avoidance of tax (whether by the charity or any other person)

The Income Tax Act 2007 and the Corporation Tax Act 2010 outline a list of 12 types of approved charitable investments for which tax relief is given on any investment-related income. A list of all 12 can be found in the Annex.

By statue, when charities make investments under Type 1 to Type 11, the investment is automatically approved, and is exempt from rules on non-charitable expenditure. The final category, Type 12, exempts any expenditure made by charities for a loan or other investment to which an officer of HMRC is satisfied, on a claim, that it is made for the benefit of the charity and not for the avoidance of tax.

Issue

We accept that in the majority of cases investments in Type 1 to 11 are made for the benefit of the charity, but we have seen some instances where investments are being made through a charity to benefit others.

For example, a charity may use its funds to purchase a foreign property which is used as a holiday home by its trustees for their sole use, whilst providing no benefit to the charity.

This arrangement would be difficult to challenge under the current rules even where the property purchase made by the charity was for the benefit of the trustees, rather than the charity, as investments in an interest in land are automatically accepted as approved investment.

Option for updating the rules

HMRC recognise that investments can be a major source of funding for charities. However, making investments can also expose charities to risk which, if not properly managed, can affect not only the charity involved, but the public’s trust in the sector. Therefore, it is important to ensure any investment is made for the benefit of the charity and not for the avoidance of tax, or some other purpose.

We would like to test whether amending the current rules to ensure that all approved investments and loans made by charities need to be for the benefit of the charity and not the avoidance of tax would allow us to challenge investments that generate little to no benefit to the charity. It is not anticipated that genuine charitable investments will be impacted by a change of this nature.

Whilst we are not proposing for all charities to make a claim to HMRC for Type 1 to Type 11 investments, it is expected that charities will be required, where HMRC has cause to consider the reasons behind the investment, to justify any investment they make and demonstrate how this benefits the charity.

Question 5: Are there any circumstances where a charity may need to make an investment under Type 1 to 11 for reasons other than benefitting the charity?

Question 6: Do you foresee any significant challenges retaining records and documents to justify, if requested by HMRC, the investment decision process and demonstrate how the investment benefits the charity?

4. Closing a gap in non-charitable expenditure rules

Background

On certain types of donations, it is possible for the donor to receive relief for the donation, for the charity to not pay tax and for the charity to then spend the donation on something other than its charitable purpose.

Charities receive tax relief on most types of income provided it is used for charitable purposes. However, when a charity incurs non-charitable expenditure, they lose the tax exemption on the equivalent amount of their income and a tax charge is raised against the charity’s ‘attributable income and gains’. Attributable income and gains is the term given to the type of income or gain that is eligible for tax relief. It includes Gift Aid donations, payroll giving donations, income such as rental income, interest received, profits from a charity’s primary purpose trading activity, and capital gains.

Income which doesn’t qualify for tax exemption, such as the profits of non-charitable trading, isn’t included. Income such as legacies and other donations made outside of the Gift Aid and payroll giving regimes that are outside the scope of tax altogether, are also excluded.

The amount of non-charitable expenditure incurred by a charity in a chargeable period may exceed the attributable income and gains the charity received in the same period and, therefore, HMRC are unable to collect the tax due. If this happens, the excess non-charitable expenditure is set against the total income and gains of the charity, that is, the sum of the charity’s attributable income and gains plus all other sources of income or gains, whether chargeable to tax or not (for example, non-taxable grants and other gifts and legacies received etc).

If there is still an excess of non-charitable expenditure then the excess can be carried back to the previous chargeable period where it will be treated as non-charitable expenditure in that period, and so on until there is no longer any excess non-charitable expenditure or the chargeable period to which the excess is carried back more than 6 years before the end of the period the non-charitable expenditure was incurred.

Where excess non-charitable expenditure is carried back to earlier chargeable periods, an assessment can be made to disallow the appropriate amount of tax relief and raise a charge to tax within the earlier period.

Issue

The distinction between ‘attributable income and gains’ and a charity’s ‘available income and gains’ can act as a blocker to fully clawing back relief where a charity has non-charitable expenditure. Legacy income, for example, is not exempted under Part 11 CTA 2010 because it does not form part of the company’s taxable income and as such, it does not satisfy the definition of attributable income.

As a result, an amount of non-charitable expenditure met by legacy income would escape a charge to tax in the hands of the charity, even if this income was used for a non-charitable purpose.

For example, if a charity has Gift Aid income of £20,000 and bank interest of £5,000 in a chargeable period, it would be entitled to a tax exemption of £25,000. The charity also has non-taxable legacy income of £10,000. If the charity spent £15,000 on charitable work and administration and £40,000 on a non-charitable loan, it would lose all the available tax relief on its attributable income as the non-charitable expenditure exceeds the attributable income and will leave an excess non-charitable expenditure figure of £15,000.

However, the amount that can be carried back is the difference between the total income and gains, including legacy income, of £35,000 and the non-charitable expenditure of £40,000. This means the excess non-charitable figure available to carry back to the previous chargeable period is £5,000 instead of £15,000.

Furthermore, if a charity has generated a modest income over several years, before incurring significant non-charitable expenditure met by historic funds or savings, HMRC may be unable to collect the right amount of tax under the current carry-back rules if there has been insufficient ‘attributable income and gains’ in the preceding six years.

Option for updating the rules

We are keen to explore several areas that would allow HMRC to tackle the gap in the non-charitable expenditure rules and current carry back provisions.

This could involve a review of the definition of ‘attributable income and gains’ to consider which types of income become chargeable following non-charitable expenditure. Extending this definition to other income streams would increase the opportunity for HMRC to collect the right amount of tax within a specified period. Additionally, this change would directly impact the treatment and amount of excess non-charitable expenditure available to carry back to previous periods.

We would also like to review the current 6 year carry back restriction to identify if there is an opportunity to amend the current rules to ensure HMRC are able to collect the right amount of tax due should there be significant excess non-charitable expenditure.

Question 7: Do you agree that it is rational and proportionate to review ways to close the tax gap here? If not, please provide reasons why?

5. Sanctioning charities that do not meet their filing and payment obligations

Background

All charities should submit annual tax returns to HMRC. However, we recognise that many charities are run by unpaid volunteers and so may struggle to balance these administrative requirements alongside their core charitable purpose. Therefore, most charities are only required to file a tax return every three years.

Submitting a tax return gives reassurance to charities that they have got their taxes right and provides confirmation that their income continues to be eligible for tax reliefs and exemptions. Additionally, it allows HMRC to police the charity sector by monitoring the activities of charities and identifying risk trends.

Issue

Although HMRC offers some charities a concession by allowing them not to file a tax return every year if they have no tax to pay, some charities still fail to meet their obligation to file their returns when they are requested. Despite not completing an overdue or requested return, the same charity may still claim tax reliefs such as Gift Aid and expect it to be paid. This is unfair to the majority of charities that fulfil their obligations and file their tax returns on time and puts the Exchequer at risk of paying out Gift Aid, or giving reliefs, to charities that do not qualify.

Question 8: What are the barriers to some charities not filing tax returns when requested to?

Option for updating the rules

To improve compliance with filing and paying liabilities and protect the Exchequer from paying out public money without verification, we are considering withholding payments of Gift Aid and disapplying other tax reliefs from charities that have fallen behind on their reporting and filing obligations.

The intention is not to make all charities file returns annually nor be punitive to charities that meet their obligations, but instead to ensure tax returns are filed when they are required or requested. If the charity fails to file a tax return or returns when requested, HMRC could withhold claims to reliefs until they submit a return. Views are sought on the circumstances where this should apply but any change would need to be carefully targeted at cases where withholding was the appropriate response. We are also seeking views on how best to educate the sector ahead of commencement of any new rules.

However, it is expected that this will encourage charities to fulfil their obligations in a proportionate way for both charities and HMRC and protect the integrity of the tax system.

Question 9: Do you think that this would adversely affect the operations of charities or CASCs and what might be the consequences of this?

Question 10: How should changes be targeted to ensure they encourage charities to meet their obligations to file a tax return when required to do so – for example should small charities be treated differently to larger ones?

Question 11: How would it be best to educate the sector about any new rules ahead of their introduction?

6. Assessment of impacts

Summary of impacts

Year	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Exchequer impact (£m)	+/-	N/A	N/A	N/A	N/A	N/A

Exchequer Impact Assessment

This is a call for evidence only and is not expected to have an Exchequer impact.

Impacts	Comment
Economic impact	Further review will be required to understand any macroeconomic impacts.
Impact on individuals, households and families	There are expected to be no impacts for individuals at present. Any future impacts will be fully examined and detailed.
Equalities impacts	Having considered the Equality Act (and similar Northern Ireland legislation), the amount of impact is unclear at present as the proposed measures have not been finalised. A full equality impact assessment is not recommended at this time, but it should be reviewed and considered prior to introducing any legislation relating to any of the measures considered in this paper.
Impact on businesses and Civil Society Organisations	There are expected to be no impacts for businesses and civil society organisations at present. Any future impacts will be fully examined and detailed.
Impact on HMRC or other public sector delivery organisations	This consultation carries no delivery costs to HMRC at this stage.
Other impacts	None.

7. Summary of consultation questions

Preventing donors from obtaining a financial advantage from their donation

Question 1: Do you foresee any unintended consequences on legitimate charities from introducing this rule?

Question 2: Do you foresee any significant challenges for charities to maintain appropriate records of any arrangements, such as substantial loans, they make?

Question 3: Do you foresee any unintended consequences on legitimate arrangements from changing the rules in this way?

Question 4: Do you believe proposed changes to the current wording would achieve our objectives or do you believe there will still be room for abuse?

Preventing abuse of the charitable investment rules

Question 5: Are there any circumstances where a charity may need to make an investment or loan for reasons other than benefitting the charity?

Question 6: Do you foresee any significant challenges retaining records and documents to justify, if requested by HMRC, the investment decision process and demonstrate how the investment benefits the charity?

Closing a gap in non-charitable expenditure rules

Question 7: Do you agree that it is rational and proportionate to review ways to close the tax gap here? If not, please provide reasons why?

Sanctioning charities that do not meet their filing and payment obligations

Question 8: What are the barriers to some charities not filing tax returns when requested to?

Question 9: Do you think that this would adversely affect the operations of charities or CASCs and what might be the consequences of this?

Question 10: How should changes be targeted to ensure they encourage charities to meet their obligations to file a tax return when required to do so – for example should small charities be treated differently to larger ones?

Question 11: How would it be best to educate the sector about any new rules ahead of their introduction?

Other related issues and questions

Question 12: Are there any changes which could be made to the charity and CASCs regimes which would ease the burden on the sector?

Question 13: Will any administrative or other burdens be created if any of the above measures are introduced? Is so, what are they?

Question 14: What are the estimated costs of any additional burdens?

Question 15: Are there any other points you would like to raise or suggestions you would like to make to improve compliance in the Charity or CASC sector?

8. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework.

There are 5 stages to tax policy development:

Stage 1: Setting out objectives and identifying options.

Stage 2: Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3: Drafting legislation to effect the proposed change.

Stage 4: Implementing and monitoring the change.

Stage 5: Reviewing and evaluating the change.

This consultation is taking place during stage 1 of the process. The purpose of the consultation is to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

How to respond

A summary of the questions in this consultation is included at chapter 8.

Responses should be sent by 20 July 2023, by email to charitypolicy.taxteam@hmrc.gov.uk

Please do not send consultation responses to the Consultation Coordinator.

Paper copies of this document in Welsh may be obtained free of charge from the above address.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

Confidentiality

HMRC is committed to protecting the privacy and security of your personal information. This privacy notice describes how we collect and use personal information about you in accordance with data protection law, including the UK General Data Protection Regulation (UK GDPR) and the Data Protection Act (DPA) 2018.

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the DPA 2018, UK GDPR and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the Freedom of Information Act 2000, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs.

Consultation Privacy Notice

This notice sets out how we will use your personal data, and your rights.

It is made under Articles 13 and/or 14 of the UK GDPR.

We will process the following personal data:

Name
Email address
Postal address
Phone number
Job Title

Purpose

The purpose(s) for which we are processing your personal data is: Charities Tax Compliance

Legal basis of processing

The legal basis for processing your personal data is that the processing is necessary for the exercise of a function of a government department.

Recipients

Your personal data will be shared by us with (provide details of recipients of the personal data, if applicable, such as HM Treasury).

Retention

Your personal data will be kept by us for 6 years and will then be deleted.

Your rights

You have the right to request information about how your personal data are processed, and to request a copy of that personal data.

You have the right to request that any inaccuracies in your personal data are rectified without delay.

You have the right to request that any incomplete personal data are completed, including by means of a supplementary statement.

You have the right to request that your personal data are erased if there is no longer a justification for them to be processed.

You have the right in certain circumstances (for example, where accuracy is contested) to request that the processing of your personal data is restricted.

Complaints

If you consider that your personal data has been misused or mishandled, you may make a complaint to the Information Commissioner, who is an independent regulator. The Information Commissioner can be contacted at:

Information Commissioner's Office
Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF

0303 123 1113 casework@ico.org.uk

Any complaint to the Information Commissioner is without prejudice to your right to seek redress through the courts.

Contact details

The data controller for your personal data is HMRC. The contact details for the data controller are:

HMRC
100 Parliament Street
Westminster
London
SW1A 2BQ

The contact details for HMRC’s Data Protection Officer are:

The Data Protection Officer
HMRC
14 Westfield Avenue
Stratford
London
E20 1HZ

advice.dpa@hmrc.gov.uk

Consultation principles

This call for evidence is being run in accordance with the government’s Consultation Principles.

The Consultation Principles are available on the Cabinet Office website.

Annex: Relevant (current) government legislation

Approved Charitable Investment Legislation

Income Tax Act 2007

Corporation Tax Act 2010