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This publication is available at https://www.gov.uk/government/publications/charities-detailed-guidance-notes/annex-ii-non-charitable-expenditure
Where a charity’s income and gains aren’t applied solely to charitable purposes, its exemption from tax may be restricted.
This restriction of tax relief may apply where:
- an item of expenditure’s incurred wholly for non-charitable purposes
- an item of expenditure’s incurred partly for charitable purposes and partly for non-charitable purposes
- a charity’s treated as incurring non-charitable expenditure
2. Charitable and non-charitable expenditure
2.1 Charitable expenditure is expenditure that the charity has incurred for charitable purposes only. It includes such items as charitable grants and expenditure incurred on the administration of the charity. It’s important to remember that charitable expenditure doesn’t include investments that the charity has made or loans which are accepted as charitable loans or investments for the purposes of sections 558 and 561 Income Tax Act 2007 (for charitable trusts) and sections 511 and 514 Corporation Tax Act 2010 (all previously Schedule 20 Income and Corporation Taxes Act 1988 (ICTA)). This is because the making of an investment isn’t generally regarded as expenditure. However, if the charity makes a non-charitable (non-qualifying) loan or investment this is treated for tax purposes as non-charitable expenditure. Annex III gives detailed guidance about charity loans and investments.
2.2 Non-charitable expenditure is:
- expenditure which isn’t incurred for charitable purposes only
- any payment to an overseas body where the charity hasn’t taken reasonable steps to ensure the payment will be applied for charitable purposes, for detailed guidance about payments to overseas bodies read paragraph 9 below
- any investment or loan made by the charity which isn’t a qualifying investment or loan
- an amount treated as non-charitable expenditure as a result of a transaction with a substantial donor under section 551 ITA 2007 or section 504 CTA 2010 (previously section 506A ICTA 88), for detailed guidance about substantial donors read paragraph 10
2.3 Charities may make trading losses. If the losses arise from primary purpose trading these will be regarded as charitable expenditure. If the losses arise from non-primary purpose trading (or deemed non-primary purpose trading for chargeable periods beginning on or after 22 March 2006) these will be non-charitable expenditure. Detailed guidance about charity trading losses is available.
3. Attributable income and gains
Charities exemptions are restricted where the charity has incurred non-charitable expenditure and it has ‘attributable income and gains’. Attributable income and gains means the amount of income and gains that are eligible for tax relief or exemption. 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 (non-primary purpose) trading or amounts taxable under anti-avoidance provisions isn’t included.
Income such as legacies and other donations made outside the Gift Aid and payroll giving regimes that are outside the scope of tax altogether, is also excluded.
4. The restriction to a charity’s tax relief
4.1 For chargeable periods commencing on or after 22 March 2006 all charities that incur (or are treated as incurring) non-charitable expenditure lose tax exemption on an equivalent amount of their attributable income and gains. Charities can’t set their charitable expenditure against attributable income and gains before their non-charitable expenditure.
A charity has gross Gift Aid income of £28,000 and gross bank interest of £3,000 in a chargeable period.
It would be entitled to tax exemption on those sources of attributable income, totalling £31,000.
The charity spends £10,000 in charitable grants and administration, and makes a non-charitable loan of £7,000.
|Income and expenditure||Amounts|
|Less: non-charitable expenditure||£7,000|
|Income on which relief is allowed||£24,000|
Tax relief is disallowed in respect of £7,000 of attributable income.
4.2 Where a charity has the tax exemptions on part of its attributable income and gains restricted it can choose which sources of attributable income and gains the restriction’s applied to. The charity must notify HM Revenue and Customs (HMRC) Charities of its preference within 30 days of being notified of the restriction. If the charity doesn’t specify a source then HMRC will do so for the charity.
4.3 If a charity has incurred non-charitable expenditure, it must complete and file a Self Assessment/Corporation Tax Return for the chargeable period concerned and account for any resulting tax liability. If the return shows the attributable income and gains being allocated against particular sources of income HMRC will accept this as notice being given as in paragraph 4.2.
5. Chargeable periods
The chargeable period for a charitable trust is the tax year ending 5 April. For a charity treated as a company for tax purposes, the chargeable period is its accounting period.
6. Carrying back excess non-charitable expenditure to previous periods
6.1 The amount of non-charitable expenditure incurred by a charity in a chargeable period may be greater than the attributable income and gains in that period. If this is the case, the excess non-charitable expenditure’s 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’s still an excess of non-charitable expenditure then this excess is carried back to the previous chargeable period, where it’s treated as non-charitable expenditure of that period, and so on until either:
- there’s no longer any excess non-charitable expenditure
- the chargeable period to which the excess is carried back ended more than 6 years before the end of the period in which the non-charitable expenditure was actually incurred
6.2 Where excess non-charitable expenditure is carried back to earlier chargeable periods, an assessment may be made to disallow the appropriate amount of tax relief and adjust the tax liability of that earlier period.
A charity has gross Gift Aid income of £25,000, and gross bank interest of £5,400 in a chargeable period.
It would be entitled to tax exemption on those sources of attributable income, totalling £30,400.
The charity also has other non-taxable grant income of £1,600. The charity spends £10,000 on charitable grants and administration. The charity makes a non-charitable loan of £35,000.
|Income and expenditure||Amounts|
|Less: non-charitable expenditure||£35,000|
|Income on which relief allowed:||£0|
The charity’s tax exemptions are lost on all of its attributable income.
The charity has excess non-charitable expenditure of £4,600.
This can be carried back only to the extent that non-charitable expenditure exceeds its total income and gains.
|Income and expenditure||Amounts|
|Total income and gains||£32,000|
|Less: non-charitable expenditure||£35,000|
|Excess non-charitable expenditure||£3,000|
6.3 The excess non-charitable expenditure of £3,000 is carried back first to the previous chargeable period and the charity exemptions restricted in that period. If there continues to be an amount of unapplied excess the balance is carried back to the period before that, and so on.
7. Payments outside the terms of the charity’s governing document
7.1 If a charity’s governing document specifically prohibits or restricts certain expenditure, it’ll be treated as non-charitable expenditure.
7.2 If expenditure is clearly of a charitable nature, but it’s not specifically authorised by the terms of the governing document of the charity, it won’t necessarily be treated as non-charitable expenditure. HMRC may seek the views of the relevant charity regulator in considering the tax treatment.
Where a charity accumulates income, or builds up reserves, HMRC needs to decide if this is within the meaning of the phrase ‘applied to charitable purposes only’. HMRC will challenge accumulations of income on the grounds that the income hasn’t been applied to charitable purposes, for example if:
- income isn’t invested at all but kept in cash or in a current account
- it becomes apparent that investment decisions aren’t made exclusively for the benefit of the charity, for example, where accumulated income is being invested in a project in which there’s a potential conflict between the interest of the charity and the interest of the trustee or provider of the charity funds
9. Payments to overseas bodies
9.1 In general, a payment by a charity for its charitable purposes is charitable expenditure by the charity. However, where the payment’s to an overseas body an additional condition must be met in order for the payment to be charitable expenditure for UK tax purposes.
The legislation is at section 500 CTA 2010 and section 547 Income Tax Act 2007 for charitable companies and trusts respectively.
9.2 A charitable payment made to a body outside the UK will only be charitable expenditure for UK tax purposes by the charity provided the charity can clearly demonstrate to the Commissioners for HMRC that it has taken steps that the Commissioners consider are reasonable in the circumstances to ensure that the payment is applied for charitable purposes. If that condition isn’t met, the payment is treated as non-charitable expenditure by the charity for UK tax purposes.
9.3 Applied for charitable purposes means applied for purposes which are regarded as charitable within Section 2 of the Charities Act (England and Wales) 2006. The same definition of charitable purpose applies for all charities claiming UK tax reliefs and exemptions whether the charity is in the UK or another member state of the EU, Iceland or Norway. Payment(s) to an overseas body and payment(s) to a body outside the UK mean any monetary payment to anybody outside the UK, and include monetary payments sent outside the UK to charities, companies, agents, partners and individual persons outside the UK.
9.4 Trustees are required to carry out appropriate research in relation to the overseas body, followed by monitoring and evaluation, and to avoid or minimise risk to the charity’s finances to meet their legal duty as trustees. The charity trustees must be able to describe the steps they take, explain how those steps ensure charitable application of funds, demonstrate that those steps were reasonable and produce evidence that the steps were, in fact, taken.
It’s not sufficient for the charity to simply establish that the overseas body is a charity under the domestic law of the host country. Nor is it enough to keep records of how things are spent. These are important but for overseas payments trustees must do more. The rest of this chapter deals with the situation where the charity makes a payment for which it must take steps to ensure that the payment is applied for charitable purposes.
9.5 When considering whether the steps taken by the charity were ‘reasonable in the circumstances’, HMRC will have regard to:
- the charity’s knowledge of the overseas body
- previous relations with the overseas body
- previous history of the overseas body
- the amounts given in both absolute and relative terms
- the charity’s observance of its own internal financial, management and decision making procedures, and whether or not these were adequate
9.6 When reviewing payments made to overseas bodies HMRC will generally ask the charity trustees to provide information and supporting documentation about the:
- person or persons to whom the payment was given
- specific charitable purpose for which the payment was given, the reasons, and how the decision to provide the payment was arrived at
- guarantees or assurances that have been obtained from the overseas body that the payment will be applied for the purpose for which it was given (such as a partnership or other written enforceable agreements), and what financial controls were in place, including sufficiently detailed financial records providing robust audit trails
- steps the trustees took to ensure the payment will in fact be applied for charitable purposes (such as safeguards, monitoring and oversight)
- follow-up action taken by the trustees to confirm that payments were applied properly
The Commissioners for HMRC must be satisfied that the steps taken by the trustees are reasonable in the circumstances. If HMRC Charities isn’t provided with sufficiently detailed evidence of the steps taken it may not be able to accept the expenditure as charitable expenditure. This may give rise to a liability to tax. The steps to be taken will depend upon the nature and circumstances of the expenditure, for example, whether the recipient body may pass on the funds to a connected person who may use the funds for non-charitable purposes. The rest of this section explains what sorts of steps would be reasonable depending on the circumstances of both the donating charity and receiving bodies.
9.7 Trustees are expected to make adequate enquiries to find out such information as is reasonably available about the overseas body, and establish what evidence will be provided or made available by that body to show that the payment(s) will or have been applied for charitable purposes. The nature of the steps will depend upon the scale of operations, the size of the sums involved and the relevant circumstances. Enquiries should also be made to identify risks relating to connections between the body and other organisations. Where visits are required proper documentation is needed to show the checks carried out. Trustees should also identify any specific risks for certain projects especially in remote areas where language literacy and banking might be issues. Properly documented systems should be put in place if necessary to manage these. Where payments are to be made to overseas branches/partners, funds should be held in properly operated accounts by authorised persons.
9.8 In the case of small one-off payments, an exchange of correspondence between the charity and the overseas body will normally be sufficient. Where possible, the correspondence should be on headed paper and it should:
- give details of the payment and the purpose for which it was given
- provide confirmation that the sum has or will be applied for the purpose given
A situation where a thank you note on headed notepaper will be sufficient evidence.
A pastor from a church outside the UK visits a partner parish in the UK. On his return home he discovers that the church building in his home town has burned down. When writing to the UK church to thank them for his visit he mentions this and the UK church decide to donate £500 to help rebuild the church. The overseas church sends a thank you note and a picture of the new building when it is complete.
This is a situation where the local pastor is known to the UK charity, the amount is a small, one-off payment and there are likely to be good connections between the charity and the overseas church. In this case a thank you note on headed paper is sufficient.
The relatively small amount of the donation affects the level of evidence required. In a situation like this HMRC would accept that the trustees’ personal knowledge of the pastor and his connection with the overseas church is sufficient evidence.
Where there was no history of personal contact and knowledge with the pastor more evidence would be needed, for example press reports confirming that the building had, in fact burnt down, and was, in fact, a church and had been rebuilt.
9.9 More thorough work by the trustees will be required where the sums involved are larger or where a transfer of funds is to form part of an ongoing commitment. This might include independent verification of the overseas body’s status and activities, along with reporting and verification of the manner of application of resources provided. The steps required can be reviewed in the light of evidence of proper use of funds and resources from recent earlier involvement on a particular project.
A situation where further evidence of action taken, is required.
A UK charity becomes aware of a small overseas hospital that’s struggling to afford drugs to treat a local epidemic. They agree to provide funding for 6 months supplies at the cost of £10,000 and enter into an arrangement with a pharmaceutical supplier close to the hospital. The supplier provides the necessary drugs to the hospital and invoices the UK charity. In this situation the invoices from the drugs company aren’t sufficient on their own. The trustees must be able to produce sound evidence to show what they did to verify that the hospital warranted the funding. This might include evidence of governance arrangements, financial controls and alternative available funding. In addition as things progress the trustees should check that the correct drugs are actually being delivered to the hospital in the amounts invoiced. A letter from the hospital confirming that they’ve received what the charity purchased would be acceptable evidence.
The larger level of the donation, a lack of detailed knowledge of the recipient charity and the existence of a third party means that more evidence is required than for example 1. In a situation like this the evidence to verify the suitability of the expenditure is likely to include:
- records to demonstrate the research undertaken, including the process in relation to the trustees’ decision to provide funding
- records of meetings or teleconferences with the overseas body
- exchanges of correspondence
- detailed financial records
- a copy of any agreement between the third party and the charity
If the charity was supporting a particular project being carried out by an overseas body, official project documentation and literature.
9.10 The steps taken are to ‘ensure’ that the payment to the overseas body will be applied for charitable purposes. If the recipient body isn’t bound by its own domestic law to apply all of its income for charitable purposes, then the trustees of the paying charity should consider seeking a legally binding and enforceable agreement to ensure that their payment will be applied charitably. If the overseas body declines to enter into such an agreement, the trustees of the paying body may have difficulty ensuring that the payment is applied for charitable purposes. If an agreement’s entered into the trustees will need to have a means of establishing whether the agreement has been complied with.
9.11 Where a charity makes a series of payments to the same overseas body for the same charitable purpose, it’s not necessary for fresh enquiries to be made in respect of each new payment. If the trustees have recently checked the overseas body is applying its charitable funding properly, for example within the last year, and they’re satisfied that the overseas body has an ongoing need for funding and is bound to apply payments from the charity for charitable purposes, then it’s not unreasonable for the trustees to rely on the results of this review for a payment shortly afterwards.
9.12 However, reliance on the overseas body’s integrity may diminish with the passing of time and the trustees should be able to demonstrate that they are making enquiries of a sufficiently searching nature at regular intervals to ensure that the funds are being properly applied for charitable purposes.
Situations where more positive action is needed.
A charity’s approached by an overseas body to provide support for a school building project. This is scheduled to take 18 months to complete. The proposed project is evaluated by the trustees who consider this to be within their charitable objects. They agree to provide staged funding totalling £250,000.
In this case the trustees must be able to produce evidence to demonstrate the research carried out in advance of any funds being made available and detailed financial and other records of how the grants were actually spent.
In a situation that involves large sums of money and a long term commitment, which could involve several overseas contractors, HMRC would expect to see comprehensive evidence of the trustees’ considerations. This might include:
- a detailed project plan
- a formal funding application from the overseas body
- records of the evaluation and decision making procedures carried out by the trustees
In addition HMRC would expect the funding to be dependent on the overseas body entering into a formal agreement with the charity providing for:
- the payment of grants in stages based on specific targets
- a series of reviews to monitor project delivery
- claw back provisions should the project fail or the building is not used as intended
The trustees should also be able to produce evidence of ongoing evaluation as the project advanced including recommendations in relation to further funding.
A charity wishes to endow an overseas body with £1,000,000 to be used for charitable purposes at the body’s own discretion. The research to be carried out by the trustees should include obtaining sufficiently detailed financial records to provide robust audit trails in support of their decision. Further, they’ll need to either:
- obtain detailed and legally binding assurances from the recipient body that the money will be applied for purposes that are charitable for UK purpose
- satisfy themselves that the body is established in such a manner that it’s subject to regulation in the overseas country that will ensure its funds can only be applied for purposes that are charitable for UK purposes
If the charity is seeking binding assurances it will need to:
- obtain the assurances in a form that’s legally binding and enforceable in the overseas country, ideally this will be in writing
- ensure, taking specialist advice if necessary, that it will be able to take enforcement action against the overseas body in case funds are not applied as intended
- ensure that it and the overseas body have a clear understanding what expenditure the funds provided are intended to meet and over what time scale
- ensure that effective monitoring arrangements are agreed with the overseas body
If the charity is relying on the manner of establishment of the overseas body and local regulation it will need to:
- ensure, taking specialist advice as necessary, that the overseas body is established in such a way as to ensure that it can only apply its funds for purposes that are charitable within the meaning of English law; in practice this will be set out in its governing document
- ensure, taking specialist advice as necessary, that the domestic legislation and regulatory structure in the overseas country are such that the overseas body will be effectively monitored, and the controlling individuals held to account, if it fails to apply its funds in accordance with its governing document
10. Transactions with substantial donors
Application of the substantial donor rules
10.1 Anti-avoidance legislation was introduced in 2006 which was designed to restrict a charity’s tax exemption where particular transactions result in all or part of a donation being effectively returned to the donor in cash or in kind. The rules will be largely repealed with effect from 1 April 2013.
10.2 New anti-avoidance provisions, the tainted charity donation rules, were introduced from 1 April 2011 to replace the substantial donor rules. However certain transactions will continue to be caught by the substantial donor rules where both:
- a donation was made before 1 April 2011
- the effect of transactions associated with the donation continues after 31 March 2011
10.3. For guidance on the tainted charity donation rules and on the application of the substantial donor rules on or after 1 April 2011, more guidance is available in Annex viii: tainted charity donations.
Introduction to the substantial donor rules
10.4 Where a charity engages in certain transactions with a person who was a substantial donor, which can lead to extraction of value (in cash or in kind) from the charity, those transactions may be treated as non-charitable expenditure, resulting in a restriction of the charity’s tax exemption.
10.5 These provisions weren’t intended to hamper legitimate activities of charities or donors, so there are exceptions to make sure the measures don’t catch certain arm’s length transactions. Most (but not all) transactions that a charity will enter into for charitable purposes and on arm’s length terms are excepted from the rules.
10.6 The legislation applies to:
- transactions occurring on or after 22 March 2006
- donations made before 1 April 2011
but doesn’t affect transactions entered into as part of a contractual arrangement put in place before 22 March 2006, unless the contract is varied on or after that date in such a way as to bring it within the scope of these measures. It’s only upon entering into a transaction (that isn’t otherwise excepted), that a potential tax liability may arise.
Definition of substantial donor
10.7 A person (individual or company) is a substantial donor to a charity in respect of a chargeable period of the charity when either the charity received relievable gifts of at least:
- £25,000 from the donor in a period of 12 months in which the chargeable period wholly or partly falls
- £100,000 (£150,000 from 23 April 2009) from him in a period of 6 years in which the chargeable period wholly or partly falls
10.8 Donations made on or after 1 April 2011 don’t count in relation to the substantial donor rules.
10.9Once a person is a substantial donor to a charity in respect of a particular chargeable period they’re also treated as a substantial donor in respect of the next 5 chargeable periods.
10.10 The disposal of an asset at undervalue to a charity can be taken into account in determining whether a person is a substantial donor (although where such a disposal attracts tax relief it won’t be a ‘caught’ transaction).
10.11 The definition of ‘substantial donor’ also includes persons connected with the donor as defined by section 839 of ICTA 1988, for example, the donor’s spouse or relative, the spouse of a relative of the donor, or a relative of the donor’s spouse (all references to ‘spouse’ being read as including civil partners). In certain circumstances a company can also be a person connected with an individual or another company.
10.12 A person isn’t a substantial donor to a charity if the donor:
- hasn’t made enough relievable gifts to satisfy the criteria at paragraph 11.2
- is a charity donating to another charity
- is a housing association or Registered Social Landlord donating to a charity with which it is connected
- made the donation on or after 1 April 2011
10.13 A company which is a wholly-owned subsidiary of one or more charities isn’t treated as a substantial donor in relation to the charity which owns it (or any of the charities which own it). This allows wholly-owned trading subsidiaries of charities to Gift Aid their profits to their parent charity without risk of a charge under the substantial donor legislation.
10.14 If for any reason a donation doesn’t qualify for tax relief (for example if a donor receives benefits in excess of the statutory Gift Aid benefit limits in consequence of their donation), the donation won’t be a ‘relievable gift’ thus the donor won’t be a substantial donor by virtue of that gift alone.
10.15 A relievable gift is a donation of cash or property (including non-monetary gifts) to a charity, which qualifies for specified tax reliefs. It includes gifts of:
- cash, under the individual or company Gift Aid provisions
- quoted shares and securities, and real property where the donor has obtained income or Corporation Tax relief
- gifts of assets where the donor has obtained capital gains relief
- plant or machinery where the donor has received capital allowances
- trading stock
- amounts donated via payroll giving
- gifts from settlor-interested trusts
10.16 It doesn’t include gifts where the only relief is from Inheritance Tax, for instance a donation made in a will.
10.17 Relatively few donors will fall within the definition of a substantial donor; and many charities will have no substantial donors. All charities, however, need to keep records of any of their donors who fall (or may fall) within the definition. Most charities will probably already keep records of these donors for the purposes of maintaining an ongoing relationship with them. These records should enable the charity to cross reference any of the specified transactions with those donors or persons connected with them. This shouldn’t be an onerous task for most charities that are acting within their charitable objects, as the majority are unlikely to be entering into transactions that are not otherwise excepted by the legislation. Charities that never enter into the types of defined transaction which return value (cash or benefits) to their substantial donors will not be exposed to any tax liability as a result of this legislation.
Chargeable periods affected
10.18 The chargeable period for a charitable trust is the tax year ended 5 April. For a charity treated as a company for tax purposes, the chargeable period is its accounting period.
10.19 The legislation applies to transactions between a person and a charity, made on or after 22 March 2006, which take place in a chargeable period of the charity in respect of which the person is a substantial donor.
10.20 A transaction can be caught if it’s made at any time in the chargeable period, even if it wasn’t until after the transaction was entered into that the person first satisfied the definition of substantial donor in respect of that period.
10.21 To decide which chargeable periods may be affected by the legislation, a charity must identify relievable gifts of at least £25,000 from a donor in a period of 12 months or at least £100,000 in a period of 6 years.
10.22 Note that a donation of £25,000 or more made on a particular date falls both within a period of 12 months ending on that date and also within a different period of 12 months starting on that date. Similarly when a single donation of £100,000 or more is received, a charity must consider the 6 year periods both ending and beginning with the date of the donation.
10.23 If a charity receives 2 or more relievable gifts from a donor which total £100,000 or more in a 6 year period, it’s necessary to identify the different 6 year periods in which the gifts are received. This means looking forward 6 years from the date of the first relevant gift and looking back 6 years from the date of the last relevant gift. The charity must then identify each of its chargeable periods which fall wholly or partly within each such 6 year period. If a donor makes regular donations it is possible for each relievable gift to form part of more than 1 total of £100,000, and so to fall within more than one 6 year period.
10.24 Once a person is a substantial donor to a charity in respect of a chargeable period they’re also treated as a substantial donor in respect of the next 5 chargeable periods.
Mr Green makes a relievable gift of £20,000 to a charity on 1 February 2008, which falls into the charity’s chargeable period ended 31 December 2008.
He makes a further relievable gift of £10,000 on 1 January 2009.
His donations of £30,000 fall within the 12 month period beginning 1 February 2008 and within the 12 month period ending 1 January 2009.
This makes him a substantial donor in respect of the charity’s chargeable periods ended 31 December 2008 and 31 December 2009, and in respect of the next 5 chargeable periods (ie until 31 December 1014).
The legislation will apply to any transactions between Mr Green and the charity between 1 January 2008 and 31 December 2014, subject to any transitional provisions applying as a result of the introduction of the tainted charity donations rules.
Mrs Gray makes a relievable gift of £100,000 to a charity on 1 January 2010, which falls into the trust’s chargeable period ended 5 April 2010.
She’s a substantial donor in respect of each of the charity’s chargeable periods falling wholly or partly within the 6 year period ended 1 January 2010 and also in respect of the chargeable periods falling wholly or partly within the 6 year period beginning 1 January 2010.
Thus she’s a substantial donor for the charity’s chargeable period ended 5 April 2004 through to the chargeable period ended 5 April 2016.
She’s also a substantial donor in respect of the next 5 chargeable periods.
Therefore in consequence of her gift, the legislation will apply to any transactions between the charity and Mrs Gray between 22 March 2006 and 5 April 2021, subject to any transitional provisions applying as a result of the introduction of the tainted charity donations rules.
Miss Brown makes a relievable gift of £15,000 to a charity on 1 June 2006, which falls within the charity’s chargeable period ended 31 March 2007.
She makes a further relievable gift of £85,000 on 1 January 2012, which falls within a period of 6 years from the first donation.
She’s a substantial donor in respect of each of the charity’s chargeable periods falling wholly or partly within the 6 year period 1 June 2006 to 31 May 2012 and also in respect of the chargeable periods falling wholly or partly within the 6 year period 2 January 2006 to 1 January 2012 ie for the chargeable period ending 31 March 2006 through to the chargeable period ending 31 March 2013.
She’s also a substantial donor in respect of the next 5 chargeable periods.
Therefore in consequence of her gifts the legislation will apply to any transactions between the charity and Miss Brown between 22 March 2006 and 31 March 2018, subject to any transitional provisions applying as a result of the introduction of the tainted charity donations rules.
Mr Black makes a relievable gift of £24,000 to a charity on 1 June 2006, which falls within the charity’s chargeable period ended 31 December 2006.
He makes a further relievable gift of £76,000 on 1 July 2012, which is more than 6 years after his first donation.
He’s a substantial donor, by virtue of the second gift only, in respect of each of the charity’s chargeable periods falling wholly or partly within the 12 month period ended 1 July 2012 and falling wholly or partly within the 12 month period beginning 1 July 2012 ie for the chargeable periods ending 31 December 2011, 31 December 2012 and 31 December 2013.
He’s also a substantial donor in respect of the next 5 chargeable periods. Therefore in consequence of his gifts the legislation will apply to any transactions between the charity and Mr Black between 1 January 2011 and 31 December 2018, subject to any transitional provisions applying as a result of the introduction of the tainted charity donations rules.
However, if Mr Black makes a further donation of £24,000 on 30 June 2015, the position must be reconsidered as he has now made gifts of at least £100,000 in a period of 6 years.
He’s a substantial donor in respect of each of the charity’s chargeable periods falling wholly or partly within the 6 year period 1 July 2012 to 30 June 2018 and also in respect of the chargeable periods falling wholly or partly within the 6 year period 1 July 2009 to 30 June 2015.
Thus he’s a substantial donor for the chargeable period ending 31 December 2009 through to the chargeable period ending 31 December 2018 and in respect of the next 5 chargeable periods.
Therefore in consequence of his gifts the legislation will apply to any transactions between the charity and Mr Black between 1 January 2009 and 31 December 2023, subject to any transitional provisions applying as a result of the introduction of the tainted charity donations rules.
Transactions caught by the substantial donors legislation
10.25 The transactions covered by the substantial donors legislation are:
- the sale or letting of property by a charity to a substantial donor
- the sale or letting of property to a charity by a substantial donor
- the provision of services by a charity to a substantial donor
- the provision of services to a charity by a substantial donor
- an exchange of property between a charity and a substantial donor
- the provision of financial assistance by a charity to a substantial donor
- the provision of financial assistance to a charity by a substantial donor
- investment by a charity in the business of a substantial donor
- payment of remuneration (including non-cash benefits) to a substantial donor
10.26 ‘Financial assistance’ includes:
- the provision of a loan, guarantee or indemnity
- Shari’a-compliant financial products, or ‘alternative finance arrangements’ (as defined by section 46 of FA 2005)
- charitable grants to beneficiaries
10.27 If 2 or more charities are connected in any way relating to their structure, administration or control, they’ll be treated as a single charity for the purposes of this legislation. This is to prevent circumvention of the legislation, by for example, fragmenting the activity of a single charity into 2 or more charities.
10.28 It ensures that where a donor makes donations to 2 or more charities that are connected, the charities are treated as a single charity and the relievable gifts made by a donor to those charities are aggregated for the purposes of this legislation. It also ensures that the legislation applies where a person makes substantial donations to 1 charity, but enters into specified transactions to extract value from a connected charity.
10.29 Transactions between a charity and a person connected with a substantial donor will also be caught. This includes transactions with the donor’s spouse or civil partner, a relative, or the spouse or civil partner of a relative of the donor or the donor’s spouse or civil partner.
How the charge to tax arises
10.30 Charities can claim exemption from tax on most sources of income, subject to the income being applied solely to charitable purposes. Where a charity incurs non-charitable expenditure, its exemption from tax is restricted.
10.31 Where a charity’s transactions with substantial donors (including persons connected with substantial donors) are caught by the legislation, the charity’s treated as incurring non-charitable expenditure. This applies in the following circumstances where a:
- charity makes a payment to a substantial donor in the course of or for the purposes of a specified transaction, the amount of the payment is treated as non-charitable expenditure
- transaction with a substantial donor takes place on terms that are less beneficial to the charity than the terms which might be expected in an ‘arm’s length’ transaction, the cost to the charity of the difference in terms (as determined by HMRC) is treated as non-charitable expenditure
10.32 It’s important to note that there’s no exception for the provision of financial assistance to a substantial donor. The provision of financial assistance includes the making of a charitable grant. The amount of any grant paid is treated as non-charitable expenditure if made to a recipient who’s (or later becomes) a substantial donor of the charity, or a person connected with a substantial donor. It’s expected that such occasions will be very rare, but charities need to be aware of the possibility of liability in these circumstances.
10.33 The provision of financial assistance to a substantial donor (or person connected with a substantial donor) includes the payment of the principal amount of a loan granted by a charity to a donor, even if the loan is made on arm’s length terms and even if the loan is later repaid in full. If a loan is made to a substantial donor (or person connected with a substantial donor) on less than arm’s length terms, for example an interest free loan, the cost to the charity of the non-arm’s length terms is also treated as an additional amount of non-charitable expenditure of each chargeable period for which the loan is outstanding.
Mr White has given a total of £250,000 worth of quoted shares to a charity over a period of 3 years to 31 December 2007.
The charity owns a number of residential properties and in January 2008 rents one of the houses to Mr White at a monthly rent of £500.
Commercially let properties in the same street have a market rental value of £1,500 per month.
The terms of the lease are less beneficial to the charity than would be expected in an arm’s length transaction.
The charity is treated as incurring non-charitable expenditure equal to the cost to the charity of the difference in terms (£1,000 per month) in each chargeable period for which the property is let on those beneficial terms.
Miss Silver makes a Gift Aid donation of £100,000 to a charity in December 2007.
In January 2008 the charity makes an interest free loan of £100,000 to Miss Silver (she repays the loan in December 2013).
The £100,000 loan principal payment made by the charity to Miss Silver is treated as non-charitable expenditure of the charity’s chargeable period ended 31 December 2008.
The cost to the charity of making the loan on less than arm’s length terms is calculated at £10,000 per year (on the basis of commercial borrowing rates for unsecured loans).
The charity is treated as incurring non-charitable expenditure of £10,000 in each of its chargeable periods ended 31 December 2008 through to 31 December 2013, subject to any transitional provisions applying as a result of the introduction of the tainted charity donations rules. Note that even if the loan was on arm’s length terms the payment of the loan principal would nonetheless be treated as non-charitable expenditure.
In February 2008 a charity makes a £5,000 grant to a homeless person, Mr Rose.
He later inherits a large sum of money and on 1 December 2009 he makes a single £75,000 Gift Aid donation to the charity which helped him.
Mr Rose is a substantial donor of the charity in respect of its chargeable period ended 31 December 2008 and each chargeable period to 31 December 2014.
The amount of the grant is therefore treated as non-charitable expenditure of the chargeable period ended 31 December 2008 and the charity’s liable to tax on £5,000 of its income for that chargeable period.
If Mr Rose deferred his donation to 1 January 2010, he wouldn’t be regarded as a substantial donor of the charity for its chargeable period ended 31 December 2008 and there would be no tax liability related to the grant.
Transactions caught twice
10.34 It’s possible for a single transaction to be ‘caught’ under the rules for both payments to substantial donors and the rules for transactions that are less beneficial to the charity than arm’s length transactions. Where this happens there’s provision to ensure that there’s no ‘double taxation’ of the charity.
A charity buys an asset from a substantial donor; the asset is worth £20,000 but the charity pays £35,000 for it.
The payment of £35,000 is treated as non-charitable expenditure (because it’s a payment made to a substantial donor in the course of a transaction to which the legislation applies).
The £15,000 excess over market value is treated as non-charitable expenditure (because the terms of the transaction are less beneficial to the charity than might be expected in a transaction at arm’s length).
However the £35,000 non-charitable expenditure treated as incurred under the ‘payments’ rule is deducted from the £15,000 non-charitable expenditure which the charity would otherwise be treated as incurring under the ‘arm’s length’ rule, reducing that sum to nil.
The result is that only the sum of £35,000 is treated as non-charitable expenditure, and only £35,000 is taxed.
10.35 The legislation also applies to ‘non-cash’ transactions, such as a transfer of property to a substantial donor. The cash equivalent of the deemed value will be treated as non-charitable expenditure and tax relief will be restricted on that amount.
10.36 The legislation doesn’t apply, and no amount is treated as non-charitable expenditure by reference to a transaction between a charity and a substantial donor, if HMRC determines that a statutory exception applies to the transaction.
10.37 The exceptions applying to each type of ‘caught’ transaction are summarised in this table:
|Sale or letting of property by a charity to a substantial donor.||No exception.|
|Sale or letting of property to a charity by a substantial donor.||Transaction excepted if it takes place in the course of a business carried on by the substantial donor, on terms which are no less beneficial to the charity than an arm’s length transaction, and is not part of an arrangement to avoid tax.|
|The provision of services by a charity to a substantial donor.||Transaction excepted if the services are provided in the course of the actual carrying out of a primary purpose of the charity, on terms which are no more beneficial to the donor than those on which services are provided to others.|
|The provision of services to a charity by a substantial donor.||Transaction excepted if it takes place in the course of a business carried on by the substantial donor, on terms which are no less beneficial to the charity than an arm’s length transaction, and is not part of an arrangement to avoid tax.|
|An exchange of property between a charity and a substantial donor.||No exception (however a disposal at undervalue to a charity, to which section 431 ITA 2007, section 203 CTA 2010 (previously section 587B ICTA 1988) or S257 Taxation of Chargeable Gains Act (TCGA) 1992 applies, shall not be a transaction to which this legislation applies).|
|The provision of financial assistance by a charity to a substantial donor.||No exception.|
|The provision of financial assistance to a charity by a substantial donor.||Transaction excepted if the assistance is on terms which are no less beneficial to the charity than might be expected from an arm’s length transaction, and the assistance is not part of an arrangement to avoid any tax.|
|Investment by a charity in the business of a substantial donor.||Transaction excepted if the investment takes the form of a purchase of shares or securities listed on a recognised stock exchange.|
|Payment of remuneration by a charity to a substantial donor (including the cash equivalent of remuneration paid otherwise than in cash, such as benefits in kind).||Remuneration for services as a trustee will be excepted only where it’s approved by the Charity Commission or another regulatory body or by a Court.|
Payments by a charity or benefits arising to a substantial donor from a transaction are disregarded if they relate to a donation by the donor and don’t exceed the relevant ‘Gift Aid’ benefit limits in S25FA90/S339 ICT88. More detailed guidance on benefits received by donors is available.
It’s important to note that there’s no exception for remuneration paid to a substantial donor or any person connected with a substantial donor, other than the exception for approved trustee’s remuneration. Payments of remuneration to a substantial donor etc are caught even if the remuneration is on ‘arm’s length’ terms, whereas payments to a self-employed substantial donor, which take place in the course of the donor’s business, may be excepted if they’re on ‘arm’s length’ terms.
Meaning of transactions ‘in the course of business’ and at ‘arm’s length’
10.38 Sometimes individuals or companies make donations to charities that they do business with in the normal course of events. As long as the arrangement between the charity and the donor is on the same terms as would be expected if the business was transacted by a person not connected in any way to the charity (a transaction at arm’s length), the transactions will be excepted.
Mr Gold carries on a successful management consultancy business; a charity engages him to run a series of seminars for its staff. He charges the charity the same daily fee rate as other customers receiving the same services; his fees are in fact slightly lower than some other consultants working in the same field.
Having become aware of the work of the charity, Mr Gold makes a £25,000 gift aid donation to the charity. He continues to provide consultancy services at the same daily rates.
The charity regularly compares his rates with those of his competitors.
As HMRC is satisfied that Mr Gold provides services to the charity in the course of a business, on terms which are no less beneficial to the charity than those expected from an arm’s length transaction, and that there’s no tax avoidance involved, the transactions between the charity and Mr Gold are excepted.
Mrs Olive is a substantial donor of a charity, and also has a longstanding business relationship with the charity, delivering public relations services.
Her charge out rate to the charity is 15% to 20% higher than several other public relations reps working in the same area.
The charity hasn’t compared rates or requested competitive tenders for the work for several years; the trustees continue to engage Mrs Olive for the work as she understands the charity’s needs and is well known by the staff.
As the terms of the transactions between the charity and Mrs Olive are less beneficial to the charity than would be expected from arm’s length transactions, HMRC determines that the exception doesn’t apply.
The charity’s treated as incurring non-charitable expenditure equal to the cost to the charity of the difference in terms (based on a comparison of open market rates for the services provided).
10.39 HMRC will normally only determine that a transaction or transactions fall within these rules, and the amount of any resulting tax liability, in the course of an enquiry into a Self Assessment tax return. If a charity enters into transactions with a substantial donor, to which none of the statutory exceptions apply, it should complete and file a tax return showing that it has incurred non-charitable expenditure, and to account for the tax due. If a charity hasn’t received a tax return from HMRC it nonetheless has an obligation to self assess any tax liability so should notify HMRC and request a tax return.
10.40 HMRC Charities won’t generally clear transactions in advance or consider hypothetical situations. Charities should therefore take care that all transactions they enter into with substantial donors fall within the letter and the spirit of this guidance.
10.41 CAP1 explains the different ways that HMRC will give information or advice.