Policy paper

Charity tax reliefs: guidance on Charity Commission policy

Published 21 January 2015

Applies to England and Wales

1. Trustees’ fiduciary duty

Charity trustees are under a fiduciary duty to act exclusively in the best interests of their charity in the management of its affairs and the application of its property to further the charity’s purposes for the public benefit. In so doing, they must exercise reasonable care and skill and act to the standard of an ordinary prudent business person in the conduct of their own affairs. This duty makes it appropriate for them to engage in reasonable and prudent tax planning and to take advantage of available statutory tax reliefs relating to charities where these will assist the work of the charity, encourage genuine donations and coincide with the purposes for which these reliefs were created. In addition, trustees may properly seek to organise their charity’s affairs when carrying out particular activities or transactions in a way which minimises the charity’s liability to tax.

Trustees will however risk scrutiny and potential investigation by the commission if they engage in tax arrangements which exploit tax legislation artificially, particularly where they serve to benefit private interests, as well as those of the charity. The use of such arrangements is likely to be in breach of trustees’ duties and responsibilities to act prudently and in the best interest of the charity. Reputational damage to the charity is highly likely to arise from their involvement in such arrangements. Trustees should refer to HMRC’s guidance as to what constitutes tax avoidance. The difference between tax evasion and tax avoidance is described in the government policy ‘Reducing tax evasion and avoidance’, which also sets out HMRC’s and the Treasury’s position in relation to tax avoidance.

HMRC defines the two concepts as follows:

‘Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter-but not the spirit-of the law. Tax evasion is when people or businesses deliberately do not pay the taxes that they owe and it is illegal.’

This document sets out the commission’s guidance on these matters.

2. Reasonable and prudent tax planning by charities

To encourage charitable endeavour the government allows charities a number of valuable tax reliefs. Charities may also engage in reasonable and prudent tax planning to minimise a charity’s tax liability. Tax planning involves structuring transactions to make the best use of relevant tax provisions that apply to charities, companies and individuals. For example, charities will often undertake trading activities through wholly owned trading subsidiaries and gift aid some or all of the profits of the trade to the parent charity to fund the charity and reduce the subsidiary’s exposure to corporation tax.

But charities need to consider carefully the point at which reasonable and prudent tax planning becomes tax avoidance. In particular, when trustees are considering proposals for tax arrangements which are supported by favourable legal opinion from a tax specialist, they should in such circumstances always take professional advice from a reputable adviser unconnected with the proposed arrangements.

An example of reasonable and prudent tax planning might be encouraging eligible donors to use gift aid when making cash donations to the charity. They may also arrange their affairs to structure transactions in a manner which minimises the irrecoverable VAT paid by their charity. Other examples of prudent tax planning include:

• a charity may give advice on legacy gifts planned in a will that will attract tax relief from inheritance tax
• a charity may encourage higher rate tax payers to claim the higher/additional rate relief (the difference between their marginal rate tax and the basic rate of tax) on their cash donation and adjust the amount they donate as a result of the overall cost to them of the donation being lower

2.1 Trustees’ responsibilities

Where trustees seek to enter into tax planning arrangements they must satisfy their duty of prudence and ensure:

• the arrangements are lawful
• they have power to enter into the arrangements in question
• they are neither conflicted nor have the potential to benefit personally from any arrangement
• they take and consider appropriate independent specialist advice about obtaining fiscal relief or minimising tax in the context of their responsibilities, such advice being independent of both the charity and the promoter of any proposed arrangements
• a record is kept of their decision-making including any tax law, tribunal decision or professional advice upon which they are relying
• they take into account and consider any published guidance and advice as to the lawfulness of the proposed arrangements offered or available from HMRC
• by entering into the arrangement, that they do not expose any of the charity’s property to undue risk
• that the proposed transactions will not damage the reputation of the charity and that they have considered how the character of the arrangement fits with the aims of the charity and the ethos of its donors and beneficiaries
• overall, that the arrangements are in the best interests of the charity

2.2 Where trustees can get advice on tax

If trustees are in doubt about a tax matter then they should seek advice. It is not the commission’s role to provide tax advice to charities. Trustees should take independent professional advice and consider HMRC’s guidance ‘Charities and tax’.

3. Tax avoidance involving charities

Tax avoidance is challenged by HMRC and can be subject to regulatory scrutiny by the commission. Examples of previous arrangements that have been considered to be tax avoidance in beach of trustees’ duties and responsibilities have involved:

• borrowing funds to buy investments for a charity and assigning them to individuals at a nominal price, where:
  • the investments are then sold at market value and the proceeds ‘donated’ to charity enabling it to repay the loan
  • this artificial transaction seeks to generate tax relief for individuals and gift aid receipts for the charity
• leasing empty properties from private landlords in which negligible charitable activity subsequently takes place, where:
  • the charity seeks to claim business rates relief on the property resulting in a loss of revenue to the local authority and seeks to avoid the landlord paying rates on an empty property
  • the charity may receive funding for its facilitation of this transaction in the form of a ‘reverse premium’
• serial and contrived financial transactions involving charities and companies which seek to disguise what may have been a taxable transaction

The principal aim of such arrangements is to confer advantage on private businesses or individuals with any benefit to the charity being a by-product of the scheme rather than its principal aim. Apart from being subject to a challenge from HMRC, such arrangements are not consistent with trustees’ duties to act prudently and to further the charity’s purposes in its best interests for the public benefit. The risks to the charity involved include damage to their reputation. Of great concern to the commission are the risks of wider damage to the reputation of the charity sector in the eyes of the general public and Parliament, and the potential loss of other tax reliefs to the sector as a result of, or as a necessary by-product of, action to stop or close such schemes.

The Disclosure of Tax Avoidance Schemes (DOTAS) legislation places a duty on promoters of certain schemes to notify HMRC of the relevant details of the scheme. This legislation is operated by HMRC and not the commission and requires advance notice of tax schemes that meet certain criteria. If a complaint is received by the commission about non-disclosure to HMRC then the matter will be referred to HMRC for consideration.

On 17 July 2013, a new General Anti Abuse Rule (GAAR) came into force to tackle abusive tax avoidance. The GAAR makes it clear that taxation is not to be treated as a game where taxpayers can indulge in any contrived or inventive scheme in order to eliminate or reduce their tax liability.

4. Tax evasion and tax fraud

Charities must not engage in tax evasion and tax fraud. Tax evasion is the unlawful concealment of taxable income or gains or the illegal or fraudulent presentation of a taxpayer’s affairs to evade paying tax. Tax fraud is claiming tax reliefs when not eligible, for example:

• a charity knowingly claiming zero rating for VAT for a new building that is used wholly for commercial and not charitable purposes
• a charity paying for goods and services in cash without a supporting tax invoice
• a charity purporting to employ a person on a self -employed basis when the nature of their work for the charity and the contractual relationship with the charity means that they should be treated as an employee for tax purposes
• knowingly claiming gift aid when qualifying donations have not been received by the charity
• knowingly presenting expenditure included for a private or non-charitable purpose as charitable expenditure in accounts or tax returns

5. The Charity Commission’s regulatory position

The commission encourages charities to take advantage of specific charity tax reliefs, for example gift aid and recognises that reasonable and prudent tax planning is consistent with the trustees’ fiduciary duties to the charity they manage. In certain circumstances the commission may authorise certain arrangements to this effect if judged expedient in the interests of the charity

The commission considers, tax fraud, tax evasion and tax avoidance to fall within an area of regulatory concern. In addition the commission expects charities to fulfil their obligations under tax law fully and to take every reasonable step to ensure that the charity is not a party to, and does not enter into, any tax planning arrangements that are imprudent in the ways described above or could bring the charity or the charitable sector into disrepute.

The commission will assess all concerns about which it is made aware concerning tax fraud, evasion or avoidance by charities and will use its power under the Charities Act 2011 to exchange information with HMRC in such cases.

The commission will, under sections 54 to 59 of the Charities Act 2011, exchange information with other agencies, including HMRC, on inappropriate tax planning issues it identifies in its casework or monitoring. Details exchanged may include, but will not be limited to, possible or suspected tax evasion and charity participation in tax avoidance or other practices which give rise to regulatory concern.

The commission will consider investigatory and/or other regulatory action for example where:

• the income or assets of a charity is put at significant or undue risk
• trustees or related parties are using a charity to obtain significant private benefit or are obtaining remuneration in cash or kind by acting either directly as an intermediary or a tax advisor to assist individuals or corporations to avoid tax or indirectly by ‘common purse’ or receipt of consideration in gifts, cash or kind
• trustees or related parties are using the charity as a vehicle for their own private benefit to minimise tax
• the charity is a sham or is not operating for the public benefit
• trustees have not considered the impact on the charity’s reputation and finances from the charity’s involvement in a tax planning scheme that afforded third parties significant private benefit
• trustees are involved in tax fraud (including the making of fraudulent gift aid claims), tax evasion or tax avoidance
• trustees have not taken appropriate tax advice and have incurred non-charitable expenditure giving rise to a material tax liability or charge to the charity or have incurred tax penalties through non-compliance with legal requirements

In these circumstances the details of any complaint and any information already obtained from the trustees or the charity will be assessed to decide if further action is justified. The commission will share all relevant details or facts with HMRC where appropriate and may report publicly on the outcome.