go site search

The Budget 2010 commentaries - charities

"The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."

UK charity tax reliefs

A package of changes with respect to charities and Community Amateur Sports Clubs (CASCs) has been announced.  These changes can be divided into three categories:

  • extending UK charitable tax reliefs to certain organisations equivalent to UK charities and CASCs in the EU and in the European Economic Area countries of Norway and Iceland;
  • a number of changes to the law and processes; and
  • anti-avoidance legislation.

Extending UK charity tax reliefs to certain organisations in Europe

This change is being introduced as a result of the ECJ judgment on 27 January 2009 in the case of Hein Persche v Fonanzamt Ludenscheid (C-318/07). From 2010/11 onwards (possibly from 27 January 2009 on a case by case basis) UK charitable reliefs on all taxes will be available to qualifying charities and CASCs in the EU and in the European Economic Area.

HMRC will publish a list of charities that it has agreed will qualify for UK charitable tax reliefs, but has also advised on its website that ‘where a charity appears on the list you may want to check that they continue to be eligible at the point when you make your donation: it is possible that some charities, particularly smaller charities, may have become dormant in the meantime or changed their circumstances’. 

Changes to the law and processes

There will be a new aligned definition of an organisation eligible for charity tax reliefs; to qualify as an eligible organisation for charity tax reliefs an entity must be:

  • set up for charitable purposes only, within the meaning of the Charities Acts 2003 and 2006;
  • located in a Member State of the EU or other territory specified in regulations by HMRC (Iceland and Norway will be specified as soon as possible after Finance Bill 2010 receives Royal Assent);
  • regulated by any body in their home country with an equivalent function to the Charity Commission or any similar regulator, as required by the law of the home country; and
  • supervised by ‘managers’ (trustees, directors and other persons with a management function) who are ‘fit and proper’ persons.

For gift aid purposes it is anticipated that this new definition will apply for donations made on or after 6 April 2010.  For other purposes it appears the definition will come into force at some point in 2010/11 (subject to a commencement order). 

CASCs, and their non-UK equivalents, will also be required to meet the location condition above and their ‘managers’ must also meet the ‘fit and proper’ persons test.

In February the Government set up a Gift Aid Forum to consider possible reforms and simplifications to the regime; the forum is expected to make recommendations in the autumn.

In a separate move the following modifications have been announced to the Gift Aid regime which will mostly take effect during 2010/11:

  • the rules on recovering tax overpaid to charities under Gift Aid where an individual has not paid enough tax to cover the donation will be amended to apply the same treatment to UK resident and non-UK resident donors;
  • the practice of HMRC making repayments of tax under Gift Aid to charitable companies before the end of the tax year will be put on a statutory basis.

A new procedure for making Gift Aid tax repayments to charities has also been announced. 

  • From 24 March 2010, if the donations are to remain tax-exempt, organisations will be required to apply donations received under Payroll Giving for charitable purposes.

Anti-avoidance legislation

A number of anti-avoidance measures were announced:

  • Effective from 15 December 2009, new rules will be introduced to block schemes that exploit the rules for tax relief on gifts of qualifying investments (certain shares, securities and land) to charities.
  • With effect from 24 March 2010, the Government announced a strengthening of the anti-avoidance rules requiring UK charities that make payments to bodies outside the UK.  Broadly, these rules require the charity to take reasonable steps to ensure the monies are used for genuine charitable purposes.   
  • At the 2009 PBR it was announced that the Government proposes to replace the current substantial donors to charities anti-avoidance rules with a new purpose test which would deny tax relief on donations to charities where the donor is party to an arrangement, the purpose or one of the main purposes of which is to extract value from the charity.  There has been consultation with stakeholders on this issue and talks are to continue. 

Comment

A number of changes have been announced the details for some of which are not yet available.  The extension of UK charity tax reliefs to certain organisations in Europe in the light of the ECJ judgment is welcome and both charities and donors should consider whether they can make claims retrospectively. 

Less welcome is the reference to a ‘fit and proper’ persons test in the proposed definition of organisation eligible for charity tax reliefs as it would appear that HMRC is seeking to take on responsibilities which should fall to the Charity Commission. 

Also of concern is the reference to strengthening the anti-avoidance rules requiring UK charities that make payments to bodies outside the UK.  It is important that any change is appropriately targeted such that it does not impose an undue burden on charities.  It is hoped that there will be consultation to ensure the legislation is properly targeted.