Home / Insights / Blog / Proposals to introduce a new definition of “Charity” to stop charities being used as tax avoidance vehicles

Proposals to introduce a new definition of “Charity” to stop charities being used as tax avoidance vehicles

Proposals to introduce a new definition of “Charity” to stop charities being used as tax avoidance vehicles

Following the 2013 Autumn Statement announcement that legislation would be brought forward this year to prevent charities being set up to avoid tax. HMRC has now published a paper, which is being consulted on until 11 April 2014, setting out two options which seek to prevent charities being set up to avoid tax.

OPTION 1: A charity would not be recognised by HMRC if one of the main purposes or results of its establishment is to secure a tax advantage.

CTG raised significant concerns over the proposed Option 1 as it is arguable that one of the main purposes of establishing a charitable foundation is the obtaining of a tax advantage, specifically gift aid and other reliefs on donations.

OPTION 2: A charity would not be recognised by HMRC if its single main purpose was to obtain a tax advantage.

HMRC considers that Option 2 reduces the likelihood that legitimate charities would be affected by the new rule as it would be clear that the main purpose of a legitimate charity is philanthropy rather than obtaining a tax advantage. However, HMRC remains concerned that adopting Option 2 could make it easier for determined tax avoiders to subvert the legislation.

NCVO, Charity Finance Group and the Association of Charitable Foundations have produced a joint response to HMRC’s proposals, advising HMRC to abandon its proposals to introduce new legislation and, instead, to focus on enforcing existing legislation.

IBB Solicitors’ specialist charities@ibblaw.co.uk