31 July 2014

HMRC decides against introducing new definition of charity for tax purposes

Following the Autumn Statement 2013, HMRC drafted two versions of legislation designed to prevent charities from being established as part of a tax avoidance scheme and initiated a consultation process.

Version A relied on preventing a charity being recognised by HMRC if, in essence, one of the main purposes or results of its establishment is to secure a ‘tax advantage’. While version B’s approach was to narrow the purpose test from one of a number of purposes to a single main purpose in order to reduce the likelihood that legitimate charities would be affected because it would be clear that the main purpose of a legitimate charity is philanthropy rather than getting a tax advantage.

The most common objection by respondents was that the definition of ‘tax advantage’ was too broad and that existing defences can deal with the worst cases of abuse. Several respondents felt that version A could catch innocent charities, such as private and corporate charitable foundations, while version B would not effectively bolster existing defences.

Following considerable lobbying, HMRC has now decided that neither version A nor version B be pursued.

While we fully support HMRC’s efforts to reduce the ability of fraudsters to use charities to avoid tax, we were concerned that the proposals were ill-targeted and could have negative implications for the sector.

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