Spring Budget 2023: Returning to territoriality in charitable tax reliefs
4 April 2023 | Applicable law: England and Wales | 6 minute read
The UK Government's Budget last month announced a change to the definition of a charity for UK tax purposes, a change expected since Brexit, but subject to much speculation as to timing.
This change removes from UK domestic law the EU non-discrimination principle introduced by Schedule 6, Finance Act 2010 (FA 2010). The change represents a return to a strictly territorial approach to charitable tax reliefs; as the government announcement put it, the change 'takes advantage of opportunities arising from the UK's exit from EU. Having left the EU it is right that UK taxpayer money should support UK charities and CASCs.'
Like many jurisdictions, the UK traditionally took a 'territorial' approach to charitable tax reliefs – relief was solely available to UK organisations, and in respect of donations to them. Most other European jurisdictions that gave preferential treatment to charities also took a territorial approach, and this was ultimately determined by the European Court of Justice (ECJ) to be contrary to the free movement of capital guaranteed by the EC Treaty.
To comply with its EU obligations, provisions in FA 2010 were introduced, bringing in several new conditions applicable to all organisations seeking recognition as a 'charity' for UK tax purposes. The 'jurisdiction condition' required an organisation was subject to the control of either (1) a relevant UK court in exercise of its jurisdiction with respect to charities, or (2) a court of corresponding jurisdiction under the law of a 'relevant territory'. The relevant territories included all EU member states and, by subsequent statutory instruments, Norway, Iceland and Liechtenstein, being European Economic Area (EEA) jurisdictions. There was some speculation at the time that this allowed for expansion beyond the EEA, but no other territories were ever added.
It was perhaps inevitable that following the end of the Brexit transitional period, the FA 2010 expansion would ultimately contract again. After all, the UK argued forcefully at the time against the original expansion, and the unique structure of the Gift Aid basic rate reclaim involves HMRC actually sending funds out to charities, not merely permitting donors to claim personal deductions, raising both practical challenges and anxiety about oversight.
What has changed
The budget provided that tax reliefs would be restricted once again to UK charities. The draft legislation published alongside the Budget reveals that this would be effected by removing entirely the concept of 'relevant territory' such that there would be only one way to satisfy the jurisdiction condition – by being subject to the control of a relevant UK court in in exercise of its jurisdiction with respect to charities. In this way, the law has reverted to the position prior to FA 2010, as developed in the English courts during the 20th century.
In addition, to be eligible for UK tax reliefs, a Community Amateur Sports Club (CASC) must be based in the UK and provide facilities for eligible sports in the UK.
The draft legislation contains somewhat complex transitional provisions. For an organisation that had, as of 15 March, already asserted its status as a 'charity' for UK tax purposes, a transitional period to April 2024 applies. For all others, UK are no longer available as of 15 March 2023.
Fit and Proper Persons
FA 2010 also introduced additional requirements on all charities: the stand alone HMRC recognition process was introduced (formerly ChA1, now an online process) and has added administrative burden, cost and delay to the establishment of a new UK charity.
In addition, FA2010 introduced a new requirement that charities be managed by persons who are 'fit and proper' to manage a charity. After 10 years it still unclear precisely what it means to be 'unfit' for these purposes, how exactly a charity is affected, and when, if it discovers a person is unfit (without having first obtained a declaration as to fitness), or whether this requirement has been effective at ensuring proper operation of charities.
Unsurprisingly, these additions will not be unwound now that Brexit has freed the UK to return to its previous territorial approach. This is unfortunate as there would be a real opportunity for minimization of administrative burden and clarification.
A return to barriers to cross border giving?
The FA 2010 expansion was in principle significant: when fully in force, it allowed a UK taxpayer to give to an eligible EEA organisation and claim UK tax relief under the Gift Aid scheme and other charitable giving incentives. Likewise, a charitable organisation that wished to fundraise in the UK, or to operate in the UK, or own and occupy premises, etc, had the opportunity to apply to HMRC for recognition as a 'charity' for UK tax purposes.
However, the reality in practice was far from the hoped for 'frictionless' cross-border philanthropy. The UK, like many EU Member States took a narrow approach to its review of foreign charities for equivalency to English charitability requirements; it was not enough that purposes fall within one of the statutory descriptions of charitable purposes, it was necessary to show that in no case could the foreign organisation do anything an English charity could not. As a result, over the space of around a decade, only around 20 non-UK organisations were recognised by HMRC as charities for UK tax purposes.
For this reason, impact on organisations formed outside the UK that currently receive tax relieved gifts from UK donors will be very limited. For such non-UK organisations wishing to fundraise in the UK, setting up an affiliated charity within the UK will once again be the only avenue for accessing support tax-efficiently. There is a long history in the UK of such 'friends of' organisations, and provided they are properly run, independent and retain discretion and control over funds, they represent a workable route to fundraising in the UK. Donor Advised Funds (DAFs) are another option.
Assessing the impact on donors or estates that might wish to give to EU/EEA organisations is slightly more difficult because recognition of a non-UK organisation by HMRC was not a pre-requisite to relief of a cross- border donation provided the non-UK organisation was in fact eligible to be recognised. However, anecdotally, it would seem that the change is also unlikely to have a significant impact by numbers or value on UK donors since HMRC did take such a narrow approach to eligibility.
Nevertheless, it is a significant change to the law, and represents a return to territoriality. It is also worth noting that while 'UK taxpayer money [will] support UK charities' under the new regime, those UK charities may in turn fund or undertake charitable activities in any part of the world. This possibility of global benefit is fundamental in the UK, and has been a part of what is now the charities sector for over 200 years.