27 September 2022 - Article
The First Tier Tribunal (Tax) was asked to review a decision, made by HMRC, that a loan to private company Gladstar from the charity The Reb Moishe Foundation could not be treated as an approved charitable investment. The ruling offers useful guidance on applying the statutory test to determine if a loan made by a charity is a qualifying ‘Type 12’ Investment.
‘Type 12’ Investment refers to the list of ‘approved charitable investments’ set out in s558 Income Tax Act 2007 being:“A loan or other investment as to which an officer of Revenue and Customs is satisfied, on a claim, that it is made for the benefit of the charitable trust and not for the avoidance of tax (whether by the trust or any other person).”
The charity in this case was established with objects to relieve poverty and advance education amongst the Jewish community. At the time the transactions under consideration were made, one of the two trustees of the charity was also the company secretary of the company Gladstar, which was a commercial property investment company. Gladstar made donations of roughly £2.5 million to the charity. At around the time of the donations, the charity made a loan of £2 million to Gladstar, the terms of which included an interest rate of 24 %.
The charity argued that the reason for this loan was that it did not have an immediate use for the funds and that it could make a substantial return by lending money with an interest rate as mentioned above. The Tribunal considered the two limbs of the Type 12 Investment test, which should be considered separately:
That it is made for the benefit of the charitable trust
This was accepted by both the Tribunal and HMRC. This was based on the fact that the charity did benefit from a high rate of interest as a result of the loan. As noted below, the Charity Commission took a different view on this point.
That the loan is not for the avoidance of tax, whether by the charity or any other person
The Tribunal noted in particular that the funds had moved in a circle from Gladstar to the charity and ended up back where they started. Gladstar benefited from two separate tax reliefs as a result of the transactions, the first being Gift Aid on the donation and the second being for the interest paid on the loan. Considering the close relationship between the charity and Gladstar, the Tribunal decided on the balance of probabilities, the more likely reason behind the loan was the avoidance of tax by Gladstar.
The Tribunal did note that the correspondence between HMRC and the charity had focused on HMRC’s guidance in relation to approved charitable investments, rather than the statutory rules. The view of the Tribunal was that what matters is whether a loan falls within the Type 12 statutory test and not whether it is consistent with HMRC guidance.
The Charity Commission also conducted its own inquiry into the charity as a result of the loan. Interestingly, the Commission reached a different view on whether the loan was in the best interests of the charity. Given the failure to manage the clear conflicts of interest and the fact that the charity did not take investment advice in relation to the loan, the Commission concluded that the trustees were unable to show that the loan was for the benefit of the charity.
The case has provided some useful guidance, in that when it comes to Type 12 loans the starting point is the statutory test when determining whether it is approved charitable expenditure. The HMRC guidance remains useful, but ultimately, HMRC case officers will be expected to show that they have applied the legislation and not just the guidance when reaching a decision. It is also worth noting the different emphasis of the Charity Commission when considering whether the loan was in the best interests of the charity. The Commission will not simply apply a commercial test, but expects to see good governance in terms of recording and justifying decisions and managing conflicts.