Charities tax compliance – Future reforms likely

HMRC has just launched a 12-week consultation on charities tax compliance. The purpose of the consultation is to explore reforming some tax relief rules that, in the words of the consultation document, 'do not work as intended.'  The aim being to tackle non-compliance and protect the integrity of these charity tax reliefs.

The consultation is seeking views on several technical but important areas:

• the tainted charity donations rules which apply where a donor enters into an arrangement with a charity or a Community Amateur Sports Club that gives them, or someone else involved in the arrangement, a financial advantage in return for the donation. The rules exist to prevent circular transactions, such as individuals ‘donating’ money to a charity, obtaining tax relief on the donation, and then receiving a benefit back from the charity.  The consultation is seeking to revisit these rules.

• approved charitable investments rules.  These rules enable charities to investment their funds to yield a financial return, allowing them to advance the organisation’s charitable aims without treating the investment as non-charitable expenditure which normally restricts a charity’s tax exemptions.   The consultation is  looking at making it easier for HMRC to challenge investments that generate little or no benefit to a charity. 

HMRC is also proposing withholding claims to tax reliefs (including payments of Gift Aid) from charities that do not file tax returns when requested.   HMRC explains in its consultation document that all charities should submit annual tax returns to HMRC but the regulator recognises that many charities are run by unpaid volunteers and so may struggle to balance these administrative requirements alongside their core charitable purpose. Most charities are therefore only required to file a tax return every three years.  Submitting a tax return gives reassurance to charities that they have got their taxes right and provides confirmation that their income continues to be eligible for tax reliefs and exemptions. Additionally, it allows HMRC to police the charity sector by monitoring the activities of charities and identifying risk trends.   Although HMRC offers some charities a concession by allowing them not to file a tax return every year if they have no tax to pay, some charities still fail to meet their obligation to file their returns when they are requested. Despite not completing an overdue or requested return, the same charity may still claim tax reliefs such as Gift Aid and expect it to be paid.   HMRC believes this is unfair to the majority of charities that fulfil their obligations and file their tax returns on time and risks Gift Aid payments or the giving of other tax reliefs to charities that do not qualify. The proposal is not to make all charities file returns annually, but to ensure that tax returns are filed when required or requested.

At this stage, HMRC is seeking views on policy design and suitable possible alternatives before it consults on specific proposals for reform. The consultation closes at 11.45 pm on 20 July 2023.  The Withers' team will be responding to the consultation so look out for our future updates.