Buried in Wednesday’s Budget was confirmation of a measure announced in last year’s Autumn Statement to look at ways to deter the use of charities for the purposes of tax avoidance. Last Friday, HMRC published a discussion paper on options for changing the definition of charity for tax purposes in order to tackle tax avoidance.
The definition of charity for tax purposes is important because these rules enable charities to claim tax reliefs and so any changes should be taken with care.
NCVO supports the government’s objective to reduce tax avoidance and ensure that charities are not used as vehicles for abuse. However we are concerned that HMRC’s proposed changes could prevent people from setting up charities.
There are particular concerns around the affect that it could have on the formation of charitable foundations. These foundations are an important source of funding for the sector and we believe that any measures pursued by HMRC should not discourage or prevent the formation of legitimate charitable foundations.
HMRC has proposed two versions of a clause which would change the definition of a charity for tax purposes.
They would give HMRC the right to withdraw charitable reliefs from charities if they believed that securing tax advantage for any person was the main purpose (or one of the main purposes) for the formation of the charity.
We are concerned that both versions could have unintended consequences for the formation of charities with philanthropists who legitimately wish to use tax reliefs, such as Gift Aid, to maximise the value of their donations coming under suspicion for tax avoidance.
Moreover, the broad wording of the clauses means that there is little certainty around what HMRC would consider as tax avoidance. This could create confusion and lead to philanthropists deciding to play it safe by either not claiming tax reliefs or not setting up charities.
We are working closely with Charity Finance Group and other bodies to ensure that all the consequences of these changes are considered. We also welcome your thoughts on how these proposals could effect you, so please email me at andrew.obrien@ncvo.org.uk to get in touch.
UPDATE (01/04/2014): The Association for Charitable Foundations, Charity Finance Group and NCVO have responded to HMRC’s discussion paper. You can read it here.
Andrew was NCVO’s senior policy officer. He covered issues around funding, social investment, tax and the impact of the economy on the voluntary sector. Andrew has left NCVO, but his posts are kept here for reference purposes. 
