FA 2011 Sch 3 contains a new targeted anti-avoidance rule covering gift aid and various other tax relievable gifts to charity. From 1 April 2011, this effectively replaced the former substantial donor provisions. Tax relief is denied for ‘tainted donations’ which are linked to the donor obtaining a financial advantage from the recipient charity.
The tainted charity donations rules in FA 2011 Sch 3 are anti-avoidance rules aimed at a small minority of donors who, it is thought, take advantage of the tax breaks for charitable gifts as well as obtaining some form of financial advantage from the recipient charity.
The new rules took effect from 1 April 2011 and substantially replaced the controversial ‘substantial donor’ provisions which have been with us since FA 2006.
Practitioners are most likely to come across these rules in relation to gift aid donations by individuals or the equivalent relief for companies, charitable donations relief.
They could potentially apply, though, to any of the other relieving provisions for gifts to charity, including the CGT exemption in TCGA 1992 s 257. Charities for this purpose would include Community Amateur Sports Clubs (CASCs).
Under the existing gift aid rules, there are already limits on the benefits which may be received in return for making a gift. Indeed, for larger donations, the upper associated benefit limit has just been increased to £2,500 from £500.
The tainted donor provisions are aimed at more indirect arrangements which sidestep the normal gift aid associated benefits rules.
The new rules should be borne in mind whenever a charity enters into transactions which might be linked in some way to a donation it has received, especially if there is any doubt over the related transaction being on arm’s-length terms.
The rules, though, are subject to a ‘main purpose’ test. This should mean the test will only bite in exceptional cases, although it might cause some uncertainty in borderline situations. A charitable donation is ‘tainted’ for these purposes only if both the following conditions are met:
It is only financial advantages obtained from the charity which are caught. So, for example, naming a new building after a benefactor or giving some other token of recognition for a gift should not be an issue.
The legislation spells out a particular circumstance in which a financial advantage is deemed to arise, being a non-arm’s length transaction between the linked person (X) and another person (Y). Y in this context would typically be the charity receiving the donation.
If, broadly, the terms are less beneficial to Y than would have occurred between parties dealing at arm’s length, a financial advantage automatically arises for this purpose.
Donors to charities could, in the light of these rules, lose gift aid relief on the entire donation if it were associated with another transaction between the donor and the charity where the terms are, even marginally, unfavourable to the charity.
Under these rules, the primary risk rests with the donor. This is a key change from the former substantial donor rules.
If a donation is tainted, it is the donor who loses any tax relief for gifts associated with the relevant arrangements.
The recipient charity could still be liable to repay any income tax claimed in relation to tainted gift aid donation, but only if it was knowingly party to the offending arrangements. Otherwise, the donor would face an additional income tax charge for the basic rate income tax recovered by the charity.
Charities will still, at least until 1 April 2013, need to monitor future transactions with existing ‘substantial donors’ (broadly, donors who before April 2011 made tax relievable gifts to the charity of at least £25,000 in any year or £150,000 over six years).
Transactions between the charity and such persons could still result in a tax charge for the charity but only if the arrangements would be ‘tainted’ under the new rules.
If the donor receives an associated benefit allowable under the gift aid rules, this would not be an advantage caught by the tainted donation provisions.
Similarly, an advantage which has restricted the donor’s tax relief for gifts of shares and qualifying real estate investments to charity is also ignored.
Donations by companies, wholly owned by charities, and certain registered providers of social housing, are outside these rules.
Accordingly, the standard practice for charities of forming trading subsidiaries which gift aid surpluses to the parent charity should be unaffected by these changes.
Similarly, non-charitable parents of housing association groups should still be able to manage their corporation tax position by donating surpluses to charitable registered providers in the same group.
Toby Bushill, Director, Deloitte
