“As the holiday spirit traditionally encourages us to think of others, and end of year tax planning is getting closer, making a large donation to charity can be a tax efficient decision. Previously, the rules regarding large gifts to charity were complicated, needed transactions with donors to be monitored for several years and could result in charities having to pay tax. Some large donors were put off by these rules and I understand they caused at least one charity to refuse a multi million pound donation,” says Sudhir Singh, Chairman of the Charities and Education Group at Baker Tilly.
The 2006 substantial donor rules were intended to stop tax abuse by donors but were the proverbial blunt instrument. Not only onerous and administratively difficult for charities, they also caught entirely innocent transactions and taxed charities not donors taking advantage of the system. Quite rightly charities protested loudly and, to their credit, HMRC recognised the problems and have been working with representatives of the charity sector to come up with a workable alternative.
The result is the draft “tainted donation rules” published earlier this month. These are a simple purpose based test which only applies to donations where there are arrangements for the donor, or a connected person, to receive a benefit from the charity. As tainted arrangements must unreasonably favour the donor, or otherwise not be at arm’s length, and the donation would not have been made without these arrangements; it is difficult to think of “innocent” situations that will now be caught. Importantly, if a donation is tainted the donor will lose their tax relief not the charity.
Graham Batty, Charity Tax Director at Baker Tilly and a member of the HMRC working party considering substantial donor legislation, adds: “No one in their right mind supports charities being used for tax abuse. While the effects will not be seen immediately, we welcome this change as it provides simple, clear and workable rules for charities and the individuals who support them while still protecting the public purse. Charities are already facing tighter budgets as the economic condition in the UK has caused people to reconsider and adjust their charitable giving. This revised approach to substantial donations will hopefully encourage increased support in the future.”
Because the tainted donation rules cannot be introduced retrospectively the existing substantial donor rules have to stay in place for a few years yet. However, from 1 April 2011 they will only apply if the original substantial donation would have been tainted under the new rules.
Good, workable, tax legislation has never be made on the hoof. The tainted donation rules show what can be achieved by proper consultation and cooperation. Hopefully this is a trend that will continue.
Source: Baker Tilly