This section of the consultation delves into The Tainted Charity Donation rules. These apply where a donor enters into an arrangement with a charity or a CASC that gives them, or someone else involved, a financial advantage in return for the donation. The Tainted Charity Donation rules are in place to prevent circular transactions, demonstrated in the diagram below:

The Tainted Charity Donation rules are based on a purpose test, with three conditions that must be met for a donation to be considered tainted:

Condition A – The donation to the charity and arrangements entered into by the donor are connected.

Condition B – The main purpose of entering into the arrangements is for the donor, or someone connected to the donor, to receive a financial advantage directly or indirectly from the charity.

Condition C – The donation isn’t made by a qualifying charity-owned company or relevant housing provider linked with the charity to which the donation is made.

These complex rules, however, make it difficult to identify all instances of tainted donations. The consultation outlines three potential options to update the rules for tainted donations, which include: replacing the rule altogether, removing, or amending Condition B. These changes would still allow charities to thank donors for their giving, with modest gifts in line with the existing donor benefit rules.

The charitable investment rules are in place to enable charities to invest excess funds to yield a financial return. In turn, this allows them to advance the organisation’s charitable aims without treating the investment as non-charitable expenditure and restricting their tax exemptions. Sometimes, individuals manipulate the charitable investment rules to make an investment through a charity to benefit others; for example purchasing an asset to be used by trustees at no benefit to the charity. HMRC aims to manage the charitable investment rules in a way that facilitates funding for charities but makes it more difficult to abuse the system. The consultation lays out plans to require charities to be able to justify investments and demonstrate how they benefit the charity, should HMRC have cause to ask.

When a charity incurs non-charitable expenditure, they lose the tax exemption on the equivalent amount of their income, and a tax charge is raised against their attributable income and gains. Attributable income and gains refers to the type of income or gain that is eligible for tax relief, and includes:

• Gift Aid donations
• payroll giving donations
• income such as rental income
• interest received
• profits from a charity’s primary purpose trading activity
• capital gains.

However, distinguishing between attributable income and gains, and a charity’s available income and gains can act as a blocker when HMRC requires the relief to be returned for non-charitable expenditure. To combat this, amongst other options, HMRC is considering a review of the definition of attributable income and gains so that it considers which types of income become chargeable following non-charitable expenditure.

Although charities should submit annual tax returns to HMRC, they acknowledge that many are run by volunteers, and therefore struggle to balance administrative requirements alongside their charitable mission. To accommodate this, most charities are only required to file a tax return every three years. Some still fail to fulfil this requirement, yet expect their Gift Aid claims to be paid. Alongside being unfair to the charities who fulfil their duties, it also means that there is a risk of charities who do not qualify receiving reliefs.

To overcome this and improve compliance, HMRC is considering the sanction of withholding payments of Gift Aid and disapplying other tax reliefs from charities that have fallen behind on their reporting and filing obligations. It’s hoped that this will encourage charities to fulfil their obligations, so that they can still access the tax reliefs they are entitled to.