Extension of UK charity tax relief

Following a 2009 European Court of Justice ruling, UK charity tax reliefs are to be extended to charities in the EU, Norway and Iceland. Legal and procedural changes are being introduced simultaneously and will affect the way UK charities interact with HMRC.

Baker Tilly analysis

The extension of UK tax relief is undoubtedly good news for EU, Norwegian and Icelandic charities (‘EUNICE charities’, as we might now call them) and their UK donors. However, the other proposed changes to the UK charity tax regime may well create additional administrative burdens for UK charities.  The next 18 months are likely to see a major reform in the way charities interact with HMRC, as both the Budget proposals and the results of ongoing consultations on the reform of donor rules and the gift aid scheme all come into effect.

In detail

Fundamental to the proposals will be a new definition of a charity for tax purposes. UK and ‘EUNICE’ charities that meet this definition, which for the first time will include a requirement to be registered with the appropriate regulator (who will also be registered with HMRC), will be entitled to UK charity tax reliefs.

Not only does this mean that EUNICE charities should be able to claim back basic rate tax on UK gift aid donations but also that UK gift aid donors to these organisations will also be able to claim higher rate tax relief. Non-resident UK taxpayers can also claim. Although the new legislation is not yet in force, the announcement does say that claims in respect of donations since 27 January 2009 (the date of the European Court of Justice decision) will be considered provided the EUNICE charity was under English law at the time. HMRC will publish a list of qualifying organisations in due course. However, it is worth remembering that in order to qualify, a valid gift aid declaration must have been made.

As part of HMRC’s drive to combat fraud and abuse of charity tax relief, trustees and those charged with financial management will have to be ‘fit and proper’ persons. Exactly what constitutes ‘fit and proper’ will be set out in the legislation and HMRC guidance. HMRC have said they will apply the test flexibly and work with charities to ensure that tax relief remains available. However, HMRC will examine a person’s records if their fit and proper status is in question.