The general election will be upon us shortly.  What tax changes is a new government going to have in store for the charity sector?

Is it a party issue?

Tax relief for charities is not generally a party political issue.  There are, however, two areas where the process of reform has already begun and is likely to continue irrespective of the election result.

Substantial donors

In his Pre-Budget Report the Chancellor confirmed that a new anti-avoidance test on substantial donations to charities is being developed and that HMRC will be working with the charity sector to produce draft legislation. This builds on the work of a joint HMRC/charity sector working group that considered the options for a replacement anti-avoidance rule during last summer. Given the Budget proposal to extend UK tax relief to certain foreign (EUNICE) charities, some further work will be needed and so it is likely to be 2011 before the new rules come into force.

The existing Finance Act 2006 substantial donor rules are, in many ways, unworkable and seek to tax the recipient charity rather than the (allegedly) abusive donor.  The proposed new test will apply if the main or one of the main purposes of the arrangement is the return of value from the charity to the donor.  If the new test applies the donor will be denied tax relief on the donation.

This has considerable advantages over the current regime in that the test is much more targeted and penalises the donor not the charity.  Unfortunately, if the tax liability will now fall on the donor rather than the charity it is unlikely that the existing rules can be repealed retrospectively. Accordingly transitional rules will be required. 

Gift aid

Whichever party wins the election, gift aid is going to be reviewed as much of the way in which it operates is based on HMRC practice and concessions.  Following a 2005 House of Lords decision that cast doubt on HMRC’s power to make concessions, the Revenue has been engaged in a programme of review and consultation with a view to putting these practices on to a statutory footing.  Of course, HMRC is likely to take the opportunity to tighten the rules in areas where it believes that abuse is taking place, a process which began in the recent Budget.

What is clear is that although gift aid is, in principle, simple to operate and one of the most generous tax relief systems for charities anywhere in the world, charities are still not taking full advantage of it.  It has been estimated that some £700 million in repayments are not claimed each year despite charities having six years (four years from 1 April 2010) from their year end to claim.  This reluctance to take full advantage results, perhaps, from a lack of awareness of the full scope of the scheme and a perception that it is difficult to operate.  It is crucial, therefore, that any reform keeps things simple.

As a result of the review and consultation to date, the redirecting of higher rate relief from the donor to the charity is an option already under consideration. This probably stands a much better chance of actually happening than the alternative idea of a presumption of gift aid, with an “opt out” for donors.  Redirecting higher rate tax relief could be complex to operate, so the withdrawal of higher rate relief for donors and the introduction of a composite rate for repayments to charities would seem to be a practical potential way forward.