HMRC Moves To Plug Charity Tax Avoidance Loophole

HM Revenue & Customs (HMRC) wants to change the law to stop tax abuse from financial advisers setting up charities and misdirecting the money.

HMRC is concerned that current laws allow charities to set up and collect cash illegally without any proper checks.

Charities turnover £4 billion in tax relief every year, with Gift Aid adding up to more than £1 billion in the 2012-13 tax year.

Sometimes, a year or two after the charity is established, tax inspectors discover that money has been donated and received tax relief when the charity has really operated as a tax avoidance scheme for the donors.

Current laws then mean HMRC has to challenge the legitimacy of the scheme in court.

Charity tax dodging

In a consultation document flagging two options to redraft charity set-up procedures, HMRC highlights how fraudsters have used charities to dodge taxes.

  • A charity is set up to make general charitable grants but is not active until it is used for a multi-million pound avoidance scheme a year or two later.

In the meantime, the charity may have received small donations from its founders and claimed Gift Aid repayments on those donations, without carrying out any charitable activities

  • A complicated tax avoidance scheme using charity donor tax reliefs is contrived to avoid tax. The charity is an active participant in tax avoidance between the promoter and donors
  • One Gift Aid case related artificial and circular trading of government gilts between a charity and donors. The charity received only a small fraction of the monies donated for charitable works.

“HMRC can and does tackle charity tax avoidance schemes, we are thinking about putting off tax cheats by withdrawing entitlements to tax reliefs for organisations blatantly abusing the system,” said an HMRC spokesman.

Proposed law changes

“Changing the law is likely to deter tax avoidance and would save HMRC time, resources and money by removing the need to challenge the schemes in the courts as often hundreds of people are involved in the schemes.”

HMRC wants to change the definition of a charity to exclude organisations set up specifically to avoid tax.

The consultation offers two draft versions of the new definition and invites charities, trustees, tax advisors and other interested parties to comment on the changes.

The discussion paper ‘Approaches To Preventing Charities Being Set Up To Avoid Tax’ is published online.

Comments are requested by April 11, 2014.

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