Three significant changes (or expected changes) to charity tax legislation and HMRC guidance are considered in this update: the revised HMRC guidance on the "fit and proper person" test that charity trustees and senior managers must meet, the amendments to the Gift Aid donor benefit rules, and the enlargement of the social investment tax relief scheme.
Changes to the 'Fit and Proper person guidance'
HMRC has updated its guidance on who constitutes a "fit and proper" person to manage a charity and made changes to the model "fit and proper person" declaration.
In the guidance HMRC lists the types of circumstances where it considers an individual may not be a "fit and proper person". If a charity is managed by a person who HMRC considers is not "fit and proper", the charity could fail the "management condition" (one of the component parts of being a charity for tax purposes), which in turn may affect its eligibility for tax reliefs. The onus is on charities to take steps to determine whether trustees and senior managers together enable the charity to meet the "management condition".
The new guidance avoids the rather woolly language used previously, which is helpful, but you would not be alone in finding some of the statements in the new model declaration fairly incomprehensible, given the many references to tax legislation. Presumably HMRC have included these statements on the basis that individuals who have found themselves on the wrong side of HMRC will know whether or not any of these circumstances apply to them.
It is recommended that charities update the model declarations managers and new trustees sign to align it with the new version published by HMRC, here.
Taking this step ensures that if HMRC ever query whether an individual meets the test, the charity can show it has requested the appropriate confirmation from those in a position of responsibility. It is worth emphasising that where an individual does fall within one or more of the descriptions listed in the guidance this does not automatically mean they cannot meet the "fit and proper person" test, but where that individual has control over a charity's tax and financial affairs it should prompt the charity to have a dialogue with HMRC about that individual's suitability as a trustee or senior manager.
Proposed simplification of the Gift Aid donor benefit rules
HMRC has lent a sympathetic ear to charities' complaints that the Gift Aid donor benefit rules are too complex and it has recently consulted on changes to the rules. These rules set the limit on the value of any benefits that donors may receive as a result of their gift where Gift Aid is claimed.
To recap, the current system is a three-tier one:
- for donations up to £100, the value of the benefit to donors can equate to a total of 25% of the donation;
- for donations between £100 and £1,000 the value of any benefit is capped at £25;
- for donations over £1,000 the value of the benefit can equate to a total of 5% of the donation, up to a maximum annual benefit value of £2,500.
Many of the original proposals for simplification found no widespread support in the sector, which is perhaps unsurprising given that in many cases the changes would have reduced the permitted value of donor benefits for small donations.
Simplification remains on the Treasury's agenda and the options still under review include:
- moving to a single threshold for donor benefits with a rate in the region of 10-15%;
- moving to a two-threshold system with the value restricted to 25% of the first £100 of the donation plus in the region of 2-5% of any additional amount donated;
- in addition to a change to the thresholds, introducing a disregard of low value benefits so that these would be omitted from the calculation when valuing benefits to donors.
It has been pointed out to the Treasury in the consultation process that major changes would represent a significant compliance burden for charities, given the need to revisit existing arrangements. The option that appears to be finding greater favour in the sector is the two-threshold system, which would see no change to the value of donor benefits for donations under £100.
The final proposals are expected to emerge during the course of this year. In the consultation numerous respondents highlighted the difficulty in interpreting HMRC's guidance on how to value donor benefits. In view of this feedback, a working group is being established to consider HMRC's guidance and its interpretation of the rules, which will hopefully result in greater clarity and improved guidance in due course.
Social Investment Tax Relief – enlarging the current scheme
Social Investment Tax Relief (SITR) was introduced in 2014 and is a relief available to individuals investing in social enterprises, where the investment meets certain criteria. For the purposes of the relief, social enterprises are charities, community interest companies and community benefit societies. The relief contains a number of elements: an income tax relief at 30% of the amount invested, the ability to defer a related capital gain, and relief from capital gains tax on the eventual disposal of the social enterprise investment.
Take-up of the relief has been limited to date, with potential investors deterred by the amount that can be invested in a single social enterprise and the qualifying criteria that must be satisfied.
With effect from 6 April 2017 the scope of the relief is being enlarged so that social enterprises can receive investment of up to £1.5m in total, which increases from a three-year rolling limit of €344,000. In general, social enterprises must raise the additional investment before the end of seven years from the date of their first 'commercial sale'. Social investments that have been operating for more than seven years will continue to be restricted to the current €344,000 limit.
Certain changes are being introduced to the relief this month, including reducing the number of employees a social enterprise receiving investment under the scheme may have from 500 to 250 (this number excludes volunteers). A number of activities have also been excluded from benefiting from the relief (as the relief is not intended to incentivise low-risk investing) such as asset-leasing, providing nursing or care homes, and providing financial services to social enterprises.
It is hoped the enlargement of the existing scheme will increase the take-up of the relief and leverage the growing interest in social investing.
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This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2017