Tainted donations to charities

The Government has made changes to existing legislation and has implemented new provisions known as ‘tainted charity donations’ rules.

The predecessor to these new provisions, the ‘substantial donor’ rules were introduced in 2006 to stop the abuse of tax incentives for donations to charities, where the donations were having a significant benefit to the donors. However, these rules quickly became an administrative nightmare and the financial implications for the charities concerned were thought too severe (previously any tax penalties were imposed fully on the charity and not the donor).

1. 1. After much discussion, changes have been drafted, which will be effective from 1 April 2011. The three main changes are:
      There will now be a purpose test to determine whether a charitable donation is a ‘tainted donation’.
   2.  All charitable donations are subject to scrutiny; previously only substantial donations were investigated.
   3.  If a charitable donation is subsequently considered a ‘tainted donation’, then the donor and any advantaged person will now be jointly and severally liable, and if an officer of HMRC is satisfied that the charity was knowingly party to the agreement then they will also be liable to penalties.

For a charitable donation to be deemed ‘tainted’ it must meet three conditions:

1. A donor or connected person enters into arrangements and it is reasonable to assume from the likely consequences or circumstances that there would have been no such donation and arrangements independently of one another. Whether the arrangement is made before or after the donation is not relevant.
2. The main purpose or one of the main purposes of the arrangements is to obtain an advantage for the donor or a connected person directly or indirectly from the charity or connected charity.
3. The donor is not a company wholly owned by one or more charities (one of which must be the charity to which the donation was made) and the company has not within the previous four years been under the control of, and does not carry on a trade or business previously carried on by, potentially advantaged persons or a person connected with such persons.

These new rules initially appear to have removed the previous unmanageable aspects of the ‘substantial donor’ rules, whilst still acting as a control to prevent abuse of the UK tax incentives.

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