Anti-avoidance rules on “Substantial Donors” to be replaced by new “Tainted Charity Donations” rules

Key points:

• Concept of a “Substantial Donor” has disappeared

• New ‘purpose test’ approach

• “Tainted donation” – where donations made as part of an arrangement to receive an advantage

• No minimum thresholds  (previously £25,000 gifted in one year and £150,000 in a six year period)

• Recovery from donor as the “primary target”

• Exemptions include companies wholly owned by a charity/charities.

• Applicable from 1 April 2011

The “substantial donor” rules were introduced from 23 March 2006 as an anti-avoidance measure designed to attack transactions where a donor can extract value from a charity. This anti-avoidance restricts the tax relief a charity ordinarily has on its’ income and gains. The legislation has been criticised for catching innocent transactions and for the additional administration and taxation burden it places on charities. A government consultation commenced in the summer of 2008 to address these issues.

Draft clauses have now been published (9 December 2010) to be included in the Finance Bill 2011. These clauses include the replacement of the existing Substantial Donors legislation with new rules on “Tainted Charity Donations” (TCD). The new rules adopt a ‘purpose test’ approach and a donation will be a TCD if all of the 3 conditions below apply:

• Condition A - the donor or person connected with the donor enters into arrangements where it is reasonable to assume that the donations and arrangements would not have been entered into independently of each other.

• Conditon B – “Potentially Advantaged Person” – the main purpose or one of the main purposes of the arrangements is to obtain an advantage directly or indirectly from the charity that received the donation (or connected charity).

• Condition C – the donor is not a company wholly owned by one or more charities.

The test will not apply to any benefits permissible under the Gift Aid rules. 

Where a donation is a TCD, no tax relief is due to the donor. Where the charity has reclaimed tax on a donation made under Gift Aid the donor will be liable to an income charge on the amount reclaimed by the charity. No charge will arise on the charity unless the charity was party to and fully aware of the arrangements.