In this blog series, Catriona Finnie, charity tax expert at Chiene + Tait outlines the key findings of the Charity Tax Commission report into the current charity tax system and outlines how the recommendations could impact charities in the future.
Blog 1 – Gift Aid and Business Rates Relief
The Charity Tax Commission has published its report into the charity tax system. The last review of the charity tax system took place 20 years ago and this latest report had set out to assess whether the system remains fit for purpose. Perhaps surprisingly, the Commission has found it difficult to gather sufficient data and research about how the tax system currently operates and, as a result, it has been limited in its ability to make recommendations.
Despite this, the report stretches to 68 pages outlining an array of short-term reforms and long-term recommendations. If you don’t have a spare few hours to read the report, we have summarised the key recommendations which will be discussed over the next 3 blog posts.
Short Term Reforms
If you have ever made several Gift Aid donations to different charities, you will have had to complete multiple Gift Aid declaration forms (one for each charity you donate to). The Commission proposes setting up a Universal Gift Aid Declaration Database (UGADD) to overcome this administrative burden. The UGADD will store Gift Aid declarations made by all donors. Under this system, donors will be able to donate to multiple charities whilst only completing one Gift Aid declaration. Charities will be able to log into the UGADD and search for a donor by searching the donors’ unique identification number (this could be anything from the donor’s national insurance number to a specific Gift Aid card number). The Commission believe that technology is such that this system is now both technologically and economically feasible.
Currently, higher and additional rate taxpayers can claim tax relief on Gift Aid donations they make to charities through their own Self-Assessment tax return. The Commission recommends that this additional tax relief is redirected to charities. You may wonder how this will work in practice, especially as some taxpayers (the self-employed for instance) may not know what their tax rate will be at the point of making a Gift Aid donation. The Commission anticipates that the UGADD will assist, as will the ability to make retrospective Gift Aid donations.
Promotion of Gift Aid and donor awareness via the following:
- Via literature that can be sent to the general public with annual correspondence from HM Revenue & Customs, along with videos and other forms of media.
- Government should consult with the charity sector in order to provide guidance on the audit trail requirements for text donations.
- Review how emerging technology can make Gift Aid administration easier and more efficient.
- Increase accessibility and reduce administration for the Gift Aid Small Donations Scheme. The Commission states that possibilities include removing the matching requirement and increasing the amount that can be claimed under the Small Donations Scheme as well as including text donations within the scheme.
- Review corporate Gift Aid rules to ensure it continues to work to maximise the amounts received by charities.
Business Rates Relief
A common tax planning tool used by charities that wish to undertake non-charitable trading is to set up a wholly owned subsidiary. The trading subsidiary will undertake the non-charitable trade activities and then Gift Aid its taxable profit to its charity parent. This structure allows charities to raise further funds without risking their own tax-exempt status. A common example of this is charity shops. In its report the Commission noted the disparity between the treatment of charities and their trading subsidiaries when it comes to business rates relief. Under the current scheme charities are entitled to a mandatory 80% relief from business rates. Local authorities can then decide to grant additional discretionary relief of up to 20%. These exemptions are not available for trading subsidiaries despite the fact that most will Gift Aid taxable profits back to the charity. The Commission has recommended that the Government consult on extending the relief to trading subsidiaries.
- It was recommended that the Government produce guidance to counter a misconception that charities enter into some business arrangements with the aim of avoiding business rates.
- Criteria for discretionary relief is set by local authorities and the Commission has found that it can often be difficult for charities to find sufficient information to check whether they are entitled to any discretionary relief. To counter this, the Commission recommends that the criteria for discretionary relief be published and easily accessible on all local authority websites.
- It is also recommended that the Government ensures that local authorities are aware that mandatory business rates relief also extends to small unregistered charities.
- The Government should also create a standard form that can be downloaded from the Gov.uk website for mandatory relief. This form should be downloadable, with electronic submission, and should be recognised by all local authorities. It is hoped this will ensure standardisation of the discretionary relief application process and will be easier for charities.
- The situation for business rates relief in Scotland is different as business rates is a devolved matter. The Scottish Government introduced a bill to the Scottish Parliament on 25 March 2019 which proposes to exclude independent charitable schools from business rates relief; except under specific circumstances.
If you have a query about charity taxes, please contact Catriona at firstname.lastname@example.org or call 0131 558 5800.