Charity Review Welcome to Blick Rothenberg LLP s Charity Review: focusing on business issues that affect the charity sector February 2015 In this edition: (click to view) P02 - Tax reliefs - reasonable and prudent planning by charities: Guidance from the charity commission P03 - Social Investment Tax Relief ( SITR ) P04 - VAT rebates for hospices, search and rescue charities and air ambulances P04 - Update on the VAT treatment of charity direct mailing P05 - Cabinet office consults on the audit of charities P05 - New guidance on donations by a company to its parent charity P06 - Charity Commission promises new guidance P06 - Blick Rothenberg s charity update www.blickrothenberg.com
Tax reliefs - reasonable and prudent planning by charities Guidance from the Charity Commission - January 2015 The Charity Commission encourages charities to take advantage of specific charity tax reliefs, for example gift aid, and recognises that reasonable and prudent tax planning is consistent with the trustees fiduciary duties to the charity that they manage. Charity trustees are under a fiduciary duty to act exclusively in the best interests of their charity. This is in both the management of its affairs and the application of its property to further the charity s purposes for the public benefit. In doing so, they must exercise reasonable care and skill and act to the standard of an ordinary prudent business person in the conduct of their own affairs. This duty makes it appropriate for them to engage in reasonable and prudent tax planning and to take advantage of available statutory tax reliefs relating to charities. This is relevant where these will assist the work of the charity, encourage genuine donations and coincide with the purposes for which these reliefs were created. In addition, trustees may properly seek to organise their charity s affairs when carrying out particular activities or transactions in a way which minimises the charity s liability to tax. Where trustees seek to enter into tax planning arrangements, they must satisfy their duty of prudence and ensure that: the arrangements are lawful; they have power to enter into the arrangements in question; they are neither conflicted nor have the potential to benefit personally from any arrangement; they take and consider appropriate independent specialist advice about obtaining fiscal relief or minimising tax in the context of their responsibilities, such advice being independent of both the charity and the promoter of any proposed arrangements; a record is kept of their decision-making including any tax law, tribunal decision or professional advice upon which they are relying; they take into account and consider any published guidance and advice as to the lawfulness of the proposed arrangements offered or available from HMRC; by entering into the arrangement, they do not expose any of the charity s property to undue risk; the proposed transactions will not damage the reputation of the charity and that they have considered how the character of the arrangement fits with the aims of the charity and the ethos of its donors and beneficiaries; and overall, the arrangements are in the best interests of the charity. However, charities need to consider carefully the point at which reasonable and prudent tax planning becomes agressive tax avoidance. In particular, when trustees are considering proposals for tax arrangements which are supported by favourable legal opinion from a tax specialist, they should in such circumstances always take professional advice from a reputable adviser unconnected with the proposed arrangements. Page 2
An example of reasonable and prudent tax planning might be encouraging eligible donors to use gift aid when making cash donations to the charity. They may also arrange their affairs to structure transactions in a tax efficient manner. Other examples of prudent tax planning include: a charity providing advice on legacy gifts planned in a will that will attract tax relief from inheritance tax; and a charity encouraging higher rate tax payers to claim the higher/additional rate relief (the difference between their marginal rate tax and the basic rate of tax) on their cash donation, and adjust the amount they donate as a result of the overall cost to them of the donation being lower. If trustees are in doubt about a tax matter then they should seek independent professional advice and consider HMRC s guidance. The commission considers tax fraud, tax evasion and tax avoidance to fall within an area of regulatory concern. In addition, the commission expects charities to fulfil their obligations under tax lawfully. They should take every reasonable step to ensure that the charity is not a party to, and does not enter into, any tax planning arrangements that are imprudent or could bring the charity or the charitable sector into disrepute. Trustees will risk scrutiny and potential investigation by the commission if they engage in tax arrangements which exploit tax legislation artificially, particularly where they serve to benefit private interests as well as those of the charity. The use of such arrangements is likely to be in breach of trustees duties and responsibilities to act prudently and in the best interest of the charity. Reputational damage to the charity is highly likely to arise from their involvement in such arrangements. The Commission will, if requested, review and authorise arrangements if they are judged to be in the interests of the charity. For more information, please contact Leo Joyce or your usual Social Investment Tax Relief ( SITR ) The 2014 Finance Act introduced a new tax relief for those wanting to invest in social enterprises. Income tax relief is available at 30% of the amount invested (up to a maximum of 1 million) to UK resident individuals who subscribe for qualifying shares, or qualifying debt investments, in an enterprise which meets the SITR requirements. The investment must be held for a minimum of three years from the date of the investment for the relief to be retained. If it is disposed of, or the qualifying conditions cease to be met, relief is withdrawn or reduced. Capital gains holdover relief is available where the gain from the disposal of any kind of asset is reinvested in shares or debt instruments, which also qualify for SITR income tax relief. It is not necessary for the investor to have made a claim for SITR Income Tax Relief. The gain must arise in the period between 6 April 2014 and 5 April 2019. The SITR qualifying investment must be made in the period one year before or three years after the gain arose. If an individual has received income tax relief on the cost of the investment and the investment is disposed after the three year holding period, then any gain on disposal is free from Capital Gains Tax. The qualifying conditions attaching to the investee company are similar to those attaching to investee companies under EIS, SEIS and Community Investment Tax Relief. For more information, please contact Mark Hart or your usual Page 3
VAT rebates for hospices, search and rescue charities and air ambulances On 3 December 2014, George Osbourne announced in his Autumn Statement new VAT rebate schemes for hospices, search and rescue charities and air ambulances. Currently such organisations cannot recover VAT on their expenditure, even though they essentially provide the same services as those provided by the NHS and other Government funded agencies such as the Coastguard. It might be that the refund scheme for charities will be implemented by additions to Section 33 of the VAT Act that will allow recovery of VAT on non-business activities undertaken by local authorities and similar specified organisations. It is also probable that search and rescue charities and air ambulances will be included within these provisions. This would allow the recovery of VAT on costs attributable to their non-business activities but not in relation to any exempt business income. Further details are awaited on how hospices are going to be refunded. One thought is that the refund scheme currently available to NHS Trusts could be extended to hospices. Under this scheme Trusts are allowed to reclaim VAT on a list of specified contracted out service. The list is published by HMRC annually and hospices could be added to the organisations entitled to take advantage of these provisions. Alternatively, there could be a completely separate rebate scheme similar to those available for Listed Places of Worship and Museums and Galleries. These are much welcomed announcements and the Government has indicated they could be worth as much as 9 million to those eligible. However, the scope and extent of the rebates are yet to be announced. There is also a possibility of a challenge to the UK Government s decision if these rebates are considered to be ultra-vires to EU Law. It is intended that the rebate schemes will be available from 1 April 2015 and we will await the details with interest. For more information, please contact Alan Pearce or your usual Update on the VAT treatment of charity direct mailing Following discussions between the Direct Marketing Association (DMA) and HMRC any changes to the VAT treatment of direct marketing services have been postponed to 1 April 2015. In our October Charity Review, we commented on HMRC s view that direct mailing services are single supplies of marketing and therefore subject to VAT at 20%. This is despite the fact that the mailing comprises mainly of zero rated printed matter. Further guidance is to be issued by HMRC shortly but this is likely to confirm their policy that a single supply of delivered marketing material (currently treated as zero-rated) will become a standard rated supply of marketing service. The change could result in a significant increase in irrecoverable VAT. Those charities affected should be reviewing the contractual terms under which services are procured. Unless contracts can be structured in a way to retain zero rating then, depending on HMRC revised policy, a legal challenge to this change is almost inevitable. For more information, please contact Alan Pearce or your usual Page 4
Cabinet office consults on the audit of charities In December 2014, the Cabinet Office opened a consultation into the audit and independent examination of charities which has followed on from the Hodgson Review of the Charities Act 2006. The consultation closed on 27 January and the responses are being scrutinized. The proposals are in line with Lord Hodgson s recommendations to increase the size limits at which charities will be subject to independent scrutiny. Those charities meeting the following criteria will be required to have their accounts audited: charities with an annual income of more than 1 million (previously 500,000); and charities with assets worth more than 3.25 million and an annual income of more than 500,000 (previously 250,000). This has a knock on effect on those charities which prepare consolidated accounts such that group accounts will only be required if aggregate group income is in excess of 1 million. There is no proposal to change the limits at which an independent examination is required. Consultation is also being undetaken on those bodies which may be regarded as suitably professionally qualified to carry out examinations for those charities with income in excess of 250,000. We will keep you informed of the outcome of the consultation in due course. For more information, please contact Mark Hart or your usual New guidance on donations by a company to its parent charity The Institute of Chartered Accountants in England and Wales ( ICAEW ) has recently issued a new technical release (TEC 16/14 BL) giving guidance on donations by a company to its parent charity. The technical release clarifies the accounting implications and legal status of profits donated by a trading subsidiary to its parent charity. Many charities own subsidiary trading companies through which they carry out secondary purpose trading activities at a profit. The trading subsidiary is used so as to not prejudice the tax status of the parent charity. The taxable profits are usually donated by the subsidiary to the parent thereby reducing its taxable profits to nil and allowing the profits to flow up to the parent charity free of tax. The Charity Commission s old guidance note CC35 gave guidance that such payments were not a distribution as defined by the Companies Act 2006, but expenditure. The implication of this guidance was that the amounts donated could and often did exceed the amount of profits available for distribution under the Act. The ICAEW became aware that this position was being questioned and given the importance of this issue to charities, Page 5
sought counsel s opinion on the matter. The legal advice received is contrary to the guidance in CC35 which is that payments are in fact distributions under the Companies Act 2006 and therefore subsidiary companies should have regard to the amount of distributable profits available. As a consequence, any payments made in excess of distributable profits will be regarded as unlawful. The implications are that: Such donations should be treated as a dividend in the accounts of the subsidiary and where this exceeds distributable profits available are unlawful. The charitable parent is liable to repay the excess to the subsidiary. There will now be a disparity between tax charge in the accounts of the subsidiary and the accounting profit which will need to be explained in the tax reconciliation notes. In addition, subsidiaries should consider whether a liability exists for the distribution to be paid at the balance sheet date. A constructive obligation (based on past practice) will no longer be recognised since the payment is a distribution rather than an expense. Therefore, a trading subsidiary will need to formally approve the distribution before the end of the financial year in the same way that dividends are approved to shareholders. It should be noted that there are no changes to the tax relief on gift aid donations paid within nine months of the year end. We recommend that legal advice be sought for your charity and its subsidiary companies if it is identified that distributions have been made unlawfully. The Charity Commission and HMRC are reviewing their own guidance in light of the ICAEW s findings. For more information, please contact Mark Hart or your usual Page 6
Charity Commission promises new guidance The Charity Commission has issued three new pieces of guidance as follows: Setting up and running a charity: How to transfer charity assets Setting up and running a charity: Changing your charity s structure Setting up and running a charity: Trading In addition, the Commission has also updated its guidance to CC21A setting up and running a charity: How to register your charity. Guidance can be found on the Charity Commission website. Blick Rothenberg s Charity Update Blick Rothenberg has a long and proud history of involvement with charitable and not-for-profit organisations, adopting a sympathetic approach that goes beyond simply fulfilling statutory obligations. Each year, employees of the firm vote for a small, London based charity to support. This year, we have chosen to fund raise for Kith and Kids, who provide activities, information and support to people with a learning disability, and their families. Recent fund raising events have included a festive jumper day for staff, holding a raffle for England football match tickets and selling charity Christmas cards. We are looking forward to taking on sponsored challenges in 2015. For more information about our involvement with charitable organisations, please contact a member of our team using the details opposite. Our team Mark Hart Business group partner +44 (0)20 7544 8805 mark.hart@blickrothenberg.com Alan Pearce VAT partner +44 (0)20 7544 8884 alan.pearce@blickrothenberg.com Leo Joyce Trust and estates director +44 (0)20 7544 8863 leo.joyce@blickrothenberg.com Mai Brown Trust director +44 (0)20 7544 8862 mai.brown@blickrothenberg.com Ella Waddingham Business group manager +44 (0)20 7544 8937 ella.waddingham@blickrothenberg.com Blick Rothenberg LLP 16 Great Queen Street Covent Garden London WC2B 5AH Blick Rothenberg LLP is authorised and regulated by the Financial Conduct Authority to carry on investment business. www.blickrothenberg.com Page 7