Charity Law Association

Report of the Working Party on the Tax Law Rewrite Project

Gift Aid and Charitable Trusts

Introduction

The Charity Law Association has over 700 members, mainly lawyers but also accountants and charity professionals. It is concerned with all aspects of the law relating to charities, and has established a working party to consider the Gift Aid and Charitable Trusts elements of the Tax Law Rewrite Project. The members of the working party are:

Jean Dollimore – Hempsons (chair)

Ros Harwood – Rollits

Godfrey Smallman – Wrigleys

Julian Smith – Farrer & Co

Matthew Waters – Stone King

General

We welcome the opportunity to comment on the Gift Aid and Charitable Trusts elements of the Tax Law Rewrite Project. The proposals are an exercise of codification rather than meaningful reform and we have accordingly confined the remit of our task to considering the relatively minor changes in law which the Project proposes in the two areas we considered. The two areas we have looked at are:-

1. Gift Aid.

2. Charitable Trusts etc.

Gift Aid

We have below responded in turn to each of the questions set out in the explanatory notes to Gift Aid:

Question 1 – Comments on the retention of the basic approach to gift aid

We are happy with the retention of the basic approach to gift aid. We do, nevertheless continue to have numerous reservations about various substantive aspects of the law, for example the unnecessary complicated rules surrounding allowable benefit. However, we have not deemed the remit of this working party to extend to a complete review of all gift aid provisions and so have stayed away from comment on any substantive issues.

Question 2 – Comments on approach to rewriting “out of” in the context of gift aid

We think this is a helpful amendment. The current drafting explains the point via a hypothetical description which seems an unnecessarily complicated approach and we agree that the proposed drafting is much simpler to understand and does not change the law.

Question 3 – Comments on proposal to allow a non-resident donor to specify which gifts are to count as qualifying donations

We welcome the recognition that the current law unnecessarily invalidates many potential gift aid payments from non-UK residents but feel that the proposed change does not go far enough to rectify the problem.

We recommend that clause 7 be re-drafted to allow for non-residents to specify the exact sum, out of the total amount gifted in a tax year, which they wish to be treated as Gift Aid. The principle behind this provision would be exactly the same as is behind the current proposed amendment – i.e. aiming to ensure that all payments that are capable, in terms of tax paid by the donor, of being treated as gift aid are allowed to be.

Under the current proposal where a non-resident donor has only paid enough income and capital tax to cover part of a gift they would have to state that none of the gift is to be treated as gift aid. This means the donor is not able to gift aid a sum of money/part of the gift which they have paid enough income and capital gains tax to cover. By using monetary value instead of ‘gifts’ as the measuring unit the donor would not be prevented from gift aiding an amount they had paid enough tax to cover.

Question 4 – Comments on proposal that this charge be expressed directly in terms of tax, rather than hypothetical amount of income

We do not agree with the proposed change and recommend that the original charging provision (s.25(8) Finance Act 1990) be retained as it offers a clearer and more succinct statement of the law. The proposed re-drafting does not amount to a change in law and the motivation for amending must therefore be improving the clarity of the law to the reader. We feel that the new clause which contains seven subsections frequently requiring the reader to cross-refer between subsections does not present the law in a clearer way.

Question 5 – Comments on the proposal not to rewrite section 25(9)(c) Finance Act 1990

We agree with the proposal.

Question 6 – Comments on the proposal to clarify the method of dealing with TMA Schedule 1B adjustments in calculating charged income

We welcome the change in principle although wish to caveat our endorsement with a note that we do not have detailed knowledge of the carry-back provisions and the extent of their use. We have based our assessment on the opinion of the Treasury that in practice the change will only have a limited impact.

Whilst the change could potentially have a positive and negative impact upon taxpayers we feel that on balance the change is likely to be beneficial. This is because we think that the carry back of a loss will generally be positive for the donor and will be more frequently relevant than the negative effect of the change in law relating to the carrying back of gains.

We appreciate that the new law will offer greater clarity to the Inland Revenue who will no longer have to consider losses/gains from subsequent tax years when considering whether enough income and capital gains have been charged for the donor’s gift aid payments in a tax year.

Charitable Trusts

We have below responded in turn to each of the questions set out in the explanatory notes to Charitable Trusts etc:

Question 1 - Views on the approach adopted to the structure of the charging provisions and exemptions relating to gifts to charitable trusts

We found the approach in joining charging provisions to relevant exemptions helpful, although we thought it might be useful to signpost to charity Trustees the mechanics of the computation of a charitable trust's overall liability to income tax, when these provisions are drafted.

We did, however, consider that more might be done to assist charity Trustees in determining whether or not a gift that is not received from another charity or under the gift aid regime is or is not "income", particularly this is relevant to the definitions used in Clause 14 ("incoming resources") and Clause 20 ("available income and gains"). Even if the legislation does not go so far as to provide a comprehensive definition of when a gift constitutes income within the charge to tax, it would be helpful to at least clarify its status for the purposes of these two clauses. We also thought that it might be useful to clarify the status of income received under the payroll giving scheme (is it a gift from the individual or the agency charity and so within or outside the charge to tax under Clause 5?).

We also thought that there might be other charity reliefs to which the provision should refer or which, again, could usefully be included signposted for charity Trustees. These might include:

(i) Section 715(1)(d) ICTA 1988.

(ii) Section 601(4) ICTA 1988.

(iii) Paragraph 7, Schedule 5AA ICTA 1988.

Finally, a small point, but we thought it might be useful if the headings to Sections 2 and 3 could refer to payments under the gift aid scheme rather than gifts generally.

Question 2 - Views on the omission of an exemption for scientific research organisations constituted in trust form

We would prefer to see the exemption for such organisations to be retained. Although in practice it is unlikely such an organisation would be constituted as a trust, it is not impossible and we would prefer to see the tax reliefs preserved for such a trust and thus the freedom to associate in this form should clients wish to do so. However, we did wonder whether it might be more appropriate for such non-charitable entities to be dealt with in a different part of the re-written legislation.

Question 3 - Comments on whether it is helpful to set out a priority rule to cater for any cases where section 687 of ICTA applies

We do consider the cross reference to be useful. However, we do think the affect of section 687 needs to be clarified for grant making charitable trusts, either in the legislation or in separate guidance, as charity Trustees would not normally regard it as necessary to deduct tax at source when making a grant to another charitable trust.

Question 4 - Comments on whether the legislation should treat post-cessation receipts arising from a primary purpose trade as exempt

We support this proposal.

Question 5 - Comments on whether the legislation should reflect accounting terms and on whether the requisite limit calculation should take account of trading income resources for a basis period and other incoming resources for a tax year

We prefer the expression "incoming resources" (although see our comments under 1 above). In relation to basis periods/tax years/period of account, we would suggest that this should be a matter for the Detail Guidance provided in the Charity's section of the Inland Revenue website.

Question 6 - Comments on whether the legislation should reflect ESC C4

We have no objection to the ESC being included in the Bill.

Question 7 - Comments on the proposal to replace references to "the Board" with the "Inland Revenue" here, and other places in this chapter

A proposal such as this, which adds clarity, is welcome.

Question 8 - Comments on whether the definitions of charitable expenditure and non-charitable expenditure correctly reflect existing practice and provide clearer guidance

As a general comment we find the Qualifying Expenditure Rules still present some problems in clarity and comprehension, and it is perhaps unfortunate that the opportunity was not taken to clarify a difficult area. We have the following specific comments.

The change from "qualifying expenditure" to "charitable expenditure" and from "non-qualifying expenditure" to "non-charitable expenditure" are both welcome clarifying changes.

The definition of "charitable expenditure" is reasonably clear. However, the wording in Clause 25 (1)(a) as currently put could be read in more than one way e.g. any loss made in a tax year in a trade carried on by the charitable trust that is not exercised throughout the basis period for the tax year - but is exercised - in the course of the carrying out of a primary purpose of the charitable trust; or, any loss made in the tax year in a trade carried on by the charitable trust that is not exercised throughout the basis period for the tax year in the course of carrying out of a primary purpose of the charitable trust - the two are different.

Question 9 - Comments on whether the definitions of charitable expenditure and non-charitable expenditure in relation to land should refer to particular interests, or whether it would be more useful, and reflect existing practice, to refer to a property business which either is or is not primary purpose

If the words "…an estate, interest or right in or over any land (wherever situated)" is intended to refer to a property business, which may or may not be primary purpose, it would be preferable in the legislation to say property business, although that might then prompt the need for a definition of those two words So it might be circular in the end. On balance we consider that it would be helpful to define “property business”.

Question 10 - Comments on whether the legislation should reflect current accounting practice about the time expenditure is taken into account in this way

Reflecting current accounting practice is a good practical course to take. To assist charities, however, we consider that there should be a clear reference in clause 27 to the definition of UK generally accepted accounting practice in ICTA S.506(4). We also consider that Guidance on the point would be of great assistance to charities in understanding it.

Question 11 - Comments on whether the legislation should reflect current practice and assume that non-taxable sums fund excess expenditure

Section 28(1) does not readily match with the comment at paragraph 81. The two wordings do not read as if they are saying the same thing at all.

It would not perhaps be wise to incorporate into legislation something which is an assumption in current practice. Things can change.

Question 12 - Comments on whether the legislation should give statutory effect to Inland Revenue guidance as to what level of non-primary purpose trading activity can be carried out by a charitable trust before the right to exemption for the profits of a dual purpose trade is lost

The proposed inclusion of the Inland Revenue guidance, giving it statutory effect, is likely to be helpful and gives a useful statutory force to what can be an important provision. We feel, in addition, however, that the provision in Clause 33(6) should be amended so that the Treasury has power to amend the figure for the allowable percentage of the charitable trust’s incoming resources attributable to non primary purpose trading, at present 10%, as well as the figure for the actual sum, at present £50,000.

April 2005