Consultation outcome

Charities tax compliance - summary of responses

Updated 30 October 2024

Introduction

Background

In April 2023, the previous government published a consultation on charities tax compliance.

The tax reliefs available to charities and Community Amateur Sports Clubs (CASCs) are a vital element in supporting charitable causes across the UK, with more than £6 billion in charitable reliefs provided to charities, CASCs and their donors in 2023 to 2024. The biggest individual reliefs provided are Gift Aid at £1.6 billion and business rates relief at nearly £2.4 billion. This government support delivers benefits to all areas of society across the UK.

The aim of the consultation was to assess the potential impact of the proposed changes within the charitable sector.

For charities to benefit from tax relief, certain rules must be met. However, some rules are not working as intended. The consultation sought views on several proposals to:

• prevent donors from obtaining a financial benefit from their contributions
• prevent misuse of charitable investment rules
• address gaps in non-charitable expenditure rules
• introduce sanctions for charities and CASCs that did not meet their filing and payment obligations

Consultation

The government published a formal consultation on 27 April 2023 setting out proposals to help tackle non-compliance and protect the integrity of the charity sector.

The consultation received 33 responses from charities, religious organisations, representative bodies, law firms and other businesses. A list of respondents is provided in Annex A.

In addition to the above responses, HMRC Officials met with a number of stakeholders during the consultation process to discuss the proposals.

The government is grateful to all the organisations and individuals that took the time to respond to the proposals.

Government objectives

The previous government launched the consultation at Tax Administration and Maintenance day 2023, with the objectives of preventing abuses by strengthening several existing charity tax compliance rules, ensuring that only the intended tax relief is given to charities.

Following the responses from the consultation this government has decided to make incremental and modest changes to preserve these important tax reliefs for the compliant majority and help to protect the reputation of the sector.

The government has worked closely with the sector to develop proposals to tackle the abuse of the charity tax rules in a fair and proportionate way and will continue to work closely with the sector to implement these changes. Full guidance will be provided to support charities.

Responses

Preventing donors from obtaining a financial benefit from their donation – Questions 1 to 4

The Tainted Charity Donation rules are too difficult to apply to certain instances of abusive behaviour including where individuals make large donations to charity and derive significant financial benefits by entering into arrangements linked to their donation. They may not take effect, for example, where a donor makes a significant donation to a charity they control, on which both they and the charity claim relief, and then the charity invests the donation in a company controlled by the donor.

The consultation asked for views on three options for updating the current rules:

• Option 1: replacing the existing rules with a new system that would apply to all donations whether in cash or other form, and exploring limits on the amount of financial assistance that can be provided
• Option 2: removing the requirement to demonstrate that arrangements relating to the donation were made to benefit the donor or a connected party
• Option 3: replacing the requirement for there to be a ‘financial advantage’ with a requirement for there to be ‘financial assistance’ or ‘financial benefit’

Questions 1 and 2 sought feedback on option 1.

Question 1: Do you anticipate any unintended consequences on legitimate arrangements from introducing this rule?

Question 2: Do you foresee any significant challenges for charities to maintain appropriate records of any arrangements, such as substantial loans, they make?

Respondents:

• had concerns over the proposal to remove and replace the existing rules and preferred to address any limitations within the current rules
• said changes were unnecessary, as the current charity tax provisions already covered abusive transactions
• had concerns about the proposal to set limits, as a standardised approach might not accommodate certain forms of donation
• said the government should always consider the main purpose of the transaction, rather than whether an incidental tax or financial advantage had been obtained, when assessing whether the donation was tainted
• asked for a carve-out for donations from subsidiaries
• said arrangements connected with a donor – or a connected person of a donor – could be made without the charity being aware
• suggested a question on the tax return could be a more effective way to address concerns
• said requirements to identify connected transactions and keep records could disproportionately burden smaller charities, especially those with a high turnover of staff. They highlighted the importance of guidance from the government on the definition of ‘appropriate records’
• thought GDPR requirements might be an obstacle to compliance with the new rules
• warned of complications when dealing with beneficiaries, community projects, or when entering into business or service contracts with companies that also act as donors and said it may be challenging for charities to demonstrate the legitimacy of subsequent arrangements

Question 3: Do you foresee any unintended consequences on legitimate arrangements from changing the rules in this way?

Question 4: Do you believe proposed changes to the current wording would achieve our objectives or do you believe there will still be room for abuse?

Respondents:

• were concerned that large donations might be caught simply because of their size, without any consideration of the reason for arrangements
• feared a lack of clarity between ‘incidental benefit’, ‘financial benefit’ and ‘financial advantage’ and called for any new guidance to explain the different terms and what the government expected in terms of record keeping
• said providing assistance within the charitable objectives should be acceptable, and raised concerns about potential unintended consequences
• doubted the changes would lead to significant changes in behaviour
• called for de minimis protections for donation size and any derived benefits to protect against unintended consequences
• feared the proposals might prevent charities from investing in companies closely affiliated with the founders, potentially limiting their investment powers
• thought the removal of Condition B’s motive test might introduce uncertainty for donors and discourage major donations
• agreed that eliminating abuse entirely was unlikely, and that regulation of donor-controlled charities by the Charity Commission might be more effective than solely relying on tax rules
• broadly preferred option 3 to the other options

Government Response

The government accepts the principle that charities should be able to have strong and lasting relationships with their donors. However, it is important to prevent charities benefitting from tax reliefs by passing those benefits back to a donor or a connected person.

The government accepts that options 1 and 2 might have the effect of increasing complexity for charities and donors who would be required to learn a new set of rules and understand them prior to implementation. A more targeted approach would be option 3 which would involve amending parts of condition B and could improve charity tax compliance rules without increasing complexity.

The government will seek to lower the bar for challenging a transaction that is currently set by ‘financial advantage’. In addition, the government will replace the current motive test with an outcome test. This change from testing the motive to testing the outcome will allow HMRC to consider a series of transactions in the round rather than a single transaction and allow for a more objective assessment of the result of the interactions between a donor and a charity.

The government will prepare legislation and invite the sector to provide feedback on the changes prior to them coming into effect to test its effectiveness, its impact on charities, and to avoid unintended consequences. The government will implement the change in April 2026, which will give charities time to understand and prepare for the new rules.

The government agrees that comprehensive guidance will be key to these changes being effective. HMRC guidance will clearly explain the new rules and set out how HMRC will apply the new financial benefit or assistance outcome tests and will contain examples where helpful.

The government will run a communications campaign to raise awareness of the changes, which will seek to leverage existing sector relationships and other mediums.

Preventing abuse of the charitable investment rules – Questions 5 to 6

There are 12 investment types that the government recognises for charitable tax relief purposes. They can be summarised as:

• any investment in a charity common investment fund, common deposit fund or similar scheme
• any interest in land (unless it is held as a security or a guarantee for a debt)
• shares or securities of companies listed on a recognised stock exchange
• units in a Unit Trust Scheme
• shares in an Open-Ended Investment Company
• bank deposits – other than deposits made as part of an arrangement under which the bank makes a loan to somebody else (such as back-to-back loans)
• certificates of deposit
• any loan or other investment made for the benefit of the charity and not for the avoidance of tax (whether by the charity or any other person)

The government recognises that investments can be a major source of funding for charities. The consultation requested views on whether extending the requirement on investments, already in Type 12, that all charitable investments be made for the benefit of the charity and not the avoidance of tax would cause unintended consequences for charities.

The government accepts that in the majority of cases investments in Types 1 to 11 are made for the benefit of the charity, but has seen some instances where investments are being made through a charity to benefit others.

For example, a charity may use its funds to purchase a foreign property which is used as a holiday home by its trustees for their sole use, providing no benefit to the charity.

This arrangement would be difficult to challenge under the current rules even where the property purchase made by the charity was for the benefit of the trustees, rather than the charity, as investments in an interest in land are automatically accepted as approved investment.

Question 5: Are there any circumstances where a charity may need to make an investment or loan for reasons other than benefitting the charity?

Question 6: Do you foresee any significant challenges retaining records and documents to justify, if requested by HMRC, the investment decision process and demonstrate how the investment benefits the charity?

Respondents:

• said investments made by charities should primarily serve the interests and objectives of the charity itself and highlighted that trustees have a legal obligation to act in the best interests of the charity. Therefore, any investment decision they make should be well-considered and aligned with the charity’s overall objectives
• had concerns regarding the potential implications of the proposed changes, predominantly around the introduction of uncertainty and complexity into the decision-making process for charities
• expressed reservations about the subjective nature of the ‘benefit to the charity’ test. They raised concerns about the practicality of implementing and adhering to this test
• highlighted that not all investments provide direct financial benefits, but may still contribute to the broader charitable objectives, such as social housing charities investing in properties
• noted that often there are loans to trustees, employees, and volunteers, enabling them to support the charitable objectives and that any new rules should not conflict with this
• were unsure how charities using third party investment management would ensure compliance
• suggested a materiality threshold to reduce the administrative burden
• said record-keeping should not present a significant challenge as investment decisions should already be sufficiently documented. Others disagreed, saying there could be an onerous burden on charities, and suggested smaller charities would be more affected
• called for a proportionate approach, targeting the highest risk categories

Government response

The government recognises that income and gains from investments can be a major source of funding for charities. Like most respondents, the government believes that investments made by charities should serve the interests and objectives of the charity itself.

The government has a duty to ensure that these investments are used for charitable purposes and not as vehicles to avoid tax. Although the government noted concerns about uncertainty and complexity, it does not expect changing the charity investment rules in this way to have a significant impact on the compliant majority. Charitable trustees already have a legal obligation to act in the best interests of the charity so applying the type 12 rule to a greater range of investment types should not create significant new burdens. It will however deter the non-compliant minority from trying to extract personal benefits from generous tax reliefs.

The government will introduce legislation to ensure that all charitable investments and not just type 12 ones must be for the benefit of the charity and not for the avoidance of tax. This will simplify the rules which will be the same for all investment categories. The government will implement the change in April 2026, which will give charities time to understand and prepare for the new rules.

The government will not set up a clearance service for all types of investment, which would require considerable resource for charities and HMRC, but instead will work with the charity sector to ensure that all the guidance clearly defines the terms used and sets out the records and documents required.

The government will supply comprehensive guidance and will set out examples of records and documents it considers will provide evidence that a charity is compliant.

2.3 Closing a gap in non-charitable expenditure rules – Question 7

On certain types of donations, it is possible for a donation to attract tax relief for the donor and be tax-free in the hands of the charity, and for the charity to then spend the donation on something other than its charitable purpose.

For example, a deceased individual’s estate provides for a legacy of £1 million to a charity controlled by the individual’s grandson. This will reduce the value of the estate that is charged to IHT by £1 million and mean the remaining value of the estate qualifies for a reduced rate of IHT due to the donation being more than 10% of the estate’s value. After using a small amount of the money in years 1 and 2, in year 3 the charity chooses to spend the remainder of the income, £900,000, on building a new house for the deceased’s grandson. 

Under the current rules, there is a tax charge on ‘attributable income’. In this scenario the legacy income would not be attributable income, and there would be no tax charge on the associated non-attributable expenditure.

The consultation proposed to extend the definition of attributable income to all income streams. This would enable the government to charge tax on any non-charitable expenditure met by income that falls outside of the current definition, such as legacies.

Additionally, the government proposed a review of the current 6 year carry back restriction to identify ways to charge the right amount of tax should there be significant excess non-charitable expenditure.

Question 7: Do you agree that it is rational and proportionate to review ways to close the tax gap here? If not, please provide reasons why.

Respondents said:

• the government was seeking to create a tax charge on income that has never received relief in the hands of the charity, such as legacy income on which the estate has received IHT relief
• imposing complex rules on tax relief could set charities and their advisers up to fail, especially those with fewer resources
• the proposal to extend the six-year carry back period would be onerous on charities and there was unlikely to be sufficient tax at stake to justify these changes
• when charities incur significant non-charitable expenditure, this should be sanctioned by the relevant charity regulators, rather than by HMRC

Government response

The government accepts that it may not be proportionate to make all income ‘chargeable income’ as some income comes from sources which are not entitled to any tax relief.

However, legacy income could have attracted considerable relief for the deceased individual’s estate, so the government will legislate to bring it into the attributable income definition. This will also have the effect of equalising treatment of income from an estate in the hands of the charity, as where the residual value of an estate is given to charity it is currently treated as attributable income.

The intended changes will make it clear that if income could be relieved in either the donor’s or the charity’s hands it should be subject to the non-charitable expenditure rules.

The government will implement the change in April 2026, which will give charities time to understand and prepare for the new rules.

Given the feedback, the government will not change the time limits relating to carry back at this time though will keep this area under review.

The government acknowledges that charitable conduct and governance are primarily for the charity regulators across the UK to monitor. However, the government does and will continue to play an active role where tax reliefs have been given.

2.4 Sanctioning charities that do not meet their filing and payment obligations – Questions 8 to 11

Some charities persistently fail to comply when HMRC send a notice to file a return, and yet still claim tax reliefs such as Gift Aid and expect it to be paid.

The consultation proposed withholding payments of Gift Aid and disapplying other tax reliefs when charities fail to comply with their reporting and filing obligations.

Questions 8 to 11 sought responses on this proposal.

Question 8: What are the barriers to some charities not filing tax returns when requested to?

Question 9: Do you think that this would adversely affect the operations of charities or CASCs and what might be the consequences of this?

Question 10: How should changes be targeted to ensure they encourage charities to meet their obligations to file a tax return when required to do so – for example should small charities be treated differently to larger ones?

Question 11: How would it be best to educate the sector about any new rules ahead of their introduction?

Respondents said:

• smaller charities and community clubs run by volunteers may lack tax expertise.
• volunteers often struggle to complete tax returns when required an many trustees of charities are not from finance backgrounds and may not fully understand their tax obligations
• there was a misconception among charities that since they are largely tax exempt, they do not need to file tax returns, even when notified by HMRC to do so
• the costs associated with appointing agents to compile and submit a return on the charity’s behalf is a significant barrier
• that online filing poses challenges for charities, with the extensive information required and complex forms
• that the turnover of individuals in charities and CASCs can result in notices to file being issued to the wrong person or to an old address
• that earlier paper return deadlines, in income tax, place a disadvantage on smaller charities that may not be able to afford electronic software
• that filing behaviours would improve if all charities, regardless of size, were required to file a return annually. This would mean charities and their trustees would gain a better understanding of their obligations
• that the proposed sanctions could be disproportionate and should be reserved for persistent offenders
• that the size of the charity and its resources should be considered when looking at proportionality
• that withholding Gift Aid payments could significantly impact charity cash flow, impair charitable work or grant-making capabilities, and even jeopardise the existence of some charities
• that the potential benefits may be limited in improving compliance, pointing out charities are already subject to penalties for late or non-filing
• the introduction of a simplified filing process for smaller charities, with a more streamlined approach, could alleviate the administrative burdens
• there was a need for improved communication, education and guidance. It was suggested that seminars, online videos, and educational materials, such as step by step guides, from HMRC would better support charities in meeting their reporting requirements and raising general awareness
• that continuous education is needed to deal with high trustee turnover. Respondents also highlighted the availability of various groups, including professional bodies, that offer assistance and that can be brought in to educate

Government response

The government will tackle this issue through a change to the Fit and Proper Persons test. This will provide a proportionate approach by addressing the risk, but giving charities the opportunity to correct it before sanctions are applied.

The government will amend the Fit and Proper Persons test so that a manager of a charity who persistently fails to comply with the charity’s tax obligations, including timely filing of returns, will fail the Management Condition. HMRC will give the manager(s) opportunity to rectify their non-compliance but if this is not done it may require the manager to be removed which may ultimately result in the withdrawal of tax reliefs. Once the failures have been corrected and systems put in place to ensure they are not repeated then reliefs could be reinstated. The government expects there will not be many instances when reliefs will need to be restricted.

The government is grateful for the suggestions about annual and simplified filing for charities and will explore this further.

To support these changes the government will implement a short-term education programme in collaboration with sector representatives, alongside a communications campaign highlighting the changes and how to ensure compliance. The government will share the changes to the Fit and Proper Persons test in draft with sector representatives and seek their views before publishing the amended rules.

2.5 Other related issues and questions – Questions 12 to 15

Question 12: Are there any changes which could be made to the charity and CASCs regimes which would ease the burden on the sector?

Respondents suggested:

• a ‘starter pack’ for new charities providing comprehensive guidance, explaining relevant tax and reporting obligations, reviewing or simplifying forms, including CT600 and CT600E, and excluding small charities from filing requirements
• the government could increase the iXBRL exemption from £6.5 million to £10 million, to protect smaller charities from the technological and financial challenges from submitting accounts in iXBRL format
• increasing the small trading limits exemption for charities would help as they have not changed since April 2019
• that if a charity has no taxable income for six consecutive years, they should not be required to file a return until they have taxable income to report
• replacing ad hoc notices to file with an annual declaration for years with no taxable income, which could be a simple checklist of key figures
• various measures to reduce the burden on CASCs such as increasing monetary thresholds for CASCs, providing Gift Aid for junior subscriptions, offering VAT relief for new sports buildings, lifting the cap on tax-deductible contributions, extending exemptions from registration with the Trust Registration Service, and conducting a review of challenges CASCs face

Question 13: Will any administrative or other burdens be created if any of the above measures are introduced? Is so, what are they?

Respondents said that the changes proposed in the consultation would be unlikely to create considerable additional burden as charities and CASCs are already required to keep relevant records for other purposes. A small number argued there was a risk that the administrative burden would increase significantly if the changes went ahead as proposed.

Question 14: What are the estimated costs of any additional burdens?

Respondents said:

• quantifying any additional financial implications is challenging but there would be additional costs for some organisations. They stated that these costs related to internal compliance expenses, the risk of inadvertent non-compliance and the allocation of resources to navigate the new rules
• that HMRC would also experience additional costs to oversee any new requirements
• that new costs associated with compliance extended beyond financial figures: the complex nature of any new requirements might lead to stress among volunteers and staff
• that smaller charities would be more likely to face challenges due to volunteer-led management and turnover among volunteers
• seeking professional advice in response to these additional burdens might result in substantial costs; this aspect was particularly pertinent for smaller charities

Question 15: Are there any other points you would like to raise or suggestions you would like to make to improve compliance in the Charity or CASC sector?

Respondents said:

• that there are challenges faced by volunteers and staff who lack tax expertise in complying with tax rules; changes should simplify rather than complicate tax responsibilities, and be implemented through collaboration between the government and representative bodies
• that most charities aim to comply with tax regulations, even if they struggle due to complex legislation; good guidance is essential and only persistent offenders should be penalised
• that more education from the government was needed about accurate charity return filing and the significance of disclosing tax reliefs claimed

Government Response

The government is grateful for the suggestions made in this section of the call for evidence which have highlighted the importance of good guidance in assisting charities with meeting their obligations.

The government continues to review guidance to ensure that it is fit for purpose and where issues are identified the government will look to rectify them as necessary. The government is considering developing an interactive guidance tool for donors, to help them understand the most effective means of donating, and another interactive guidance tool for charities, to support them to understand their compliance obligations. To assist with this and the testing of guidance, the government will engage with key stakeholders in the charity sector.

The government notes the suggestions on thresholds and time limits. Although there are no changes being made at present the government will consider them when making any future updates.

Responses also highlighted the importance of communications campaigns in communicating changes and their impact on charities, CASCs and donors. In planning campaigns the government will seek to maximise industry links, sector updates and social media, to enable it to get messages out efficiently across the sector.

Where the responses do not relate directly to the measures that are being consulted on, the government will consider them when making any future changes.

Next steps

The government has listened carefully to the views expressed in the call for evidence and is grateful to all respondents for their responses.

The government has taken account of the feedback received and used it to modify its original proposals. The government feels that the amended proposals represent a proportionate and reasonable package that balances tighter compliance rules with changes that are straightforward for charities and donors to comply with.

3.1 Preventing donors from obtaining a financial advantage from their donation

The government will introduce legislation to update the current rules rather than undertake a full overhaul. It will seek to change ‘financial advantage’ to ‘financial assistance’ and replace the motive test with an outcome test.

3.2 Preventing abuse of the charitable investment rules

The government will introduce legislation to ensure that all charitable investments and not just type 12 ones must be ‘for the benefit of the charity and not for the avoidance of tax’.

3.3 Closing a gap in non-charitable expenditure rules

The government has reflected on the consultation feedback and will proceed with a more limited approach to add only legacies to the non-charitable expenditure rules.

3.4 Sanctioning charities that do not meet their filing and payment obligations

The government will amend the Fit and Proper Persons test to enable it to better address poor compliance with tax obligations. A trustee who persistently fails to comply with tax obligations will fail the Management Condition.

3.5 Actions to support the changes

To support these changes the government will update guidance to reflect the new rules, define terms and explain what is needed from charities and donors in order to comply. A short-term education programme and comms campaign will be undertaken where needed. The government will also engage with key industry stakeholders on updates to guidance and to assist with communicating the new measures.

Due to the changes in terms used and the tests that need to be considered, the government will seek to test the draft legislation in a technical consultation. Once in place the government will set out all the new terms and definitions clearly in guidance to ensure that any charity or donor seeking to understand the rules will be in the best position possible to do so.

3.6 Timeframes for changes

The government will publish draft legislation for consultation in 2025, before introducing the legislation later in 2025. Guidance changes will be in place when new legislation comes into force.

For the measure to sanction charities that do not meet their filing and payment obligations the government will make changes to the Fit and Proper Persons guidance during 2025. Prior to full implementation the government will consult on the changes with sector stakeholders to prevent unintended consequences.

Annex A: List of stakeholders consulted

Only organisations that responded are listed

• Arts Council England
• Association of Church Accountants and Treasurers
• Azets
• Ballards LLP
• BPB Pitmans
• BDO LLP
• British Universities Finance Directors Group
• Buzzacott LLP
• Charities Property Association
• Charity Law Association
• Charity Tax Group
• Chartered Institute of Taxation & Association of Taxation Technicians
• Churches Legislation Advisory Service
• Crowe UK LLP
• Diocese of Shrewsbury
• Evelyn Partners
• Farrer & Co
• GAIN
• Gloucestershire Rural Community Council
• Haysmacintyre LLP
• Health Street Baptists Church
• HFMA
• ICAEW
• Institute of Financial Accountants
• Medical Research Foundation
• Moore Kingston Smith LLP
• Philanthropy Impact
• RSM UK Tax
• Turcan Connell
• Warner Wilde Ltd
• Working Families

Charity Tax Group provided a joint response for the following organisations:

• The Association of Chief Executives of Voluntary Organisations (ACEVO)
• The Charities Aid Foundation (CAF)
• The Charity Finance Group (CFG)
• The Charity Retail Association (CRA)
• The Charity Tax Group
• The Chartered Institute of Fundraising (CIOF)
• The National Council for Voluntary Organisations (NCVO)
• The Scottish Council for Voluntary Organisations (SCVO)