“It is one of the beautiful compensations of this life that no one can sincerely try to help another without helping himself.” Charles Dudley Warner (Fifth Study, 1872) 

For most, charitable giving is about helping others and that is reason enough.

However, as mentioned in some of the other articles in this edition of Private Affairs, giving can have additional benefits for donors.

This is fine in most cases where donors are simply making the most of the tax reliefs available, but there are rules to deal with donors who go too far in seeking to benefit from their gifts.

Tainted donation rules

The tainted charity donations rules are anti-avoidance provisions aimed at preventing abuse of charities by a perceived small minority of donors who might seek the benefit of the tax reliefs available, and also a financial advantage from the recipient charity.

The rules came into force on 1 April 2011 and largely replaced the unpopular “substantial donor” rules. However the substantial donor rules still apply to gifts made before 1 April 2011 but which come into effect before 1 April 2013.

A donation needs to fulfil three conditions before it is considered tainted. Firstly, the donor enters into arrangements with a charity or community sports club (CASC) before or after the donation, and it is reasonable to assume that the donation would have not been made and the arrangements would not have been entered into independently of each other.

Secondly, one of the main purposes of the arrangements is for the donor to receive a financial advantage directly or indirectly from the charity. Thirdly, the rules only apply if the donor is NOT a qualifying company wholly owned by a charity or charities, or a non-profit registered provider of social housing.

All three conditions also apply to people connected to the donor eg, spouses and civil partners.

Examples in practice

HMRC provides a number of examples highlighting how it thinks these rules will work:

  • A donor Gift Aids a donation of £100,000 to a hospital after agreeing with the hospital that the donor’s son will receive £125,000 of treatment.
  • A company is instructed by one of its directors to make a donation to a charity. The charity gives a commission of 75 per cent of the value of the donation to a trust for arranging the donation. The trust is connected to the director instructing the donation.

Other examples where the donation may be treated as tainted include selling, letting or exchanging property, providing services, providing a loan or financial assistance and investing in a business.

Consequences

If a donation is deemed tainted by HMRC, the donor loses any tax relief on the gift. An income tax charge may arise on the donation, if it was made under the Gift Aid scheme. If the charity was knowingly party to the offending arrangement, it may also need to repay any income tax claimed back from HMRC on the gift.

Issues with the rules

There is no lower limit for the value of gifts that may be caught by the tainted donation rules, unlike the substantial donor rules, any donation is theoretically open to being challenged.

Furthermore, the rules only require a reasonable assumption that the donation would not have been made or the arrangement would not have been entered without the tax relief. Critics have suggested these rules make matched funding, gifts to foreign causes routed through UK charities and even sponsored events conditional on the event being completed potentially tainted donations!

The ambit of the rules seem very wide, and, unfortunately, they seem quite likely to catch innocent donations.

With this in mind, the tainted donation rules should be considered whenever a donor and a charity enter into transactions that may be linked indirectly to a donation it has received. This is particularly the case where there may be doubt as to whether the related transaction is on a commercial basis.