New provisions introduced in finance legislation in 2010 stand to have a dramatic effect on the UK system for assessing entitlement to charity tax reliefs and exemptions, removing traditional domestic boundaries and opening up new opportunities for international philanthropic giving and cross-border activities by charities established outside the UK.
The evolution of the new provisions - the EU dimension
The new provisions were introduced in the Finance Act in April 2010. There was no prior consultation, but some changes to the tax system had been expected following a long line of developments in EU law.
Decisions of the Court of Justice of the European Communities (CJEC) have been upholding treaty principles of free movement of capital between member states of the EU, leading to a gradual erosion of restrictions on national charity tax concessions which had traditionally been defined according to domestic borders. These decisions have run alongside threatened infringement proceedings by the EU Commission, including a formal request to the UK Government in 2006 that it desist from similar discriminatory practices.
In January 2009, a decision of the CJEC in the case of Persche (C-318/07) made it clear that the principle of free movement of capital extended to removing undue restrictions on donor relief where a gift of goods was made across national borders to an organisation which would qualify as a charity had it been established within the donor's member state. The changes introduced in the Finance Act 2010 were designed to implement the Persche and earlier decisions into UK tax law.
The new provisions - Schedule 6, Finance Act 2010
When brought fully into force, the provisions will change the meaning of "charity" for most tax purposes under UK law so that a "charity" for these purposes will no longer be limited to organisations established within the UK, but can also extend to qualifying organisations across the EU and, at present, Norway and Iceland (but see further below).
This means that UK taxpayers can claim tax relief on donations to qualifying organisations and those qualifying organisations can claim equivalent tax reliefs and exemptions within the UK to those currently available to UK charities.
To qualify under the new provisions, an organisation, whether or not established within the UK, must satisfy 4 conditions:
- it must be established for exclusively charitable purposes (as defined in English law);
- it must meet the jurisdiction condition, i.e. be subject to the control of a UK court in the exercise of its jurisdiction with respect to charities, or the equivalent under the law of a relevant territory;
- it must meet the registration condition by complying with any requirement to be registered as a charity in the relevant territory; and
- it must satisfy the management condition, which requires that its managers are fit and proper persons.
Fit and proper persons
The management condition is a new requirement for UK charities and has attracted a significant level of controversy since the provisions were published. The introduction of this new condition seems to stem from concerns of HM Revenue and Customs (HMRC) over the potential for abuse in administering claims for a substantially enlarged group of potential claimants for tax reliefs. This seems to have led to the novel approach of determining the tax status of an organisation according to the propriety or otherwise of one or more individuals associated with that organisation. This is a complete departure from usual principles and is perhaps symptomatic of the price which may have to be paid for greater cross-border charitable activity while retaining valuable tax concessions.
There are further difficulties with the new legislation, e.g. what makes a person "fit and proper" is not defined in the provisions, thereby leaving it to the discretion of HMRC, whose interpretation has attracted much heated debate. Similarly, HMRC has taken a wide view of who within a charity is a "manager" for this purpose. This is important as just one "manager" being considered not "fit and proper" can jeopardise a charity's entitlement to tax reliefs and exemptions and hence, potentially, the charity's continued viability.
Applying to be recognised by HMRC
A foreign organisation wishing to take advantage of UK tax concessions can now apply to HMRC to be "recognised" as a "charity" for UK tax purposes. This involves completion of new forms (currently being revised) available on HMRC's website together with provision of relevant documents (such as the organisation's constitution) designed to enable HMRC to determine whether the 4 conditions are satisfied. Successful applicants will be able to qualify for UK tax concessions and gifts by UK taxpayers to such organisations can then qualify for gift aid relief. HMRC have indicated that they will publish a list of all successful applicants for easy reference by potential donors.
Does Schedule 6 go far enough? - Wider opportunities ahead
The new provisions are designed to comply with the principles established in Persche, but doubts have been expressed whether they go far enough to comply with the underlying treaty principles. For example, a formal request has been made to the Netherlands regarding its requirement that organisations must register in the Netherlands to qualify for charity tax reliefs. This is said to be discriminatory because the Netherlands law does not make provision for a donor to demonstrate that a recipient of his or her donation which has not sought to register nevertheless would qualify as a charity in the Netherlands. It is not clear, at present, whether the new UK regime would pass such a test.
But that is not the only doubt over whether the new test complies with EU treaty principles. Those principles prohibit not only restrictions on the movement of capital between member states, but also restrictions between members states and third countries, i.e. countries outside the EU. There is an argument, therefore, that the Schedule 6 provisions should be read to comply with treaty principles, so as to enable recognition of organisations established beyond the borders of the EU, Norway and Iceland. It seems it should be only a matter of time before that barrier is also toppled. In the meantime, the UK charities regime continues to provide a robust legislative framework for international organisations looking for a base within Europe.