The Autumn Budget announced by Chancellor Philip Hammond on 29 October 2018 included some important changes for the charity sector which are aimed at reducing the administrative burden for charities.
In this article we have summarised the key changes expected to come into force in April 2019 of which charity trustees and senior management should be aware.
In addition to the changes announced in the Autumn Budget 2018, the simplification of the Gift Aid donor benefit rules, which was announced in the Autumn Budget 2018, is expected to come into force in April 2019. This will result in the current three monetary thresholds being reduced to two with all extra-statutory concessions legislated.
Increase in the upper limit of non-primary purpose trading
The most significant change announced was the increase to the maximum amount of non-primary purpose trading that a charity may carry out under the ‘small-scale exemption’ tax relief.
It is not within the scope of this article to provide a detailed explanation of the rules on charities, trading and tax. However, we will begin by summarising the basic position.
Charities are not required to pay tax on the profits gained from trading activities that directly advance (or are ancillary to advancing) the charitable purposes of the charity. For example, the sale by a charitable theatre of tickets to a show at the theatre would constitute primary purpose trading (and the sale of refreshments during the interval would constitute ancillary purpose trading). However, if a charity wishes to engage in ‘non-primary purpose’ trading there is a limit to how much may be carried out within the charity before taxes become payable on the profits.
Non-primary purpose trading is any trading activity that makes profits for the charity but is not related to advancing the charity’s purposes. Importantly, the fact that the profits arising from that trading activity are applied in furthering the charity’s purposes is not sufficient; the activity itself must advance the charity’s purposes. To continue our theatre example, if the theatre opens as a café that any members of the public may use (including those who are not visiting to see a show) that activity will constitute non-primary purpose trading.
The small-scale exemption thresholds have remained the same for many years, so the announcement by the Chancellor that they are to be increased will be very welcome for many charities. Provided that a charity’s non-primary purpose trading is below the maximum threshold (and does not represent a significant risk such that the trustees consider it should be ring-fenced) it may be carried on directly by the charity. Otherwise, it is necessary to form a trading subsidiary, which creates an administrative burden for charities.
The current limits are:
The new limits will be:
Increase in the individual donation limit under Gift Aid Small Donation Scheme
The Chancellor also announced an increase in the maximum eligible cash or contactless donation under the Gift Aid Small Donation (GASD) scheme from £20 to £30 (in line with contactless payments nationally). The maximum amount that charities may claim under the scheme will remain at £8,000 per tax year.
GASD was introduced in 2013 to allow charities to receive a Gift Aid style top-up payment on small cash donations. The purpose of the scheme is to avoid the disproportionately burdensome requirement to complete Gift Aid forms in respect of very small donations.
New rules will be introduced to remove the requirement for charity shops operating the Retail Gift Aid scheme under Method A or Method B, to send an annual letter to donors to notify them of the total net proceeds of sale raised from the sale of their goods during that tax year if the total amount raised is less than £20. Instead, charity shops will be permitted to issue the relevant letter every three years rather than annually.
The Retail Gift Aid Scheme allows charities to claim Gift Aid in respect of the sale of donated goods. The scheme is complex, but in summary it allows charity shops to qualify for Gift Aid if the charity or its trading subsidiary offers to act as an ‘agent’ for individuals and sell goods on their behalf, so that at the point of sale the funds actually belong to the individual, after which the net proceeds of sale are donated (and eligible for Gift Aid).
Due to the fact that the net proceeds of sale belong to the individual donor at the point of sale, it was historically necessary for charity shops to send a letter to each donor after selling their goods before the net proceeds of sale could be treated as a donation on which Gift Aid was claimed (this is called the ‘Standard Method’ and the template letter can be found here). However, in April 2013, two new methods were made available to allow individuals to specify at the beginning of the process that they do not need to be contacted for their consent following the sale up to a specified limit. Instead, the charity shop may issue annual letters to its donors so long as the net proceeds are within the limits set out below:
If the net proceeds from a donor exceed the above limits during a tax year, the charity shop is required to obtain consent from the donor before treating the net proceeds of sale as a donation and claiming Gift Aid.
Many donors make small value donations each year, and the administrative burden involved in sending letters to every donor every year has an impact on the costs of operating the scheme for charities. The changes are designed to reduce the administrative burden, as it is disproportionate to the donation received. This will be a very welcome change within the sector, and follows considerable work by the Charity Retail Association and Charity Tax Group in lobbying HMRC for the changes.
Widening of the beneficiaries of tax-exempt pension benefits provided by employers
The Chancellor announced changes to the premiums paid by employers into life assurance products or contributions to certain overseas pension schemes. The current rules state that the employer’s contributions are only exempt from tax if the beneficiary of the policy or pension is the employee or a member of the employee’s family or household.
The change to the rules widens the scope of beneficiaries with the benefit of tax exemption to any individual or registered charity nominated by the employee. This is good news for charities since it means that an individual will be able to nominate a charity to receive their death or retirement benefit without the employer’s contributions being treated as a taxable benefit in kind.
This article is from the January 2019 issue of Essential Trustee, our newsletter for charity trustees and senior management. To download the latest issue, please visit the newsletter section of our website. Law covered as at January 2019.