For reasons which we won’t go into for the purpose of this Bulletin, there are differences in the definition of charitable under UK tax law, compared to Scottish charity law. The passing of the Finance Act 2010 has complicated matters again, by introducing a new definition for tax purposes. The change has been introduced to address an issue which was identified by a case recently heard before the European Court.
A charity must now meet three conditions in order to fall within the new definition, for tax purposes. These are:-
- The registration condition - the charity must be registered with the charity regulator in its home nation;
- The management condition - managers of the charity must be “fit and proper”; and
- The jurisdiction condition - the charity must satisfy the definition of charity under UK law.
Charities that do meet this new test (which can include charities in the EU, Iceland and Norway) can now qualify for UK charitable tax reliefs on cross-border transfers – they will be able to receive repayments of UK income tax if they have income that would have otherwise have been liable to UK income or corporation tax. They will also be entitled to claim other tax reliefs that are available for UK charities. Consequently, UK donors will be entitled to claim Gift Aid and other reliefs on donations made to overseas organisations which meet the criteria. As a result of this, there has however been a tightening of rules where UK charities pay money overseas, namely that the recipient charity must now take reasonable steps to satisfy HMRC that payment will be applied for charitable purposes.