The Charity Commission of England and Wales has published a useful guidance entitled "Charity tax reliefs: guidance on Charity Commission policy".
The Charity Commission notes:
Charity trustees are under a fiduciary duty to act exclusively in the best interests of their charity in the management of its affairs and the application of its property to further the charity’s purposes for the public benefit. In so doing, they must exercise reasonable care and skill and act to the standard of an ordinary prudent business person in the conduct of their own affairs. This duty makes it appropriate for them to engage in reasonable and prudent tax planning and to take advantage of available statutory tax reliefs relating to charities where these will assist the work of the charity, encourage genuine donations and coincide with the purposes for which these reliefs were created. In addition, trustees may properly seek to organise their charity’s affairs when carrying out particular activities or transactions in a way which minimises the charity’s liability to tax.
Trustees will however risk scrutiny and potential investigation by the commission if they engage in tax arrangements which exploit tax legislation artificially, particularly where they serve to benefit private interests, as well as those of the charity. The use of such arrangements is likely to be in breach of trustees’ duties and responsibilities to act prudently and in the best interest of the charity. Reputational damage to the charity is highly likely to arise from their involvement in such arrangements. Trustees should refer to HMRC’s guidance as to what constitutes tax avoidance. The difference between tax evasion and tax avoidance is described in the government policy ‘Reducing tax evasion and avoidance’, which also sets out HMRC’s and the Treasury’s position in relation to tax avoidance.
The guidance also discusses what is reasonable and prudent tax planning by charities.
The guidance discusses specifically the responsibilities of trustees/directors of charities:
Where trustees seek to enter into tax planning arrangements they must satisfy their duty of prudence and ensure:
- the arrangements are lawful
- they have power to enter into the arrangements in question
- they are neither conflicted nor have the potential to benefit personally from any arrangement
- they take and consider appropriate independent specialist advice about obtaining fiscal relief or minimising tax in the context of their responsibilities, such advice being independent of both the charity and the promoter of any proposed arrangements
- a record is kept of their decision-making including any tax law, tribunal decision or professional advice upon which they are relying
- they take into account and consider any published guidance and advice as to the lawfulness of the proposed arrangements offered or available from HMRC
- by entering into the arrangement, that they do not expose any of the charity’s property to undue risk
- that the proposed transactions will not damage the reputation of the charity and that they have considered how the character of the arrangement fits with the aims of the charity and the ethos of its donors and beneficiaries
- overall, that the arrangements are in the best interests of the charity
There are a number of important points including the obvious such as the arrangement is legal and the charity has the ability to enter into the arrangement. However, trustees have to go far further including looking at conflicts of interest, obtaining appropriate legal advice, keeping records related to the transaction, consider guidance from the regulator and ensure that the reputation of the charity will be protected.
The Charity Commission provides some useful examples
...Examples of previous arrangements that have been considered to be tax avoidance in beach of trustees’ duties and responsibilities have involved:
- borrowing funds to buy investments for a charity and assigning them to individuals at a nominal price, where: the investments are then sold at market value and the proceeds ‘donated’ to charity enabling it to repay the loan [and] this artificial transaction seeks to generate tax relief for individuals and gift aid receipts for the charity
- leasing empty properties from private landlords in which negligible charitable activity subsequently takes place, where: the charity seeks to claim business rates relief on the property resulting in a loss of revenue to the local authority and seeks to avoid the landlord paying rates on an empty property [and] the charity may receive funding for its facilitation of this transaction in the form of a ‘reverse premium’
- serial and contrived financial transactions involving charities and companies which seek to disguise what may have been a taxable transaction
The principal aim of such arrangements is to confer advantage on private businesses or individuals with any benefit to the charity being a by-product of the scheme rather than its principal aim. Apart from being subject to a challenge from HMRC, such arrangements are not consistent with trustees’ duties to act prudently and to further the charity’s purposes in its best interests for the public benefit. The risks to the charity involved include damage to their reputation. Of great concern to the commission are the risks of wider damage to the reputation of the charity sector in the eyes of the general public and Parliament, and the potential loss of other tax reliefs to the sector as a result of, or as a necessary by-product of, action to stop or close such schemes.
The Charity Commission also discusses tax evasion and fraud:
Charities must not engage in tax evasion and tax fraud. Tax evasion is the unlawful concealment of taxable income or gains or the illegal or fraudulent presentation of a taxpayer’s affairs to evade paying tax. Tax fraud is claiming tax reliefs when not eligible, for example:
- a charity knowingly claiming zero rating for VAT for a new building that is used wholly for commercial and not charitable purposes
- a charity paying for goods and services in cash without a supporting tax invoice
- a charity purporting to employ a person on a self -employed basis when the nature of their work for the charity and the contractual relationship with the charity means that they should be treated as an employee for tax purposes
- knowingly claiming gift aid when qualifying donations have not been received by the charity
- knowingly presenting expenditure included for a private or non-charitable purpose as charitable expenditure in accounts or tax returns
You can read the full text of the Charity Commission guidance "Charity tax reliefs: guidance on Charity Commission policy".
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.