Measures to stop abuse of charitable tax relief rules

Following the exposure of the Cup Trust as a tax avoidance vehicle last February, and the admission by the Charity Commission in December that it was investigating 13 similar cases, HMRC has published Following the exposure of the Cup Trust as a tax avoidance vehicle last February, and the admission by the Charity Commission in December that it was investigating 13 similar cases, HMRC has published a discussion paper seeking views on its proposals to stop the abuse of the charitable tax relief rules as announced in the 2013 Autumn Statement.  HMRC is consulting on how to prevent tax avoidance without causing damage to charities operating legitimately.  It aims to achieve this by establishing a "purpose of establishment condition"  in effect, a motive test.

Two versions of the motive test are suggested, both of which have attracted criticism:

• Version A will cause a charity to be prevented from recognition as charitable by HMRC if "one of the main purposes" or results of its establishment is to secure a tax advantage.  This has been criticized on the basis that a main purpose of establishing most charities is to qualify for tax breaks.  Therefore genuine charities could be caught.


• Version B is a narrower test.  Here a charity will be prevented from recognition as charitable by HMRC if "the main purpose" is to secure a tax advantage.  This is less likely to catch a genuine charity on the basis that philanthropy is likely to be its main driver, rather than obtaining a tax advantage.

Commentators have pointed out that neither version would catch a charity founded for genuine reasons but subsequently taken over for tax planning purposes.

The HMRC consultation closes on 11 April.