Prevention and relief of poverty by charities the tax issues

Transcription

1 Prevention and relief of poverty by charities the tax issues March 2014 Stewardship Briefing Paper Stewardship, 1 Lamb s Passage, London EC1Y 8AB t: e: enquiries@stewardship.org.uk w: stewardship.org.uk

2 This Briefing Paper and others like it are provided free of charge and help a great many churches and charities. Their development involves many hours of dedicated professional expertise both from within and outside of Stewardship. They are provided at our own cost as part of our mission to equip you. If you find the material in this Briefing Paper to be of value, we would invite you to respond in the following ways: Subscribe to receive our bulletins at our website, and Tell others in your church or charity about our resources. If you regard the material to have been of particular help and significance to you in your work (for example using it to inform a church or charity group/network) perhaps you would consider making a financial gift to Stewardship in appreciation (though please feel under no obligation). CONTACT DETAILS Stewardship 1 Lamb s Passage, London EC1Y 8AB t: e: enquiries@stewardship.org.uk w: stewardship.org.uk Stewardship is the operating name of Stewardship Services (UKET) Limited, a registered charity no , and a company limited by guarantee no , registered in England Copyright Stewardship 2014 COPYRIGHT This publication is the copyright of Stewardship. We want our resources to have the maximum impact, therefore you are welcome to reproduce or otherwise distribute this material in whole or part. We simply ask two things: (1) there must be no use for commercial gain, and (2) Stewardship is clearly acknowledged with the following wording Reproduced with permission from Stewardship. If extracts are to be used in another context, permission should be sought in advance by ing enquiries@stewardship.org.uk or telephoning Thank you. DISCLAIMER Whilst every care has been taken in the preparation of this material, Stewardship cannot be responsible for action taken or refrained from in reliance thereon. It is recommended that appropriate professional advice be sought in each relevant individual circumstance. 2

3 table of contents Page 1. Introduction 4 2. Why is the prevention and relief of poverty a tax an issue? 4 3. Should the charity support the particular cause? 5 4. Is the charity empowered to give this particular support? What is poverty? Justification Guidelines and poverty Further assistance 6 5. Meeting the Public Benefit Requirement 6 6. What are the gift aid and other tax consequences? Gift Aid - general principles Gift Aid and restricted funds Restricted funds - best avoided? Gift Aid and payments overseas 9 7. conclusion 9 8. further help 10 3

4 This Briefing Paper is an updated edition. The original Paper was written by Andy Jones of HM Revenue and Customs and Kevin Russell, Technical Director of Stewardship. Stewardship gratefully acknowledges the valuable input of Andy and of HMRC in the writing of the earlier edition. 1. introduction Responding to disastrous or calamitous situations and to very real and pressing needs can provoke an instinctive and immediate reaction from the heart. Sudden disasters, such as the 2010 earthquake in Haiti, or the 2004 Tsunami are clear examples. Poverty in all its guises is another. When we act instinctively to situations we can often disregard other considerations, things that we would have taken into account if we had some time to examine them in calmer and more rational times. That is not to say that we would deny help where needed but that we may avoid making some wrong assumptions. For example, there may be charity law and tax consequences arising from our actions. If these crop up and surprise us years after such a humane act, they can leave more than a bad taste. It is therefore worth being aware of the issues. This is particularly important for church leaders and trustees who have responsibilities and obligations to the authorities as much as to beneficiaries. 2. why is the prevention and relief of poverty a tax an issue? There are several aspects to consider: Should the charity support this particular cause? (an internal decision) Is the charity empowered to give this particular support? (a regulatory decision) In doing so, will the charity be meeting the public benefit requirement? Following on from this, what are the Gift Aid and other tax consequences? The first is a subjective consideration. The other three can lead to very unwelcome outcomes if charity leaders get it wrong. Describing or defining the word poverty is like trying to describe an elephant. It is not easy to give a robust definition and it means different things to different people. It is also very subjective. Like an elephant, in most cases, we are pretty sure when we see it. Both churches and individuals can react to poverty with the heart. Poverty is not only evident in the developing world; it is on our doorsteps the homeless, aged and infirm, those who are jobless, are on low incomes, are dealing with redundancy, or are caught up in a cycle of drugs, alcohol etc. It is difficult for most to turn away and ignore issues like this when they stare one in the face. For Christians, this is arguably a more acute issue. 4

5 3. should the charity support the particular cause? As noted above, this is an internal policy decision. The answer will depend on the goals and objectives that the trustees have set for the short and medium term, the priorities and the expected impact that their involvement will have in the particular circumstances. In some cases, the charity s involvement could be quite crucial and have major impact, for example where a church identifies an ongoing need that others have not seen or recognised. At the other extreme, it may be that other charities or relief bodies are already doing an excellent job and the benefits of your charity becoming involved may be marginal. Could those funds and resources that you would otherwise devote be used for greater impact elsewhere? 4. is the charity empowered to give this particular support? Churches usually have the promotion and advancement of religion as the central charitable objective. Some may have a separate objective of preventing and / or relieving poverty. Even where this second objective does not appear in the governing documents (trust deed, CIO constitution, articles of association or similar founding document), it is often a strand of the church activity through its doctrine and tenets. 4.1 What is poverty? Strictly, this is not a tax issue. Further, tax legislation does not specify or define poverty. We therefore have to turn to quotes ( judicial dicta ) from judges in cases that have gone before the courts. Even here, they fall short of a definition as such. Most parties agree that poverty is a relative term. Anyone who cannot afford the normal things in life that most people would take for granted could probably be classed as being in poverty. So it doesn t just apply to those with a recognised low quality of life, it could include a wealthy person who has fallen on hard times through a particular event such as bereavement. In these cases, there may be temporary financial hardship that would still be eligible for assistance. Trustees may consider in these circumstances that it is more appropriate to give relief by way of a loan rather than an outright gift. Just because someone is in receipt of State Benefits does not mean that they cannot receive further support from a charity if their full needs are not met by those benefits. That said, charities should take care in case provision of support means that some of the State Benefits are thereby withdrawn for example because of means testing. If that is the case, support may not be appropriate since the charity could then effectively be relieving the State rather than the individual! 5

6 4.2 Justification It is recognised that assessing the normal things in life can be difficult to assess particularly in this day and age. Inevitably there will be a subjective judgement to be made. Also, standards of living and public perception change over time. It is therefore important that church leaders and trustees are able to justify their decisions to support individual cases of poverty rather than just acting on feelings or emotions or long established policy. 4.3 Guidelines and Policy However, it is helpful for churches or charities that are preventing or relieving poverty on a more that casual basis to establish guidelines covering the criteria used to decide on support for identified cases. These guidelines should be regularly reviewed. Possibly the restraints of the cash available will make it a case of deciding on need first. It may be better to make an impact on a narrower group of people rather than spread resources too thinly such that impact in materially reduced. 4.4 Further assistance The Charity Commission booklet entitled The Prevention or Relief of Poverty for the Public Benefit provides excellent advice to guide decisions and is recommended reading. It is available for download from 5. meeting the Public Benefit Requirement A charitable purpose must be one that is for the public benefit (Sections 2 and 4, Charities Act 2011). The Charity Commission is obliged to issue Guidance to promote awareness and understanding of the operation of this requirement, and the charity trustees are obliged to have regard to that Guidance when exercising their powers or duties to which the Guidance is relevant (Section 17 of the Act). Charity trustees must carry out their purposes for the public benefit and therefore, the decisions that they make, including decisions on whether to support a particular need, must bear in mind the Public Benefit Requirement. The Charity Commission s main statutory Guidance on public benefit can be accessed from This is a landing page, providing an overview only. The statutory Guidance can be found by reference to the three Public Benefit Guides (PB1 Public Benefit: the Public Benefit Requirement, PB2 Public Benefit: Running a charity, and PB3 Public Benefit: Reporting) for which links are provided from this landing page. In addition to these three guides (which apply to all charities) there is further supplementary Statutory Guidance for charities engaged in the prevention and relief of poverty. This is contained in the booklet The Prevention or Relief of Poverty for the Public Benefit referred to in Paragraph 4.4 above. Sections D, E and F of this booklet provide the additional Statutory Guidance to trustees. 6

7 6. what are the gift aid and other tax consequences? Once the decision to support someone is made it s then a matter of how. Practical help such as support, guidance, spiritual direction etc. are helpful and will generally have no tax consequences. Cash gifts on the other hand might have consequences for the recipient although this is likely to be rare since in most cases, the relief given is unlikely to be regarded as taxable income. 6.1 Gift Aid general principles However, the gifts made into the charity are subject to a number of tax considerations, especially if made under the Gift Aid Scheme. Take for example money put into church funds using Gift Aid. In tax terms, donations are income in the hands of the church and are only exempt from tax if spent on the charitable objectives. If the Church trustees follow the guidance above, they will have taken steps to ensure that proposed payments are charitable and therefore there should be no problem here. A few words of caution: the need for a charity s funds to only be used for the charitable purposes set out in its Governing Document (Trust Deed, CIO constitution, Articles of Association, or similar) arise in both charity law and tax law. Therefore all payments that a charity makes must pass this test. Although it is rare for there to be a material breach of this nature, it does happen from time to time, even in the church sector. For example, a church decides to spend some of its income on a new sports car for the preacher (yes, this has happened). Unless that payment can be described under one of the legal heads of charity, it is classed as non-charitable expenditure. Other examples which church trustees should be careful over, are gifts made more as expressions of friendship or personal esteem, such as gifts for a wedding or a thank you, rather than towards prevention of, or relief of poverty. Any non-charitable expenditure can attract a tax charge on the charity, at the appropriate rate. For churches this could be the prevailing company tax rate. There are some peculiar elements to the tax calculation but the principle for recovery of tax is sound. However bizarre the examples may seem, they reflect the underlying need for trustees to demonstrate due care in whatever they do. 6.2 Gift Aid and restricted funds It is not uncommon for funds to be given to the church for specific appeals. Although donors can express a use for their donation, one of the principles of Gift Aid is that it is given without imposing such tight conditions that the charity s trustees have no effective discretion as to the use of the funds. So a donor cannot make a gift under gift aid on strict condition that it is used to relieve a particular 7

8 case of poverty (or for that matter on a strict condition that it is used for any other specific purpose). Trustees must retain discretion on how their charity s funds are used. 1 This is different to the situation where the church (that is the church trustees) recognises a need and establishes an appeal for that cause or where a donor suggests that their donation is used for a particular purpose and the trustees exercise their discretion in agreeing to the donor s suggestion. As a matter of trust law, donations made to an appeal in this way become restricted funds and must be used for that purpose. If fulfilling this purpose becomes difficult or impossible, the trustees must either obtain the donor s permission to use the funds given by them in another way, return the donation to the donor on the basis that the trust created (by the donation) has failed or seek the advice of the Charity Commission. Advice should be sought before returning a donation. Once received and accepted, a donation forms part of the charitable funds of the charity and must be spent for charitable purposes. In most cases, making a (re)payment to the donor will not rank as charitable expenditure. It is therefore important to establish that the funds can be returned as a matter of charity and trust law. Returning a donation will also have tax consequences if Gift Aid relief had been claimed on the donation the tax so claimed will need to be promptly repaid to HMRC by sending a payment or adjusting the next repayment claim. HMRC Charities will advise you on this, if these circumstances occur. 6.3 Restricted funds best avoided? When accountants refer to a restricted fund, lawyers will generally use the term special trust. In other words, when a donor gives a donation to charity for a purpose that is narrower than the purposes of the charity generally, a trust over that particular donation is automatically created. Dealing with that trust can be onerous if, for example, it is not possible to spend all of the monies collected for the specified purpose. 2 Whilst starting an appeal to meet a particular need in the church, or beyond, may be a means of motivating people to give, it can (as we have seen) create problems later, sometimes necessitating professional advice. It may therefore be better, when appealing for funds, to state in literature, notices and verbal appeals, that the funds collected will be used for the stated cause so far as is possible but, in the event that too little is raised, or indeed too much, or there are other legitimate reasons why all of the funds cannot be used as intended, any funds in the appeal that remain, will be transferred to general funds. 1 Where a donor imposes strict conditions on how their donation is to be used, it may cease to have the character of a gift and the charity then acts purely as a conduit. This can pose serious tax and legal risks. We explore this complex topic further in our Briefing Paper When a Charity s Income is not its income. 2 There are regulations governing how monies are dealt with in such cases. Our forthcoming Briefing Paper on Financial Appeals and Failed Appeals will cover this in more detail. 8

9 6.4 Relatives of trustees Where a church wishes to support a particular individual who is a relative of one or more trustees, especial care needs to be taken. Whilst the individual concerned may be in genuine need, the potential conflict of interest that might otherwise arise, because of the relationship to the trustee(s), needs to be managed and to be seen to be managed. Accordingly, the trustee or trustees that are related to the proposed beneficiary should take no part in any discussions or decision to support the individual. The decision made by the remaining trustees (whom should still constitute a majority of all of the trustees) should be carefully minuted, giving clear objective reasons for the decision that they reached, and making it clear that the potentially conflicted trustees absented themselves from the discussions. 6.5 Gift Aid and payments overseas The matter becomes a little more involved when dealing with matters outside of the UK and extra care is needed. Whilst the same subjective judgement of poverty can be made the trustees must take additional steps. Tax law 3 is explicit on this. It demands that when making payments to a body outside of the UK the charity concerned [must take] such steps as the Commissioners for HMRC consider are reasonable in the circumstances to ensure that the payment will be applied for charitable purposes. Again there is a subjective element to this but the potential downside, where large sums are sent overseas, could be significant. This is especially so if the support is spread over a number of years. Fortunately, HMRC have published guidance on what they expect to see. This guidance recognises that what is reasonable in the circumstances will vary from case to case, depending on the size of the payment, and other factors. Stewardship has produced a Briefing Paper A Guide to Churches Making Payments Overseas which not only cross refers to and distils the HMRC Guidance down to situations relevant to churches, but also covers other associated risks such as corruption, terrorism, and contravening the Bribery Act. 7. conclusion Supporting those less fortunate than ourselves is very important. By embedding the steps discussed above into the charity s thinking and procedures, an unexpected tax bill that could take the shine off the good work that is done, can be avoided. 3 The relevant law depends on whether the charity is an unincorporated trust or is regarded as a corporate body (such as a charitable company limited by guarantee, or a charitable incorporated organisation (CIO)). For unincorporated charities, the law is contained in s547 Income Tax Act For incorporated charities, refer to s500(b) Corporation Tax Act But, for all practical purposes, the rules are the same. 9

10 8. further help Further help and assistance, please contact Kevin Russell or Stephen Mathews: Stewardship 1 Lamb s Passage, London EC1Y 8AB t: e: enquiries@stewardship.org.uk w: HMRC Charities Correspondence SO708 PO Box 205, Merton Road, Bootle, Merseyside L69 9AZ t: (8am 5pm, Mon Fri) e: via the link at hmrc.gov.uk/charities/ .htm w: 10