The Charity Commission encourages charities to take advantage of specific charity tax reliefs, for example gift aid, and recognises that reasonable and prudent tax planning is consistent with the trustees’ fiduciary duties to the charity that they manage.
Charity trustees are under a fiduciary duty to act exclusively in the best interests of their charity. This is in both the management of its affairs and the application of its property to further the charity’s purposes for the public benefit. In doing so, 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. This is relevant 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.
Where trustees seek to enter into tax planning arrangements, they must satisfy their duty of prudence and ensure that:
- 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, they do not expose any of the charity’s property to undue risk;
- 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; and
- overall, the arrangements are in the best interests of the charity.
However, charities need to consider carefully the point at which reasonable and prudent tax planning becomes agressive tax avoidance. In particular, when trustees are considering proposals for tax arrangements which are supported by favourable legal opinion from a tax specialist, they should in such circumstances always take professional advice from a reputable adviser unconnected with the proposed arrangements.
An example of reasonable and prudent tax planning might be encouraging eligible donors to use gift aid when making cash donations to the charity.
They may also arrange their affairs to structure transactions in a tax efficient manner. Other examples of prudent tax planning include:
- a charity providing advice on legacy gifts planned in a will that will attract tax relief from inheritance tax; and
- a charity encouraging higher rate tax payers to claim the higher/additional rate relief (the difference between their marginal rate tax and the basic rate of tax) on their cash donation, and adjust the amount they donate as a result of the overall cost to them of the donation being lower.
If trustees are in doubt about a tax matter then they should seek independent professional advice and consider HMRC’s guidance. The commission considers tax fraud, tax evasion and tax avoidance to fall within an area of regulatory concern. In addition, the commission expects charities to fulfil their obligations under tax lawfully. They should take every reasonable step to ensure that the charity is not a party to, and does not enter into, any tax planning arrangements that are imprudent or could bring the charity or the charitable sector into disrepute.
Trustees will 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.
The Commission will, if requested, review and authorise arrangements if they are judged to be in the interests of the charity.