Budget Report 2010 – CharitiesWhilst a number of announcements in yesterday’s Budget were specifically aimed at charities, the practical impact of these announcements is unlikely to be significant for the vast majority of existing UK charities. The announcement that UK charity tax exemptions and reliefs will be extended to organisations in the EU, Norway and Iceland that satisfy the new definition of “charity” for UK tax purposes will no doubt be welcomed by UK donors seeking to obtain tax relief on donations to such organisations. UK charities may on the other hand feel increased ‘competition’ for donations if their existing UK donors change their charitable giving as a result of this announcement. Of particular note was the disappointing announcement that the anticipated new rules on substantial donors would not be introduced in the forthcoming Finance Bill. It was instead confirmed that the informal consultation with stakeholders would continue to explore the proposed new purpose test. KPMG will continue to be part of the HM Revenue & Customs (“HMRC”) working party looking at the development of these new rules and we will provide further updates in due course. We have summarised below key taxation proposals which could affect charities arising from the Budget Report delivered on 24 March 2010. KPMG’s general commentary on the 2010 Budget Report can be found at the following link: Extending UK charity tax exemptions and reliefs to EU organisationsCurrently UK charitable tax exemptions and reliefs are only available to UK charities. Non-UK charities are therefore unable to benefit from these exemptions and reliefs. In addition UK taxpayers are unable to obtain tax relief on donations to non-UK charities. Legislation will be introduced to extend the UK charitable tax exemptions and reliefs to organisations in the EU, Norway and Iceland that satisfy the new definition of “charity” for UK tax purposes. This announcement effectively implements the European Court of Justice ruling in the Hein Persche case. The new definition of “charity” for UK tax purposes will include the requirement for UK charities and EU organisations to demonstrate that their trustees, directors and managers are “fit and proper” persons. For EU organisations that are able to satisfy the new definition of charity this is a positive move as income that would previously have been taxable in the UK may now be exempt. These organisations will also now be able to reclaim tax from HMRC on eligible Gift Aid donations, i.e. donations from UK and non-UK donors where sufficient UK tax is paid by the donor. This is also a positive move for UK donors who can obtain tax relief for donations to charities in the EU, Norway and Iceland, providing the donation qualifies under the existing Gift Aid rules. The estimated cost to the Exchequer of extending the charitable tax reliefs and exemptions is anticipated to be £200 million by 2018-2019. International expenditureThe existing legislation relating to charitable expenditure treats a payment by a UK charity to an overseas body as non-charitable expenditure unless the charity has taken reasonable steps to ensure the payment will be applied for charitable purposes only. New rules are to be introduced that will require a charity to demonstrate to HMRC that it is has taken appropriate checks before the money is sent overseas and that it will monitor how the funds are spent to ensure this is for charitable purposes. It has been noted that account will be taken by HMRC of the circumstances under which the funds were spent, for example it is expected that routine spending of funds would be viewed differently to spending during an international humanitarian emergency. Income received under Payroll GivingIt was announced that with effect from 24 March 2010 income received by charities under Payroll Giving will now only be exempt from tax to the extent that it is applied for charitable purposes only. This legislative change simply brings donations from Payroll Giving into line with the treatment of income received by charities from other tax effective giving. Gift AidA number of announcements were made in relation to the existing Gift Aid regime, including new rules which will bring donations received from non-UK donors in line with donations from UK donors as regards the recovery of tax where the donor has not paid sufficient UK tax and a requirement for new charities to complete an application form in order to make a claim for repayment of tax on Gift Aid donations. HMRC will also consult with the sector on proposals to restrict the number of in-year repayments that can be claimed by a charity. Corporation tax – Capital allowancesIt is common place for charities to own non-charitable subsidiary companies; the announcements relating to capital allowances may be applicable to such companies and therefore of interest to charities. Since 1 April 2008, the majority of businesses in the UK have been able to claim the annual investment allowance (“AIA”) on up to £50,000 of qualifying expenditure, effectively giving tax relief for 100% of the first £50,000 of qualifying additions. The Chancellor announced that the AIA will be increased to £100,000 for qualifying expenditure incurred from 1 April 2010. The list of energy-saving items qualifying for enhanced capital allowances has also been extended. VATShared servicesThe Government’s announcement of its intention to work with charities and other affected sectors to consider the options for implementing the VAT exemption for cost sharing groups is very welcome. Unfortunately there is no indication of the timescale for the consultation process and the complexity of the relief is likely to mean that it will not be a universal panacea for VAT costs in the charity sector. Lennartz accountingThe Government also announced its intention to bring forward further legislation to restrict the use of the “Lennartz” accounting principle and to ensure that organisations that have recovered VAT under the Lennartz principle have a statutory obligation to continue accounting for VAT unless they unravel their arrangements. Employment TaxEmployer Supported Childcare VouchersA relaxation will be made to the conditions applicable to childcare vouchers and directly contracted childcare schemes delivered through salary sacrifice arrangements, for those employees at or near the National Minimum Wage (“NMW”). Where salary sacrifice arrangements have been introduced some employers have excluded employees with earnings at or near the NMW. Where such arrangements are made without being “available generally” to all employees, the exemption from being a chargeable benefit will not apply and the provision of childcare will be taxable. The Government now plans to relax the “available generally” condition in respect of low-paid employees so that the exemption from taxability will apply to salary sacrifice arrangements for childcare vouchers or directly contracted childcare. This applies retrospectively for the tax year 2005/06 and subsequent tax years. Company Cars and Vans - Zero Emission vehicles and benefit chargeTwo measures will be introduced to change the chargeable benefit in kind on company cars and vans for five years from 6 April 2010 to 5 April 2015. The first change is full relief from the chargeable benefit in kind on company cars and vans which cannot produce more than 0gm per km CO2 engine emissions under any circumstances when driven. The second change reduces the chargeable benefit in kind on company cars which have an approved CO2 emissions figure of exactly 75g per km or less. Arrears of Tax - PAYELegislation in the Finance Bill 2010 will introduce powers for HMRC to require a financial security from employers who have a history of serious non-compliance in terms of paying late or not paying their pay as you earn (PAYE) income tax. The detail will be set out in regulations, which will be published for consultation before they are made. The measure will affect those who are determined not to pay and will not affect those who need time to pay and who make payment arrangements with HMRC. The measure introduces a new criminal offence where a person required to give a security fails to do so. If the person is found guilty of the offence they may be fined up to £5,000. The intention is that the new powers will come into effect from 6 April 2011. ContactsIf you have any queries regarding any of the announcements in the 2010 Budget Report and how these may affect you and your supporters, please contact one of the Public Sector Tax team below or your local KPMG contact.
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