The Government has published the Finance (No.2) Bill 2016 and associated explanatory notes. Provisions relevant to charities are outlined below, with the vast majority reflecting announcements in last week’s Budget.

 

VAT: women’s sanitary products

This clause reduces the VAT rate on the supply of women’s sanitary products from a reduced rate of 5% to a zero rate. This change follows discussions at the European Council which has agreed to increased flexibility for Member States on tax rates.

This is a very important development as charities had previously understood that it was not possible tro introduce new zero rates, and that once they had been removed they were lost forever. The European Commission Action Plan outlining this greater flexibility on VAT rates is expected shortly and presents a number of possible opportunities and risks for the sector.

Loans to participators etc: trustees of charitable trusts

This clause confirms the exemption that CTG secured for charities from the loans to participators rules. CTG raised concerns with HMRC after it became apparent that certain financing transactions that charities entered into could be caught by the rules, despite this never being the Government’s intention

Dividend Allowance

This clause introduces a new dividend allowance (initially announced in the Summer Budget 2015), which will apply to the first £5,000 of an individual’s dividend income and will replace the existing dividend tax credit. The allowance will operate as a 0% tax rate inserted into the Income Tax Act 2007 (ITA 2007). The measure also introduces new rates for dividends received above the £5,000 allowance, and abolishes the dividend tax credit (along with consequential amendments). The new rules will apply from 6 April 2016.

At present, dividends have a tax credit which can count towards tax paid to cover Gift Aid donations. The new rules mean that there is no longer a tax credit. A person with dividend income of £5,000 currently has a tax credit of £555. From April 2016, it will be NIL because the first £5,000 of dividends will be taxed at a zero rate. A person with pensions of £11,000, bank interest of £500 and dividends of £5,000 will not have a tax liability and so will be unable to claim Gift Aid. Of course, anyone with a higher income from other sources or a higher dividend income, say, from their own company, will still be a taxpayer.

An article on Accounting Web suggests that this could have an adverse impact on pensioners wishing to make a Gift Aid claim.  We would welcome feedback from members on the anticipated impact on their donors.

Gift aid: power to impose penalties on charities and intermediaries

This clause amends primary legislation introduced at Finance Bill 2014 and gives HMRC the power to impose penalties if an intermediary or a charity fails to comply with requirements set out in regulations. The legislation sets out when a penalty may be imposed, the maximum amount that can be imposed per failure to comply with requirements and confers a right of appeal against the imposition of a penalty. These regulations will be discussed in a technical consultation early next year and will be laid later in 2016. CTG continues to participate in the HMRC Charity Tax Forum working group on Gift Aid and intermediaries and will keep members apprised of developments.

Apprenticeship Levy – connected charities

This clause sets out that at the beginning of the tax year where two or more qualified charities are connected with one another only one will be entitled to the Levy allowance to be offset against the Apprenticeship Levy.

• Subsection 1 applies where at the start of the tax year two or more charities are connected, and would apart from this section each be entitled to a Levy allowance for the tax year
• Subsection 2 sets out that only one of the qualified charities can be entitled to the Levy allowance.
• Subsection 3 sets out that it is up to qualified charities to decide which charity will be entitled to claim the Levy allowance.
• Subsections 4 and 5 set out the meaning of charity.
• Subsection 6 provides that the meaning of connected can be found in sections 21 and 22.

Charity lump sum death benefits

This clause and Schedule amend Part 4 of Finance Act (FA) 2004. They make various minor changes to ensure that the pension flexibility changes introduced from 6 April 2015 operate as intended. They make changes to the tax rules for situations including charity lump sum death benefits.

VAT: Isle of Man charities

As previously announced this provision will put it beyond doubt that charities subject to the jurisdiction of the High Court of the Isle of Man are capable of qualifying for UK Value Added Tax reliefs for charities. This is purely an administrative measure to formalise existing practice.

Serial tax avoidance – restriction of relief

The legislation provides that a person who has received a relief restriction notice may not make any claim for a relief for the period of restriction. Certain reliefs relating to charities, are excluded from this restriction:

• a claim for relief under Schedule 8 to FA 2003 (stamp duty land tax: charities relief);
• a claim for relief under Chapter 3 of Part 8 of ITA 2007 (gifts of shares, securities and real property to charities etc);
• a claim for relief under Part 10 of ITA 2007 (special rules about charitable trusts etc);
• an election under section 426 of ITA 2007 (gift aid: election to treat gift as made in previous year).

Inheritance tax: gifts for national purposes etc

The legislation amends Schedule 3 Inheritance Tax Act 1984 (IHTA) to bring back within its scope any museum or gallery which has been maintained by a local authority or a university, for example those now constituted as independent charitable trusts which have been unable to benefit from the provisions because of that change. The clause also transfers the power to add national institutions to Schedule 3 from HM Revenue and Customs (HMRC) to the Treasury.

Climate Change Levy rates

This clause increases the main rates of Climate Change Levy (CCL) with effect from 1 April 2019.

The context of the changes in this clause is that of wider reform to energy taxation, announced at Budget 2016, following a review of the business energy efficiency tax landscape announced at Summer Budget 2015. Budget 2016 announced the closure of the CRC scheme with effect from the end of the 2018 to 2019 compliance year following business concerns that the scheme is overly complex and administratively burdensome. It also announced increases to the CCL main rates from 2019 to 2020 to recoup revenue lost from the abolition of the CRC and strengthen the energy efficiency incentives amongst CCL-paying businesses.

A consultation response document to the review of business energy efficiency (to which CTG responded) was published on 16 March 2016. Government has confirmed that it will consult on de minimis arrangements to exempt small or low energy-consuming charities, later this year.

Exemption for income tax for trivial benefits

This clause introduces a statutory exemption from income tax for trivial benefits in kind (BiKs) provided by employers to employees. BiKs that qualify for the exemption will not incur a charge to income tax nor a liability for National Insurance contributions (NICs), and will not need to be reported to HMRC. The change comes into effect on and after 6 April 2016.

Office of Tax Simplification

The legislation provides for the permanent establishment of the Office of Tax Simplification (OTS) in statute and makes certain provisions for the governance and operation of the OTS. The OTS was established as a temporary, non-statutory office of the Treasury in July 2010 to provide independent advice to the Government on simplifying the UK tax system. At the Summer Budget, the Chancellor announced the Government’s intention to introduce legislation in 2016 to put the OTS on a permanent, statutory footing with an expanded role and capacity.