It has been an interesting time in the world of charity taxation. We have seen some long anticipated movement in the field of charity compliance, a taxpayer has successfully argued that fees charged by investment Charity Authorised Investment Funds (CAIFs) are exempt, HMRC have updated (and then modified) their guidance on signatories of trust returns and Gift Aid declarations, CTG have been busy raising awareness of reliefs from withholding tax on investment income, and finally, we consider the impact of increased NI contributions on charity funding requirements.

The changing charity compliance landscape

After a long delay, the Autumn budget did finally reveal the Government’s conclusions on the charity compliance consultation which was launched in April 2023. Much of this is focussed on improving compliance levels and preventing improper use of charity tax reliefs to obtain personal benefit.

Fit and proper person

Tax reliefs for charities are dependent on the charity falling into the statutory definition of charity found in Schedule 6 of FA2010. One of the requirements in Schedule 6 is the ‘management condition’ which requires that “managers are fit and proper persons to be managers of the body or trust”. The term ‘fit and proper’ is not defined anywhere in tax legislation, but HMRC publish guidance, which was last updated in 2017, on their approach to interpreting this term. A failure to meet the management condition would mean that the charity was no longer entitled to the generous tax reliefs claimed. The most significant of which are probably gift aid and corporation tax.

In a bid to improve compliance levels, HMRC are proposing to update their guidance to extend the definition of not a fit and proper person to include a person who persistently fails to comply with tax obligations such as ‘timely filing of returns’. It does appear that HMRC expect that this is a measure of last resort for those charities who persistently fail to engage with the need to file returns, but nonetheless tax returns can easily fall to the bottom of the pile of priorities; this measure means that failure to submit the return could result in a huge financial problem for charities.

Tainted charitable donations

In addressing avoidance, the government has proposed two changes to come in from April 2026. The first is to update the Tainted Charitable Donations (TCD) legislation by lowering the bar for challenging a transaction. In the current legislation, HMRC must demonstrate a ‘motive’ or ‘main purpose’ of obtaining a ‘financial advantage’. This test will be replaced with an ‘outcome test’ which will allow HMRC to consider a series of transactions in the round rather than a single transaction.

Qualifying investments

The second strand of addressing avoidance is qualifying charitable investments (QCI). Because the compliance requirements around QCI are quite light touch, this area is sometimes given less attention than it deserves. This is surprising because whilst the TCD rules impact on donors, the QCI rules impact on the charities themselves, withdrawing corporation tax reliefs. The QCI rules set out 12 types of qualifying investments. The 12th category is a ‘catch all’ covering loans or other investments made for the benefit of the charitable company and not for the avoidance of tax. The government will introduce new legislation from April 2026 to ensure that all investments, not just ‘type 12’ ones must be for the benefit of the charity and not for the avoidance of tax.

Who signs on the dotted line? Signatory of trustee returns

HMRC recently updated, and then following representations from CTG, clarified, their Charities Guidance around authorised official. The new section reads as follows:

“6.3.9 For charitable trusts completing trusts and estates tax returns, if an authorised official who is not a trustee of the charity completes and signs the charity’s tax return this must be countersigned by a trustee of the charity.”

This change potentially poses some practical challenges for charities constituted as trusts, as whilst in a smaller charity it may well be one of the Trustees who prepares and submits any returns to HMRC, in a larger charity this is very unlikely. Instead, there will usually be a scheme of delegation giving the finance director/CFO and/or their team the power to file these returns on behalf of the charity. It would be unusual for charity trustees to be involved, making it an unwelcome and unhelpful administrative hurdle for them to personally sign off a tax return. Further, if a trustee is required to countersign a return it is not clear in practice how a dual signature would work where a return is filed electronically. CTG will continue to work with HMRC on this point.

CCLA VAT case – Charity Authorised Investment Funds fees

This VAT Tribunal case, considering the VAT status of fees charged by investment managers (CCLA in this case) on Charity Authorised Investment Funds (CAIFs), found that the fees should be exempt from VAT. To get maximum benefit, charities would need to approach their fund managers asap to ensure that they are charging the correct rate of VAT as there is a 4 year time limit for managers to make the VAT adjustments (unless they are CCLA or had claims ‘stood behind’ the CCLA appeal).

What’s in a name? Gift Aid Declarations

HMRC updated their guidance on Gift Aid declarations and then withdrew it following representations from Charity Tax Group. The withdrawn guidance stated that a Gift Aid declaration must include the full name (rather than just the initial) of the donor. This is not consistent with the tax legislation which only requires the donor’s name. However, to enable HMRC to match Gift Aid claims with taxpayer records, HMRC would like charities to provide a forename where that information is available, but HMRC should not reject a line on a Gift Aid claim where there is only an initial. CTG is working with HMRC to ensure that any future changes to the guidance will accommodate the practical difficulties of changing systems and include workable transitional provisions, especially for enduring declarations.

Maximising returns by minimising withholding tax on investments

Many charities that hold investments are probably missing out on reliefs or reclaims of withholding taxes or WHT. And this means that your investment returns will be less than they should be. Although some fund managers assist with minimising the amount of WHT, in many cases they have ceased to offer this service as they are not authorised to offer tax advice. This means that some charities are no longer getting this service. Completing the claim forms is complex, and so professional help is usually needed. Although this comes at a cost, in many cases it can be very economic so it may be worthwhile for charities to work with their professional tax advisers to discuss this. PwC gave a presentation on ‘operational taxes’ associated with investments, and this can be found on the Charity Tax Group website.

National Insurance Changes

Finally, the increases to national insurance will clearly have an impact on charities who, unlike commercial entities are mostly unable to raise fees/charges to cover this cost and could be working on projects where a grant funding budget is already set. The impact may not be significant for members of the FIRM network themselves, but there may be a question as to whether it is possible to increase any existing grants to charities which are funded by FIRM members to cover this additional cost.