An anti-avoidance measure, known as the ‘substantial donor legislation’, was introduced with effect from 22 March 2006. It was designed to restrict a charity’s tax exemption where it entered into certain transactions with donors that allowed the donor to extract value from the charity (whether in cash or in any other form). Any transactions caught under the legislation were regarded as non-charitable expenditure in the hands of the charity.

New legislation to replace the substantial donor rules, known as the ‘tainted charity donation rules’ was introduced in 2011; it adopts a ‘purpose test’ approach focusing on ‘tainted charity donations’ and applies to relievable donations made on or after 1 April 2011. The types of donations covered by the legislation include Gift Aid donations, payroll giving, gifts of trading stock, and gifts of shares, securities and property.

The rules apply, broadly, to situations where the donor (or a connected person – see Donor Benefits for a definition) makes arrangements where the main purpose, or one of the main purposes, is that the donor or associated person obtains a financial advantage, directly or indirectly, from the charity which received the donation. Where a donation is deemed to be ‘tainted’, the donor will lose tax relief on the donations and may be liable for any tax reclaimed by the recipient charity.

The rules do not apply to donations by a company which is owned by a charity or is a relevant housing provider linked with the recipient charity.

For further information please see HMRC guidance Annex viii: tainted charity donations.