Charities (Hansard, 4 June 1986)

§ Mr. Lawson

In the Budget I announced important new tax reliefs to encourage charitable giving by individuals and businesses. These reliefs have been widely and warmly welcomed, and it is already clear that charities will be seeking to ensure that they are well used.

I also proposed measures to curb the growing misuse in some quarters of charity reliefs for tax avoidance purposes. In the light of consultations on these proposals, it is agreed that the provisions as drafted—in clause 29 and schedule 7 to the Finance Bill—were drawn too widely and would have unintended and undesirable effects on some genuine charities. I have decided, therefore, that they need to be substantially amended, in order to overcome the legitimate concerns.

The consultations have revealed a wide agreement that effective action should be taken to curb the most serious of the abuses in the interests of encouraging charitable giving and the good reputation of the vast majority of responsible charities, especially in the light of the generous extensions of relief this year, as well as to protect the revenue. I have concluded, therefore, that the right course is to concentrate this year on tackling situations where a charity: applies its funds for non-charitable purposes; or passes funds to an overseas body, without taking reasonable steps to satisfy itself that the funds will he applied for charitable purposes; or loans or invests funds in certain limited ways, for example by lending or 560W returning them back to the original donor, or to those connected with him, in circumstances in which the charity cannot show that the loan or investment is made for genuine charitable purposes.

Accordingly, a charity will be subject to a restriction of its tax relief only if its funds are used in any of the above ways and, even then, only if its taxable income and gains exceed its allowable expenditure and certain specific reserves.

I propose to retain in the Bill provisions under which: grants paid by one charity to another are to be regarded as chargeable to tax, but eligible for exemption if applied to charitable purposes; covenant payments made by a subsidiary company to its parent charity are to be paid under deduction of tax. The tax will, however, be repayable to the parent, provided the charity satisfies the conditions for exemption; and in these cases arrangements will be made to ensure that the charity and its subsidiary do not suffer a cash-flow disadvantage; higher rate relief for covenanted donations may be withheld where, under the revised rules, the donee charity's own relief is restricted.

I am proposing generally to exclude from some aspects of the new provisions all charities whose taxable income and gains (including grants from other charities) do not exceed £10,000. Furthermore, for the vast majority of charities there will be little or no change in the extent (if any) to which they are required to supply information to the Inland Revenue.

On this basis, I do not propose to proceed in this year's Finance Bill with two particular features of the original proposals which caused nearly all of the concern: the distinction betwen "private indirect" and other charities; and the possible restriction of tax relief where the charity accumulates income.

I have concluded that action in these areas is not essential in the current Finance Bill, but rather that they are matters which should be considered further, over the coming months, in consultation with the charity movement, with a view to establishing as far as possible a consensus on whether any further legislation is needed here and, if so, what form it should take.

The Government will be bringing forward revised proposals accordingly, when we come to discuss clause 29 and schedule 7 to the Finance Bill in Committee. The Inland Revenue will be issuing a press notice giving the text of the amendments as soon as they are tabled.