There may come a time in the life of a charity when all prospects of avoiding a profit on fundraising have been exhausted. Patently a profit is not a bad thing but the attendant tax liability is not good. However, there are means by which the position can be alleviated if not eradicated. The traditional route is to establish a trading company wholly owned by the charity. In essence the trading company will be liable on its profits to corporation tax but by paying those profits to its parent charity that tax liability can be eliminated. The effect is that there is no tax paid by the company and the charity receives an income not caught by the trading regime. Consequently they receive the proceeds of trade exempt from tax. In order to achieve this aim the income must be paid in the form of a share dividend, interest on, and repayments of, loan capital, or as Gift Aid. The question is therefore why every charity doesn't do this. It is probably because

Maintained in partnership with Julian Hickey and Adrian Shipwright, both at Burnell Chambers Generally, a transfer of value to a charity is exempt from inheritance tax (IHT), but there are circumstances where an IHT charge may be triggered on the charity. Charity exemption Irrespective of it being a gift to a charity an individual has an annual tax free allowance of £3,000 which can be carried forward one year to give a one off exemption of £6,000. Gifts out of income, assuming that they are genuinely gifts that can be afforded out of disposable income, also carry exemption. These forms of gifts are important to charities but legacies are probably the most important source of income for most charities. The main exemption in favour of charities is found in section 23 of the Inheritance Tax Act 1984 (IHTA 1984). This provides that transfers of value are exempt so far as those transfers are attributable to property given to charities. However, this does not apply where the property gift: • only takes effect after the termination of any

As noted below, there is no general exemption from income tax or corporation tax for charities and each case must be considered on its own facts.Further, it cannot be assumed that the tax treatment of charities is constant through all the tax regimes. In general, charities enjoy substantial tax advantages. However, income tax and corporation tax do not follow the same rules as, say, VAT, so just because a charity enjoys exemption from VAT does not mean it will escape income tax and vice versa. Basically, the first hurdle to overcome is to prove to HMRC that the organisation is a charity for tax purposes. In other words, it must be established for charitable purposes only and meet the conditions in paragraph 1 of Schedule 6 of the Finance Act 2010 (FA 2010). This, in effect, includes a fit and proper person test for the managers (see paragraph 4, Schedule 6, FA 2010. Thereafter, the income tax exemptions for charitable trusts are set out in Part 10 of the Income Tax Act

Charities are as susceptible to money laundering 'attacks' as any other organisation. It is essential that charity trustees protect their charity from these attacks and to recognise them they need to understand the offences that can be committed. What is money laundering? Money laundering is a crime and is usually described as the process of turning the proceeds of crime into property or money that can be accessed legitimately without arousing suspicion. The term ‘laundering’ is used because criminals turn ‘dirty’ money into ‘clean’ funds which can then be integrated into the legitimate economy as though they have been acquired lawfully. See Practice Note: Money laundering—key information for businesses. The offences The Proceeds of Crime Act 2002 establishes a number of money laundering offences including and applies to all persons. See Practice Note: Proceeds of Crime Act 2002—key information for businesses. It is unlikely that a single charity will commit all of the potential offences but they should recognise their existence. The principal offences are: • concealing, disguising, converting, transferring, or removing from the UK, criminal

Overview of the public and community benefit sector in England and Wales The sector comprising non-public sector organisations which pursue, in whole or part, purposes for public or community benefit, rather than to maximise and distribute profit to owners or shareholders, is described in various ways, including: in common usage 'the not-for-profit', which more precisely means 'the non-profit distributing sector'; 'the third sector', as distinct from the private and public sectors; and the 'voluntary' or 'community and voluntary sector'. The sector is also broadly referred to as the 'charity sector', which more precisely refers to thousands of charities registered with the Charity Commission for England and Wales, a range of charities expressly exempt, or excepted, from registration, for example statutory further education colleges, mainstream universities and registered places of worship and countless small charities below the income threshold of £5,000 for formal registration. Within this sector, there are distinct types of organisation, including: charities, social enterprises, co-operatives/mutuals, community organisations, and socially-focussed businesses. Such types of organisation

The starting point It is well established that the promotion of a political cause or activity cannot be a charitable purpose because: • charities are subject to the jurisdiction of the courts • it is for the courts to decide whether a particular purpose is charitable as a matter of law • arriving at such a judgment involves deciding whether the particular purpose is beneficial to the public or not, and • it is not for the courts to judge whether a political cause or activity is beneficial to the public or not On this basis: • organisations with the purpose of upholding the law may be charitable • organisations which aim to promote or prevent a change in the law (either domestic or foreign) are not, and • political parties cannot be charities, and neither can organisations whose purpose is to support a political party or candidate for election Subsequent developments Further clarification was subsequently provided when it was held that Amnesty International was not a charity but that its Prisoner of Conscience

To date there has not been a sufficiently persuasive judicial definition of a charity, although the man in the street probably has a good idea of what one is. The only links between the various attempts at a definition is that it is a gift and it is for general public use. However, not all gifts are for the general public use, hence the need for the gift to have a charitable purpose. The purpose will not be charitable unless it satisfies the public use ('benefit') test. This public benefit test has been: ‘stated in the proposition that it must benefit the community or a section of the community. Negatively it is said that a trust is not charitable if it confers only private benefits’ Consequently, even if it seems a client is able to fit into a charitable purpose category, they may still fail to be registered as a charity if they cannot meet the public benefit criteria. For the practitioner, a difficulty is that Charities Act 2011 (CA 2011) does not contain a

For an introduction to the Bribery Act 2010 (BA 2010), see Practice Note: The Bribery Act 2010—an introductory guide. The Ministry of Justice has also produced guides to the BA 2010. At first sight it may seem incongruous to link charities with bribery but all organisations, since the Bribery Act 2010 (BA 2010) came into force on 1 July 2011, must be wary of not breaching its wide net. Charities could be liable as BA 2010 states that a relevant commercial organisation can commit an offence. A commercial organisation is defined (inter alia) as: ‘(a) a body which is incorporated under the law of any part of the United Kingdom and which carries on a business (whether there or elsewhere), (b) any other body corporate (wherever incorporated) which carries on a business, or part of a business, in any part of the United Kingdom… and, for the purposes of this section, a trade or profession is a business’ It can be seen from this that many but not necessarily all, charities

The charities sector in the UK is significant in size. There is a wide range of pension provision across the sector. Many charities are facing financial pressures as a result of a combination of factors including: • increased running costs • a decrease in the amount of giving • investment underperformance There is an increasing trend among local authorities to seek to outsource certain of their services to the private and third sectors. These services often include housing services, elderly care and youth services. Many of these services are taken on by charities and other not for profit organisations. In this note, where we refer to a ‘charity’ we also refer to a ‘not for profit organisation’. However, it is important that any charity which takes on a local authority contract understands the pensions implications. In September 2015 it was reported, for example, that the Multiple Sclerosis Society was to sell a support centre in order to meet costs relating to its Local Government Pension Scheme membership. This Practice

There is no general exemption from VAT for Charities. There are special rules for VAT that allow output supplies by charities in some cases to be zero rated or exempt. Where relevant this can affect input tax recovery. It is very difficult for charities to be entirely sure of their VAT position, as the listings for zero rated and exempt supplies are extensive and confusing, with the Value Added Tax Act 1994 (VATA 1994) containing two schedules, Schedule 8 (relating to zero-rating) and Schedule 9 (exemptions), each divided into groups, with the groups then divided into items. Many of the items have detailed notes ('the devil is in the detail'). Areas of particular relevance to charities include: • specific items zero-rated for charities • education • subscriptions • donations and grants • admission charges • fundraising activities • conferences • aids for the handicapped See also VAT Notice 701/1 (How VAT affects charities). In particular, of note, is HMRC’s recently published position on fundraising. HMRC state: ‘5.9.2

The relief of poverty is one of the earliest and most generally accepted of all charitable purposes. By ‘relief’ of poverty is meant the ‘alleviation’ of its effects, ie the removal or reduction of disadvantages suffered by a person or group because of their lack of financial means. Acceptable relief activities The most basic activities for charities for the relief of poverty are the provision of necessities such as food, clothing and shelter, or the means of acquiring them. However, the relief of poverty is not limited to alleviating such basic needs. Historically, courts tended to define poverty in financial terms. However, increasingly there is a recognition that the ‘poor’ are not just the destitute but include those who are unable to provide themselves with the items, services or facilities which most people take for granted, or have to ‘go without’. It is not confined, in the UK, to those entitled to state benefits (although it obviously includes such persons) and may vary in terms of income level from time to time and from region

Although many charities will wish to organise and deal with their own investments, such will be beyond the capabilities of others either because of lack of available skills or lack of time or staff. In those circumstances, it will make sense to consider the use of agents or nominees and/or custodians. Agents Section 11 of the Trustee Act 2000 (TrA 2000) sets out, at least so far as unincorporated charities are concerned, those powers that the trustees have, over and above those contained in their governing document, to delegate certain functions to agents. 'Delegate' in the context of TrA 2000, s 11 has been defined by the Charity Commission: The use of the term 'delegate' in this context means someone who is discharging a prescribed function on behalf of the trustees as a whole.  In this case the delegate is the agent who is appointed to carry out a specific function. The agent should not be appointed or retained without a specific purpose to undertake. Providing that the power to delegate those functions (and review the delegation)