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UK Moves To Shut Charity Avoidance Scheme

by Robert Lee,, London

17 December 2009

The UK Treasury has announced that legislation is being brought forward in Finance Bill 2010, effective from December 15, 2009, to block a tax avoidance scheme exploiting the gifts of qualifying investments to charities rules in the Income and Corporation Taxes Acts.

In a written ministerial statement dated December 15, Stephen Timms, Financial Secretary to the Treasury, explained that:

"These tax reliefs provide valuable incentives to encourage people to give and provide support to the charity sector. It is therefore particularly regrettable that we have become aware of an artificial, aggressive and offensive tax avoidance scheme that seeks to abuse those tax reliefs available for donations to charity."

"A similar scheme to exploit this same relief was shut down in Finance Act 2004 and we are aware other schemes to exploit these reliefs have been marketed since then."

He continued: "This government will not tolerate tax avoidance or tax evasion, and will act promptly to tackle both of these, so I am today announcing changes to be made to legislation, with immediate effect, to counter these schemes."

According to Timms, the scheme exploits the relief available for donations of listed shares and other types of qualifying investments (including land) to charities in section 431 of the Income Tax Act 2007 and section 587B of the Income and Corporation Taxes Act 1988.

Under the scheme, an offshore company sells to a taxpayer listed shares with a market value well in excess of the amounts paid. However, the offshore company has an option to buy back the shares, exercisable after three years, for GBP1. The taxpayer then gifts the shares to a charity and receives tax relief on the higher market value of the shares, despite having paid only a fraction of that market value for the shares.

The option to buy back the shares is not taken into account for the purposes of determining the amount of the relief. The rules disregard contingent liabilities, such as an option, until the liability crystallizes, typically by the exercise of the option in this case. In reality the option is never exercised and the scheme organizer gets their money back from the charity through some "contrived" arrangements.

Timms observed that the resulting benefit to the charity is typically less than half of 1% of the value of the tax relief obtained.

He went on to state: "The Government does not accept that these highly contrived arrangements have the effect sought, but will remove any doubt by introducing appropriate legislation in Finance Bill 2010. The new rules will reduce the tax relief on such arrangements to the lower of the cost of acquisition to the donor of the shares or investments gifted, or the market value at the date of disposal, where the acquisition was made as part of a tax advantage scheme. This legislation will have immediate effect."

However, it was explained that: "The legislation will not affect genuine donations to charity where tax avoidance arrangements are not involved and HM Revenue and Customs (HMRC) will be consulting with the charity sector to ensure the legislation achieves its intended effect."

"The government introduced these reliefs in 2000 with the intention that they should be used only for genuine donations to genuine charities. Where HMRC become aware of arrangements which attempt to frustrate that intention, the government will introduce legislation to close them down, where necessary, with effect from today."

In conclusion, it was announced that: "This action will not affect the vast majority of charities and donors who organize their affairs in a straightforward and ordinary way. The Government continues to believe charities make an important contribution to our society and do not deserve having their reputation called into question by such offensive tax avoidance."

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