UK: Budget Round-Up - Just A Spoonful Of Sugar?

Last Updated: 6 August 2010
Article by Luke West

In recent weeks, George Osborne and principal figures in the new Coalition Government appear to have taken a leaf from the book of that epitome of Britishness, Mary Poppins, for it was she who sang: "Just a spoonful of sugar helps the medicine go down..."

With headline giveaways paving the way, the true cost of the emergency Budget was announced. The medicine when taken didn't seem quite so bad. So what was the outcome for charities and their supporters – the taxpaying public?


Charities were thankfully spared from any seismic changes in the VAT arena, though obviously the increase in the rate of VAT to 20% from 4 January 2011 will need to be budgeted for.

However, the March Budget's rules regarding VAT and postal charges could potentially affect charities – see the back page of this newsletter for more information.

Sunset on transitional relief

When considering cashflow constraints, charities should remember that the transitional relief, introduced in April 2008 to address the cash impact of the reduction in the basic rate of tax, will cease on 5 April 2011. This relief is worth 3.2 pence in the pound. Privately owned charities should seek to secure tax-effective funding while this relief remains and donors are suffering 50% income tax rates.

Fit and proper persons test

The real medicine for charities comes, with or without a spoonful of sugar, in the form of a new definition of charitable status for tax purposes. This will be introduced in Finance Bill 2010. The new definition includes a requirement that the charity's managers and trustees be fit and proper persons (FPP).

HM Revenue & Customs' (HMRC) intention to legislate in this area has prompted some commentators to say that the tax authority doesn't trust the Charity Commission to monitor adequately the honesty of trustees. It is perhaps worth setting the background for why these changes are being introduced.

In order to comply with EU law, UK charity tax reliefs are now extended to European Economic Area countries (with the exclusion of Liechtenstein). As many will know, the Charity Commission only considers applications for charities established in England and Wales and, of course, HMRC must protect the UK's tax coffers.

Also, in recent months HMRC has become aware of highly artificial and contrived tax avoidance schemes using gifts made into charities. These give an individual higherrate tax relief but provide the charity with no financial benefit whatsoever. Clearly HMRC is right in seeking to block abusive schemes such as these.

HMRC is at pains to stress that the FPP tests will vary from case to case to take account of individual circumstances but, in brief, the following factors might lead HMRC to conclude that a person is not a FPP.

  • A history of tax fraud or other fraudulent behaviour.
  • HMRC knowledge of previous involvement in the abuse of tax repayment systems.
  • Information pointing to a heightened risk of involvement in financial impropriety.
  • Being barred from acting as a charity trustee by a charity regulator or court, or being disqualified from acting as a company director.

HMRC envisages that the individuals to which the FPP test might apply could include the chairperson, treasurer, secretary and cheque signatories. In larger charities, the test might be extended to employees with finance control.

The consequences of a trustee failing HMRC's FPP test is that the charity could lose its charitable tax status. HMRC has indicated that, where the charity innocently appoints a person who is not an FPP, a period of grace should be available for the charity to 'put its house in order' and redeploy the person not qualifying as an FPP.

How should charity trustees protect the charity going forward? HMRC will expect charity trustees to be able to show, if challenged, that they have given proper consideration to the suitability of people they appoint, especially where they are able to exert control over the charity's finances and tax affairs.

Trustees may therefore wish to obtain a declaration from any new managers, trustees and directors appointed after 5 April 2010. A template is available and includes a declaration by the individual that he/she is a fit and proper person to act as a charity manager. Visit:

Finally, HMRC has introduced the Charities Variations Form for charities to notify HMRC of changes to their organisation. This includes changes to the managers covered by the FPP test. Charity trustees would do well to familarise themselves with these changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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