Charity and philanthropy update - January 2021
In this edition, we:
- provide a brief update on recent developments arising out of the ongoing pandemic;
- report on a recent case which considered "approved charitable investments";
- comment on the ongoing litigation in relation to the National Fund, a charitable trust established nearly a century ago with the purpose of discharging the UK’s National Debt; and
- conclude on a note of caution in relation to gift aid claims.
Covid-19 and charities: an update
In April 2020, as the pandemic swept across the world, we published questions and answers on the impact of Covid-19 on the charity sector and, in our July 2020 charity and philanthropy update, included information on holding meetings remotely in line with social distancing requirements. We could not have imagined then that almost a year after the first confirmed UK case, we would be in the midst of yet another national lockdown.
It therefore seems like an appropriate time to refer readers back to our previous articles, and to note briefly a few updates on the points made in those articles which may be of relevance for charities as they attempt to carry on running their organisation during these challenging times.
On 8 January, the Charity Commission updated its Covid-19 guidance in light of the recent lockdown, giving the following instruction to charities: "These restrictions mean if you can, you should hold trustee or member meetings online or by telephone…".
Our note on charity meetings in our July 2020 charity and philanthropy update discusses options for holding both trustee and members’ meetings remotely. We mentioned the introduction of the Corporate Insolvency and Governance Act 2020, which provided companies (including charitable companies) and other "qualifying bodies" (including charitable incorporated organisations) with flexibility as to how they conduct AGMs and other members’ meetings. In particular, the legislation provided that such meetings:
- need not be held at any particular place;
- may be held, and any votes may be permitted to be cast, by electronic means or any other means (i.e. there is no requirement for physical meetings, so they could be held by telephone, videoconference or a combination of both); and
- may be held without any number of those participating in the meeting being together at the same place.
These measures initially applied to members’ meetings held between 26 March 2020 and 30 September 2020. In light of ongoing restrictions associated with the pandemic, the provisions have now been extended until 30 March 2021. However, before the legislation expires, trustees should consider whether their charity’s governing documents ought to be updated, for example, by introducing provisions specifically permitting remote meetings.
Gift Aid and other financial support for charities
In our Covid-19 questions and answers last year, we noted that the government had indicated that it would be prepared to relax the Gift Aid rules so that charities could claim Gift Aid on the value of tickets in the event that a charity event was cancelled but the ticket owner agreed not to be refunded for the cost of the ticket, and instead donate the price to the charity. The Charity Tax Group has recently reported that HMRC intends to make this change of approach permanent, so that any waivers of refunds (whether in relation to tickets for cancelled events or loans to charities) can count as donations to which Gift Aid can apply, provided that the individual’s agreement to waive the amount in question is clear and irrevocable. This is to be welcomed and should assist charities which have been forced to cancel events as a result of the pandemic.
On 9 January, the Government also announced the expansion of the "Dormant Assets Scheme", a programme which enables financial products (such as bank accounts) which have not been used for many years, and which the provider has been unable to reunite with its owner, to be used for social and environmental initiatives. The expansion of the scheme should allow dormant assets across the insurance and pensions, investment, wealth management, and securities sectors to be unlocked, with the potential for over £800m to be made available.
Charity leaders have also called for additional support packages to be made available as part of the Government’s forthcoming Budget. Demands include a temporary increase in the value of Gift Aid to help mitigate the impact of Covid-19 on charities. To date, the Government has not agreed to this (and it seems fairly unlikely that this will be an option it chooses), but we await any Budget announcements on 3 March with interest.
Approved charitable investments – Reb Moishe Foundation v HMRC
The recent case of Reb Moishe Foundation v HMRC  UKFTT 303 (TC) provides useful guidance to charity trustees who wish to invest excess income or capital or to challenge a decision by HMRC. The case also serves as a cautionary tale to those who do not keep proper records of decision-making, or fail adequately to distinguish between the charity’s best interests and the interests of a connected organisation.
What can charities invest in?
Charities can invest in 12 different types of "approved charitable investments" without jeopardising their charitable tax reliefs. The first 11 are specific types of investment, most of which are uncontroversial, such as land, bank deposits and shares in listed companies. The final type, known as "Type 12", is a catch-all provision, covering "a loan or other investment as to which an officer of Revenue and Customs is satisfied, on a claim, that it is made for the benefit of the charitable trust and not for the avoidance of tax (whether by the trust or any other person)".
Investment which is not an approved charitable investment will be regarded as non-charitable expenditure. Where a charity uses its funds for non-charitable expenditure, the charity’s tax exemption will be reduced by the amount of the non-charitable expenditure.
What happened in the Reb Moishe case?
Between 2005 and 2007, the Reb Moishe Foundation, a registered charity (the Charity), received donations totalling around £2.5m from Gladstar, a company registered in Gibraltar (the Company). The Charity had intended to use the funds to build schools in Israel but these plans were delayed, so the Charity found itself with excess cash. Using that cash, the Charity loaned £2m back to the Company. The loan was repayable on demand, secured by a guarantee from the Company’s parent and had an interest rate of 24% per annum.
HMRC decided that the loan was not a Type 12 investment (or any other type of approved charitable investment) and it therefore assessed the Charity to income tax based on the amount of this non-charitable expenditure. It argued that the loan could not have been for the benefit of the Charity because its trustees, who had various connections to the Company, did not carry out due diligence on the Company or take action to recover the loan after the Company had missed a repayment. There were various other failures of the trustees’ independence and decision-making.
The Charity appealed against HMRC’s decision.
What did the Tribunal find?
The First-tier Tribunal looked at the words in the Type 12 test and held that its jurisdiction over HMRC’s Type 12 decisions was only of a supervisory nature, i.e. it can only overturn HMRC’s decision if that decision was unreasonable. This is because the test is whether an HMRC officer is satisfied that the investment is made:
- for the benefit of the charitable trust; and
- not for the avoidance of tax.
The Tribunal’s analysis was as follows:
- HMRC incorrectly focused on applying its own guidance rather than the legislation. Applying the legislation, it would be "difficult to argue that the loan was not for the benefit of the charity" on account of the excellent return the Charity made on it. The trustees’ lack of due diligence could be explained by the knowledge the trustees had of the Company’s finances.
- The purpose of the loan was probably the avoidance of tax: there were two tax deductions for the Company (once under gift aid and once as tax-deductible interest) in respect of funds which had not in reality moved anywhere. Although HMRC’s decision did not explicitly take this purpose into account, it should have.
The Tribunal concluded that, although HMRC had taken into account irrelevant information and had failed to consider relevant facts, HMRC’s decision was reasonable because it would have reached the same decision had it applied the material correctly.
The Charity Commission has recently announced that it will consult on revised guidance on responsible investments. There will undoubtedly be more lessons for trustees to digest – as well as the chance to influence those lessons through the consultation process.
For the time being, trustees should ensure that they carefully evaluate any proposed investment, particularly anything which might be considered unusual or non-standard, and make sure that they keep full records of any decisions they make in this regard.
The National Fund
H.M. Attorney General v Zedra Fiduciary Services (UK) Limited And Ors
This case looks at the National Fund, a charitable trust established nearly a century ago with the purpose of discharging the UK’s National Debt. The eventual failure of this charitable purpose has given rise to a number of issues of longstanding charity law. The central question was simple: where should the charitable assets be paid: the National Debt Commissioners, the estate of the original donor, or a new charity? Macfarlanes acted for the trustee of the charity, and we explain the position below.
Following the First World War, and the consequent surge in the UK’s National Debt, a British private banker named Gaspard Farrer wished to make a donation to his country – not of the usual works of art or stately homes, but of seed capital intended to repay the National Debt for the relief of subsequent generations.
So in 1927, Mr Farrer donated some £500,000 of his personal assets to establish the National Fund, a charitable trust which was intended to grow through both investment and mutual donations from the public until it was sufficient to discharge the entirety of the National Debt, which then stood at £7bn.
At that time, national debts were considered like personal debts as burdens to be relieved. Further, the view then was that a post-war surge of patriotism would encourage enough public contributions to meet the ambitious target.
For nearly 100 years the fund was left to grow, initially under the trusteeship of Baring Brothers Bank and latterly of Zedra Fiduciary Services (UK) Limited, the charity’s current trustee.
However, unforeseen circumstances arose, including the Second World War, causing a further spike in debt and a shift in prevailing economic theory positing that national debts were in fact good for economies.
Subsequently, while the invested capital had performed well, public contributions to the National Fund decreased, while the National Debt continued to surge. It gradually become apparent that the chances of the purpose of the charity being achieved were becoming vanishingly small.
By 2018, the National Fund had grown to approximately £500m but the National Debt was fast approaching £2tn (meaning a full distribution of the National Fund would discharge less than one day’s interest on the National Debt). The Attorney General brought proceedings seeking a court-ordered scheme to release the charity’s funds, by changing either the purpose of the charity or the aspects of its machinery that were causing the blockage. As the charity was a trust and not a company with easily amendable governing documents, a court-ordered scheme was the only available recourse.
The key issue at this stage was the technical question of whether the charity’s purpose was to discharge the National Debt, or whether it was simply to reduce the National Debt with a direction to only do so when the National Debt would be discharged. The answer to this question would largely determine the form of scheme required.
If the purpose was discharge (and because this was impossible), then the charity was amenable to the court’s jurisdiction under the cy-près doctrine (meaning "as near as possible to"), under which, where a charity’s purpose has failed, a new purpose with similar objects will be ordered in its place.
Conversely, if the purpose was reduction (but with a problematic direction for full discharge of the National Debt), then the National Fund was amenable to the court’s administrative jurisdiction, under which the mechanics of the charity are altered to resolve the malfunctioning direction.
The Attorney General preferred the administrative jurisdiction, under which the scheme would remove the problematic direction requiring the National Fund to be paid only on a full discharge. This would allow the funds to immediately be paid to the National Debt Commissioners in reduction of the National Debt. While this would not have unburdened the Government’s liability as far as had been intended, it would provide a degree of relief.
With the Attorney General taking this position, the trustee, although neutral on the matter, was directed by the court to present the alternative arguments that the purpose was to discharge the National Debt and that therefore a cy-près scheme in which a new entity with general charitable purposes should be ordered.
The Farrer family
However, on the eve of the trial’s original window in November 2019, a descendent of Mr Farrer (and as such a beneficiary under his estate) applied to be joined to the proceedings to argue that the charity was, and always had been, invalid. In particular, it was suggested that, because the purpose of the charity was impossible from the outset, the charitable assets in the National Fund were in fact held on resulting trust for the donor’s estate.
The court considered that this argument was not without a reasonable prospect of success, so the descendant beneficiary was joined and the trial was postponed to allow for further evidence. However, before any evidence was prepared, the descendant beneficiary withdrew from proceedings. This left the Attorney General and the trustee to return to focus on the original issue of the purpose of the charity and the appropriate form of scheme.
However, history repeated itself and, seven weeks before the new trial window, two further descendant beneficiaries of the original donor’s estate approached the trustee with a fresh claim against the validity of the charitable trust.
The issues in detail
These two beneficiaries were joined as the second and third defendants and consequently the trial had two key issues, which are explained further below.
- Is the National Fund a valid charity or was it void from the outset?
- If the National Fund is a valid charity, what was its true purpose and therefore which scheme should be ordered?
Validity of the charity
On the first of these, the descendant beneficiaries argued that the requirement for the National Fund to have grown until it could discharge the National Debt was in effect a condition precedent. Until such time that the condition precedent was attained, the trust would not vest in the hands of the trustees. As it was now accepted that the requirement to discharge the National Debt was impossible, the condition precedent had never been satisfied and never would be. As such, the trust was never validly established, meaning the gift was never properly devoted to charity and so the funds should revert to the original donor’s estate.
The trustee’s position was that, on the terms of the trust instrument (specifically, "the Trustees shall hold the National Fund upon trust until [it is sufficient to discharge the National Debt]…"), there was plainly no condition precedent. Instead, the trust vested immediately and unconditionally. While the purpose was now impossible, at the time of the trust’s establishment in 1927 this was a possibility and so the gift had been devoted to charity and the National Fund was valid.
Purpose of the charity
On the issue of the charity’s true purpose, as discussed above, the Attorney General’s position was that this was to reduce the National Debt. The requirement for discharge was merely a direction in the exercise of the charity’s purpose. Therefore, only the mechanics of the trust needed altering under the court’s administrative scheme jurisdiction so that the funds could be distributed before they were sufficient to discharge the National Debt.
In support of the contrary position that the purpose was to discharge the National Debt, the trustee again relied on the meaning of the trust instrument itself and argued that the requirement for discharge was so integral to the function and ultimately intended result of the charity that it was its purpose. With this purpose now impossible, the court must exercise its cy-près jurisdiction to order a scheme with a new purpose. This, the trustee argued, could be used to create a new charity with general charitable purposes – one that could make a more tangible difference to the charitable sector as a whole which has been ailing since the pandemic – rather than be used to pay less than one day’s interest on the National Debt.
After a four-day remote trial, the court handed down its judgment on 9 November 2020 and in summary held that:
- the charitable trust was valid: no condition precedent existed and the trusts had vested immediately. This meant that the funds would not revert to the donor’s estate but would remain within the charitable sector;
- the purpose of the charitable trust was to discharge the entirety of the National Debt, as this requirement was an inherent element of the charity and more than a matter of timing or administration; and
- as this purpose was not impossible in 1927 but only later became so, a cy-près occasion had arisen and a new purpose for the charity would need to be drawn up.
This decision represents a very satisfactory result both for the charity and for the trustee, which was able to protect the charitable funds from the claims of the descendant beneficiaries and secure a new purpose for the National Fund.
There is now the possibility for the establishment of a new charity that could directly help the charitable sector in the areas where it is needed most, the final details of which will be the subject of further evidence and determination by the court over the course of 2021.
Gift aid and tax returns – re Webster
Gift aid – how it works
Most of our readers will be aware that donations to UK registered charities can benefit from various tax reliefs, the best known of which is Gift Aid. The idea behind Gift Aid is that the UK Government should repay all of the tax paid on cash donated to charity, but the mechanics are complex. The charity receives part of the benefit of Gift Aid, and the individual receives the remainder.
By way of example:
An individual makes a donation of £100 to charity.
Benefit to charity
It is assumed that the individual has paid basic rate income tax on the donation, so the value of the donation is "grossed up". Accordingly, on a donation of £100, it is assumed that the individual has already paid 20% tax on the money and so it represents £125 (the "grossed up donation") of their pre-tax income. The charity can then reclaim the basic rate tax from the government, which is 20% of the value of the grossed-up donation. This equates to 25% of the value of the actual donation, i.e. £25 in this example.
For the charity to be able to make a claim for the basic rate tax, the individual must sign a Gift Aid declaration to confirm that they have paid an amount of income or capital gains tax in the tax year of the donation which is at least equivalent to the amount being reclaimed by the charity.
Benefit to taxpayer
If the individual is a higher rate taxpayer (paying income tax at 40%) or an additional rate taxpayer (paying income tax at 45%), they can also reclaim the higher/additional rate income tax paid on the grossed-up donation. As the charity has already reclaimed the 20% basic rate, this means that:
- a higher rate taxpayer can reclaim 20% of the value of the grossed-up donation (equating to 25% of the value of the actual donation, i.e. £25 in this example); and
- an additional rate taxpayer can reclaim 25% of the grossed-up donation (equating to 31.25% of the value of the actual donation, i.e. £31.25 in this example).
The end result for the charity and the individual is summarised in the table below:
|Taxpayer||Actual donation||Grossed up donation||Gift Aid claimed by charity||Tax relief for individual|
|Basic rate taxpayer||£100||£125||£25||None|
|Higher rate taxpayer||£100||£125||£25||£25|
|Additional rate taxpayer||£100||£125||£25||£31.25|
Gift Aid - claiming the relief
It should be noted that, for the individual to make a Gift Aid claim, they must actually have paid an amount of tax equal to the tax relief being claimed. Otherwise, the individual will be required to pay the additional tax to cover the amount of tax claimed back by the charity or the individual under the Gift Aid regime, which is not matched by the amount of tax which has actually been paid by the individual.
However, if an individual has a large tax liability in one year but does not make a charitable donation until the following year (when their tax liability is much lower), they may be able to take advantage of section 426 of the Income Tax Act 2007, which allows taxpayers to be treated, for Gift Aid purposes, as if they had made the charitable donation in the previous tax year (i.e. "carry back" the relief by one year).
Section 426 requires any "carry back" election to be made "on or before the date on which the individual delivers a return" for the previous tax year and "not later than the normal self-assessment filing date". It was this provision which caused trouble for the taxpayer in the recent case of Re Webster  EWHC 2275 (Ch).
Mr Webster made a donation of £800,000 in August 2017 (i.e. the 2017/18 tax year) to a charitable fund which he had established following his wife’s death in 2016. He had not paid sufficient tax in the 2017/18 tax year to cover a Gift Aid claim so decided to carry back his claim to the 2016/17 tax year as he had realised significant gains in that year (which were sufficient to cover the £200,000 basic rate Gift Aid claim made by the charity).
Mr Webster submitted his 2016/17 tax return in November 2017 and included details of the charitable donation. However, in doing so, he made a mistake and entered a donation of £400,000 instead of the actual amount of £800,000. Later, he realised his error and, in February 2018, emailed HMRC to explain the mistake and also submitted an amended tax return.
However, HMRC denied tax relief on the donation, relying on the requirement in section 426 that a "carry back" election must be made "on or before the date on which the individual delivers a return" for the previous tax year and "not later than the normal self-assessment filing date". HMRC referred to the 2010 case of Cameron v HMRC. In that case, Mr Cameron submitted his 2005/06 tax return in August 2006. He then made a charitable donation in January 2007 and wished to make a carry back election for gift aid purposes, so that the donation was treated as being made in the 2005/06 tax year. However, it was concluded that, on the basis of the relevant statutory provisions, a gift aid carry back claim could only be made in an original tax return. Here, Mr Cameron had filed his tax return before making the donation and so he could not amend the return to include a carry back election. The judge accepted that this was "odd" but "neither absurd, repugnant or inconsistent".
In Mr Webster’s case, the court agreed with HMRC’s interpretation of section 426. Although Mr Webster had attempted to submit the carry back election on his original tax return, it was not valid because the donation amount entered in the return did not correspond with the actual amount of the donation.
Mr Webster asked the court to rectify (rather than amend) his tax return so that the carry back election would be treated as having been made in the original return; however, the judge was not persuaded that a tax return was capable of rectification and, in any case, was of the view that Mr Webster should have sought redress through the tax tribunal system rather than the High Court. The judge was also fairly unsympathetic towards Mr Webster, given that the error arose from his own carelessness.
As a result, Mr Webster is now liable for the basic rate tax of £200,000 (plus interest and penalties) which the charity has already reclaimed on the donation.
Lessons to be learnt
With the self-assessment deadline of 31 January looming, many taxpayers will be preparing to submit their tax returns in the next few days. For some, it will make sense to take advantage of section 426 and make a "carry back" election for Gift Aid purposes. Indeed, the effect of the pandemic may mean that many individuals’ income levels have dropped in the current tax year, meaning that they would not be able to make a Gift Aid claim on current year charitable donations without making such an election.
For those taxpayers, the Webster case serves as a reminder of the need for taxpayers to be very careful in completing their tax return. In particular:
- any errors made in the election (for example, getting the amount of the donation wrong) cannot be corrected at a later date as the election must be made in the taxpayer’s original tax return;
- tax returns containing such an election must be submitted on time (i.e. by 31 January); and
- the taxpayer must have actually made the donation before the tax return (containing the "carry back" election) is submitted – meaning that the deadline for making any charitable donations during the 2020/21 tax year, which are then "carried back" for Gift Aid purposes to the 2019/20 tax year, is 31 January 2021.