Gift Aid – circular payment structure struck down
In the recent case of Harvey & Others v Commissioners of Revenue & Customs [2024] UKFTT 1098, a First Tier Tax Tribunal ruling resulted in a claw back of Gift Aid from a charity and the refusal of a claim for tax relief by the donor. The case contains a number of reminders of the need to check the technical requirements for Gift Aid and could be a warning to taxpayers not to try and be too clever in their tax planning.
Facts
John Harvey is a very successful businessman with a history of supporting charities that reflected his Christian beliefs. Mr Harvey was the controlling shareholder of Keswick Enterprises Group Limited (the “Company”) which had received substantial loans from Mr Harvey. Mr Harvey also established Keswick Enterprises Holdings Charitable Trust (the “Charity”) in 2015 with the trustees being Mr Harvey and his three daughters who were financially independent. The Company had an overseas subsidiary that needed an investment to purchase a crane. Bank funding was available at an interest rate of 10%.
Rather than pay the bank interest, the following steps were undertaken:
- The Company repaid part of the loan to Mr Harvey.
- Mr Harvey made a charitable contribution to Charity of an amount equal to the loan repayment. Mr Harvey could have made the contribution without the loan repayment.
- The Charity made a loan to the Company to allow the Company to lend the money to the overseas subsidiary. The loan was subject to interest, initially at 10% and reduced to 4%.
The steps were repeated several times over two tax years with a total of £800,000 being gifted to the Charity which claimed Gift Aid. Mr Harvey claimed additional tax relief on the gifts.
Part of the rationale for the arrangement was to enable the Charity to be paid the interest on the loan to the Company rather than a bank (thereby creating an income for the Charity), and also to enable Gift Aid to be claimed by the Charity (thereby increasing the value of the gifts to the Charity).
The Charity held trustee meetings to approve the loans to the Company. However, although the minutes indicated that interest of 10% would be payable and that security would be taken over the Company’s assets, the actual rate of interest was reduced and security was never taken due to issues with obtaining approval from the Company’s bank (to reduce the bank’s overall security for its existing banking facilities). The loan to the Company was repaid to the Charity in January 2018 when the overseas subsidiary was sold.
The Charity took advice from its accountants at the time of the first loan in February 2016 regarding the interest to be charged, the security over the assets of the Company and the length of the loan (six years). No further advice was sought regarding the subsequent loans and the reduction in the interest rate to 4%.
HMRC challenge
HMRC challenged the Gift Aid claim by the Charity and the tax relief claim by Mr Harvey, opening informal enquiries initially into Mr Harvey’s tax affairs in December 2016 and formal enquiries in August 2018 into Mr Harvey and the Charity (by different teams although communicating with each other). There were several changes in HMRC officers and at one point the enquiry into Mr Harvey was formally closed before being reopened by a new officer.
The challenges by HMRC involved breaches of section 416 Income Tax Act 2007 and, in particular, benefits received which were linked to the donations so that some of the conditions set out in section 416 were breached, namely:
- Condition B – the donation is not subject to any condition regarding repayment.
- Condition E – the donation is not conditional on the acquisition of property by the charity.
- Condition F – there are no benefits associated with the donation received by the donor, or a person connected with the donor.
It was only necessary for HMRC to succeed with the breach of one of the Conditions for the Gift Aid and tax relief claim to fail.
Tax Tribunal decision
The Tribunal decided that Conditions E and F had been breached. In terms of Condition E, the loan to the Company was treated as “property” and therefore acquired by the Charity. The donations from Mr Harvey were part of an arrangement involving the acquisition of “property” by the Charity from the Company (which is associated with Mr Harvey).
In terms of Condition F, the loans to the Company from the Charity were benefits to the Company and were a consequence of Mr Harvey making the gifts. The commerciality of the loans in terms of the interest rate did not make any difference.
HMRC did not succeed with Condition B as there was no repayment to Mr Harvey and the making of the loans to the Company was not a repayment (even though Mr Harvey controlled the Company).
Learning points
The key issue that created the failure of the Gift Aid claim was the circularity of the payments and the pre-ordained steps, plus the linkage between Mr Harvey, the Company and the Charity. There is no fundamental problem with a charity making a loan as long as the charity’s governing document permits this and the trustees can justify the loan in relation to the interest rate and commercial terms such as security and repayment. The issue in the case is that the Charity was controlled by Mr Harvey and his daughters, and the Company was controlled by Mr Harvey. The fact that the funds for the donations came from the Company by way of repayment of a shareholder loan certainly did not help. If one was to be uncharitable, Mr Harvey tried to be a little too clever with the arrangements. The Company could have made a loan to its subsidiary without funnelling the money through the Charity.
If you have any questions regarding charity finances and taxes, please contact Andrew Evans.