‘Tainted donation’ rules: worth the wait?


Welcome to my blog. At the moment I’m feeling more than a little aggrieved by the drafting of the new ‘tainted donation’ rules, intended to replace the old ‘substantial donor’ rules from 1 April 2011. Therefore, it seemed a good topic for a first post.

A brief history of the ‘substantial donor’ rules

The ‘substantial donor’ rules were introduced by the Finance Act 2006 (without any prior consultation by the then Government) with the intention of preventing the misuse by individuals of the tax reliefs available on donations to charities.

The rules applied where an individual made a relievable donation to a charity in excess of either £25,000 in any 12 month period or £100,000 over any six year period, and subsequently entered into one of a number of transactions specified in the legislation with the charity on terms which were favourable to the donor.

Even before the rules came into force, they were subject to widespread criticism for being too broad in their effect, and too likely to catch innocent transactions.

In addition, the rules placed a significant administrative burden on charities which received such donations, and, if the charity was found to have infringed the rules, the charity lost the benefit of any income tax or capital gains tax reliefs which would otherwise have been available.

The ‘substantial donor’ rules have now been under review since 2008 and, finally, with the Finance Bill 2011, replacement legislation has been unveiled in the form of the ‘tainted donation’ rules.

The ‘tainted donation’ rules

The new rules come into force on 1 April 2011. They differ in two key ways from the existing ‘substantial donor’ rules:

  • not only ‘substantial’ donations are caught – any donation can be open to scrutiny, no matter how small; and
  • the donor is liable for any penalties, jointly and severally with the charity in certain circumstances.

A donation will be considered to be tainted if:

  • a donor or connected person enters into an arrangement (involving, for example, a transaction such as the sale of property, the provision of services or a loan, or investment in a business) whether before or after the donation is made, and it is reasonable to assume that the arrangement and the donation would not have been entered into independently of each other (Condition A); and
  • the main purpose of the donation is to obtain an advantage directly or indirectly from the charity which is the recipient of the donation (Condition B); and
  • the donor or connected person is not a wholly owned subsidiary of the charity in question (Condition C).

So, were the new rules worth the wait?

Unfortunately, it appears not. The ‘tainted donation’ rules seem as likely to catch innocent transactions as the ‘substantial donor’ rules, if not more so. In addition, there are no de minimis provisions for the ‘tainted donation’ rules, which means that many more charities will be affected by the new rules than are currently affected by the ‘substantial donor’ rules.

One particular problem is that, although the purpose of the donor in making the donation seems to be key as to whether a donation is tainted or not, the rules seem to apply where there is no intention on the part of the donor to obtain an advantage. This is a result of proposed s.809ZK of the Finance Bill 2011, which ‘deems’ an advantage to arise and for Condition B to be satisfied in certain circumstances.

As a result of this, matched funding gifts would appear to be treated as ‘tainted donations’, as would a donation conditional on the completion of a marathon, for example. It is hard to believe these are the kind of donations the Government intended to target!

Therefore, it seems the only significant improvement in relation to the ‘tainted donation’ rules is that this Government has as least seen fit to consult with the sector before bringing the new rules into force.

Now, it can only be hoped that the Government listens to the criticisms of its legislation which have emerged during the consultation. The charity sector does not need another set of anti-avoidance rules which are not fit for purpose.