The UK Budget and donor benefit rules for charities

Emily Deane TEPThree years ago, the UK government’s Autumn Statement 2014 announced a review of the Gift Aid donor benefit rules with the intention of simplifying them. Following a call for evidence, it launched a consultation on 18 February 2016 setting out a range of options.

The responses helped develop specific proposals for reform, which were set out in a second consultation that ended on 3 February 2017. We have been informed that a summary of responses to the second consultation will be published on 1 December 2017.

This week the government announced that it would replace the current three-tier thresholds with two tiers. Under this reform, donors will be no worse off in terms of the value of benefits that charities can offer them, as the new limits will be, for every eligible donation, at least as generous as the current limit.

Current system

The current donor benefit limits (the relevant value test) is a set of monetary thresholds that determines the value of benefits that charities may give to donors as a consequence of a donation and still claim Gift Aid on that donation. These are:

• For donations up to £100, the value of the benefit can equate to a total of 25% of the donation.
• For donations between £100 and £1,000, the value of benefits is capped at £25.
• For donations over £1,000, the value of the benefit can equate to a total of 5% of the donation, up to a maximum annual benefit value of £2,500.

New system to be introduced

Under the new limits, the benefit threshold for the first £100 of the donation will remain at 25% of the amount of the donation. For larger donations, charities can offer an additional benefit to donors, up to 5% of the amount of the donation that exceeds £100. Some examples are provided in the table below. The total value of the benefit that a donor can receive remains at £2,500.

Extra statutory concessions

The government also announced that it will bring into legislation the four extra statutory concessions that currently operate in relation to the donor benefit rules.

Time-frame

Legislation to make all the changes will be introduced in Finance Bill 2018-2019 and will come into effect from 6 April 2019. Draft legislation will be published in 2018.

Examples of how the new benefit thresholds will work:

Size of donation (£) Existing relevant value test  – size of donation
determines level of benefit (£)
Planned relevant value test from April 2019 (£)
70 17.50 17.50
100 25 25
400 25 40 (25% of 100 (25) plus 5% of 400-100(15))
1,000 25 70 (25% of 100 (25) plus 5% of 1,000-100(45))
1,500 75 95 (25% of 100 (25) plus 5% of 1,500-100 (70))

STEP will continue to liaise with HMRC’s Charities Tax Team in this connection.

Emily Deane TEP is STEP Technical Counsel

Tax changes your clients may need to know by 6 April

Emily DeaneThe UK government will be making significant changes to both dividend tax relief and entrepreneurs’ relief effective from 6 April 2016. These changes were outlined by Robert Jamieson TEP at a STEP seminar in London on 22 February.

Dividend tax relief

The dividend tax credit will be replaced with a new tax-free dividend allowance of GBP5,000 per year for all taxpayers. The notional 10 per cent tax credit on dividends will be abolished. HM Treasury states in its Budget Report, ‘The current system of tax credits on dividends was designed over 40 years ago when corporation tax was more than 50 per cent and the total tax bill on dividends for some was more than 80 per cent. Since then, tax rates (including corporation tax) have fallen, leaving the dividend tax credit as an arcane and complex feature of the tax system.’

From April 2016 an individual will receive a tax-free allowance on dividend income of GBP5,000 and tax will only become payable on income above the allowance. An individual may also still apply personal reliefs that are applicable. It is worth noting that the GBP5,000 allowance is segregated from the GBP1,000 allowance that is available on savings income and is not applicable to dividends, which will also become effective on 6 April.

Dividend income above GBP5,000 will be taxed at 7.5 per cent (basic rate), 32.5 per cent (higher rate), and 38.1 per cent (additional rate). In addition, basic-rate tax payers who receive dividends of more than GBP5,001 will be required to complete a self-assessment return from 6 April 2016.

The impact of these changes will be keenly felt by small business owners. However, there is still some missing information, such as special rates, which is yet to be announced. This should become available after the Budget on 16 March 2016.

Entrepreneurs’ relief

Entrepreneurs’ relief (ER) changes are also anticipated on 6 April. ER was introduced in 2008 to incentivise people to set up and grow businesses by providing a reduced level of capital gains tax (CGT) on business disposals. ER is available to individuals, rather than companies and it would normally apply to a business person such as a sole trader, a business partner or a limited company shareholder in a trading business. An individual will pay only 10 per cent on the CGT arising from the sale of a qualifying business asset, instead of the usual 18 per cent or 28 per cent.

In order to claim the relief, the applicant must have held the qualifying business asset for at least one year. The relief would typically be applied to a disposal of shares or securities, but it can also be applied to the disposal of other business assets, except this may not be available on property or investment assets.

In December 2015, however, the government issued a policy paper proposing some significant changes to ER, and if these are not amended they will become effective from 6 April. As a result of these changes, ER will no longer be applicable to a shareholder who receives a distribution from a company in liquidation. According to the paper, this applies where the shareholder, ‘continues to be involved with the carrying on of a trade or activity that is similar to that of the trade or activity carried on by the wound up company in two years following the date of distribution.’

It is anticipated that thousands of entrepreneurs will liquidate their companies in the coming month before the April deadline. Liquidating a small business and establishing a new one should not be too disruptive; however the liquidation of a trading business could be more complex. Property developers, among other entrepreneurs, could therefore be seriously affected by the proposed changes.

We have also seen an increase in recent case law involving the application of ER, where the courts have been tested as to the definitions of an ‘employee’ and a ‘director’ for the purposes of the relief.

Useful links:

Emily Deane TEP, Technical Counsel at STEP