Tax Efficient Giving & Charitable Foundations…
To be a charity, an organisation must have purpose (or ‘aims’) all of which are exclusively charitable. A charity must also operate for the public benefit. There are different activities that have been described as charity events by the Charities Commission.
Some of the activities may include but are not limited to; the prevention or relief of poverty, the advancement of education, the advancement of religion, the advancement of health or the saving of lives, and the advancement of education.
Types of charity structures
To set up a new charity, one must decide what sort of legal structure it will have. A charity’s structure is defined by its ‘governing document’ (the legal document that creates the charity and says how it should be run).
There are four main types of charity structures:
· Charitable incorporated organisation (CIO)
· Charitable company (limited by guarantee)
· Unincorporated association
One needs to consider the right structure for a charity, depending on whether one needs it to have a corporate structure or to have a wider membership. Some charity structures are corporate bodies. If you choose a structure that forms a corporate body, the law considers your charity to be a person in the same way as an individual.
This gives your charity the legal capacity to do many things in its own name that a person can do, such as:
· Employing paid staff
· Delivering charitable services under contractual agreements
· Entering into commercial contracts in its own name
· Owning freehold or leasehold land or other property
If a charity structure is a corporate body, generally its trustees aren’t personally liable for what it does.
If a charity isn’t a corporate body (‘unincorporated’):
· The trustees are personally liable for what it does
· It won’t be able to enter into contracts or control some investments in its own name
· Two or more trustees, a corporate custodian trustee or the charities’ land holding service will have to ‘hold’ any land on your charity’s behalf
Establishing a corporate foundation is one of the options available to a company thinking about how to donate to charity, perhaps as part of its corporate social responsibility programme.
In deciding to set up a corporate foundation, consideration should be given to the fact that the foundation must be set up only to further charitable purposes for the public benefit as detailed above.
Conditions set by the Charities Commission for Charitable Foundations
The following list includes some of the factors that the Commission would consider when deciding whether a corporate foundation is established for exclusively charitable purposes.
Whether the trustees would:
- Be able to negotiate and agree funding terms with the company that would enable the charity to further its charitable purposes;
- Explain how any proposed funding condition might affect this and ultimately decline funding that was subject to conditions that were not in the charity’s interests;
- Be free to make their own decisions on matters outside the scope of funding arrangements with the company;
- Be able to take their own legal and financial advice;
- Draw up their own policies and business plan;
- Conduct arms-length negotiations with the company;
- Manage conflicts of interest e.g. a trustee who was subject to a conflict of interest would not participate in discussions and would not count in the quorum;
- Be able to preserve and exercise their discretion to select beneficiaries and provide services (whilst complying with any conditions of funding from the company which the trustees had accepted as being in the charity’s interests);
- Not commit themselves simply to giving effect to the policies and wishes of the company; and
- Not agree to conditions that undermined the confidentiality of their discussions (such as the presence at their meetings of an observer from the company).
Relief for qualifying charitable donations
- Qualifying charitable donations made by a company are allowed as deductions from the company’s total profits in calculating the corporation tax chargeable for an accounting period.
- The donations are deducted from the company’s total profits for the period after any other relief from corporation tax other than group relief [and group relief for carried-forward losses].
- The amount of the deduction is limited to the amount that reduces the company’s taxable total profits for the period to nil.
- Except as otherwise provided, a deduction is allowed only in respect of qualifying charitable donations made by the company in the accounting period concerned.
Non-UK resident charitable foundation
Have you ever thought of donating outside of the UK? A Non-UK Resident Charitable Foundation, for convenience, ‘foreign charity’ is any entity of a charitable nature which is not subject to the jurisdiction of the UK courts and cannot, therefore, qualify as a ‘charity’ for the purposes of the charity law of any part of the UK.
It is necessary to distinguish between entities of a charitable nature established in other member states of the European Economic Area (EEA) except Liechtenstein and foreign charities established outside the EEA. Broadly speaking, gifts to EEA charities qualify for UK tax relief, whereas gifts to non-EEA foreign charities do not.
Historically, ‘charity’ was defined in the UK tax legislation to mean a body or trust established for charitable purposes only. The legislation did not, on the face of it, say anything about where a charity must be established to qualify as such. Nor did it expressly state which law applies to determine whether the purposes of the body or trust are exclusively charitable.
Tax planning opportunity
You may want to give back but wondering which may be the best way to do so as a company or as an individual. As noted above, there are conditions that need to be met and tax reliefs that may be available for you.
We at Enterprise Tax are here to provide you with advice on tax efficient giving, depending on your specific circumstances. Feel free to contact us though our website for more information on charitable trusts, foundations and setting up a charity in the UK. You may also find our recent article about charity and tax relevant.