Guidelines on the tax treatment of appeal funds

Contents

Introduction

When an accident, disaster or other misfortune happens, people often want to offer practical assistance. They may contribute or raise money to help those affected, perhaps the injured or bereaved. These notes are to help people organising such appeals.

Where a number of people are likely to benefit, the appeal funds will normally need to be held in a trust. Donations of money to the appeal will be completely free of income tax and capital gains tax. However, investment income, some other sorts of income, and payments made out of the trust, may in certain circumstances be subject to tax. There are also occasions when inheritance tax and VAT may be due.

These notes:

  • highlight the sort of tax issues which can arise in relation to appeal funds;
  • suggest ways in which they might be handled;
  • explain how further help and information about tax can be obtained.

Top

Please see the detailed guidance about the tax position on:

Anyone arranging appeal funds should always seek legal and accountancy advice right at the outset. This should be as soon as possible, and before launching any formal appeal.

It is also a good idea to tell HMRC about the appeal at once, to avoid any unexpected problems later on. The department will be happy to help.

Top

Main points

The main points you should bear in mind when setting up an appeal fund are:

Fund raising events

Fund raising events can give rise to VAT or other tax liability consequences. You should take professional advice as quickly as possible to ensure that the right arrangements are in place to prevent any unnecessary tax liabilities.

Trust fund

The usual way to organise an appeal is by setting up a trust fund. A trust fund can be set up either as

  • a charitable trust, or
  • a non-charitable discretionary trust.

A charitable trust has tax advantages but charity law means that there can be limits on what is done with the money.

A non-charitable discretionary trust has no particular tax benefits but it gives the trustees greater freedom on how to use the money.

An appeal which uses two trusts - one charitable and the other non-charitable – can combine the tax advantages of the first with the flexibility of the second.

Donations to charity

As an alternative the appeal may state that all the donations will go to an existing charity or charities. If the terms of the appeal specify at the outset

  • which charity or charities the donations will go to, and
  • how the donations will be divided between the charities

Any income generated by the donations before they are passed to charity or charities will be treated for tax purposes as income of the charity.

When to decide

It is important to decide which of these alternatives to use and to think carefully about how the funds will be applied before making any appeal to the public.

  • If the appeal states, for example, that the funds will be distributed among particular groups affected by a disaster this in itself may create a trust. You may not be able to change the terms of the trust later.
  • If the appeal states that a charitable trust is to be set up the funds must be applied for charitable purposes. These purposes are set out below. The trustees will need to apply for charitable status for the trust.

Top

Charitable trust or non-charitable trust?

Appeal funds are often either charitable trusts or non-charitable discretionary trusts. A trust legally obliges trustees to deal with property or income in a particular way. This is for the benefit of a class of persons, known as beneficiaries.

  • There are special rules about how charitable trusts are run. The trust's purposes must all be charitable in law. Charitable trusts are normally exempt from tax.
  • In contrast, the trustees of a discretionary trust generally have "discretion" to use the trust income as they see fit. Usually it has to be for the benefit of particular beneficiaries or a class of beneficiaries. Trustees can decide how much they pay, and how they make the payment.

It is important to make an early decision on what kind of fund to establish. It will determine:

  • the uses to which the appeal funds can be put, and
  • the fund's tax position.

Summary of the tax position for donations of money

The following gives a brief overview of the trustees', donors' and beneficiaries' tax positions:

Income tax, capital gains tax, and inheritance tax

Donors

  • Donations of money into the fund are completely free of income tax (except for Gift Aid donations to a charitable trust) and capital gains tax. Inheritance tax would only be payable if the donor's nil rate band (£300,000 for 2007-08) has already been used and the gift is not to a charitable trust.

Trustees

  • Trustees do not pay any tax on donations of money;
  • This applies to both charitable and non-charitable types of trust.

VAT

Donors

  • Donations and other voluntary contributions from the public are normally outside the scope of VAT. This is conditional on the donor receiving no direct benefit in return other than a basic acknowledgement such as a letter of thanks, a lapel badge or an item which would also be provided without charge to a non-donor.

Trustees

  • The trustees are responsible for accounting for VAT on the sale of other items where necessary.

Tax credits

Beneficiaries

  • A person’s entitlement to the child and/or working tax credits may be affected by receipt of an award from an appeal fund;
  • Generally, persons claiming the child and/or working tax credits are required to report in their initial claim and annual renewal form all their income of a tax year which is chargeable to income tax, including income from a trust;
  • Further help on claims for the child and working tax credits is available from the Tax Credits Helpline.

Income Tax, Capital Gains Tax and Inheritance Tax

Charitable trusts

Charitable trusts have some tax advantages:

  • Investment income arising to the trustees (for example interest from the investment of the funds) is exempt from income tax if this income is used for charitable purposes.
  • Grants to beneficiaries are not normally treated as the income of the beneficiary for tax purposes. But they may be treated as income if a beneficiary is given a regular income on a continuing basis.
  • Companies can obtain a tax deduction for donations made to the trust.
  • Individuals (including sole traders) who are higher rate taxpayers can claim tax relief on the difference between basic and higher rates of income tax for gifts made to the charitable trust under the Gift Aid scheme.
  • The trust can reclaim tax on donations received under the Gift Aid scheme from individuals.
  • Any capital gains made by the trustees are exempt from capital gains tax if the proceeds from any disposal are used for charitable purposes.
  • The donor will not have any capital gains tax charge on donations of assets. Donors can also get income tax relief for the value of gifts of qualifying shares and securities and real property.
  • Gifts and bequests to the trust are exempt from inheritance tax.
  • There is no inheritance tax charge on the trust fund held for the purposes of the charity or on the application of the fund for charitable purposes.
  • Other charities will be able to make donations to the trust.

Top

Help and advice is available from a number of sources about charitable trusts:

  • In England and Wales, the Charity Commission are able to advise and to assist trustees in England and Wales about many aspects of the performance of their charitable trusts, and the Commission's advice is given free. They are always willing to discuss particular matters with trustees urgently and on an informal basis, which is often helpful immediately after a serious disaster.

You should consult the Charity Commission before setting up a charitable trust using one of the Charity Commission contact options shown at the end of this guide. It will probably have to be registered with them as a charity if its gross annual income is going to be more than £5,000. A trust registered with the Charity Commission is accepted as a charity for tax purposes.

You should consult OSCR before setting up a charitable trust. The trust should not claim to be a Scottish charity until it has been recognised as such by OSCR.

  • In Northern Ireland, the Department for Social Development, Charities Branch, 3rd Floor Lighthouse Building, 1 Cromac Place, Gasworks Business Park, Ormeau Road, Belfast, BT7 2JB, Telephone 028 90 829427 will similarly provide help to trustees where it can.

If you require further information about the tax exemptions and reliefs available to a charitable trust before or after a charity is established you should consult HMRC Charities Bootle. The trust should not claim to be a charity for tax purposes until it has been recognised as such by HMRC.

Limitations

Charitable trusts also have some limitations worth bearing in mind. The charitable status limits the discretion of the trustees to purposes that are charitable in law in general terms:

  • the relief of poverty,
  • the advancement of education,
  • the advancement of religion,
  • other purposes beneficial to the community, which do not come under any of the three previous purposes.

So charitable funds may not be used to help victims and their families if their needs do not fall within these four purposes. Trustees may find these constraints difficult to resolve.

The tax advantages of using a charitable trust rather than a non-charitable trusts may be less significant if the intention is for most of the appeal fund to be distributed quickly.

Non-charitable trusts

It is common for appeals to feature parallel charitable and non-charitable discretionary trust funds.

The advantage of non-charitable trusts is flexibility. Trustees can take advantage of this when applying funds for the benefit of victims and their families.

The main disadvantage of non-charitable trusts is that they do not attract any special tax reliefs.

Tax liabilities can be small if the fund's arrangements are set up carefully from the start. Please see the summary of the main tax points covering income tax, capital gains tax, Self Assessment for income and capital gains tax and inheritance tax.

Top

For the purposes of income tax:

Trustees

  • The trustees do not pay tax on donations to the fund;
  • The trustees pay tax on income they receive from investing the appeal funds. Liability on income is at:
    • the rate applicable to trusts (40% from 2004-05) on income other than dividends; or
    • the dividend trust rate (32.5% from 2004-05) on dividends and other distributions.
  • The trustees may be liable to tax on the income from certain fund-raising events. Liability is at the rate applicable to trusts.
  • Trustees should identify income included in payments they make to beneficiaries. This will enable them to pay income where it will attract least tax liability. It helps if they have a separate bank account for income. Sometimes trustees make payments from an account that includes both income and capital. Each distribution from that account will be partly income and partly capital. The split is based on the proportion of income and capital in the account at that time.
  • Each income payment that trustees make carries a credit for tax for the beneficiary. The total of these credits can be more than the tax that the trustees have paid. In that event, the trustees will have to pay the difference to HMRC.
  • Trustees of a discretionary trust may have the power to accumulate income. Accumulation converts income to capital. It enables the trustees to control the nature of the payments they make to beneficiaries. They may be able to use this to the best advantage of the beneficiaries. Trustees should seek professional advice as this is a complex area.

Top

Beneficiaries

  • Income that the trustees pay out is the beneficiaries' income for tax purposes. It carries credit for tax at the rate applicable to trusts. Beneficiaries can claim repayment of some, or all, of this tax if it exceeds their personal liability. Higher rate taxpayers will have no additional tax to pay. Whether or not a payment is "income" for tax purposes is a complex area and trustees may need professional advice.
  • Other payments that the trustees make are not usually the beneficiaries' income for income tax purposes.
  • Payments out of capital may exceptionally be beneficiaries' income for income tax purposes, if the trustees:
    • create an annuity for the beneficiary, or
    • give the beneficiary a similar right to receive income on a regular and continuing basis.
For example, the trustees may agree to bring a beneficiary's earnings up to a defined level. Often they would base this on previous earnings. Or they may commit themselves to meet a beneficiary's recurrent expense.

In both these cases the payments of capital made by the trustees are treated as the beneficiary's income for tax purposes.

For the purposes of capital gains tax:

Donors

  • There is no capital gains tax charge on donations of UK money.
  • The donor will normally have to pay capital gains tax on the donation of any asset other than money as if the asset were disposed of at its market value. In certain cases the donor can defer the tax liability, but then the trustees may have a larger tax liability when the fund disposes of the asset.

Trustees

  • Trustees must pay capital gains tax on any gains that they make from the sale of assets. There is no capital gains tax due if the total gains in a year are less than a certain amount. For 2007-08 the amount allowed for most trusts is £4,600.
  • Trustees do not pay capital gains tax when they receive donations of other assets although they may have a tax liability to pay when the asset is disposed of and this may include any deferred liability of the donor.

Self Assessment for income tax and capital gains tax purposes

Trustees

Self Assessment is the method for calculating and paying tax. Trustees are responsible for making a return and paying the tax on time. Failure to do so may result in automatic interest, surcharges and penalties. When completing the tax return, as trustee you can choose whether to calculate the actual tax due or ask us to do the calculation for you. Self Assessment tax returns are generally issued each year in April, and ask for details of income and capital gains for the year ended on 5 April. You must complete and return the Trust and Estate tax return:

  • by 30 September, if you want us to calculate the tax due; or
  • by 31 January in the following year if you intend calculating your own liability.

If you need further information about tax returns, assessments and payments please contact one of the appropriate HMRC Trusts offices.

For inheritance tax:

  • Individual donations to the fund that do not exceed the annual exemption of £3,000 will normally be exempt from inheritance tax. But even for donations over £3,000, it is unlikely that tax will actually be payable by a donor.
  • Trustees might have to pay inheritance tax on a payment out of the fund only if the donor has to pay inheritance tax on the equivalent donation.
  • Trustees do not have to ask the donor about his or her tax position. For donations over £3,000, trustees need only let HMRC Inheritance Tax know the amounts donated and relevant details about the donors. HMRC Inheritance Tax will advise the trustees of any inheritance tax implications as appropriate.
  • The trustees can prevent any inheritance tax liability arising by distributing large donations within three months of receiving them.

Top

Fund-raising enterprises

Profits from events such as sales, concerts, galas, football matches and other sporting events and enterprises such as record releases (including copyright royalties), publications, etc., which are organised to raise funds are sometimes taxable. This depends upon the arrangements and whether the trust can benefit from an HMRC concession for charitable trusts.

The organisers of such events may have to pay tax on the profits before the proceeds reach the fund. By concession, however, HMRC Extra Statutory Concession, ESC C4 exempts the proceeds of such events from tax where the event is organised by a charity or a voluntary organisation to raise funds for a charity provided, that;

  • the event is of a kind which falls within the exemption from VAT under Group 12 of Schedule 9 to the VAT Act 1994;

and

  • the profits do in fact go to charity or are used for charitable purposes.

Whether the profits from a fund-raising event qualify for exemption from income and corporation tax under ESC C4 will depend upon whether the event is regarded by HMRC to be a VAT exempt fund-raising event. The text of the concession is contained in this Guide. The income and corporation tax treatment will be bound by VAT rulings on this matter. Detailed guidance is contained in the HMRC leaflet Fund-raising events: Exemption for charities and other qualifying bodies.

  • The concession is not available for funds raised by or for a non-charitable trust. If the trustees of non-charitable trusts organise events they are taxed on the profits.
  • All such receipts will normally be taxable, but where a basic minimum charge is set, any additional free-will donations will not count towards taxable profits if they are;
  • given by persons attending the event;

    • and

  • collected on behalf of, and passed on to, the trustees of the non-charitable trust.

    • Top

    The concession is not available for trading events organised by a company (whether or not part of that company's existing trade) and the proceeds of the fund-raising event will potentially be taxable on the company. However a company may claim a deduction against its corporation tax liability where the proceeds are paid to a charity.

    We suggest that organisers of fund-raising events are made aware of these points so that they can seek professional advice before making any arrangements.

    Practical solution

    As outlined above, charitable trusts and non-charitable trusts each have their own advantages and disadvantages. Organisers of appeal funds will need to keep these in mind when deciding which kind of trust to set up.

    Organisers of many appeal funds use both types of trust, by setting up two parallel funds; a non-charitable discretionary trust and a charitable discretionary trust. When that happens:

    • the organisers should make it clear in the terms of the appeal that donors have the right to choose the fund to which they want their contribution to go. Some donors - e.g. other charities - will only be able to contribute to the charitable fund, but the option to contribute to the charitable fund should be available generally. In that way:
      • fund-raisers can take advantage of the concession described above to exempt profits where their activities amount to a trade;
      • the charitable trust can reclaim basic rate tax on Gift Aid donations;
      • some reliefs are available to companies;
      • contributors of large amounts can take advantage of the inheritance tax reliefs.
    • the appeal should make it clear to which fund unallocated donations will go;
    • the appeal should make it clear that the charity will be one of the objects of the trustees' discretion in the non-charitable discretionary trust, along with the individual victims. This will allow the trustees to consider distributing income, including trading income, to the charitable trust. The charitable trust would be able to recover the tax suffered by the trustees where it might not otherwise be recoverable by individual beneficiaries. However, considerable care needs to be taken in the drafting of the non-charitable discretionary trust deed to ensure that the charitable trust is a proper beneficiary along with the individual victims. You will need to take legal advice on this subject;
    • the property of the charitable and non-charitable funds should not be mixed, e.g. in a single bank account;
    • payments which can properly be considered to be for charitable purposes - such as the relief of poverty, etc. can be met first from the charitable fund.

    This is a complex area and we recommend that appeal organisers discuss the final form of the appeal with professional advisers.

    Top

    Value Added Tax (VAT)

    Donations

    Donations, bequests or other voluntary contributions from the public are outside the scope of VAT, provided the donors receive no direct benefit in return.

    Charges for admission to fund-raising events which are not eligible for VAT exemption arranged by supporters of an appeal are liable to VAT if they are the proceeds of a taxable business activity which exceeds the VAT registration threshold. But voluntary donations made on top of a basic minimum charge for a fund-raising event will be outside the scope of VAT if all the following conditions are met (the minimum basic charge remains subject to VAT):

    • it is clearly stated on all publicity material including tickets that anyone paying only the minimum charge will be admitted without further payment;
    • the additional payment does not secure any particular benefit (for example admission to a better position in the stadium or auditorium);
    • the extent of further contributions is ultimately left to ticket holders to decide, even if the organiser indicates a desired level of donation;

    Top

    Fund-raising events organised by appeal funds with charitable status

    Goods and services supplied by charities in connection with their fund-raising events are exempt from VAT, subject to not more than fifteen events being held in the same location in any financial year. This means that the sales of entrance tickets and any other supplies made by the charity for events that they promote as fund-raising will not be liable to VAT, but VAT incurred on events cannot be recovered. Full details are contained in the HMRC leaflet Fund-raising events: Exemption for charities and other qualifying bodies.

    Relief is restricted by number and location of events to ensure that charities' fund-raising activities are not given an unfair tax advantage over commercial organisations that are liable to pay VAT.

    Appeals funds with charitable status will not need to register for VAT unless their income from taxable activities, such as regular trading in goods or organising a series of events in excess of the number permitted exceeds the VAT registration limit. If a charity does need to register for VAT for taxable activities, it will not be able to reclaim VAT incurred on those activities.

    Fund-raising events organised on behalf of appeal funds

    A fund-raising event can, in some circumstances, qualify for exemption when organised by a non-charitable body. Certain philanthropic bodies will be able to benefit from the exemption in their own right. Other bodies can apply the exemption provided they are acting as agents for appeal funds that have charitable status. The trust fund must have formally agreed that the organiser is acting as its agent. It must also remember that as the event will be treated as the trust fund's own it must count any such event arranged on its behalf toward the limit of fifteen. The arrangements for supplies made by and to agents are set out in section 22 of the VAT Guide. Any charge which a VAT registered organiser makes to a trust will be subject to VAT at the standard rate of 17.5%.

    It may be that no fund with charitable status has been set up to act as beneficiary of fund-raising activities, or the trustees are reluctant to channel anything other than small amounts into a fund with charitable status. In these circumstances the best option may be to set a basic minimum charge for the event and encourage those attending to make additional contributions. The business will have to account for output tax on the total of the basic admission charge, but it will also be able to recover input tax on the relevant overhead expenses.

    Purchases with charity funds

    Unless covered by the zero or reduced rates that are generally applicable, goods purchased with charitable funds will normally be liable to VAT at the standard rate. This will include tents, blankets, pumps and water treatment plants. Some specialised equipment that is purchased by certain specialist charities or for donation to such charities, might be able to be purchased VAT free. Included in this are medical equipment and search and rescue equipment. Further details are contained in Customs and Excise Notice 701/6.

    Goods purchased in the United Kingdom by charities and then exported to a destination outside the European Community (EC) can be treated as a business activity for VAT. Thus a charity sending goods to a disaster area outside the EC is eligible to register for VAT and reclaim VAT paid on the goods which it exports.

    Unless an item can be purchased VAT free there is no relief for goods sent to disaster areas in the UK or the EC.

    Further information on VAT

    HMRC will be glad to give such further help as they can. Copies of the VAT Guide and VAT Notices mentioned can also be obtained from HMRC Charities.

    Top

    HMRC Extra-Statutory Concession C4

    Certain events arranged by voluntary organisations or charities for the purpose of raising funds for charity may fall within the definition of "trade" in Section 832 ICTA 1988, with the result that any profits will be liable to income tax or corporation tax. Tax will not be charged on such profits provided:

    • the event is of a kind which falls within the exemption from VAT under Group 12 of Schedule 9 to the VAT Act 1994 and
    • the profits are transferred to charities or otherwise applied for charitable purposes.