Economics of Non-Profit Accounting

Country Reports: Western Europe

The International Journal
of Not-for-Profit Law

Volume 5, Issue 1, September 2002


European Union – Changes fro Charities Proposed in Sixth VAT Directive

The European Parliament voted in March 2002 by a clear majority to accept a report by Benedetto della Vedova MEP on the European Commission’s communication on “Tax policy in the EU: Priorities for the years ahead”. Following an amendment promoted by the European Charities’ Committee on VAT, the Parliament’s resolution notes that when the EC 6 th VAT Directive was originally drafted the particular needs of charities were not taken into account, and “urges the Commission to provide in its proposal for a definitive VAT system for charitable organizations to be exempted from paying VAT or to be entitled to refunds of VAT already paid”.  (Report of the Committee on Economic & Monetary Affairs, A5-0048/2002, 22 February 2002).  PB


New Law on Associations and Foundations

On 18 April 2002 the Parliament adopted a new law on not-for-profit organizations.  The law makes several changes to the existing laws governing domestic and international nonprofit associations, and provides for a new public benefit entity in the form of a foundation.  Further coverage of this new legislation, which goes into effect on 1 January 2003, will be provided in a future issue of IJNL.


New Rules for Tax Treatment of Donations of Works of Art

In January 2002 the government passed a law regulating the status of French museums, i.e. state-owned and private not-for-profit museums.  The collections of French museums are in principle inalienable, and the disposal of any part of a collection other than for the benefit of an approved state or private body that has undertaken to maintain it at a French museum is void.

The law amends, with effect from 1 January 2002, the tax incentives in Article 238 bis O A of the General Tax Code for contributions by private businesses towards the purchase by the state of works of art that are part of the national heritage and which have been refused an export certificate.  The existing incentive takes the form of a tax credit equal to 90% of the contributions up to a maximum credit of 50% of the tax liability.  The amendment introduces a new tax credit equal to 40% of the contributions towards the purchase of cultural works that have been refused an export certificate but which the state has not offered to purchase, provided that they are made accessible to the public for a period of 10 years in a French museum and that the business agrees to the work being given the status of a historic monument.  In addition, a business that purchase the original works of living artists can deduct the acquisition price from their taxable profits for the year of acquisition and the 4 succeeding years (previously 10 years) in equal installments, provided that the work is open to public access.

The law also amends the Patronage Law of 23 July 1987 in relation to the regulation of business foundations. It is no longer necessary for such foundations to be established with an initial endowment, and their minimum duration is reduced from 5 to 3 years.

Loi No. 2002-5, 4 January 2002, JO 5 January 2002.  PB

Amendments to the Tax Code Affect Taxation of NGOs.

By  Caroline L. Newman*

The Finance Law of December 28, 2001 amended provisions in the French Tax Code affecting the tax treatment of NGOs and the tax treatments of their donors. These changes include the following:

  • individuals are eligible for a tax credit of 50% of their donations to general interest and public utility organizations, up to a maximum of 10% instead of 6% of taxable income. In addition, donation by individuals to certain charitable organizations serving the needy are eligible for a tax credit of 60% of their donations up to a maximum of € 400 for donations during the year 2001 (tax code) and of € 407 for donations during the year 2002 (Tax instruction n°18 of January 25, 2002).
  • as an experiment taxpayers will not be required to submit evidence of their gifts in support of their tax returns for the years 2002 to 2004 inclusive, when filling electronic tax returns. Instead they will need to provide in their returns information regarding the beneficiary and the amounts donated for each beneficiary except when the beneficiary is a religious or charitable organization or a association established for financing political life and the amount donated is inferior or equal to € 3000.  It is still necessary for taxpayers to retain receipts issued to them by NGOs for a period of three years.  Tax payers filing usual returns in hard copy still need to provide the receipts from the beneficiary in order to benefit from the tax credit;
  • the fact that certain board members of an NGO receive remuneration for their service will no longer prejudice the non-profit nature of the organization, provided that:
    • the remuneration is reasonable in relation to the work performed and does not exceed €84,672 per year and per board member,
    • the NGO respects democratic principles in its functioning (regular and periodical election of the board),
    • such remuneration is provided for in the charter of the NGO,
    • the charter and the organization of the NGO guaranties the financial transparency of the NGO.
      The NGO may then remunerate:
    • one board member if its gross income exceeds € 200,000
    • two board members if it gross income exceeds €500,000
    • three board members if its gross income exceeds € 1,000,000
  • NGOs are granted a safe harbor exemption from commercial taxes[1] if their gross income does not exceed € 60,000 (instead of € 38,120 in 2001). This exemption is granted as long as the not-for-profit activity of the NGO is predominant and it does not distribute any income or assets to any private interest.
  • NGOs which gross income for the year 2001 was inferior to € 84,000 do not need to make advance installments on company tax for the year 2002. This threshold was of € 53,357.16 (FF 350,000) for the year 2000.

Caroline L. Newman is a Program Advisor for ICNL.  She can be reached at .

[1] Commercial taxes include : VAT, turnover tax, and company tax.


A Small Reform of the Foundation Law in Germany 

by Rupert Graf Strachwitz*

English synopsis of the German text.

On 1 September 2002, some changes of the German Federal Civil Code (Buergerliches Gesetzbuch) came into effect.  They concern one of the several legal forms a foundation may take in Germany, the autonomous foundation with legal personality, subject to government authorization and supervision.  The reform of the Code was preceded by lengthy deliberations chaired by the Federal Ministry of Justice and attended by the foundation authorities of the states (Laender), experts in administration, but not in civil society.

The result therefore is disappointing.  Whereas, 2 years ago Parliament amended the tax law in a way that really made a difference to donors, this reform does not allow for any fundamental changes.  The liberty of a founder to create his/her foundation remains severely curtailed by administrative procedures, while the established way of any civil society organization of communicating with the outside world, transparency, has again not been made mandatory.

Four years ago, the then new government talked about reforming charity law in three steps.  Two have now been accomplished; the third and most difficult one by far remains on the agenda: a fundamental reform of all tax law concerning not-for-profit organizations.  It remains to be seen whether, after its re-election, the government will introduce measures to this effect.

*Rupert Graf Strachwitz is Director of the Maecenata Institut in Berlin and was a member of several recent committees involved with law reform for NPOs in Germany.  He can be reached at


EC Clarifies its Position on Banking Foundations

Following the instigation of an investigation by the European Commission as to of whether the tax exemptions granted to Italian banking foundations were in breach of EC law (see IJNL Volume 4, Issue 4), the Government enacted Law 448 of 28 December 2001, Article 11.  This new law prevents joint control of banking institutions by more than one foundation, and it introduced stricter rules on incompatibility between managing positions to exclude the exercise of banking activity by a foundation through a controlling shareholding.  In the light of this last measure, the European Commission ruled in August that these incentives are not subject to the EC state aid regime because the Commission considers that the foundations’ activities of managing their own assets and applying the proceeds to make grants to not-for-profit entities are not economic activities, and the foundations could not therefore be classed as undertakings for the purposes of the state aid rules.  European Commission Press Release, 23 August 2002.

The Netherlands

Update on the Taxation of Philanthropic Entities in the Netherlands: Exemption of Business Profits Destined for a Public Cause and Other Important Changes in Tax Law

by Ineke A. Koele*

The Netherlands has a genuinely attractive legal atmosphere for philanthropic activities.  There is very little administrative or tax control of the organizations, the public objects that can be carried out are wide-ranging and open-ended, there is full exemption of accumulated income and gains, individuals may deduct the value of their gifts against 100% of taxable income, and there is a fairly liberal policy as regards international activities.  As disadvantages one might mention the obligation to pay 11% gift tax upon any substantial gift to a charitable entity and the fact that any active business income is always subject to normal corporate income tax rules.

The taxation of business income has recently been the subject of a quietly introduced tax law reform.  As a part of the Tax Plan 2002 the Dutch legislature has introduced some remarkable changes in favor of philanthropic entities; it is even more remarkable that no attention was given to these changes and that the scope of the major change was unclear until very recently, when my firm received an answer from the Ministry of Finance to questions raised on behalf of a number of philanthropic clients.

1. Background: non-competition motive is predominant

Foundations and associations, whether charitable or not, have a preferential tax status for corporate income tax purposes notwithstanding the fact that they may have significant commercial activities or activities geared to satisfying private goals.  In other words: philanthropic entities are not regarded as different from the business sector because of their purposes, but because of the different legal form (foundation, association) in which they usually are organised.

Foundations and associations, whether charitable or not, are subject to Netherlands corporate income tax only to the extent that they are engaged in an enterprise or in competition with taxable enterprises (art. 2(1)(d) in conjunction with Art. 4 Corporate Income Tax Act, hereinafter referred to as ‘CITA’).  This results in the complete exemption of the foundation’s income if this income is not considered to be attributable to an enterprise or to activities which are ‘competitive’ with the for profit sector.  In contrast to this, the entire income of a limited liability company is deemed by law to be related to entrepreneurial activities of the limited liability company (BV, NV)[1].

With these general rules, the Netherlands has adopted an egalitarian approach towards the non-profit sector and the for-profit sector and has chosen as fundamental the requirement of fair competition between the two sectors.  There is, however, a special exemption of corporate income tax that may apply to a philanthropic entity, irrespective of its legal form, if it meets the following criteria (article 6 CITA): it must (a) predominantly serve the general interest and (b) its profits may not exceed Euro 7 500 per year or Euro 37 500 in the year itself and the four previous years, and (c) the profits must be exclusively spent in accordance with the ‘general interest’.

Until 2002, the practical impact of this special exemption for entities that predominantly serve the general interest was negligible, as the profit limits were very low.  Although the limits have more or less remained the same, many business activities which are connected to a qualifying philanthropic entity may remain exempt from corporate income tax, thereby saving the 34.5% tax.

2. Introduction of a (nearly exclusive) destination test

In Dutch practice, commercial activities exercised by philanthropic entities usually are structured in a separate entity (most often a limited liability company with shares) in order to avoid a potential ‘force attractive’ between the taxable (business income) sphere and the exempt (passive income, donations).  As a result, the shares of corporate entities in the Netherlands are frequently held by philanthropic foundations.  The corporate entity exploits e.g. real estate or intellectual property rights in such a way that the income could not be said to constitute only passive income that would be exempt in the hands of the foundation if the activity were carried out directly by the foundation.

Charities and NGOs may also use separate foundations or other entities to raise funds; although these funds are destined to be used by those charities and NGOs, it was not clear whether the payments by the fundraising entities to the charities or NGOs could be considered tax deductible.  A fundraising activity may under certain circumstances be classified as commercial if it is conducted in competition with taxable entities, and thus the proceeds of these activities were frequently subjected to corporate income tax.

In 2002, the CITA has introduced a special deduction for entities whose activity is aimed exclusively or nearly exclusively[2] to serve the general interest or whose activity is aimed exclusively or nearly exclusively to collect monies which pursuant to the charter of the entity or, alternatively, a written agreement, must be distributed to a charitable institution[3] within the meaning of article 16 of CITA.  The expenditures for the benefit of the general interest or (in the second case) the distributions to the charitable institution qualify for deduction unless this would lead to serious unfair competition.

The law only refers to ‘collection of monies’ that will be distributed to a philanthropic entity, and the official explanation only refers to genuine fundraising activities.  The question has arisen to what extent other entrepreneurial activities such as the exploitation of real property within a limited liability entity would remain taxable, even where the philanthropic entity which is also the shareholder could be qualified as beneficially entitled to this income.  Upon request on behalf of several taxpayers, it has been approved by the tax authorities that under certain circumstances other entrepreneurial activities exercised by a corporate entity, the profits of which are destined for a qualifying Dutch philanthropic foundation, in effect could remain exempt as the distributions to the latter may be treated as being a deduction   If the payments to the philanthropic foundation are deductible in the meaning of this new provision, all payments distributed within 6 months after the end of the accounting period may on request be treated as a tax deduction for the accounting period.

There is one major exception to the deductibility of the distribution payments.  In typical Dutch fashion the legislature has directed that the deduction could not be obtained if serious unfair competition would be the result.  This establishes a vague criterion, as there is little guidance on what should be considered ‘serious unfair competition’.  It provides a tool for the tax authorities to withhold the deduction in certain cases, and the courts will have the noble task of interpreting this functional test.  It has been emphasized that the criterion could frustrate the deduction, if the business sector would ‘feel’ the unfair competition as a serious matter.  As relevant circumstances the type and size of activities could be determinative and also the extent to which the business entity presents its activities in the market as being for the benefit of a philanthropic entity.

When the unfair competition standard was the basis for full taxation of business profits (until last year), there was a modest, but important deductibility for profits which are destined up to at least 90% for a qualifying philanthropic purpose.  There is no functional test in relatedness between the business income and the philanthropic purpose for which the business profits are used, as is the case in many other countries.  However, the fact that only business profits which are destined up to at least 90% for a qualifying philanthropic purpose were treated favorably, implies a normative relation between the business profits and the philanthropic objective.

The practical effect of this new provision is of relevance both to NGOs with business activities and to private philanthropic foundations that hold business interests through shares of corporate entities.

Even though NGOs may avoid effective taxation on business income by expending the profits in accordance with their philanthropic objective, there still may be an advantage for NGOs to structure the business activities within a separate corporate entity.  Although the profits must be distributed to the philanthropic entity in order to avoid an effective corporate income tax burden, the philanthropic entity will not be obliged to expend the received monies in accordance with its objective in a specific way.  The Netherlands does not have general or specific expenditures rules; as long as the philanthropic entity can be said to be aimed at a qualifying philanthropic purpose, there is no adverse consequence in the (tax free!) accumulation of funds within the philanthropic foundation.

For private foundations, the new provision creates new planning opportunities.  While there are no restrictions on business holdings for private foundations, the private philanthropic foundation might become an excellent planning vehicle to avoid inheritance tax; to create a deduction against 100% of taxable income (which is deductible at progressive income tax rates if structured properly); to structure the ownership succession of a privately held enterprise; and , since 2002, to minimize corporate income tax at the level of the business – assuming that the problem of the unfair competition can be avoided.

Apart from UK Charity Commissions’ restrictions, Dutch practice seems to become more comparable to the UK practice where trading income may be offset against Gift Aid donations to a qualifying charity or, in the case of unincorporated trading, to make annual payments to a charity (R v Special Commissioners of Income Tax ex parte Shaftesbury Homes and Arethusa Training Ship 8 TC 367). 

Where wholly-owned subsidiaries are paying Gift Aid to their shareholders, the Gift Aid payment may be made up to nine months after the end of the accounting period.

In the Dutch context, the corporate entity should avoid making its profits available through gifts, as this would normally attract a 11% gift tax. Although a Governmental Report called the Moltmaker Report recommended in Spring 2000 that this 11% gift tax be abolished, no concrete proposals have been initiated as yet to carry out that suggestion.  Proper tax planning is necessary to avoid this and other pitfalls.

3. Deduction of fictitious costs expanded

In a number of remarkable decisions, the Supreme Court has taken the position that a philanthropic foundation can never deduct more costs than it is actually charged.  In many circumstances, philanthropic entities receive benefits in kind from third parties because they are sympathetic to its philanthropic objectives.  In the Supreme Court’s opinion, a foundation is not allowed to deduct a notional market price when computing the business profits, as a result of which the benefits in kind may be taxed as “business income” in the hands of the foundation[4]. This becomes even more striking in cases where the philanthropic entity may be considered to run an enterprise because of the fact that no notional market prices may be taken into account; where a foundation has a regular positive result, as a matter of fact it is often considered to run an enterprise, as the profit motive is deemed to exist.

Although this general principle has been maintained, CITA provides since 1 January of this year for a deduction of fictitious costs for employees; this is in principle restricted to the minimum wage provided by law unless it is proven that an at arms ‘ length remuneration would be higher.  The deduction is not applicable if it would lead to serious unfair competition.  This deduction is not only allowed for philanthropic entities pursuing a qualifying public interest, but also for entities pursuing a social interest.

4. Scope of taxable philanthropic entities restricted 

Due to the newly introduced provisions, the scope of the special exemption for philanthropic entities that are organised in the form of a corporate entity (and as such subject to full taxation) or foundations that are considered to run an enterprise has been expanded substantially.  Although the thresholds for exemption are very low, the thresholds only apply after the tax deductions as indicated above.  The CITA contains further provisions in relation to anti-accumulation of the two prospected deductions and a prohibition to create tax losses due to these deductions.

[1] Article 2 paragraph 5 CITA.

[2] This has to be interpreted as: at least for 90% of its activities.

[3] Charitable institution is the Dutch term which can be found in several laws. However, I prefer the less old-fashioned term ‘philanthropic entity’.

[4] Supreme Court 18 November 1959, BNB 1959/386; idem, 24 June 1987, BNB 1987/265; idem, 15 November 1989, BNB 1990/48 ( Bloodbank).

* Ineke A. Koele is a partner in the Utrecht law firm Van Mens & Wisselink; she can be reached at


New Tax Provisions for NPOs

Various tax provisions applicable to NPOs were amended by the Budget for 2002.  In particular a new category of corporate income tax relief for company donations to NPOs engaged in the support of families was introduced.  The tax relief takes the form of a deduction equal to 150% of the total amount donated to specified bodies (central, regional or local government agencies, to foundations, IPSSs (social service agencies) or legal entities designated as comparable to an IPSS by law, legal entities of public administrative utility, cooperatives of social solidarity engaged in activities of charity, assistance, benevolence or to the cultural and sporting centers prescribed in of Art. 1 and 2 of the Patronage Statute) with the purpose of being used for supporting family patronage aims (e.g., the support of young mothers, pregnancy in difficult conditions, newly born babies in risk situations, single mothers, etc.), up to a limit of 0.8% of the company’s turnover.  This limit may be disregarded if the recipient’s activities are considered to be of high social interest.  Art. 2-A Patronage Statute, as amended by Art. 45 (10) of Law 109-B/2001 of 27 December.


New Tax Proposals

A draft law for a new non-profit organization (NPO) tax regime was submitted by the government to the State Council on 11 March 2002.  The proposed new regime (consisting of 27 articles) would, if approved by the parliament, abolish Law 30/1994 of 24 November 1994 in respect of foundations and NPOs.

The draft law retains the requirement that an NPO would have to expend at least 70% of its income on financing its purposes within 3 years of the receipt of the income, but additionally proposes that at least 70% of the amount resulting from applying the annual legal interest rate to the total value of the NPO would have to be expended on its purposes.  The draft law also proposes that an NPO would have to renounce its voting rights in excess of 3% in participations in listed companies and would be unable to designate directors in such companies.  These proposals have been criticized, as they could be considered to be incompatible with Spanish corporate law and EU Directives.

In addition, a partial tax exemption would continue to apply, under which the taxable base would be subject to corporate income tax at a rate of 10%.  The income to be included in the tax base would, however, be restricted to certain non-exempt business income.

Finally, the current tax credits available for donations to an NPO would be increased from 20% to 25% for resident and non-resident individual income tax purposes.  A tax credit of 35% would apply for corporate income tax purposes.  To encourage donations in respect of certain non-profit activities, these credits could be increased to 30% and 40% for individuals and corporations, respectively.

The Government’s tax proposals for 2002 include the following measures relevant to NPOs:

  • a new capital gains reinvestment relief tax credit under which capital gains realized on the disposal of certain assets, the proceeds of which are reinvested in tangible or intangible fixed assets or participations exceeding 5% of the capital of the company concerned, will receive a tax credit equal to 25% in the case of not-for-profit organizations currently taxable at the income tax rate of 25%;
  • not-for-profit organizations qualifying for income tax privileges will no longer be allowed to acquire shares representing more than 10% of their assets, to hold an interest of over 3% in a listed company, or to hold a majority interest in an unlisted company;
  • with effect from 1 January 2002, payment of any tax debt can be settled by the donation of items forming part of the national heritage, which are registered in the General Registry of Cultural Interests or included in the General Inventory (previously this scheme applied only to payments of income tax, inheritance and gift tax, and wealth tax).

For further information on these proposals, see Miguel Angel Cabra de Luna, “Accountability and Governance of Public Benefit Civil Society Organizations in Spain” and Enrique GimenezReyna, “Considerations about Tax Matters of the Not-for-Profti Entities in Spain,”in Ambrosianeum Foundation (ed.) Governance and Taxation of Public Benefit Nonprofit Organizations (Milan: 2002).  Further coverage of these and other proposed changes in the legal framework for NPOs in Spain will be found in a future issue of IJNL.

United Kingdom

A. Legal Framework

1. Cabinet Office Charity Study.  In September 2002 the Cabinet Office’s Strategy Unit (formerly the Policy and Innovation Unit) released its report on the voluntary sector, which includes 61 specific recommendations for reform.  The main recommendations include the introduction of legislation:

  • redefining charitable purposes based on the principle of public benefit;
  • establishing six new categories of charitable purpose currently forming part of the fourth head of “other purposes beneficial to the community” (i.e. the advancement of: health (including the prevention and relief of sickness, disease and human suffering); social and community welfare (including protection of old, young and disabled people); culture, arts and heritage; amateur sport; human rights, conflict resolution and reconciliation; environmental protection and improvement);
  • allowing charities to undertake permanent trading activities in their own name without the need to establish a separate trading company;
  • facilitating charity mergers, possibly by the creation of a dedicated advisory unit in the Charity Commission;
  • allowing charities to convert permanent endowments of £10,000 or less into expendable capital without Charity Commission approval, and facilitating conversion of larger permanent endowments where this is in the interests of the charity;
  • creating a new legal form, the Community Interest Company, for non-charitable social enterprises based on existing forms of limited liability company but with entrenched public interest purposes and the power to issue preference shares carrying a fixed rate of return;
  • creating a new legal form specifically designed for charities, the Charitable Incorporated Organisation (CIO);
  • replacing the umbrella term “Industrial and Provident Society” with two distinct concepts: the Co-operative (to be defined by statute in line with the International Co-operative Alliance Statement on Co-operative Identity), and the Community Benefit Society, which can vote to dedicate its assets in perpetuity to a public purpose and prohibit conversion into a co-operative or a company;
  • requiring large charities (those with annual income over £1 million) to publish their ethical investment policy in their annual report;
  • giving charities a statutory power to pay individual trustees for services rendered to the charity if the trustees reasonably believe that this is in the interests of the charity;
  • clarifying the circumstances in which the activities of a charity can be used as an aid to the interpretation of charitable purposes;
  • establishing an independent tribunal to hear appeals against decisions of the Charity Commission;
  • raising the threshold for compulsory registration with the Charity Commission to annual income above £ 10,000, and requiring charities in this category that are currently excepted from registration to register;
  • adapting the monitoring regimes of “exempt charities” that are currently supervised by other regulators to cover basic charity law requirements and giving the Charity Commission power to investigate them at the request of the main regulator

Other recommendations include:

  • continuous checks by the Charity Commission on the public character of existing charities (e.g. to ensure that charities that charge high fees continue to meet the public benefit test);
  • the creation of a new umbrella committee comprising all UK charity regulators to ensure a consistent regulatory approach throughout the UK;
  • the establishment of an independent body to regulate fundraising practices, funded initially by government and later by a levy on fundraising income (subject to the Home Secretary having the power to introduce compulsory legislation if the voluntary initiative fails);
  • the development by the sector of performance indicators against which results can be measured;
  • a revision of the local authority licensing scheme for collections from the public;
  • the teaching of trusteeship as part of the citizenship element of the national educational curriculum;
  • the legal position on political activities of charities should not be changed but the Charity Commission’s current guidance should be revised to clarify the extent to which campaigning can be undertaken within the law.

Comments on the proposals are invited by 31 December 2002. Following the consultation period, the Active Communities Unit of the Home Office will prepare a detailed timetable for the preparation of legislation concerning England and Wales.  Any reform of charity law in Scotland or Northern Ireland will be the responsibility of the devolved administrations.

(“Private action, public benefit”, Cabinet Office Strategy Unit, 25 September 2002)

2. Trust Rules on Perpetuity and Accumulation.  In September 2002 the Lord Chancellor’s Department issued a consultation document on proposed legislation to amend the law of England and Wales on perpetuity and accumulation periods governing property held under a trust.  The proposals generally follow the recommendations of the Law Commission in its report no. 251 on this subject, which was published in March 1998.  The main proposals are:

  • to introduce by primary legislation a standard perpetuity period of 125 years to replace the current rule derived from common law (a specified  period of up to 80 years or a period equal to the lifetime of a person alive at the time of the disposition plus a period of 21 years);
  • to repeal the statutory prohibition on accumulation of income as regards private trusts (including non-charitable purpose trusts) taking effect after the repealing legislation enters into force (the effect of such a repeal would then be that the maximum accumulation period would then become the perpetuity period, as was the case under the common law before 1800);
  • to restrict the maximum accumulation period to 21 years in the case of charitable trusts, subject to giving the Charity Commission power to order class derogations at their discretion as well as specific derogations under section 26 Charities Act 1993; and
  • to extend the rules governing accumulations to cover trusts established by corporations as well as by individuals.

The government invites comments on the proposals, including whether the reforms are suitable for implementation in 2003 by means of a Regulatory Reform Order (a simplified parliamentary procedure for amending the law), by 29 November 2002.

(“The rule against excessive accumulations”, Lord Chancellor’s Department, September 2002)

3. Study by Treasury of Role of Voluntary Sector in Service Delivery.  In September 2002 the Treasury launched the report on the cross-cutting review of the role of the voluntary sector in the delivery of public services. The report’s main conclusions are that:

  • the cost of contracts for services should reflect the full cost of delivery, including relevant overhead costs;
  • government departments should move to a more stable funding relationship to ensure that the sector is equipped to work effectively in partnership with government;
  • the sector should be involved in the planning as well as the delivery of public services;
  • the capacity of the sector should be developed with a view to achieving a more equal balance within the partnership framework.

A new “ futurebuilders” fund, worth £125 million over 3 years, has been set aside by the government to implement these recommendations.  The Active Communities Unit of the Home Office will have the lead responsibility for co-ordinating changes in government policy across individual departments through an Implementation Group supported by two Advisory Groups, comprising representatives of the sector and local statutory agencies.

With regard to the burden of irrecoverable VAT on the sector, the review concluded that no fundamental changes should be made to the current system and that the available resources would be better directed through the new futurebuilders fund.  The review recommended that Inland Revenue and Customs & Excise should work together to establish by January 2003 an integrated helpline service to provide charities with advice on direct tax and/or VAT issues, and that Customs & Excise should work with the sector to improve its guidance to charities.

(“The role of the voluntary and community sector in sector delivery”, H.M. Treasury, 10 September 2002)

4. Human Rights and Promotion of Racial Harmony as Charitable Purposes.  In July 2002 the Charity Commission announced that, following the introduction of the Human Rights Act 1998,  it would in future recognise the promotion of human rights as a charitable purpose in its own right.  However, the range of activities open to a human rights charity will depend on whether or not the country in which it operates has adopted human rights into its domestic law.  In the case of an organisation active in countries that have not adopted such rights into domestic law, the activities will be more restricted because promotion of human rights in these circumstances remains capable of being a non-charitable political purpose.  Charity Commission Press Release 47/02, 4 July 2002.

The Charity Commission has announced a decision that the promotion of racial harmony for the benefit of the public is a charitable purpose. The Commission considered that this purpose is analogous to the existing charitable purposes of promoting equality of the sexes, racial harmony, and the mental and spiritual welfare of the community, and that there is sufficient evidence of public benefit. In considering applications for registration under this head, the Commission will need to be satisfied that the activities of the applicant are capable of furthering the purpose.  Charity Commission Decision, August 2002.

5. New Proecedures for Charity Commission.  In September 2002 the Charity Commission announced a revision of its approach to reviewing its decisions.  Under the new two stage process, the first stage review will normally be carried out by a senior Commission officer under the direction of the Regional Operations Manager, and the final review will be undertaken by at least one Charity Commissioner.  Revised Operational Guidance has been added to the Commission’s website.

(“Requests for a decision review” (OG 94), Charity Commission Press Release, 19 September 2002)

6. Report by House of Commons Committee on Charity Commission.  In July 2002 the House of Commons’ Public Accounts Committee published its report on the role of the Charity Commission in regulating charities.  Its main conclusions are that the Commission should:

  • monitor more closely the significant minority of charities that do not file annual accounts on time, and levy fines on persistent offenders;
  • complete investigations into potential abuses of charitable status more quickly and follow them once completed to confirm that its recommendations have been implemented;
  • improve its internal operational procedures to respond the number of complaints against the Commission that have been wholly or partially upheld by an independent reviewer; and
  • examine the scope for publishing comparative information on the performance of charities of similar type and size.

(“Giving confidently: The role of the Charity Commission in regulating charities”, (HC 412), 3 July 2002)

7. Guidance on Museums and Galleries.  In August 2002 the Charity Commission published new guidance on the charitable status of museums and galleries as part of its ongoing review of the Register of Charities.  The guidance states that the merit of collections of organisations recognised under the Registration of Museums scheme will be recognised by the Commission, and that public benefit can be established through public access via the internet and other media.

(“Museums and art galleries”, leaflet RR10, Charity Commission Press Release 64/02, 28 August 2002)

8. Charity Law Review in Scotland.  On 17 April 2002 the Scottish Executive published an analysis by the Centre for Public Policy and Management of the responses to the consultation on the review of Scottish charity law.  The Scottish government has not yet issued any legislative proposals for reform of the law of charity in Scotland.

(Scottish Executive)

B. Taxation

1.Promotion of Sport.
In April 2002 the Charity Commission issued revised guidance on the charitable status of the promotion of sport.  Although several respondents to the consultation in 2001 argued that the promotion of sport itself should be recognized as a charitable purpose, the Commission felt constrained by the decision of the Court of Appeal in Re Nottage [1895] 2 Ch 649 to maintain the status quo.  However, in November 2001 the Commission issued a guidance note setting out the extent to which sport is charitable.  The note confirms that in future the Commission will accept as charitable the promotion of community participation in healthy recreation by the provision of facilities for playing particular sports, and the advancement of the physical education of young people not undergoing formal education.  This would allow community amateur sports clubs (CASCs) that provide facilities for “healthy” sports and are genuinely open to the public without discrimination to apply to be registered as charities.  This guidance was later revised in April 2002 to clarify what constitutes “healthy” sport and “community participation”.  The Commission is not inclined to accept that passive or dangerous sports (e.g. angling or parachuting) are healthy, and takes the view that genuine community participation precludes the use of barriers such as high entry fees or tests of skill to restrict membership.  (Charity Commission Press Releases, 30 November 2001 and 18 April 2002).

In the light of the developments in the charitable status of CASCs, the Government decided to introduce a new package of tax reliefs for non-charitable CASCs in the Finance Act 2002.  The reliefs are only available to amateur clubs that are open to the whole community without discrimination and which provide facilities for an eligible sport (i.e. a sport listed by Sport England and the other sports councils). Clubs can apply to the Inland Revenue to be registered as CASCs from 23 July 2002 when the Finance Act 2002 entered into force.

Non-charitable CASCs qualify for the following tax privileges:

An exemption from corporation tax on all interest income, on the first £ 15,000 of trading income, and the first £ 10,000 of real estate income;

  • exemption from tax on capital gains;
  • discretionary exemption from non-business rates.

In addition, individual donors qualify for exemption from inheritance tax and capital gains tax, and for Gift Aid relief. Business donors can claim the capital gains exemption and the relief for gifts of trading stock or plant and machinery.  Section 58 & Schedule 18 Finance Act 2002.

2. New Rules to Promote Charitable Giving.
The Finance Act 2002 included several measures to promote charitable giving. The following measures apply in 2002-2003:

  1. a new relief for charitable gifts of freehold or leasehold property in the UK by individual donors with effect from 6 April 2002 and by corporate donors with effect from 1 April 2002 (Sec. 97 FA 2002);
  2. a new relief for companies to donate drugs for humanitarian purposes directly to developing countries with effect from 1 April 2002 (Sec. 55 FA 2002).

In addition, the Government announced several measures to use the self-assessment tax return to promote individual charitable giving that will take effect in future years:

  1. with effect from 6 April 2003, higher rate taxpayers will be able to elect to carry back Gift Aid donations against their income of the previous tax year (Sec. 98 FA 2002);
  2. with effect from 6 April 2004, taxpayers who are entitled to a repayment of income tax will be able to nominate a charity to receive all or part of their repayment on their tax returns; and
  3. the promotion of Gift Aid on individual tax returns, probably by the inclusion of a box or some other feature intended to attract the taxpayer’s attention when completing the return.

The Government did not announce any extension of the 10% supplement payable on donations raised through payroll giving schemes in the 3 year period ending on 5 April 2003.

The new relief for gifts of real estate works in a similar way to the tax relief for gifts of listed shares introduced in FA 2000, i.e. the donor can deduct the full market value of the property (less any consideration or other benefit received) from taxable income and, if a corporate donor, from capital gains.  The donor must have sufficient taxable income or capital gains in the year of the gift to make full use of the relief, since there is no provision to carry forward or carry back any excess.  It is also necessary for the charity to indicate acceptance of the gift by issuing a certificate to the donor; the rationale for this procedure appears to be to ensure that relief is not given for gifts of unwanted property.  It is also necessary for the donor to dispose of the whole of his or her beneficial interest in the property.

As regards the facility to carry back individual Gift Aid donations, the claim must be made by the earlier of the date when the return is filed or 31 January in the year when the donation is made.

(Finance Act 2002; Inland Revenue Budget Note 4, 17 April 2002)

3. Tax Credits for Investments in Community Development Finance Institutions.
As foreshadowed in the Pre-Budget 2001 announcements, the Finance Act 2002 introduced a new relief in the form of a tax credit available to both individual and corporate investors making debt or equity investments in Community Development Finance Institutions (CDFIs) accredited by the Small Business Service of the Department of Trade and Industry.  Accreditation generally lasts for 3 years, subject to renewal.  There is no prescribed legal form for a CDFI, so charities and other non-profit organisations can apply for CDFI status.  The May 2001 guidance from the Charity Commission on programme related investment also makes it clear that charities can invest in as well as borrow from CDFIs.  Two types of CDFI are provided for: “wholesale” CDFIs which invest in other CDFIs and can raise up to £ 20 million during its accreditation period, and “retail” CDFIs that aim to invest directly in both for profit and not-for-profit enterprises in disadvantaged communities and can raise up to £ 10 million.

The CDFI issues tax relief certificates within these limits to the investor, who can claim a credit against the annual income or corporation tax liability of up to 5% of the investment each year for a period of 5 years starting with the year of investment.  In the case of individual investors, the relief operates so as to leave sufficient income tax to cover Gift Aid donations.  Subject to provision for the use of nominees and bare trustees, the investor must be the sole beneficial owner of the investment.  The investment must be subscribed for wholly in cash, fully paid up on issue, and must not be redeemable directly or indirectly within the 5 year period.  There are detailed conditions to be complied with throughout the 5 year period in order to limit the investor’s ability to receive value or dispose of the investment without loss of tax relief.  There is also a general provision to target arrangements one of the main purposes of which is the avoidance of tax.  Additional regulations regarding the accreditation criteria will be issued by the Treasury in due course.  It is intended that the scheme will come into force once European Commission state aids approval has been received and with effect for investments after 16 April 2002.  European Commission approval was announced in a Commission Press Release dated 2 October 2002.

4. New Rules for Intellectual Property of Charities. Another important change is the introduction of a new schemes for taxing intellectual property rights created or acquired after 31 March 2002. This incorporates a new exemption from tax on certain income derived by charities from non-trading gains on intangible fixed assets within the new intellectual property regime.

(paragraph 3 of Schedule 30 FA 2002).