Use of charity tax reliefs could leave universities open to avoidance accusations, experts say

FOCUS: As charity trustees, university governing bodies have an overriding duty to act in the best interests of their institution. However, the HMRC’s hardening stance on tax planning and the current political climate could leave them treading a fine line between their desire to maximise revenue for the university’s purposes and being accused of inappropriate tax avoidance.17 Mar 2015

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New guidance from the Charity Commission seeks to clarify where this line might be drawn. Interestingly, it confirms that charity trustees should actively engage in “reasonable and prudent tax planning”. For governing bodies, this will include taking advantage of available tax reliefs where this assists the university in its work, encourages genuine donations and coincides with the purposes for which these reliefs were created. The guidance also explicitly states that they are permitted to organise the university’s financial affairs in a way that minimises its tax liabilities when entering into transactions or arrangements.

According to the guidance, when managing the university’s tax affairs governing bodies should be mindful of HMRC’s definition of ‘tax avoidance’ – meaning that they should consider whether they are “operating within the letter but not the spirit of the law”, or using artificial transactions whose only aim is to create a tax benefit. In particular, the guidance warns them against engaging in tax arrangements which serve to benefit private interests, where any benefit to the charity is a by-product of the arrangement rather than the principal aim. The Charity Commission has “regulatory concern” about “any tax planning arrangements that are imprudent … or could bring the charity or the charitable sector into disrepute”, according to the guidance.

The Commission’s guidance on where the line should be drawn is helpful to a point, particularly as it also includes examples of arrangements that might be “reasonable and prudent tax planning” and arrangements that have previously been considered to be tax avoidance by HMRC. However, these concepts are very subjective and there are widely differing views on what amounts to inappropriate tax planning, which change markedly over time.

Take, for example, the House of Commons Public Accounts Committee’s repeated criticism of the ways in which large companies minimise their tax bills, which has included presenting their use of legitimate statutory tax reliefs as a form of tax avoidance. Applying this analysis to the charity and university sector could potentially mean that even using legitimate reliefs such as gift aid in the intended way could present a risk of criticism.

This is of course an extreme example and unlikely to be challenged in practice. Nevertheless, it highlights that the Commission (or HEFCE, the Higher Education Funding Council for England) might take one view of what amounts to inappropriate tax planning whilst HMRC, and indeed the public, could take another. There is also the point that tax planning which a few years ago would have been considered quite routine is now held up for public vilification. Perhaps of most concern is the Commission’s (understandable) focus on reputational issues, which presumably requires universities as charities to take into account the verdict of the court of public opinion, regardless of whether that accurately reflects what the legislation originally intended.

It is, therefore, a question of being alert to risk but managing that risk in a way that allows governing bodies, as university trustees, not to miss valid and legitimate opportunities to arrange the university’s affairs in a tax efficient manner or claim legitimate charity reliefs. There is a balance to be struck, and as always obtaining and acting on independent professional advice will go a long way towards rebutting any suggestion that the trustees may have acted in breach of duty. However, given the potentially serious consequences of perceived avoidance and the uncertainties created by the prevailing political climate, many trustees will be concerned that the risks of all but the most ‘plain vanilla’ planning might exceed the benefits, and will want to revisit any existing structures which may be susceptible to criticism.
Janet Hoskin and Chris Thomas are tax experts specialising in universities, charities and trust arrangements at Pinsent Masons, the law firm behind Out-Law.com.