INLAND REVENUE: THE MONITORING AND CONTROL
OF TAX EXEMPTIONS FOR CHARITIES
ELIGIBILITY
FOR
TAX
EXEMPTIONS
6. Eligibility for tax exemptions is decided on the
basis of charitable status. Over 180,000 charities in England
and Wales registered with the Charity Commission are automatically
entitled to tax exemptions. For 85,000 further organisations exempt
or excepted from registration, and 24,000 organisations in Scotland,
the Inland Revenue determine eligibility themselves.[2]
7. The Department maintain a database of charities
which they check before making tax repayments to minimise the
risk of making them when they are not due. The Charity Commission
provide information to the Department to help them keep the database
up to date.[3]
8. We asked the Department whether, given our concerns
over the accuracy of the Charity Commission's register and the
strength of their regulatory work, they had discussed with the
Commission the extent to which they could rely on their work.[4]
The Department told us that they had a great deal of liaison with
the Commission and had stepped it up increasingly in recent years.
They discussed the reliability of the register with them and would
be heavily involved in the Commissions' review of their register.[5]
9. When asked about what was being done to minimise
the risk to the revenue from failure to exchange information,[6]
the Department told us that they now had on-line access to the
Commission's register, so that if a charity had been removed it
would show up when they performed a check against charitable status.
The Commission also sent the Department details of organisations
removed from their register. On being notified, the Department
would instantly put a stop to any further repayments, write to
the ex—charity informing them of the tax-consequences of
removal, and tell the relevant tax district of the decision.[7]
They had found minimal loss of tax in such cases.[8]
They would be reviewing this arrangement with the Commission at
future liaison meetings but as far as they could tell it was satisfactory.
10. The Department carried out checks to confirm
eligibility during their compliance work and would, for example,
look out for things such as trading activities which were obviously
not in line with charitable status.[9]
The Department also told us that they had referred 66 cases to
the Commission where they thought that there were questions of
eligibility which needed to be considered, of which 20 resulted
in the Commission taking action or giving advice to the organisation.[10]
In such cases it was for the Commission to determine whether activities
were compatible with charitable status.[11]
The Department had an important role in supporting the Commission
but the responsibility for the register was theirs.[12]
11. In view of the potential benefits which might
be secured from sharing a database with the Commission, we asked
the Department about the practicality of a joint database.[13]
The Department told us that statutory duties of confidentiality
imposed on both organisations restricted the information they
could exchange and that a shared database was unlikely to be a
practical possibility.[14]
The Department had, nevertheless, made a determined effort to
get more alongside the Commission in recent years, to have a freer
exchange of information, exemplified by the on-line access to
their register.[15]
12. Charities are entitled to receive certain investment
income gross, for example interest on deposits, by self-certifying
their status to the bank or building society concerned.[16]
When asked how they minimised the risk of such organisations claiming
tax exemptions to which they were not entitled[17]
the Department said that FICO audited banks and building societies
and would bring back a full schedule or a sample schedule of organisations
receiving interest gross. They would then check the schedule to
ensure that they were bona fide organisations. It was extraordinarily
difficult to estimate the value of this concession, which could
be of the order of £100 million.[18]
Conclusions
13. Registered charities are automatically entitled
to tax exemptions and the Inland Revenue therefore have to place
a significant degree of reliance on the Charity Commission's work
to regulate charities and to maintain an accurate register. In
view of our concerns about the accuracy of the Commission's register
there is a risk that the Inland Revenue may allow tax exemptions
where they are not appropriate.
14. The Department have stepped up their liaison
with the Commission and plan to be heavily involved in the Commission's
review of their register. The Department also provide information
to the Commission where their inquiries raise doubts about an
organisation's charitable status. We look to the Department to
continue their efforts to encourage and assist the Commission
to maintain an accurate register to help minimise the risks of
tax exemptions being wrongly awarded.
15. Within the statutory restrictions on the exchange
of information between the Charity Commission and the Inland Revenue,
measures have been taken to provide better access to the Commission's
data. The Department believe that their controls should prevent
tax repayments being made to organisations which have been removed
from the Commission's register. The Department will need to keep
the arrangements for exchanging information under review, and
seek further improvements where these would assist their compliance
work.
16. The absence of a reliable estimate of the value
of tax concessions enjoyed by charitable bodies that receive investment
income gross from banks and building societies by self-certifying
their status may prevent the Department from properly assessing
the risk to tax revenues from these arrangements. The Department
should explore the scope for improving their knowledge of the
risks associated with self-certification of entitlement to charitable
tax exemptions through analysis of the results of their checks
on organisations claiming exemptions.
2 C&AG's report (HC 575 of Session 1997-98), paras
1.1, 2.3 Back
3
ibid, paras 2.5, 2.15-2.18, 3.9 Back
4
Q2 Back
5
Q7 Back
6
Q7 Back
7
Q24 Back
8
Q35 Back
9
Q39 Back
10 Q7
and Evidence, Appendix 1, p15 (PAC/319) Back
11 Q37 Back
12 Q50 Back
13 Q63-64 Back
14 Q66 Back
15 Q62 Back
16 C&AG's
report (HC 575 of Session 1997-98) para 2.6 Back
17 Q3 Back
18 Q26 Back
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