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Revolving donations failed to avoid tax

In Reb Moishe Foundation v HMRC, the charity lent donations back to a connected donor company, which reduced the company’s tax liability, but created a liability for the charity.

20th Nov 2020
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Charity built school

At first sight, a substantial donation to a registered charity looks like a good thing. But peeling away the layers of this particular onion, as the FTT Judge did, reveals why the exercise was always likely to end in tears.

The story begins with Gladstar Ltd that had substantial profits and faced a commensurate corporation tax liability. It made donations over a two year period totalling over £2.5 million to one charity; the Reb Moishe Foundation (RMF), and claimed tax relief for the deduction. 

Tax on the interest  

This case specifically concerned RMF’s exemption from income tax on income applied for a charitable purpose. 

A charity is not exempt from tax on its income because it is a charity. The exemption is conditional on the charity applying its income in an approved way. Ordinarily, a charity will apply its income in furtherance of its charitable aims. However, charities are also permitted to apply income in other ways which will support its purposes, in particular in approved investments or approved loans which generate income for the charity’s benefit.

RMF did not apply its income from Gladstar towards its primary purposes because, it was claimed, no suitable purpose could be identified at the time. Instead, the bulk of the total donation was loaned back to Gladstar, on terms calculated to produce a very healthy rate of interest for RMF. However, HMRC was not satisfied that the loans were allowable expenditure.

Charitable or non-charitable purpose

The question for the FTT was whether RMF’s loans to Gladstar met the statutory definition provided in ITA 2007 s 543(1)(i) which defines the amount of non-charitable expenditure:

“the amount of any of the charitable trust's funds that is invested in the tax year in an investment which is not an approved charitable investment.” 

To be accepted as an approved charitable investment the loan must be “A loan or other investment as to which an officer of Revenue and Customs is satisfied, on a claim, that it is made for the benefit of the charitable trust and not for the avoidance of tax (whether by the trust or any other person).” 

The keyword there is the “and”. It is not enough that the arrangement benefits the charity. The charity must make a claim to the effect that both conditions are met which includes satisfying HMRC that there is no tax avoidance purpose.

The test is not whether a tribunal would decide that there was no tax avoidance purpose: the test is only that HMRC is satisfied. Provided that the officer’s decision is reasonable it cannot be displaced on appeal. Thus, a charity that presents its claim badly may be denied relief from tax on its income.

HMRC was not satisfied 

In deciding if it was reasonable for HMRC not to be satisfied that there was no tax avoidance purpose (there is no “only or main” qualification to that purpose), the Judge considered the facts and arguments presented by both sides.

The Judge boiled down the issue to two matters:

  • the amount of expenditure at stake; and 
  • the question whether HMRC were right to disallow the expenditure.

The first was a question of fact but one on which HMRC got their sums wrong, looking at expenditure in an accounting period and not the tax year, as well as not giving proper credit for interest paid and amounts of capital repaid. But that was not the final decider of the case.

The second required more consideration.

HMRC argued that factors supporting their refusal to treat the expenditure as allowable were:

  1. lack of evidence that the trustees had taken independent advice as to the suitability of this investment for a charity;
  2. the fact that RMF and Gladstar could not truly have been said to be acting at arm’s length when, for example the leading trustee was also, subsequently, the company secretary of Gladstar, while both of the other two trustees were extremely elderly and one had dementia while the other died and was not replaced; 
  3. the rate of interest was not an arm’s length rate compared to the Bank of England base rate at the time; 
  4. the loan appeared to be open-ended with no final repayment date and therefore there was no intention that the loan should be repaid; 
  5. no interest was actually paid on the loan. It was all rolled up and added to the balance outstanding;
  6. RMF took no action to recover the loan when an event of default had taken place;
  7. there was no evidence that the trustees gave further consideration as to the suitability of the loan when the interest rate was reduced;
  8. there was no evidence that the trustees considered the creditworthiness of Gladstar or Bridgemere Holdings Ltd at any stage; and
  9. HMRC was unable to see how this was for the benefit of the charity. 

The Judge dismissed point 4 because the loan was stated to be repayable on demand, and point 5 because actual repayments were made. The Judge accepted HMRC’s other points and placed some emphasis that most of RMF’s “evidence” amounted to little more than unsupported assertions.


HMRC’s determinations of tax payable by RMF were upheld and Gladstar’s deduction for the donation will also have been refused.  

Replies (2)

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By Justin Bryant
23rd Nov 2020 12:25

Courts are normally sympathetic to charity reliefs and applied a "to the extent" purposive construction in Pollen Estates, which may have helped if it had been pleaded here (there is no apportionment rule as in LR unallowable purposes test s441 CTA 2009).

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Replying to Justin Bryant:
By SigTaxChris
12th Jan 2021 10:59

Whilst I agree that the courts will generally try their best to help 'deserving' cases, they are increasingly reluctant to offer any assistance to instances where the arrangements smack of tax avoidance planning.

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