Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

I beg to move amendment No. 77, in page 38, line 34 [Vol I], at end insert

‘at a rate that is less than an arm's length rate'.

John Butterfill (Bournemouth West, Conservative)

With this it will be convenient to discuss the following: Amendment No. 78, in page 38, line 35 [Vol I], at end insert

‘at a rate that is less than an arm's length rate'.

Amendment No. 79, in page 38, line 36 [Vol I], at end insert

‘at a rate that is less than an arm's length rate'.

Amendment No. 80, in page 38, line 37 [Vol I], at end insert

‘at a rate that is less than an arm's length rate'.

Amendment No. 81, in page 38, line 39 [Vol I], at end insert

‘at a value that differs from market value so that the charity is disadvantaged by the transaction'.

Amendment No. 82, in page 39, line 3 [Vol I], after ‘investment', insert

‘other than a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988'.

Amendment No. 83, in page 39 [Vol I], leave out lines 15 to 17.

Amendment No. 84, in page 39 [Vol I], leave out lines 18 to 23.

Amendment No. 85, in page 39, line 26 [Vol I], after ‘remuneration', insert

‘unless it is paid either under a contract of employment at a rate not exceeding an arm's length rate or'.

Amendment No. 86, in page 39 [Vol I], leave out lines 37 and 38.

Amendment No. 87, in page 40, line 9 [Vol I], leave out

‘on a recognised stock exchange'

and insert

‘or admitted to trading on any market which from time to time appears on the most-recently updated list of regulated markets as published by the European Commission under Acticle 16 of Directive 93/22/EEC (OJL 141, 11.6.1993) or Article 47 of Directive 2004/39/EC (OJL 145, 30.4.2004) together with securities admitted to trading on the Alternative Investment Market of the London Stock Exchange PLC; or is a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988'.

Government amendment No. 62.

Amendment No. 88, in page 40, line 23 [Vol I], leave out ‘which is wholly' and insert

‘of which 50 per cent. or more of the shares is'.

Government amendment No. 63.

Amendment No. 89, in page 41 [Vol I], leave out lines 1 to 6 and insert—

‘(4) Subsection 3 of section 506A shall not apply to any transaction to which subsection 4 applies.'.

Amendment No. 90, in page 41, line 28 [Vol I], at end insert—

‘(10) Where a person who considers that subsection 3 or 4 of Section 506A above may apply to any transaction or proposed transaction, supplies to the inspector to whom he makes his return of income written particulars of the transaction or proposed transaction—

(a) the inspector shall, within 30 days from his receipt of the particulars, notify that person whether or not he is satisfied that, in the circumstances as described in the particulars, the transaction would not be chargeable to tax on that person under this section; and

(b) if the inspector notifies that person that he is so satisfied, the transaction shall not be chargeable on that person under this section.

(11) If the particulars given under this section with respect to the transaction are not such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the inspector, any notification given by the inspector under subsection (10) above shall be void.'.

Amendment No. 91, in page 41, line 31 [Vol I], leave out

‘by reference to gifts made at any time'

and insert

‘only by reference to gifts made on or after that date'.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

It is a pleasure, Sir John, to see you in the Chair. If I make the mistake of moving an amendment when I am debating it, I know that you will pull me up at once and put me right. I think that I am moving amendment No. 77 and speaking to amendments Nos. 78 to 87 and amendments Nos. 88 to 91. I do not know if the Economic Secretary will be dealing with this chapter—I think that he will not, from the way that he is moving with his files—so I might not have the opportunity to congratulate him on his appointment, which I have not yet had the chance to do even though it has been recorded that I have done so.

John Butterfill (Bournemouth West, Conservative)

Order. May I just make it clear, for the benefit of all Committee members, that in relation to each of the amendments that I have introduced, this will be the only opportunity for them to be debated, although it will not be the only opportunity for them to be voted on?

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

I am grateful for your guidance, Sir John. Because no Minister has had the opportunity to speak to clause 54, we are in the correct but slightly difficult situation of having to explain a little about the clause in order to make sense of the amendments. Without pre-empting the clause stand part debate, I want to outline the context, which is that the measures set out in clauses 54 to 58 aim to prevent the exploitation of charity tax reliefs. No doubt, in due course, the Paymaster General will make the case for them. To make part of her case for her, the measures have been welcomed by the Institute of Fundraising, the National Council for Voluntary Organisations and the charity finance directors group.

We understand the Government’s concern about such exploitation, and support in principle efforts to prevent it from taking place, as do other organisations that have commented on the clauses, such as the Charities Tax Reform Group, The Law Commission and the Chartered Institute of Taxation. However, and in such matters there is nearly always a “however”, those latter organisations are concerned about the clauses both because some innocent transactions might inadvertently be caught by them and because they will add unnecessary complexity to the tax system. In addition, they fear that those two factors could cause a reduction in charitable activity, which I am sure is not the Government’s intention. In short, we might have another example of the law of unintended consequences.

It is worth noting that Ministers do not claim that the clauses are incapable of improvement, given that they have tabled two amendments—Government amendments Nos. 62 and 63—that seek to plug the gaps in the proposed clauses. Government amendment No. 63, in relation to housing associations, is particularly important in that regard. Our amendments are essentially probing amendments. They seek to lessen the risk of innocent transactions being caught by the clauses and to reduce complexity.

Brooks Newmark (Braintree, Conservative)

I understand that the Charities Tax Reform Group has had discussions with Ministers to express concerns about the very issues that my hon. Friend raises. It would be interesting to know the results of those discussions as they relate to my hon. Friend’s concerns.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

Indeed. As my hon. Friend appreciates, I was not present at those discussions, nor, I believe, were any of my hon. Friends. I am sure that the Paymaster General will want to comment on them in due course and in a moment I shall raise some of the concerns that were voiced. Our intention is to prevent innocent transactions from being caught by anti-avoidance measures that are quite proper in their intent, and we will listen carefully to what the Paymaster General says before deciding whether to press the amendments to a vote.

Amendments Nos. 77 to 80 aim to clarify that the sale or letting of property to a charity by a substantial donor at market value—that is, as part of a normal business transaction in which there is no special deal or arrangement between the substantial donor and the charity—would not be caught by the clause.

Amendment No. 81, has a similar aim—to clarify that an exchange of property between a charity and a substantial donor at market value will not be caught by the clause.

Amendment No. 82 aims to ensure that otherwise unexceptionable transactions by a charity are not caught by the legislation. One example of an unexceptionable transaction is when a charity buys a property from a substantial donor at full arm’s length value, whether or not the charity intends to use it for charitable purposes.

To illustrate the example, let us suppose that a private landowner owning 5 acres of farmland next to a school donates 1 acre of that land, worth £200,000, to  the school for use as a playing field. The next year, he decides to sell the remaining 4 acres on the open market, of which the school buys another acre to build a new science block. If the school bought the same property at the same price from a non-donor, the expenditure would be treated as charitable expenditure. However, it is claimed that under proposed new section 506A(3) of the Income and Corporation Taxes Act 1988, the school would be caught and would have a tax liability of £60,000 in respect of purchase if it was a corporate charity and £80,000 if it was a trust.

Another example of an unexceptionable transaction is when a charity purchases property from a substantial donor as an investment that qualifies under any of the provisions of schedule 20 to the Income and Corporation Taxes Act 1988 except paragraph 5. To illustrate the example, let us suppose that a charity buys a house from a private householder as an investment. Under the same section of the Bill, it would have a tax liability of up to 40 per cent. of the value of the house if the householder was a substantial donor.

A third example is when a charity makes an investment in unquoted shares that qualify under paragraph 9 of our old friend schedule 20 of ICTA 1998. To illustrate, let us suppose that a charity enters into a joint venture agreement with a commercial company. For example, a health care charity might use its consultancy expertise to provide private health care services through such a joint venture. The charity holds 50 per cent. of the shares in the joint venture company and receives regular and substantial payments of gift aid from the company. The 50 per cent. subsidiary therefore becomes a substantial donor and, although the investment is a qualifying investment, tax will be charged on the amount of any share or loan capital invested by the charity in the associated company.

I turn to another example. The National Trust is concerned that the measures are drawn very widely and could catch many innocent transactions in which the trust has a relationship with substantial donors. It says:

“For example, the following situations could trigger a tax change in our circumstances: a donor family, living in a National Trust mansion free of charge or at a below-market rent under a historic agreement entered into at the time the mansion was donated to the Trust, who now make a substantial donation to the Trust”

to fund a restoration project at the mansion, for example. The National Trust believes that it would be caught by the clause.

Another example is when a trust purchasing land from a substantial donor needs to pay more for the land than its market value—for instance, when the trust makes a private offer to secure conservation land as an incentive to the vendor not to sell it on the open market or at auction. Those concerns were raised with me during the past few days, after I had prepared my initial remarks.

Amendment No. 83 seeks to remove subsection (3) from the Bill. The Charities Tax Reform Group argues that the subsection is drawn too widely and that in any case it is unnecessary because subsection (4), which catches all transactions on non-arm’s length rate terms,  fulfils the same function. I would be interested to hear the Paymaster General’s response to that.

Amendment No. 84 seeks to remove subsection (4) from the Bill. The Charities Tax Reform Group argues that it can be difficult for a charity to establish what an arm’s length rate might be for the purposes of a transaction, and claims, with some force, that most charities do not have the resources to pay consultants in order to establish a market rate for every transaction. For instance, the market rate for the use of a charity’s name and logo in an advertising campaign varies from charity to charity. There is one main concern about the substantial donor clauses: a substantial donor to a small charity might be a very important donor whereas a substantial donor to a larger charity might not be so important. Perhaps that is illustrated by the point about the logos.

Will the Paymaster General tell the Committee what steps charities will be required to take to determine whether a transaction is at a market rate and what evidence they will have to retain? The Charities Tax Reform Group argues that unless subsection (4) is removed, charities will incur substantial compliance costs. However, if the subsection must be retained, and of course amendment No. 83, which I proposed, presumed that it would be retained—[Interruption.] I was waiting for some alert person—possibly the hon. Member for Wolverhampton, South-West—to get to his feet and ask why the Charities Tax Reform Group proposed to delete one subsection relying on another, and then to remove that other subsection. The Charities Tax Reform Group argues that if it must be retained—I am confident that the Paymaster General will say that it will be—there should be a de minimis amount beneath which Her Majesty’s Revenue and Customs would not dispute the amounts charged by or to a charity. I would be grateful to hear her comments.

Amendment No. 85 seeks to insert on page 39, line 26, after “remuneration”:

“unless it is paid either under a contract of employment at a rate not exceeding an arm’s length rate or”

for services as a trustee. The amendment aims to ensure that employees of a charity can be substantial donors to that charity. As it is, the subsection apparently means that if an employee of a charity who is not a trustee makes substantial donations to that charity, either under gift aid or as a deduction from payroll, that employee’s salary is to be treated as a non-charitable expense.

If the Paymaster General is unwilling to accept the amendment, she might at least make it clear that the subsection should apply only when an employee is paid more than another employee doing a similar job who is not a donor, and that it should be clarified that remuneration to an employee who is not a trustee does not need to be approved by the Charity Commission. I would be grateful for her comments.

Rob Marris (Wolverhampton South West, Labour)

I should now like to see whether we are alert; I had picked up on the point to which the hon. Gentleman referred about subsections (3) and (4). If I read amendment No. 85 correctly and if it were inserted, subsection (5) would read extremely oddly, to say the least. Is the hon. Gentleman aware of that?

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

What the hon. Gentleman thinks may read oddly is not necessarily what I think reads oddly. I should be happy for him to enlarge on that point.

Rob Marris (Wolverhampton South West, Labour)

Although I may be misreading it, under the amendment, subsection (5) would read that

“for the purposes of section 505 as non-charitable expenditure unless it is remuneration unless it is paid either under a contract of employment at a rate not exceeding an arm's length rate or for services as a trustee”.

If I have read that correctly, and I concede that I may have not, it is because the word “unless” is used twice within four words.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

I think that the hon. Gentleman is using the term “odd” to describe something “inelegant”. I am willing to concede that it may not be elegant drafting, but I am sure that, legally speaking—although I am not a lawyer—it is effective or surely the amendment would not have been accepted for debate.

Perhaps I can move on to amendment No. 86, ready as I always am to be picked up by the hon. Gentleman for stylistic inelegance or, indeed, for any other matter. Amendment No. 86 would leave out lines 37 and 38 on page 39. Subsection (1)(a) of the proposed new section 68B provides an exemption where a transaction is undertaken as part of the donor’s business. As paragraph (b) deals with arm’s length terms, the Charities Tax Reform Group argues that there is no need for paragraph (a) and asks what difference it makes whether the transaction is a business transaction for the donor.

Amendment No. 87 returns us to the country explored in amendment No. 82 and would insert the words

“or is a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988”.

Committee members will note that the amendment attempts in some detail to draw a more watertight definition of the words “recognised stock exchange.” The amendment would enable charities to continue to benefit from any investment by the charity that is a qualifying investment under schedule 20 to the Income and Corporation Taxes Act 1988. There appears to be no reason why charities dealing with substantial donors should be prevented from making qualifying investments that should surely be unexceptionable.

Amendment No. 88 would leave out the words “which is wholly” on page 40, line 23 and insert

“of which 50 per cent. or more of the shares is”.

Subsection (8) exempts transactions with trading subsidiaries from the new legislation. That exemption is arguably too narrowly drawn and should be extended to companies where the charity owns 50 per cent. or more of the company’s shares. Again, however, I should be interested to hear the Paymaster General’s view.

Amendment No. 89 would delete lines 1 to 6 on page 41 and insert

“(4) Subsection 3 of section 506A shall not apply to any transaction to which subsection 4 applies.’.”

The Charities Tax Reform Group believes that the amendment will “restrict the damage” that would otherwise be caused by subsection (3) of proposed  section 506A if the Government will not accept amendment No. 83, which proposes to accept subsection (3). Committee members will recall, if they are exceptionally alert, the argument made a moment ago that subsection (3) is widely drawn.

Amendment No. 90 would insert a procedure that would provide an advance clearance procedure for charities, so that they can check whether potential transactions comply with new requirements of the legislation. If the Paymaster General is unwilling to accept the amendment, it would be helpful if she were able to give an assurance that charities seeking advance clearance on transactions would, in practice, be able to obtain advice from the HRMC. I imagine that she will be able to do so.

Rob Marris (Wolverhampton South West, Labour)

Before the hon. Gentleman deals with amendment No. 91, which is, in a sense, separate from amendment No. 90 and some connected amendments, can he tell me his preferred batting order if the Government were to accept these contradictory amendments? I think that he would accept that they are contradictory, or could not all be accepted, especially those dealing with subsections (3) and (4) of proposed section 506A. His amendments could not all be incorporated in an Act that made sense, because some of them delete bits to which others refer.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

If I may quote the Economic Secretary earlier, that is a very interesting question. I cannot answer it until I hear what the Paymaster General says. I accept that the amendments do not all lead in the same direction. They are probing amendments designed to draw a response from the Paymaster General. I am unwilling in principle to press them to a Division, but I first want to hear what she says before I make it absolutely clear that I shall not.

The hon. Gentleman said that I was about to explain amendment No. 91, which would delete the words:

‘by reference to gifts made at any time’,

and insert

‘only by reference to gifts made on or after that date’.

As it stands, under the proposed section, the new provision should have effect on transactions occurring on or after 22 March 2006. In other words, it has a retrospective element. However, charities will not have time to upgrade their record-keeping requirements. They may not be aware that they are entering into transactions with people who qualify as substantial donors. The amendment would ensure that the rules apply only to transactions with donors who become substantial donors by reference to gifts made on or after 22 March, so that the charities can implement new systems of record keeping.

John Butterfill (Bournemouth West, Conservative)

I should perhaps state at this stage that I am advised that I may continue to chair the proceedings on these amendments, despite the fact that I am a trustee of three national charities and one substantial local charity. However, I have taken advice and I hope that the Committee will be happy with that.

Philip Dunne (Ludlow, Conservative)

I am grateful, Sir John. I should also declare that I am a trustee of, I suspect, less august charitable organisations than your good self.

I support in particular amendment No.91, which covers the retrospective nature of the proposals. I have no difficulty with the intent of the Government’s proposals to tighten up the provision to avoid potential abuse. However, they need to consider the practical nature of the definition of substantial donations, which goes back more than sixyears.

I will illustrate my argument from my experience as a former trustee of the Juvenile Diabetes Research Foundation, which is a worthy charity raising hundreds of millions of pounds globally each year. In the UK, it raises at least a couple of million pounds each year mostly from annual walks, which take place in cities throughout the country.

There are several examples of teams put together by individuals or families, often connected with diabetes, which raise several thousand pounds each year from sponsored donations and contributions. Many could qualify, on a cumulative basis, as substantial donors. However, it would be a difficult challenge for the charity to unravel the records of the many thousands of donations of what are currently sub-£1,000 amounts. Although the Paymaster General may respond by saying that the provision applies only to donations of £100,000 and that most charities will have records adequate to pick up large donations, I am not convinced that charities such as that which I gave as an example will have good enough record keeping to enable them to make that aggregation. A simple solution to the problem would be to accept my hon. Friend’s amendment, so that the legislation would take effect from the date of the Budget without requiring many charities to go to a great deal of time-consuming effort for no benefit to themselves and potentially very little to the Exchequer.

David Gauke (South West Hertfordshire, Conservative)

I, too, should like to speak to amendment No. 91. I have a particular concern that I hope the Paymaster General will address. As the Bill stands, how far back would charities need to look through their records? My hon. Friend the Member for Ludlow (Mr. Dunne) referred to six years, but I am concerned that it might be necessary for them to look back 11 years. I say that because the wording of new section 506A, subsection (2)(b)—[Interruption.] It has clearly caused a reaction somewhere, either in this world or another.

There is reference to £100,000 over a six-year period, and then to the following five chargeable periods. If donations were made between 1 January 1995 and, for argument’s sake, 1997, the six-year period in which the £100,000 would fall would run until 1 January 2001. At that point, we should apply the following “five chargeable periods”—that is the following five years—which takes us to 11 years after 1995. To amplify the point that my hon. Friend just made about the need for charities to look back, the way I interpret the clause is that the need for amendment No. 91 seems to be all the more significant. I shall be grateful for clarification from the Paymaster General.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I shall be brief. The clause seeks to deal with the abuse of charity tax reliefs, and we support the Government’s efforts to tackle that. It could prove to be an effective defence for charities that are trying to resist donors who want to attach strings to their gifts, and that is very important. As the intricacies of the Bill and the amendments show, relationships between charities and their donors can be very complicated, as the political parties are learning at the moment. What is the extent of the abuse that the clause seeks to overcome, and will it create further difficulties? Will it catch charities and donors inadvertently? I think in particular of the examples that have been given of charities that will have to look back at their records of regular donors to see at what point they might have become significant donors. I shall be grateful for clarification from the Paymaster General.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Good afternoon, Sir John. I compliment the hon. Member for Wycombe (Mr. Goodman). This is a complex set of amendments, and he advanced his arguments very clearly. He made it clear that they are probing amendments, and acknowledged that there are issues to be dealt with, as did the hon. Member for Falmouth and Camborne.

I should like to start by answering the hon. Gentleman’s questions about the National Trust. He looked perplexed as he was making his statements and I was startled. There were two points. The first concerned a charity that pays more than the market rate. I have to say that any charity that did that would be in breach of charity law; such a situation has nothing to do with the Bill. If he wishes to make the point differently after the debate, I would be happy for him to write to me. As I am sure Members would all agree, however, 99.9 per cent. of charities do not undertake that type of planning, and they comply with the generous reliefs that apply. Secondly, he asked about tenants in historical premises. My understanding on that point is that contractual arrangements will not be caught by the new rules—that is clear.

The two points made by the hon. Gentleman go to the heart of the difficulties with the clauses and to the substantive debate on them, so I should like to remind Committee members why the provisions are necessary. I assume that the hon. Member for Falmouth and Camborne wants to know how much abuse there is already. Substantial donors either make payments or transfer assets to charities, and then receive back money, shares or property. Reliefs in the form of gift aid payments or share relief payments are then triggered depending on which of those applies. Having obtained the relief, the donor then gets back a loan that may, for example, carry no repayment schedule with it—in fact, the charity may not want to be paid back at all. So the substantial donor status is used as a money box to attract more reliefs, which is clearly not a charitable function. I think that that is scandalous and despicable.

In its reaction to the proposed provisions the charity sector has made it clear that it takes the same view. I agree with the Charity Finance Directors Group when it said:

“It is essential that the charity brand is protected and not tainted by association with tax avoidance schemes.”

Furthermore, the Charity Reform Group said that it

“strongly welcomes the introduction of measures to prevent the exploitation of tax reliefs for charities by substantial donors for their own benefit”

—rather than that of the charity. I could go on with a long list of important organisations that have commented.

I shall deal in turn with each of the hon. Gentleman’s substantive points on the amendments and explain why the Government regard them as unnecessary, because it seems to me that the amendments are based on a misunderstanding of what the clauses seek to achieve. There was some recent unfavourable coverage in the magazine Charity Finance, but I do not believe that the fears that have driven the drafting of the amendments will materialise.

The trigger comes not when the substantial donor makes a payment or transfers property to a charity. The trigger comes if there is then a relationship between the charity and the substantial donor, whereby something comes out of the charity. That is what starts the clock. The terms are not unfavourable for the charity, but they are most definitely favourable for the substantial donor, and that is not the point of the charity reliefs and their support.

The point of the charitable reliefs is to assist people in charitable giving and to enable that to happen, not to allow wealthy individuals to find ways of getting reliefs to which they are not entitled and damaging the process or, as the hon. Member for Falmouth and Camborne said, attempting to apply undue pressure on charities in order to get that advantage.

Brooks Newmark (Braintree, Conservative)

Although I cannot but agree with the Paymaster General and support her substantive point, the use of slightly selective quotes concerns me. Yes, the Charity Finance Directors Group was complimentary about the measure, and so was the Charities Tax Reform Group, to which the Minister referred, which said:

“While CTRG strongly supports measures to prevent the tax reliefs for charities being abused, we are concerned that it will become a responsibility on the charity to police transactions entered into with substantial donors and it will be the charity that could face a tax liability where it fails to do so even if innocently.”

It is the “innocent” matter that my hon. Friend the Member for Wycombe and the Charities Tax Reform Group raised.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I shall come to those points, and the amendments, in a moment. I shall be careful here because our debates have an important audience that we want to reassure.

I say to the hon. Gentleman, first, that charities understand their obligations under charity law and they ensure that the transactions that they undertake are in the best interests of the charity. Those organisations are equally able to understand—although they may be subject to pressure, on which I cannot comment—when they are making what is in effect an unrelievable transaction or one that is clearly not to the benefit of the charity. That is what is at the heart of the proposal.

Brooks Newmark (Braintree, Conservative)

Will the hon. Lady give way?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

If the hon. Gentleman will let me make progress on the amendments he will see that his fears about whether innocent transactions will be caught or about the requirement for more record-taking and so on are unfounded, and I will try to reassure him.

In terms of possible loss, it is very difficult to give a precise figure because much of it would not necessarily be reported to HMRC, but on the basis of the information that HMRC currently has, £60 million of reliefs are finding their way to being used in that avoidance mechanism. It is in the best interests of charities and of taxpayers that that loss of revenue is not seen either to increase or to close off the opportunities, as the amendments propose.

Quite the reverse of the points that have been made in the debate, the measure protects charities because it makes it clearer under what circumstances they can make transactions. Those transactions that fall outside those circumstances are not therefore relievable, although they are not supposed to undertake any transactions as charities that are not in pursuit of their charitable aims, so there is a little mixing of the pot.

As an experienced Chairman of our Committees, Sir John, and of the charities on behalf of which you are very active, you will know that charities are extremely careful to ensure that they comply with charitable law, in the best interests of their objectives, unlike individuals who may just want extra money from the taxpayer to which they are not entitled.

Amendments Nos. 77 and 79 deal with the sale or letting of property or the provision of services by a charity to a substantial donor. There is no exception for the provision of property and only a limited one for services provided by a charity as part of its primary charitable purposes. However, a charge would only arise on a charity under proposed section 506A(4) where the terms of the transaction are less beneficial to the charity than would be expected in an arm’s length transaction—and then, only the difference in terms. So, this is saying to a charity that it should make sure it does not make transactions that are actually less beneficial to it. Amendments Nos. 77 and 79 replicate that effect, so they are unnecessary, as provision has already been made.

Amendments Nos. 78 and 80 deal, as the hon. Member for Wycombe said, with the sale or letting of property, or the provision of services, by a substantial donor to a charity. Expenditure by a charity on such transactions is treated as non-charitable expenditure by virtue of proposed section 506A(3) and will result in a restriction of the charity’s tax exemptions. An exception removes the charity from such treatment where it is purchasing property or services from a substantial donor’s business—we are not saying that there is no relationship—on terms that are no less beneficial to the charity than the arm’s length terms; that is, the same as everybody else. The intention is to ensure that most commercial transactions between a charity and a substantial donor are not caught.

Amendments Nos. 78 and 80 have the opposite effect. As we discussed, their effect is entirely contradictory by ensuring that clause 54 catches only transactions that are more beneficial to the charity than the arm’s length terms, and lets out the very transactions that the clauses are designed to stop—namely, those that are on terms detrimental to the charity. I think the hon. Gentleman acknowledged that that may have been down to a drafting error when he made the point that he was really seeking clarification, as we go through the various subsections of proposed section 506A, on what exactly happens there.

Amendment No. 81 seeks to prevent exchanges of property between a substantial donor and a charity from being caught by the rules. As with amendments Nos. 77 and 79, it is unnecessary as a charge will arise under proposed section 506A(4) only in relation to an exchange of property where the terms of the transaction are less beneficial to the charity than the arm’s length terms.

Amendment No. 82 seeks to ensure that any transaction involving investments would qualify for relief under schedule 20 of the Income and Corporation Taxes Act 1988 and will not be caught by the new rules. I am afraid that I could not support such a change. Schedule 20 provides charities with a list of qualifying investments and loans that are acceptable for charity investment. While that works well for most charities, it is at times open to abuse by controlled charities. Clause 54 imposes additional protection, trying to ensure that such abuse cannot occur.

Amendments Nos. 83 and 84 seek to remove entirely the charging provisions from the legislation. Hon. Members will not be surprised to hear that I am not at all attracted to that idea. It would leave legislation that would have no effect. I am trying to convey to the Committee how important it is as a matter of principle for charities and for the continuation of security that those who give to charities believe that they will have.

Amendment No. 83 removes section 506A(3). That is the principal charging mechanism in clause 54. If I accepted the amendment, which I will not, HMRC would be unable to restrict a charity’s tax exemption where it entered into a transaction with a substantial donor that is not otherwise accepted. Instead HMRC would be forced to rely on the application of section 506A(4) to penalise such behaviour. However, amendment No. 84 also calls for the removal of section 506A(4), which is the secondary charging provision. The legislation would be effectively gutted. I have tried to make it clear why clause 54 is necessary to prevent the abuse of the charity reliefs.

Amendment No. 85 is intended to ensure that employees of a charity are able to donate large sums to the charity without being designated as substantial donors. I cannot accept the amendment. An extension of the rule that prevents a payment of remuneration for services as a trustee is on the face of it reasonable, but the rules are targeted at those who abuse the reliefs. Providing for the payment of employees not to be caught would enable artificial employments to be created by those still seeking to abuse the charitable relief.

Charitable workers are not always the most well-paid people. It is almost a vocation. The individuals concerned are making a huge contribution. In looking across the work of charities and how much they pay  and whom they employ I do not see that the problem could arise and so it increases my anxiety that ghost employment might be created here in order to create a category of employees.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

The Paymaster General said that she was minded not to accept amendment No. 85. She said that the rules are targeted at those who abuse the reliefs. But will the proposed changes also catch those who do not abuse the reliefs? If so, what justification is there for that?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I was going to come to the point about those who do not abuse the reliefs. I touched on it in my opening remarks. If the charities are behaving according to charity law and are acting in the best interests of their charitable objectives, they cannot innocently have been in a transaction of this type because they would have noticed that they were paying or transferring value to a substantial donor that would not have been in the best interests of the charity. That comes back to the point about record keeping. Charities know well enough what they are doing. The overwhelming majority will have no concerns about the clauses. Although it is unfortunate, it sometimes happens—thus the requirement on HMRC.

There are some who, to put it politely, have the wrong end of the stick about what is happening. They have raised a number of questions in the amendments. I can understand why charities would be fearful if such concerns were well founded, but they are not. Those who have moved the amendments are mistaken. That is why I am taking as much care as I can in responding to give assurance that the fears underpinning the amendments—more record-keeping, taxation of innocent transactions, restriction of charities—are ill-founded. The hon. Member for Falmouth and Camborne hit the nail on the head when she said that the legislation will actually stop the pressure that might be applied to charities by those who might seek to achieve an advantage for themselves.

Since 1997, the Government have given great care to such questions. I have a long list of all the legislation, changes in tax and work that we have done with the charitable and voluntary sector. I shall not read it out, but it cannot be disputed that we have done everything possible at every point to assist charities and charitable giving.

Amendment No. 86 aims to ensure that when a substantial donor sells or leases property or provides services to a charity, such transactions will be excepted where the transaction takes place at arm’s length. Again, I cannot accept the amendment. As I mentioned in relation to an earlier amendment, proposed new section 506B(1) contains an exception that will ensure that the sale or letting of property or the provision of services by a substantial donor will not be caught by the rules where they are provided in the course of the substantial donor’s business on terms that are no less official to the charity than the arm’s length terms. The overwhelming majority of such transactions will take place in the course of a donor’s business. The exception in section 506B(1) strikes the balance between eliminating the avoidance risk and ensuring that innocent commercial transactions  entered into by charities are not caught. We are trying to do precisely what the hon. Member for Wycombe suggested.

Amendment No. 87 seeks to extend the investments that a charity can make in a donor’s business to include shares and securities listed on a market recognised by the European Union, securities admitted to trading on the alternative investment market and any investment that is a qualified investment for the purposes of schedule 20 to the Income and Corporation Taxes Act 1988.

The existing exemption in section 506B(4) prevents investments in shares or securities listed on recognised stock exchanges from being caught by the new laws. Such an exception is drafted widely enough to prevent the most common charity investments from being caught. Although extending the list of investments to include those in the European Union list sounds desirable, I do not believe that there is a material difference between the lists of exchanges maintained by the European Union and those on the list of recognised stock exchanges.

Helen Goodman (Bishop Auckland, Labour)

I am not clear about how that will work in practice. It would be usual for a charity to hand over its investment responsibilities to a bank. It would agree an overall strategy but, having handed matters over to a bank, would not be involved in detailed decision making on individual investments. However, the managing bank might invest in a portfolio that included someone who had made an donation. Will my right hon. Friend clarify that that situation will not be caught by the clause?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

That would not be caught because such matters would be part of the charity’s usual business when pursuing its objectives. We thought that the particular abuse in a small number of cases had been made clear to the charitable sector in respect of the relationship between the substantial donor and the charity in the sense of money shares, property going in and benefit coming directly out to the individual.

I was trying not to jump around in respect of the amendments, but the donation could have made to the charity by a substantial donor and the benefits be yet to be acquired. The provision would make sure that those benefits could not be acquired, though substantial donors had still given money to the charity that had received the necessary relief. We should applaud the donors for that, but they will not be receiving benefit as a result of the provision. Confusion arises under amendment No. 91 about whether the action is retrospective. I am sure that members of the Committee are not suggesting that, when someone has already arranged for a completely unacceptable use of charitable reliefs, we should allow it to continue. As I said, that is triggered by what happens to what comes out of the charity—hence, the period of six years.

Mr. Gaukerose—

Mr. Dunnerose—

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I have got out of order. I am happy to go straight to amendment No. 91. The issue is about what happens in the case of the charity with an interest or property that it invests in an individual’s company at a high rate, but receives a poor rate of return, and it is absolutely transparent to everyone that that is the case. That is not really something that we expect charities to feel it necessary to do in pursuit of their charitable objectives, nor should they.

David Gauke (South West Hertfordshire, Conservative)

I wanted to intervene in case the Paymaster General was about to conclude her remarks.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Good grief, no.

David Gauke (South West Hertfordshire, Conservative)

That comes as a relief to us all. I wanted merely to question the point about whether the time was five, six or 11 years. The worry that some of us have is about the bureaucratic burden that may fall on charities to check previous donations to ensure how far back they need to go to be confident that they will not be caught under clause 54.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I do not know whether the hon. Gentleman is struggling with the idea that somehow a charity does not know that it is about to invest in a company that has been triggered. The charity might choose that company because it is wholly owned by a substantial donor or is receiving a substantial loan with no repayment details and an understanding that the loan will be struck out. I cannot believe that a charity will not know clearly the relationship between the substantial donor and the proposed transaction.

The issue that the hon. Gentleman raised was about innocents being affected. The transactions in question may be acceptable in the best interests of the charity if they trigger reliefs in pursuit of charitable objectives and in the course of the substantial donor’s “normal business,” or if the charity might have had the same relationship with any other company without a substantial donor. I am trying to be clear and reassure the Committee that the aim is to target mischief, not to prevent charities from working. The question of the time involved is difficult. In exceptional circumstances, the HMRC has seen that, in such schemes, there might be quite a long gap between resources going in and benefit coming out.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I understand that the target of the regulations is charities that are consciously exploiting loopholes and seeking to benefit a major donor. Will the Paymaster General accept that there are charities with substantial major donors that are acting perfectly within the law but will now have to take on an additional burden of compliance?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

No, I cannot accept that. We are discussing a very narrow set of circumstances. If a charity is complying with charity law and the requirements of its charitable status, all its transactions should comply with them. That is true particularly if the charity is accessing reliefs that are specifically for charitable purposes.

We are discussing whether the transactions in question should enable access to reliefs. If hon. Members can  give me specific examples—it does not have to be done today—I will certainly consider the issues raised. If examples cannot be provided, with an explanation of why the people involved should not be covered by the measure or should be because they are committing the abuse that we are trying to deal with, I cannot address the more general matter of whether innocents will be caught. I say to the Committee and those who listen to our proceedings that if they have more information than they have provided us with to date, they should come forward with it. Our current information is not detailed enough.

Philip Dunne (Ludlow, Conservative)

I seek to give such an example. My concern relates solely to subsection (1)(d) in proposed new section 506A on

“the provision of services to a charity and a substantial donor”.

There might be individuals who are not substantial donors, but who are providing services to a charity, such as their own time for lay review on a charity’s medical committee. Individuals whose donations differ from year to year may suddenly become beneficiaries of a windfall, have substantial funds to make available to a charity and then make a substantial donation. As a result, their relationship might be caught under the provisions in clause 54.

Under proposed new section 506B(1), it will be for the HMRC to determine whether a transaction is caught by those provisions. I am concerned about record keeping, as is the hon. Member for Falmouth and Camborne. For reasons with which all Members will sympathise, we are placing an obligation on charities that extends way beyond what is necessary to restrict dubious transactions, which the Paymaster General is rightly seeking to do.

The Paymaster General might say that my example is not relevant and that such relief will not apply because it will be caught by the exemptions. Surely, however, that does not obviate the need for the charities to continue to keep records of individuals who might become substantial donors. I do not have a problem with that going forward, but there is a problem if charities have to look back through the records for anybody who might subsequently be caught under the clause.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I disagree with the hon. Gentleman entirely. Fundraising charities know who their major donors are; that is good fundraising practice. They keep such records and invest a great deal of time and effort into securing their revenue, or future increases in it.

Proposed new section 506B(1) ensures that the

“sale or letting of property”,

or

“the provision of services...by a substantial donor”

will not be caught by the rules when provided in the course of the substantial donor’s business

“on terms which are no less beneficial to the charity than...a transaction at arm’s length”.

That draws the distinction in the relationship with a substantial donor with which we are trying to deal.

Helen Goodman (Bishop Auckland, Labour)

Does my right hon. Friend agree that there will not be a burden on charities of increased record keeping? Every year they submit their reporting accounts to Companies House, at the back of which must be an annexe listing all donors, including donors substantially below the level set out here. Furthermore, they are required to keep copies of those accounts going back either seven or 10 years—I cannot remember which. Certainly, that covers the proposals in the clause.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I agree with my hon. Friend. In my experience, charities are very thorough about knowing who their substantial donors are and about ensuring the best possible outcome in the interest of their charitable objectives. That matter is being confused here. The issue is not whether they have a relationship with substantial donors for the provision of businesses or services, but that that is conducted in a transparent way. I know of no charity that does not drive a hard bargain in seeking to get services, provisions or support in the best possible circumstances for that charity and its purposes. They are excellent at it, and a jolly good job too. That is part of making sure that their resources are efficiently used.

David Gauke (South West Hertfordshire, Conservative)

I come back to this question of timing. The Paymaster General may be pleased to know that I will approach this from a slightly different tack and for argument’s sake I fully accept her point that clause 54 relates only to dubious transactions that should be picked up. If the donations were made in 1996, 1997 or 1998 and then the payment under subsection (3) or the transaction at less than arm’s length value in subsection (4) occurs in 2006, will the clause be effective in dealing with that? In other words, will it deal with mischief going back 11 years or does it go back only five or six years?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

In all truthfulness it is feasible that there could be limited circumstances in which it could go back 11 years. The hon. Gentleman suggests that the abuse has gone on for a much longer period of time and is much more widespread than HMRC believes. HMRC’s view will be based on information and knowledge that it collects in running the tax system on our behalf. I cannot give the hon. Gentleman an absolute assurance that there might not be exceptional circumstances and some charities might be in that position. In those circumstances, they would need intensive support and clear guidance from HMRC, but that happens in the tax system in exceptional circumstances.

David Gauke (South West Hertfordshire, Conservative)

My point was merely a question of interpretation as to what the clause is saying. I think that the Paymaster General has clarified that. Because of the £100,000 over six years, it may be possible to look back 11 years. That is a point that charities will need to bear in mind, whether they are acting mischievously or otherwise.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The best way to avoid that is not to engage in those arrangements from now on. Charities  will then not have to look back, so the issues that the hon. Gentleman raises will not need to be addressed. This rather flexible use, perhaps unintentionally, of retrospection came in because it is the second part of the transaction when that is triggered.

I shall not speak to the Government amendments. The hon. Gentleman and others have welcomed them and it was necessary for the Government to make them. I hope that I have assured the Committee—

George Young (North West Hampshire, Conservative)

On Government amendment No. 63, which as the Paymaster General said is welcomed by registered social landlords, can she confirm that the Treasury cleared it with the Housing Corporation and that those transactions that will now be exempted by the Treasury will not be caught by the Housing Corporation objecting to substantial donations being made by a housing association to a charity that it set up?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I apologise to the right hon. Gentleman. I cannot answer that detailed question. It is an important point and I wish that I had thought of it. I will write to the right hon. Gentleman and give every Committee member a copy of the letter. I shall keep my fingers crossed that that is all in order, as it was precisely because of the interaction with controls and regulations that it was felt that these changes could be made. I do not quite have the confidence to give the right hon. Gentleman a straight yes answer this minute. [Interruption.] With the elapsing of 30 seconds, I am apparently able to answer yes, but I should still like to consider the matter and write to the right hon. Gentleman, because it is an important point.

In conclusion, I hope that I have been able to convey to the Committee that the Government took great care with this legislation and did their best to obtain the correct balance between trying to stop the abuse of the reliefs and ensuring as much as possible that the law-abiding charities were not affected by these changes. I hope, therefore, that the hon. Member for Wycombe, in the spirit that he moved the amendment, will not press the amendments today, even if he wants to reserve his position on some of the answers I have given. I hope that he is reassured on a number of points.

Helen Goodman (Bishop Auckland, Labour)

I am grateful to the Paymaster General for the way in which she responded in her marathon speech that would otherwise have been the responsibility of the Economic Secretary. She suggested, at the start of her response, that some of the objections by the Charities Tax Reform Group may  have come rather late and may work contrary to the general welcomes of other organisations, which I mentioned on moving my amendment.

Reservations have been expressed by others, including the Law Commission and the Chartered Institute of Taxation, as I said, but generally the Paymaster General sought, having listened to concerns about innocent transactions being caught, to say either, “Innocent transactions won’t be caught and I give guarantees and assurances”—which were welcome—or that some of the examples given should be exceptionable transactions. My hon. Friends and I still have some reservations about her response, particularly to amendment No. 91 on substantial donors. She argued that charities know who their substantial donors are. However, there may be a donor who is a substantial donor, who later, for one reason or another, stops being one, or there may be a donor who was not a substantial donor, who later becomes one. That takes us back to issues about bookkeeping and how far back charities will have to look.

We will not press the amendment to a vote. We heard the Paymaster General’s reassurances, but there may be some matters to which we will wish to return in due course. I beg to ask leave to withdraw the amendment.