‘(4) In the application of section 993 for the purposes of subsection (3)—
(a) a charity that is a trust is to be treated as if it were a company (and accordingly a person), including in this subsection;
(b) a charity that is a trust has “control” of another person if the trustees (in their capacity as trustees of the trust) have, or any of them has, control of the person;
(c) a person (other than a charity regulator) has “control” of a charity that is a trust if—
(i) the person is a trustee of the charity and some or all of the powers of the trustees of the charity could be exercised by the person acting alone or by the person acting together with any other persons who are trustees of the charity and who are connected with the person,
(ii) the person, alone or together with other persons, has power to appoint or remove a trustee of the charity, or
(iii) the person, alone or together with other persons, has any power of approval or direction in relation to the carrying out by the trustees of any of their functions.
(4A) A charity that is a trust is also to be regarded as connected with another charity that is a trust at a time for the purposes of this section if, at that time, at least half of the trustees of one of the charities are—
(a) trustees of the other charity,
(b) persons who are connected with persons who are trustees of the other charity, or
(c) a combination of both.
(4B) In determining whether a person is connected with another person for the purposes of subsection (4)(c)(i) or (4A)(b), apply section 993 of the Income Tax Act 2007, with the omission of subsection (3) of that section (and without the modifications in subsection (4) above).’.
Amendments 2 and 3 modify the connected charity rules in clause 5 for charities that are charitable trusts. The purpose of the connected charity rules is to deter charities from fragmenting in order to increase the number of £5,000 allowances from which the charity can benefit under the scheme. The rule applies only where the charities—or community amateur sports clubs, known as CASCs—are undertaking substantially similar activities and have substantially similar purposes. A charity delivering support for the homeless, for example, would not be connected to a charity that supports the education of vulnerable children.
Most charities and all CASCs are subject to corporation tax. The Taxes Acts already provide a definition of when a company is connected with another person, whether that person is another company, a living individual or a trustee. The Taxes Acts also include well-trodden rules that determine when an individual is connected with another individual, for example a spouse, a civil partner or their children. Clause 5 keys into those provisions.
However, clause 5 also deals with the small minority of charities that are set up as trusts. There is no appropriate concept of a connected trust as such in the Taxes Acts. However, rules to connect charitable trusts with other charitable trusts and with other persons are needed for the purposes of the scheme, and clause 5(4) provides special rules for doing so.
Respondents at the public reading stage pointed out that the effect of subsection (4) would be to connect two charitable trusts doing similar things even if they shared one trustee, which would be a problem in cases where it is difficult to find anyone willing to stand as a trustee; one person may end up as a trustee of several charities. We agree that that was not the intention of the provision, and on Second Reading the Exchequer Secretary said that the Government would be willing to reconsider the rules.
The amendments to clause 5 substitute a new subsection (4) and insert new subsections (4A) and (4B) and a new subsection. The effect of the amendments is as follows. First, the rules that apply in the Taxes Acts to connect charitable companies will also apply to charitable trusts. However, the connected company rules cannot be applied to trusts in their entirety, because companies usually have share capital, members’ voting rights and so on, and the connected company rules use those concepts in certain places. By contrast, a trust deed sets out how the property in trust and income arising from the property are to be managed and who should benefit from the property and income. The trustees are required to act in accordance with the trust deeds.
Proposed new subsection (4) sets out in more detail than the original subsection (4) when a person may control a trust by reference to exercising the powers of the trustees or to direct trustees to act in accordance with their wishes. Importantly, it removes the original provision that connected two charities simply because they share a single trustee.
However, proposed new subsection (4) would have made it too easy for trustees of charitable trusts to set up new trusts to benefit from the scheme, encouraging fragmentation, so new subsection (4A) introduces a further test to connect two charitable trusts. It will apply where at least 50% of the trustees of one trust are also trustees of the second charitable trust.
The amendment to clause 5 proposed by the hon. Member for Kilmarnock and Loudoun would confine the rule to the individual trustees. People connected with trustees, such as spouses or civil partners, would not count. If two trusts, A and B, had similar activities, if two of the five trustees of trust A were also trustees of trust B and the husband of a third trustee of trust A was also a trustee of trust B, then the two trusts would be reconnected. I think that that helps to show that it is important to get the clause right.
I thank the Minister for trying to throw some light and clarity on a complicated situation. Does he accept that in many circumstances people are connected by reason of being each other’s spouses or other family members, and that the provision could, therefore, limit the opportunities for people to be trustees?
There are such situations, but I am sure that the hon. Lady will agree that because of the feature that the clause tries to capture it is difficult to come up with the simplest possible language to ensure that it cannot be exploited. It is important that there are rules that deal with connected charities, for the purposes I have laid out.
I do not think that the result is unreasonable. If we accept that individuals can be connected through their personal relationships, it follows that there will be times when trusts will be connected through the personal relationships of the trustees. It is important to set the rules in context: most charities are not charitable trusts, and to be affected, the two charities need to be doing substantially similar things.
The Minister knows that what he has described is extremely complex. Does that not, therefore, underline the need to provide further clarity through a properly organised series of national meetings for small charities that want to understand the need for the legislation, rather than relying on individual charities going through guidance or turning up to the Minister’s charity away-day?
The hon. Gentleman is right that the rules are complex; that reflects the feature they try to capture. However, he is also right that it is important that the Bill, when enacted, is well advertised and explained, and that when HMRC contacts charities there is an appropriate mechanism through which they can raise their questions, either via the advice line or directly with HMRC. The guidance, when it comes out, should try to cover the issue as clearly as possible, so that it is easily understood.
Given that the issue was raised at an early stage in the consultation and has been raised again on Second Reading and in evidence, what further consultation has taken place with the charitable sector for the amendment to be arrived at? Has any assessment been made of the number of trusts that would be captured?
There is an estimate of the number of trusts to which the provision might be relevant. As the hon. Lady points out, it is relevant only to charitable trusts, and the two trusts would need to be engaged in similar charitable purposes. There could be situations in which two charitable trusts for all other reasons might look connected, but if they were conducting different activities they would not necessarily be caught by the provision. HMRC consulted trusted stakeholders and went through the provision in detail with them, and the output from that was taken into account in the development of the clause and the Government amendment.
Charity representatives have been supportive of the amendments, but we recognise that the provisions are complicated. Until the rules start being used in practice, we cannot be certain that they will work as intended, so amendment 3 gives the Treasury the power to amend by order the connected charity rules. Any order would be subject to the affirmative procedure in the House.
Given that the Minister accepts that the rules are complex and it will not be possible to assess how they operate until they are actually in operation, and that he wants to build in a provision to allow changes to be made, would it not also be sensible to provide in the Bill for a formal review to be carried out so that appropriate changes can be made if necessary?
I readily admit that this part of the Bill is complex and that we do not know exactly how it will work until it comes into practice. I think we all agree, however, that that is not an argument for not proceeding with the Bill. It is sensible to empower the Treasury to amend the rules, so that when the Bill becomes law and we see how things work out in practice we will be able to make changes if necessary. If at that time the hon. Lady has suggestions based on the representations that she receives, or on her own observations, we will gladly take those into account.
Amendments 2 and 3 resolve a problem that was identified at the public reading stage by making provision to amend the connected charities rule in future, and I commend them to the Committee.