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Tangled webs
by David Whiscombe
The more complex tax rules becomes the more the law of unintended consequences makes its appearance.
Readers will be aware that when the basic rate is reduced, charities complain (not unreasonably) that the value of their tax refund is reduced. This time around, HMRC are introducing a three-year transitional supplement which will effectively allow charities to reclaim tax at the old 22% rate even though tax will actually have been paid by donors only at 20%. Curiously, this now means that charities will be better off (for the next three years) receiving someone else's income rather than receiving their own. For example, if I receive £1,000 of interest and gift it to the charity, the charity's net income - after tax has been deducted by me and reclaimed by the charity - is almost £1,026. If the charity itself receives £1,000 it receives ...er... £1,000. Thus - as in a case we encountered recently - gifting to charity an income-yielding asset is perhaps better deferred for three years, all other things being equal. Similarly, those charities which are the beneficiaries of interest-free loans from supporters would be better off if they were to pay interest on the loans which would or might then be gift-aided back to the charity! This is subject of course to the anti-avoidance rule which we can expect to be introduced to counter abuse of the transitional rule which was introduced to ameliorate the effects on one group of a change which was financed by the abolition of the 10% rate and other changes which are now being revised to compensate in part for the unlooked for effects on another group.
