Withdrawal of tax reliefs for defaulting charities
The government’s draft legislation for the 2025/26 Finance Bill proposes stricter sanctions for charities that fail to meet tax compliance obligations, such as filing corporation tax returns. While most charities comply, a small minority persistently fail yet still claim tax reliefs like Gift Aid. HMRC may deem these charities to have failed the “management condition,” (for the purposes of the Fit and Proper Person test) potentially leading to withdrawal of tax reliefs.
Following a 2023 consultation, HMRC is focusing more on tax compliance, urging charities to take their obligations seriously, seek professional tax advice, and utilise resources from organisations like the Charity Tax Group. The majority of compliant charities should not face increased difficulties.
The 2025/26 Finance Bill introduces further charity tax compliance measures.
Tainted donations
The tainted donations rules will be revised: HMRC will assess not only donor intent but also the outcome of transactions. The threshold for identifying a tainted donation will shift from “financial advantage” to the broader “financial assistance,” tightening the criteria for tax relief eligibility. In simple terms it’s lowering the bar slightly for catching and penalising people who want to give to charity but get a benefit from it themselves.
Approved charitable investments
HMRC will also extend the amount of investment types subject to the requirement that an investment must be made for the benefit of the charity and not for tax avoidance. The anti-avoidance requirement —previously applicable to only one of twelve recognised investment types— will be increased to all twelve. This change aims to simplify and standardise compliance across all investment categories.
Legacies
Legacies received by charities or CASCs will now fall within the definition of attributable income. Consequently, such funds must be used for charitable purposes or risk being taxed. This aligns the treatment of legacies with other estate income already classified as attributable.
These changes reflect HMRC’s broader push for enhanced compliance and transparency in the charity sector. The timetable for introducing the Bill into Parliament and the date of the Autumn 2025 Budget have yet to be confirmed. Charities are encouraged to review their governance, seek professional advice where needed.
If you have any questions please contact Neil Burton.
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