What does 'transaction' mean for the purposes of the substantial donor rules under section 557 of the Income Tax Act 2007?

Under section 557, a transaction is given a deliberately wide meaning. It covers not only formal contracts but also any agreement, arrangement, or understanding, whether or not it is legally enforceable. This ensures the substantial donor rules capture both informal and formal dealings between charities and substantial donors, preventing avoidance through oral or unwritten arrangements.

How do the substantial donor rules in section 557 apply to connected persons?

Section 557 extends the substantial donor provisions to persons connected with the donor. If a family member or a company controlled by the donor enters into a non-arm's-length transaction with a charity, that transaction is treated as if the donor had entered into it directly. This prevents avoidance by routing transactions through connected parties.

What role does an HMRC officer play under section 557 of the Income Tax Act 2007?

An officer of Revenue and Customs has the power to determine whether the terms of a transaction depart from arm's-length terms. This gives HMRC a practical mechanism for challenging transactions where terms appear to benefit the donor or disadvantage the charity beyond what independent parties dealing on the open market would agree.

How are linked transactions and donations treated under the substantial donor rules?

Where a transaction between a charity and a substantial donor is linked to a donation — for example, as part of the same overall arrangement — section 557 requires the two elements to be considered together. This prevents taxpayers from splitting what is in substance a single arrangement into separate parts to avoid the income tax charge.

Income Tax Act 2007 section 557

Substantial donor transactions: supplementary

Section 557 provides supplementary definitions and interpretative rules that apply to the substantial donor transaction provisions in sections 549 to 555.

A "transaction" includes any agreement, arrangement, or understanding, whether or not it is legally enforceable, ensuring the rules capture informal as well as formal dealings between charities and substantial donors.
References to a substantial donor include persons connected with the donor, so that transactions routed through connected parties cannot be used to circumvent the provisions.
An officer of Revenue and Customs may determine whether a transaction is on terms that are less beneficial to the charity than arm's-length terms, or more beneficial to the donor than arm's-length terms, bringing an element of official judgement into the process.
Where a charity enters into a transaction that is linked to a donation — for example, as part of the same arrangement — the donation and the transaction are looked at together to decide whether the substantial donor rules apply.

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