Alana Lowe-Petraske of Withers LLP takes a look at the impact of the Finance Act 2010 on charity taxation, and highlights the key points accountants should be aware of.
The UK has historically limited charitable tax benefits to charities established locally and gifts to them. However, pressure from recent European legal developments has required the UK to abandon this ‘territoriality’ on non-discrimination grounds with an amendment to domestic law.
When fully in force, the Finance Act 2010 will replace the existing definition of ‘charity’ across UK tax legislation to allow a foreign organisation to enjoy the same tax reliefs as a domestic charity provided it is:
Established for charitable purposes
Within the jurisdiction of an EU member state, Norway or Iceland
Registered with its local charities regulator (if required); and
Managed by 'fit and proper persons'
An organisation – at home or abroad – that fails any of these tests is not a ‘charity’ and will not (once the new law is entirely in force), be eligible for Gift Aid, or other charitable tax reliefs including those from income, capital gains, corporation, inheritance and stamp taxes, and the benefit of VAT reliefs and exemptions. The ‘Fit and Proper Person’ test Meeting the fourth test should, in principle, be straightforward. However, the legislation is widely drafted, leaving much to HMRC discretion. HMRC guidance interprets ‘manager’ very widely, extending beyond trustees to those charity employees, such as finance directors, who are able to direct how charity assets are used. In addition to this wide scope of ‘manager’, there is also uncertainty about what ‘fit and proper’ means, as the legislation and guidance lack clear and objective criteria. Worryingly, it is only currently known that the test may be failed by an individual with a:
History of tax fraud
History of fraudulent behaviour including misrepresentation or identity theft
History of attacks against/abuse of tax repayment schemes, in the ‘knowledge’ of HMRC; or
Disqualification from acting as a charity trustee or company director
For HMRC, this test is needed to deal with potential fraud from foreign organisations far from UK regulatory scrutiny as well as what it reports as increasing domestic fraud. However, there remains much uncertainty around the test including: who must meet it, the criteria and process for failure and appealing a decision of unfitness.
So where does this leave charities? Advisers should be aware that this new law affects all charities as well as those individual or corporate donors relying on donation reliefs. In brief:
The new law is currently only in force in relation to Gift Aid (with retrospective relief considered for gifts made after 27 January 2009).
New charities and existing charities without an HMRC registration number will need to make an application on the new HMRC Charity Application Form (ChA1) when they first seek relief.
Existing charities with an HMRC registration number will have to use the new HMRC Charities Variations Form (ChV1) when they next change the details of those nominated to deal with HMRC.
The new test applies to all ‘managers’ at all times, even those not listed on any HMRC form.
Now that tax status is linked with the character of ‘managers’, trustees should review their current hiring and induction processes to consider if they are prudently asking the right questions of applicants to try to confirm that they are ‘fit’ within HMRC’s guidance. Although the new HMRC manager declaration is not required, its use may help satisfy HMRC that a charity ‘innocently’ appointed a tainted manager.
Charities and advisers should watch out for further developments. The sector has responded critically to the uncertainty the new law and guidance has created. Although there is no indication at this stage that the law will be changed, HMRC may further amend its guidance in response to sector consultation.
Alana Lowe-Petraske is an associate at Withers LLP specialising in advising charities and their donors on UK and international matters.