Features Directory
Helen Besant-Roberts
Published 07 September 2011

The HMRC have set a new test for charities to prove that they are eligible

for benefits and tax relief.

For many years, charities have enjoyed tax benefits, reliefs and exemptions not available to commercial organisations. The total value of tax reliefs available to charities and their donors in 2010/11 is estimated to be £3.3bn. Historically, registration as a charitable body was, on the whole, sufficient to become eligible for those benefits. However, HM Revenue and Customs introduced a new test for charities in the Finance Act 2010. Under the Act, in order for charities to obtain the tax reliefs and exemptions available, they must meet a new enhanced definition of a charity. This definition now includes a management condition whereby the charity's managers must be fit and proper persons.

This seemingly innocuous statement has caused huge amounts of confusion and concern. It means charities will not automatically be eligible for tax reliefs and exemptions simply by being one of the 162,000 charities registered with the Charity Commission.

Why the need for a fit and proper test?
Why has HMRC brought in this measure? The government is concerned about fraud and the loss of revenue to fraudsters. Although the incidence of fraud within charities remains low, tax fraud is one of the most prevalent. According to the National Fraud Authority's Annual Fraud Indicator, fraud against the public sector costs the UK economy over 21 billion each year. The fit and proper test is intended to reduce the risk of fraud within charities and fraud conducted by so-called sham charities.

However, the new conditions have been the subject of much debate. The National Council for Voluntary Organisations (NCVO) recently published its report, Managing Risk: A New Approach for the Fit and Proper Regulation of Charities, as a response to the Act. This highlights the concerns over the new regulations and the results of a review conducted by a task force set up by the NCVO.

One concern is the lack of clearly defined terminology. As a result, HMRC has had to produce further clarification though supplemental guidance notes. Despite this guidance, the Act is still open to interpretation and HMRC will be able to apply a large amount of discretion on how they police it.

The Act states all managers must fulfil the new test of being fit and proper and defines managers as being persons having the general control and management of the administration of the body or trust. This appears to agree to the Charities Act definition of a trustee. However, HMRC guidance suggests they will apply a broader definition, extending it beyond trustees to any official who has general control and management.

What does it mean for charities?
Many of the charities we have spoken to are concerned over the lack of clarity and the potential administrative burden the rules may represent. Although they are confident their managers meet the fit and proper requirement, the onus is on them to demonstrate compliance for all those they deem to be managers. Their interpretation of the rules and their response to those rules could be challenged by HMRC resulting in a loss of tax benefits.

It is unlikely HMRC will want to see evidence from every charity as to how they have fulfilled this requirement. It is expected they will only conduct tests if they perceive a risk. But it is possible HMRC could ask a charity at any time to demonstrate they meet all the criteria. The guidance states HMRC expects charities to be able to show, if asked, they have given proper consideration to the suitability of its managers.

How can charities avoid falling foul of the new regime?
Although there is no prescriptive set of procedures to follow, HMRC has produced a basic guide on how to meet the test. This guide recommends that charities have all managers sign a declaration to confirm their fit and proper status. The charity should retain all signed declarations so they are available should HMRC request evidence. Although this may not eliminate the risk entirely, it should mitigate the risk of losing tax benefits and reliefs due to non-compliance.

Helen Besant-Roberts is a partner at accountancy firm HURST which has offices in London, Stockport and Manchester.


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