New definition of a charity for tax purposes will increase burden for charities

A new definition of 'charity' for tax purposes in the 2010 Finance Act, including a requirement that its managers be 'fit and proper', will increase the administrative burden on UK charities, and create concerns among charity managers about their position.

The 2010 Finance Act changes the definition of a 'charity' for tax purposes, to ensure that certain foreign bodies are recognised as charities. The aim is to ensure that both they, and UK donors making gifts to them, enjoy equal treatment for UK tax purposes as if the foreign body was registered with the Charity Commission as a UK charity. However, the new definition also applies to UK charities.

The old law said that a body was charitable for tax purposes if it met the criteria for being charitable under the Charities Acts.

New definition
The new rule is that, to be recognised as a charity for tax purposes by HM Revenue and Customs (HMRC), a body must:

• Be established for charitable purposes (as defined in the Charities Act 2006) only.
• Be established in the EU, Norway or Iceland.
• If required under UK charity law, to have registered with the Charity Commission or other local UK regulator.
• Have managers who are 'fit and proper persons'.

The last requirement means that there will be a significant difference between the criteria that must be satisfied to be a charity under charity law, and the criteria to be satisfied under UK tax law.

Managers
'Managers' includes those with "the general control and management of the administration of the body or trust" and the guidance issued by HMRC says that this includes not just charitable trustees (as defined in the Charities Act 1993), but also "any other officials having day to day control over the running of the charity and any other persons who are able to exert direction or influence over the running of the charity or the application of its assets" - a very wide definition, which can include:

• Anyone who can sign cheques on the body's behalf.
• Anyone who can decide how its money is spent.
• An outsider, such as a major donor, who could influence the trustees.

Matters are made worse in that there is no definition of 'fit and proper', although the guidance points to evidence of tax fraud, dishonest behaviour in the past, such as identity theft or misrepresentation, abuse of tax payment systems as being instances where a manager is unlikely to be a fit and proper person.

While aimed at foreign bodies, this creates confusion for UK charities which are now faced with different tests for deciding whether they are a charity, depending on whether they are looking at charity law or tax law.

Their administration will also increase because HMRC now requires a new charity to submit a form CHA1 giving details about matters such as its registration (if any) as a charity, its accounts and gross income and its area of operation; justification of how its activities benefit the public; quarterly bank statements; personal information about the trustees, chairman, treasurer, secretary and cheque signatories; and bank details.

It will then allocate the charity an HMRC reference number and the date from which it recognized the body's charitable status. There are also new forms to be filed on various events, including a change in trustees, bank details or charity address.

The 'fit and proper' test for managers leaves real uncertainty. While it only applies to new charities, there is no clearance procedure - charities just appoint managers and hope they are not investigated.

Recommendation

• Charities should ensure they collect the relevant information required for the new CHA1 return and other notifications to HMRC.
• Those worried about the impact of the new law on their managers should take specialist legal advice.