Many UK charities, in particular large grant-making charities, may have obligations under the Common Reporting Standard (a global exchange of information initiative to which more than 100 countries have signed up) to identify and report to HMRC on their non-UK beneficiaries.
The Common Reporting Standard (CRS) is a regime for the exchange of information between jurisdictions. Broadly speaking it is intended to ensure that certain information on foreign individuals is reported back to the tax authority of the country in which those individuals are resident.
Will your charity be caught?
The CRS places obligations on, what it terms, “Financial Institutions” based in CRS signatory states. Financial Institutions must identify their “Account Holders” and make reports on them to their local tax authority. Perhaps surprisingly, the term Financial Institution potentially includes charities. Objections have been raised to the lack of a blanket exemption for charities from the new regime, but these have, so far, fallen on deaf ears. Indeed, the decision not to exempt charities seems to have been a conscious one.
The CRS came into force in the UK on 1 January 2016. Every UK charity which is a Financial Institution for CRS purposes should already be collecting information on any non-UK resident individual or entity receiving a grant or other financial benefit from the charity – these are the charity’s Account Holders on which the charity will need to submit reports by 31 May 2017 (for the 2016 calendar year), and each year thereafter.
A charity will be deemed a “Financial Institution” where:
- the charity is ‘managed’ by another Financial Institution (this includes where the charity is a trust and has a corporate trustee, or holds assets which are managed by a professional investment adviser with discretionary authority over investments); and
- more than 50% of the charity’s gross income (in the relevant calendar year) derives from investing in financial assets (as opposed to, for instance, fundraising).
This means that large grant-making charities and charitable companies, many of which will have managed portfolios which are responsible for most or all of the charities’ income, are likely to be treated as Financial Institutions and so have due diligence and reporting obligations under the CRS.
A charity’s Account Holders will effectively be non-UK tax resident individuals or entities (not including charities) receiving a grant or other financial benefit from the charity. Gifts of goods are not included. Grants to other charities which are Financial Institutions and located in another CRS signatory state do not have to be reported.
So what do you need to do?
Any charity which qualifies as a Financial Institution must carry out due diligence on Account Holders each year. It will need to identify:
- where each beneficiary is tax resident;
- their tax identification number;
- what type of entity the beneficiary is (if it is not an individual); and
- where the beneficiary is an entity that is not itself a Financial Institution, details of its “controlling persons”.
This can be done by requiring beneficiaries to complete a self-certification form confirming these details. HMRC have said that, if necessary, charities can obtain verbal confirmation from individuals. No reporting is required for UK beneficiaries (although charities must identify UK resident beneficiaries for their records). All information gathered must be stored for a minimum of 6 years.
However, if your charity is a Financial Institution and is established as a company (as opposed to a trust) it will not generally have to report on grants to overseas beneficiaries; it will only have to report on its equity holders and lenders.
Charities which are not Financial Institutions (“Non-Financial Entities”) will not be obliged to carry out due diligence on their beneficiaries or report information to HMRC, but may be asked by other Financial Institutions (e.g. banks with which they hold accounts) to confirm where they are tax resident.
Implications for the sector
There is a concern within the sector that these new reporting requirements will be onerous, and difficult to comply with. For many charities operating overseas this is likely to be the case, particularly where beneficiaries are part of hard-to-reach groups. Beneficiaries themselves may also be put off seeking help from charities, knowing their details will be passed to tax authorities.
The administrative burden will also translate into higher costs, which in turn may force some charities to change the way that they operate and reduce the amount they spend on furthering their charitable purposes.
Despite these concerns, which are being voiced by individuals and organisations within the sector, for the moment it remains the case that the rules will apply to some charities. Charities who believe they may be caught will need to:
- take steps to identify whether they are a “Financial Institution”. If they are, “Account Holders” for the 2016 calendar year should be identified;
- formulate and implement data collection procedures, and data storage facilities, and notify Account Holders that their data may be passed to HMRC;
- consider how grant application forms and other documentation should be amended to take into account obligations under the CRS;
- consider what the financial impact of these new rules might be and how the cost of the additional administration will be met.