HMRC has recently released its formal guidance on the implementation and obligations of charities under the new Common Reporting Standard (CRS). The CRS was introduced from 1 January 2016 following in the footsteps of the recent wide ranging US legislation, the Foreign Account Tax Compliance Act (FATCA). The CRS is a voluntary, reciprocal code which individual nations agree to comply with in order to facilitate the automatic exchange of information between foreign tax authorities and governments.
To date the CRS has been adopted by more than 100 countries including the UK and all EU nations. The CRS effectively obliges each nation to automatically share information on the assets and income of its residents with any other jurisdiction that has also signed up to the CRS and to which the resident in question has a connection. Prior to this, such information was only shared upon request and following case by case approval by the authority in question.
The wide ranging nature of the CRS seeks to ensure that residents’ activities in different countries are reported to the relevant tax authorities, to ensure the correct tax is paid and to target cross-border criminality. Whilst the CRS will impact a number of very sophisticated institutions with large resources, unfortunately it will also impact some UK charities.
Impact on UK charities
Under the FATCA legislation UK charities were fully exempt from the reporting requirements. However, despite the fact that the CRS essentially builds upon the FATCA reporting regime, it will apply to some UK charities (in particular those with professionally managed invested assets) and they will need to file documentation before May 2017.
The first reporting period covers 1 January 2016 to 31 December 2016 and the relevant information will need to be submitted to HMRC by 31 May 2017. There are fines of £300 for a late report and up to £3,000 for any deliberately inaccurate reports. Accordingly the emphasis is very much on trustees to ensure that their charities are compliant with this new reporting requirement.
It is likely that every UK charity will have some form of increased regulatory compliance work, to a greater or lesser degree, due to the CRS. However, the requirement to file and report such information to HMRC will only affect charities that have had over 50% of their gross income derived from investing and/or trading in financial assets (savings interest, dividends, royalties, rental income etc.) in the last three calendar years and where those investments are under the control of a professional investment manager or institution.
Therefore the charities most likely to be affected will be those that have (in line with a trustee’s duty to ensure they act in the best financial interests of the charity’s beneficiaries) invested funds via a professional investment manager or stockbroker.
Any charity that fulfils these criteria is regarded as a “Financial Institution” and will need to file a CRS return with HMRC by 31 May 2017 (and every year thereafter). There is no de minimis limit for the amount invested in this way and therefore even small charities with relatively modest investments and income may well be caught.
A CRS return will report details of all recipients of funds from the charity; both individuals and institutions whether based in the UK or not during the reporting period. There are also other more detailed reporting requirements that would need to be met as well.
If a charity falls outside the above criteria then it will be classified as an “Active Non-Financial Entity”. Obviously the reasons why a charity might fall outside the criteria include over 50% of its income being derived from gifts, donations, grants and legacies etc. (rather than investment income) or the fact that its investments are not professionally managed. In relation to the latter, we would expect this to be rare given the onerous duties placed upon trustees for generating good returns and the potential personal liability associated with such an approach.
Trustees need to assess whether their charity is a Financial Institution or an Active Non-Financial Entity. Depending on this assessment there will be fluctuating levels of information to be gathered (covering the current calendar year), a need for recipients of charity funds to sign a confirmation declaration and, in some cases, report this information to HMRC.
For further assistance, please contact the partner at Fladgate LLP with whom you normally deal or Matthew Biles at firstname.lastname@example.org
Note: This is intended to be general guidance only and is not to be relied on as legal advice in any particular case. It only covers the position under UK domestic law.
For further information, please contact:
Neal Todd, Partner, Fladgate LLP (email@example.com)
Matthew Bennett, Partner, Fladgate LLP (firstname.lastname@example.org)
Helena Luckhurst, Partner, Fladgate LLP (email@example.com)