In this article we recap the key issues and point charities to helpful guidance produced by HMRC and the Association of Charitable Foundations (ACF).
The CRS is an international tax transparency regime, aiming to reduce tax evasion by those who move financial assets outside their home tax jurisdiction. It involves identifying money passing through 'financial institutions' to 'account holders' who are tax resident in other jurisdictions and HMRC will then pass this information to the appropriate tax authorities.
Whilst the CRS is designed with banks and financial institutions in mind, there is no exception for charities and so if charities fulfil specified conditions they will have to conduct due diligence and report to HMRC.
A charity will fall within the CRS' broad definition of a 'financial institution' if:
This is likely to apply in particular to endowed charities that receive a high proportion of their income from investments where the investments are managed by professional managers who are able to choose which stocks to buy. HRMC's guidance contains examples of discretionary management.
If your charity falls within the definition it will have to:
The charity will also need to consider whether the exchange of information could put at risk the human rights of those reported on, and if so, apply to HMRC to have the information redacted.
For charitable trusts and other unincorporated charities grant recipients are regarded as having an equity interest in the charity. Unincorporated charities which make grants are therefore more likely to have reportable 'account holders'.
For incorporated charities, only those with an interest in the profits or capital of the company are regarded as equity interest holders, and grant recipients are not regarded as such (unless they also have an interest in the profits or capital). Members are not regarded as having an equity interest. Most corporate charities will therefore have no one with a debt or equity interest. Having said this, an incorporated charity that holds property in trust (for example permanent endowment) should consider whether it has a reporting obligation in relation to the trust assets.
Many charities will have already received forms from their bank or investment manager which will require them to confirm which category the charity falls into for the purposes of the CRS. A UK charity that is not a financial institution will generally be classed as an active NFE (non-financial entity).
HMRC has confirmed that in the early years its approach to compliance by charities will be a 'soft landing', meaning that HRMC will not seek to apply penalties where charities have made efforts to carry out due diligence requirements and report accurately.
We have previously reported on the background to the CRS. Since then, HMRC has published helpful guidance for charities (in August 2016) which it has recently updated to include how charities may apply for redaction of information on human rights grounds (January 2017). The ACF and the Charity Finance Group have also released useful guidance which includes a checklist, draft policy document and self-certification forms for grant-holders. This article is intended to be a general and high level summary of the requirements of the CRS, we would be pleased to advise you regarding how the rules apply to your charity.