The Finance Act 2010 (the “Act”) introduced new measures which could impact upon the availability of tax exemptions for charities. The new measures have been introduced in response to a ruling by the European Court of Justice on German charity tax law..

The Measures

The Act introduced a new definition of charities for tax purposes. To qualify as a charity (for tax purposes), an organisation must meet three conditions – the jurisdiction condition, the registration condition and the management condition. The focus of this note is on the management condition, which requires that a charity’s manager must be “fit and proper persons”. The management condition is intended to protect charities from abuse. Charities must ensure that their managers meet this requirement in order to minimise the risk of losing charity tax reliefs.

The Act defines managers as “persons having general control and management of the administration” of the organisation. There is no definition of “fit and proper persons” in the Act. Accordingly, HRMC has published Guidelines in order to assist charities in deciding how to apply the management condition.

HRMC Guidelines (the “Guidelines”)

Who is a manager?

The Guidelines define managers as “the trustees of charities, directors of corporate charities, community amateur sports club officials, 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.” This means the management condition can extend beyond the formally appointed directors or trustees of a charity. For example:

  • in a small charity, a manager could include the Chairperson, Treasurer, Secretary and the rest of the management committee who have control over expenditure; and
  • in a larger charity, a manager would include all trustees or directors but may also extend to employees with control over for spending a significant proportion of the charity’s funds.

Who is a “fit and proper person”?

The Guidelines state “an individual is ‘fit and proper’ if they ensure that charity funds and tax reliefs are used only for charitable purposes”. HRMC will make an initial assumption that all persons appointed by charities are fit and proper persons unless they hold information to show otherwise. So long as charities and other organisations take appropriate steps to determine that a person is “fit and proper” when they are being appointed, then they may assume thereafter that the person is fit and proper unless challenged otherwise by HMRC.

The Model Declaration

HMRC has suggested a Model Declaration for managers to sign declaring that they are a “fit and proper person”. The Model Declaration confirms that the person in question will ensure the charity’s funds are used only for charitable purposes and also confirms information about their past in order to demonstrate that they are “fit and proper persons”.

When a charity notifies HRMC of new managers, HMRC will cross check that person’s details against any information it holds and will raise any concerns it has if there is anything to indicate the person may misuse the charity funds and tax reliefs. Factors which may lead HRMC to decide that an individual manager is not a “fit and proper person” include:-

  • where the individual has a history of tax fraud or other fraudulent behaviour including misrepresentation and/or identity theft;
  • where HRMC has knowledge of the individual’s involvement in attacks against, or abuse of, tax repayment systems; and
  • where the individual has been barred from acting as a charity trustee by a charity regulator or Court, or has been disqualified from acting as a company director.

However, HRMC has highlighted that their decision on whether a person is “fit and proper” will be taken on a case-by-case basis in light of the specific circumstances of the charity.

HMRC suggests that if charities ensure that all persons defined as “managers” read their guidance and sign a Model Declaration, then they can assume that such persons meet the management condition at all times unless challenged otherwise by HMRC.

What should you be doing?

We would recommend that all managers being appointed to a new charity, as well as new managers being appointed to an existing charity, should read HMRC’s Basic Guide for Charity Managers and sign a Model Declaration. Once signed, these declarations should be retained by the charity and disclosed to HMRC if and when requested.