HMRC’s test for charity tax relief
28 January 2021
The Finance Act 2010 introduced the ‘fit and proper persons’ test which was defined for tax purposes of charities and other organisations entitled to UK charity tax reliefs. The inclusion of the test makes it harder for fraudsters or sham charities to abuse the charity tax reliefs available.
It also ensures that charities are not being managed or controlled by individuals who represent a risk to the charities tax position. A charity can only claim charity tax reliefs if it meets the management condition.
The ‘fit and proper persons’ test is a statutory requirement, and applies to all charity tax reliefs administered by HMRC. It requires individuals who are trustees or managers of a charity or Community Amateur Sports Club (CASC) to be fit and proper persons to manage the organisation.
The fit and proper persons test should be considered in respect of all charity trustees and managers of a charity who have power to determine how a significant proportion of the charity’s funds are spent (for example members of an Executive Board of senior employees). The test should also be applied on the appointment of all new charity trustees and managers.
The term ‘manager’ is defined as the person having the general control and management of the administration of the charity, which could include trustees, directors, CASC official volunteers or any other persons that have general control over the running of the charity.
HMRC assumes that the charity has given due consideration to the suitability of its managers, and that everyone appointed by the charity is a fit and proper person, unless they hold any evidence to the contrary.
A person is deemed not to pass the test if they have been removed or disqualified from acting as a charity trustee by the charity regulator, have a conviction involving dishonesty, or have ever been bankrupt. HMRC also has access to a wider scope of information that the charity regulators do not have access to, so they could also identify if individuals have been involved in tax fraud or other fraudulent behaviour, including misrepresentation or identity theft, have been involved in attacks of or abuse against the tax repayment system, have used arrangements under Disclosure of Tax Avoidance Schemes (DOTAS) or have been actively involved in promoting tax avoidance schemes.
Where HMRC finds that a manager of a charity is not a fit and proper person, the charity will not automatically lose entitlement to the relevant charity tax relief, and it is not usually withdrawn during the enquiry period, although they can withhold repayments of tax due to the charity during this time. HMRC can treat the charity as having met the conditions if the manager had no ability to prejudice the charitable purpose or its funds, or if in the circumstances it is ‘just and reasonable’ to treat the charity as having met the management conditions, despite their findings.
When considering the test, HMRC will take into account the likely impact on the charity’s position, and this will depend on the position that the person holds within the organisation. Someone who has no dealings with HMRC or control over financial issues is unlikely to affect the charity’s eligibility for tax relief, even if they do not meet the requirements of a fit and proper person. In such circumstances, the charity would be treated as meeting the management condition.
HMRC will work with individuals and charities to ensure that they meet the test. If someone is identified as not meeting the requirements, they will be notified by HMRC and asked if they want to step down from the charity. HMRC will not notify the charity of its findings unless the individual retains their position within the charity. HMRC also works closely with the Charity Commission for England and Wales, and will notify them of any findings where permitted to do so by law.
HMRC’s suggested procedure is that all existing trustees and managers of a charity or CASC should read HMRC’s guidance and sign the model declaration provided by HMRC. This procedure should be repeated when new trustees or managers are appointed.
HMRC recommends that a charity or CASC should retain all such signed declarations in case HMRC ever asks to see them. Charities should consider their data protection obligations in this regard.
If you require advice on any aspect of your governance arrangements, please get in touch with Penny Wotton, Katie Gibson-Green or another member of Birketts’ Charities Team.
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Katie Gibson-Green
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Penny Wotton
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2021.